We believe that the foundation of Muyuan Co., Ltd.'s ability to continuously break through the boundaries of large-scale economy in the industry lies in its innovative spirit of daring to break through, and continuous refinement. The company has focused on pig herd health and has accumulated over 20 years around population and feeding, which represents a strong vitality during the post-epidemic era when the challenges of the epidemic became more serious. We believe that in the context of heated cost competition in the pig breeding industry, only group companies with significant cost advantages can have a future and are optimistic about the ability and sustainability of Muyuan Co., Ltd. to obtain excessive profits in the industry.
Looking at the current time, the company's overall valuation level is at a historically low level. The profit level may benefit from a recovery in the later stages of farming, and in the long run, as the company's capital expenditure slows down, the dividend ratio is also expected to increase in the future after the balance ratio is reduced. Key recommendations are recommended.
Cost competition in the industry intensifies, and Makihara leads the example of industrial farming
The high profitability of the pig breeding industry after the African swine fever outbreak in 2019 enabled capital to enter the industry quickly. The capital expenses of major listed companies increased 77% and 199% year-on-year respectively in 2019 and 2020, and the market share of listed companies increased from 7.0% in 2018 before the pandemic to 20.7% in 2023. Looking at it now, cost competition in the pig breeding industry is gradually entering a heated stage. Relying on capital expansion or has come to an end, only large-scale enterprises with significant cost advantages will have room for growth and profit in the future. Muyuan Co., Ltd. has accumulated and proven its outstanding cost control capabilities in past development. Compared with other listed companies and other industry players, it has a clear advantage over the full cost of other listed companies and other industry players. In 2023, the full cost of the company was 15.1 yuan/kg, ranking first among the listed peers. Furthermore, as technology advances and capacity utilization increases, it is expected that costs will continue to decline in the later stages, and the ROE level will continue to lead the industry.
Why can Makiyuan Co., Ltd. become the industry's long-term cost benchmark?
Long-term independent innovation has enabled Muyuan Co., Ltd. to form its own production system and methodology in the pig breeding industry. The chairman of the company focused on raising pigs, adhering to long-term principles, and dared to make independent breakthroughs in technical elements. The company took pig herd health as the core, and accumulated over 20 years of accumulation around population and feeding — (1) After normalization of the epidemic, pig herd health became the core difference in industry costs, and Muyuan Co., Ltd.'s continuous hardware facility iteration over a long period of time has created a farming environment that is extremely resistant to external diseases; digital innovation has also made it possible to finance, digitize and manage the epidemic with minimal granularity of breeding operations, increasing the positive effects of “people” on pig herd health, so that the positive effects of “people” on pig herd health can be enhanced. More disease challenges Severe post-plague periods indicate a strong sense of vitality. (1) The innovation of the binary return system has created the company's extremely resilient sow population. The high renewal rate of the sow herd not only increases the proportion of high-performance births, but also forms rapid resilience after damage from the epidemic; (2) On the basis of the advantages of raw materials, the company's feed formula nutrition research is in-depth. Under biosynthesis technology opens up the path of low-cost amino acids, there is still room for implementation of the economic benefits of low-protein diets.
How do you view the investment value of Muyuan shares at this time?
In the short term, an inflection point on the right side of the current pig cycle may have appeared. According to inference from the rhythm of breeding sows in 2023, pig prices are expected to continue to rise in the later stages. Currently, the average market value and net market ratio of Xiamugyuan Co., Ltd. are at historically low levels. The profit level may benefit from a recovery in later farming conditions. Assuming a pig price of 19 yuan/kg, the company's profit elasticity is expected to reach 31 billion yuan, and the corresponding valuation is only 7.7X. In the long run, Muyuan Co., Ltd.'s large capital expenditure during the period of rapid growth suppressed its dividend performance to a certain extent, and against the backdrop of a future decline in the company's capital expenditure rate, the high profitability brought about by the company's lower full cost level may make the balance sheet expected to recover quickly. After free cash flow is positive, the dividend ratio is also expected to increase in the future.
Risk warning
1. The impact of the outbreak of animal diseases caused the scale of enterprise sales to fall short of expectations; 2. Additional policies and financial support caused the pig breeding industry to reduce production capacity to meet expectations; 3. Demand for pork declined significantly in the short term;
4. The profit forecast assumption is unfounded or falls short of the expected risk.