The company's recent situation

Recently, we invited the management of New Hope to conduct an offline non-transactional roadshow. During this period, the company exchanged views with the organization on recent production and operation improvements and subsequent capital planning. We judge that the company has entered the cost optimization channel, its financial strength is improving marginally, and the balance sheet is expected to be repaired relatively quickly this year.

reviews

Improved production management helped, and costs improved rapidly. First, the company's cost decline has progressed rapidly recently. In April, the cost of weaned piglets was 304 yuan/head, compared to -120 yuan/head; operating field costs dropped to 14.7 yuan/kg. We think it is due to: 1) The increase in the company's production indicators: according to the company announcement on May 8, the company's survival rate in April was 92%, +3ppt; the meat ratio in April was 2.65, -0.2; 1Q24 PSY 25 heads, +3 heads year on year. 2) The company's refined management promoted the reduction of backup sow conversion costs: The company's backup conversion cost for 1Q23/1Q24/24 was about 4700-4800/2600/2,400 yuan/head. We believe that the reduction in conversion costs will help reduce sow elimination losses and reduce pig production costs. Second, we consider 1Q24 to be a low point in the company's operations. April showed marginal improvement, and the company announced that April was profitable.

The company actively optimizes the asset structure, promotes pig farm hardware upgrades, and may return to high-quality listing growth in 25 years.

On the one hand, around the business idea of “improving quality, reducing costs, restructuring, and stabilizing scale”, the company actively adjusts and optimizes enterprise sites with frequent epidemics and high costs in the north, and is saving up to unleash operating potential in the coming year. According to the company's announcement on May 8, the 1Q24 company's optimization of production capacity caused a one-time loss of 400 million yuan, and the company's ability to breed sows dropped to 720,000 at the end of 1Q24, and the target number of pigs released in 24 was adjusted to 14-15 million heads.

On the other hand, the company is promoting production capacity adjustments in the north, such as positive pressure ventilation and small-unit housing renovation. The company expects to complete the renovation and gradually resume production in September. We believe this measure will help improve the quality of the company's pig farm hardware, and also help resist the disruptions caused by the epidemic. Looking ahead, we judge that the company's recent production management adjustments have set the momentum for 25 years. As 4Q24 production resumes and capacity utilization increases, the company may return to growth in 25 years.

Pig prices were on a quarterly upward basis in '24, and the company's balance sheet is expected to recover relatively quickly. Looking at external factors, as we judged in “Breeding Topic 6,” we think pig prices may start to rise in 2Q24. The company's current cost is about 13-14 yuan/kg, which is expected to benefit from the scissor gap brought about by rising pig prices and falling costs, which is conducive to balance sheet repair. Looking at internal factors, the company has strengthened capital control or optimized its endogenous balance sheet. The company sorted out headquarters management and plans to reduce headquarters expenses to 300 million yuan in a single quarter from 2-3 Q24; manage accounts receivable periods and inventory turnover, which is expected to contribute to positive operating cash flow; maintain stable bank cooperation and increase 1Q24 credit amounts steadily; in addition, the company also plans to promote some asset battles, promote fixed issuance, etc., and further form capital supplements.

Profit forecasting and valuation

We maintain our 24/25 net profit forecast of $18/19 billion. The current stock price corresponds to 24/23 times P/E in 2024/25, maintaining an outperforming industry rating. Maintain the target price of 12.5 yuan, corresponding to 32/30 times P/E in 2024/25, corresponding to 30.1% upward space.

risks

Risk of market growth and cost control falling short of expectations; risk of financial security; risk of animal disease.