Core views:
The leading pig breeding and slaughter company in East China plans to increase its financial strength by 1.6 billion yuan. The total number of pigs released by the company in '23 was 2.3027 million, an increase of 91.13% over the previous year. In the first quarter of '24, the company released 657,000 pigs, an increase of 23% over the previous year. As of 24Q1, the company's balance ratio was 76.78%. In order to support capacity expansion and capital structure optimization, it is planned to increase capital strength by no more than 1.6 billion yuan. At the same time, in February '24, the company introduced the China Agricultural Industry Development Fund to help strategic development.
The 24-year pig cycle is trending upward, and the company is expected to fully benefit from the high pig prices in Zhejiang. The pig industry has continued to eliminate sow stocks since 23 years, and the effects of early production capacity removal are gradually showing. With subsequent supply improvements and seasonal recovery in demand, pig prices are expected to trend upward in the 2nd quarter, and a reversal of the pig cycle is imminent. The company mainly sells in Zhejiang Province and will fully benefit from the high pig prices in Zhejiang Province.
Farming costs are declining steadily, and listing is expected to continue to grow rapidly. The company introduced high-performance French breeding pigs to open up space for cost reduction and efficiency. It is expected that the proportion of French breeding pigs will increase to 40-50% this year; over the past 23 years, the company has continued to reduce breeding costs by improving production efficiency and breeding technology. The average complete cost in '23 and 24Q1 is about 17 and 16.4 yuan/kg, respectively, and the average full cost target for 24 years is 16 yuan/kg. According to the investor relations activity records, the company's current fattening production capacity is 310-3.3 million heads, and is capable of breeding close to 150,000 sows. According to the company's strategic cooperation framework agreement, the long-term plan is to build its own fattening capacity of about 2.45 million heads, while vigorously developing asset-light expansion models such as surrogacy. The future release is flexible. According to equity incentive targets, the company's target sales volume for 24 years is 5 million heads, and a trigger value of 4 million heads.
Profit forecast and investment advice: We expect the company's net profit to be 949/15.64/2,083 million yuan in 2024-26, respectively, and corresponding EPS of 1.53, 2.53, and 3.37 yuan/share, respectively. Referring to the valuation level of the industry, considering the company's high future listing flexibility and significant room for continuous cost improvement, the company was given a “buy” rating of 20 times PE in 2024, corresponding to a reasonable value of about 30.66 yuan/share.
Risk warning: risk of fluctuating pig prices, risk of epidemic, food safety, etc.