Performance summary: In 2023, the company achieved operating income of 1,598 billion yuan, +4.55% year on year, net profit to mother of 284 million yuan, +34.64% year on year, net profit after deduction of 255 million yuan, +29.74% year on year. The fourth quarter achieved revenue of 379 million yuan, a year-on-year decrease of 9.76%. Net profit to mother was -5 million yuan, which changed from profit to loss over the previous year. In the first quarter of '24, the company achieved revenue of 348 million yuan, up -4.42% year on year, and net profit to mother was 106 million yuan, up -1.05% year on year.

Comment: Steady growth in the face of adversity, and R&D investment paid off. 2023 was the most difficult year in the history of the breeding industry. Pig prices continued to be sluggish throughout the year, cow and sheep prices and milk prices were at their bottom, and breeding companies suffered deep losses over a long period of time, putting pressure on the overall operation of the animal insurance industry. The company strengthens in-depth cooperation with leading customers in the fields of industry and capital, and forms closer organizational relationships. The company has formed a healthy growth model based on foot-and-mouth disease, with multiple products growing together. While the industry is at the bottom of the cycle, gross margin continues to rise, and cash flow has increased dramatically, reflecting the company's effective work in improving product structure, improving quality and efficiency, and greatly improving overall competitiveness and business quality. The farming market was sluggish in 24Q1, and revenue performance declined slightly, but gross margin maintained an upward trend, and the quality of the company's operations continued to improve.

The reversal of the aquaculture industry cycle may lead to a sharp rise in volume and price in the insurance sector. In recent years, the downstream aquaculture industry has continued to lose money, market demand is sluggish, and customer prices are sensitive, which has had a certain impact on the company's market development. According to data from the National Bureau of Statistics, at the end of the first quarter of 2024, the number of pigs stored nationwide was 408.5 million, a decrease of 22.44 million heads compared to the same period last year, a year-on-year decrease of 5.2%, setting a new low in 4 years. Judging from the number of pigs stored, it has been declining for 2 consecutive quarters since the third quarter of 2023, and the decline is increasing rapidly. At the end of the first quarter of 2024, the number of breeding sows was 39.92 million, a year-on-year decrease of 7.3%, and the number of breeding sows hit a four-year low. The double bottom of production capacity and storage indicates that pig prices will maintain an upward channel in the future, and the profit cycle is expected to continue for a long time.

Looking ahead to 2024, as production capacity on the aquaculture side continues to decline, the cycle may reverse or drive a sharp rise in volume and price in the insurance sector.

Adhere to scientific and technological innovation in difficult circumstances to provide support for performance growth. In 2023, the company invested 230 million yuan in R&D, accounting for 14.39% of revenue. Over the next five years, we will lay out more than 40 new R&D pipelines. During the reporting period, the company obtained two new veterinary drug registration certificates: live brucellosis vaccine (Rev.1 strain) and mycoplasma pneumoniae inactivated vaccine (ZY strain). It is expected that from 2024 to 2025, vaccines such as small ruminant disease, bovine nodular skin disease, mycoplasma bovine disease, brucellosis S19, swine fever E2 protein subunits, canine bipolar, and cat triplets will be approved for marketing to ensure the company's continued growth in the next two years.

Profit forecasting and investment advice. EPS is expected to be 0.34 yuan, 0.41 yuan, and 0.52 yuan respectively in 2024-2026. The corresponding dynamic PE is 27/22/18 times, respectively, maintaining the “holding” rating.

Risk warning: Risks such as product development falling short of expectations, product sales falling short of expectations, and outbreaks of the epidemic in the aquaculture industry.