Matters:
The company achieved revenue of 1,037 billion yuan in 2023, -14.77% year-on-year; net profit to mother of $516 million, or -1302.69% year-on-year. 24Q1 achieved revenue of 280 million yuan, -13.95% YoY, +21.74% month-on-month; net profit to mother -83%, +56.49% YoY and +17% month-on-month.
Commentary:
Operating conditions: 1) The net profit of the company in '23 was 516 million (yoy -1303%), with 624,500 pigs listed (yoy +20%), of which commercial pigs accounted for about 70%, a single loss of about 74 yuan, and the pig business lost about 140 million yuan in normal pig operations; in addition, a single pig farm lost about 180 million yuan due to unstable blue ears/pseudo-rabies in '23; losses of about $140 million due to the large depreciation and amortization of the new farm that had not yet been put into operation; the slaughter business lost about 80 million yuan. 2) The net profit of the 24Q1 company was -083 million (yoy +56%), and 166,400 pigs were released (yoy -21%. The reason for the decline was that 23Q1 had a large release base in 23Q1 due to blue ear and fake instability). Among them, commercial pork pigs accounted for 76%, with a loss of about 170 yuan per head, and losses of about 0.25 million yuan in normal pig operations; in addition, pig farms that were cleared earlier due to unstable blue ears/pseudocracies are currently in the production recovery stage., with an estimated loss of 32 million yuan; production has not yet reached full capacity The large depreciation and amortization of the new farm resulted in a loss of about 0.2 billion yuan; the slaughter business lost about 4 million yuan.
Costs continue to improve and are expected to drop to 16 yuan/kg in the second half of the year. On the basis of balancing the quality of raw pork, the company continues to improve costs by improving the population and optimizing batch management. 1) The population continues to improve. Currently, the new population system has broken 11.5 heads, which is 1 higher than the original pig breeding system. PSY is expected to reach 25-26 (the original population PSY is around 22). 2) The full cost of normal operation of the farm has been reduced from 18.5 in 23Q1 to 17.2 yuan/kg in 24Q1, down 1.3 yuan/kg year on year. Among them, the latest full cost in March has dropped to 16.7 yuan/kg. The company expects the full cost to be within 17 yuan/kg in the second quarter. Against the backdrop of gradual improvement in production performance, release volume, and reduction in raw material costs, the company's cost is expected to drop to 16 yuan/kg in the second half of the year.
Production capacity has been growing steadily, moving towards 2 million heads. 1) The 24Q1 productive biological assets have a book value of 161 million, +35% over the previous month. The company is currently capable of breeding 50,000 heads with a reserve of 25,000 heads. The Huangsha fixed growth project is expected to be put into operation in August in the second half of the year, which can increase the storage scale of 25,000 sows. It is expected to reach 90,000 sows by the end of 24, corresponding to 2 million sows. 2) The company expects to release 2 million heads and supply more than 400,000 heads to Hong Kong in '26, and is expected to reach 600,000 heads through supply and export methods.
The low balance ratio helps the company to safely get through the bottom of the cycle and expand against the trend. With a balance ratio of 44%, 24Q1 is one of the few companies in the industry with a balance ratio of less than 50%. The company's book capital was 900 million yuan at the end of the first quarter, and the company's capital expenditure was basically completed. The construction progress of the 500,000 head project was 80%, and the payment schedule was 70% complete. It is expected that there will be less large capital expenditure in the future.
Investment advice: The premium for pigs supplied to Hong Kong is obvious. The company's profitability is in the first tier of the sector (average profit exceeding the industry's average profit of more than 500 yuan in 18-23 years), the balance sheet is safe (one of the few companies in the industry with a debt ratio of 50% or less), and the expansion resource reserves are sufficient. It is expected to reverse the trend at the end of the cycle. The compound growth rate is expected to be about 47% in 24-26. We expect the company's net profit to be 0.05/690/303 million for 2024-26, corresponding PE is 1024/8/18X, respectively. Referring to the company's historical valuation and the valuation of similar comparable companies, high-quality and steady growth pig companies will be given a 25-year 10XPE with a target price of 27 yuan, maintaining a “strong push” rating.
Risk warning: Production capacity has fallen short of expectations, pig prices have fluctuated greatly, large-scale uncontrollable epidemics have occurred, extreme climate disasters have caused large-scale crop production cuts to drive up food prices, the increase in the scale of the company's listing has fallen short of expectations, the company's breeding costs have fluctuated greatly, and the quota system for the Hong Kong pig market has changed.