The company's recent situation
Dekang Agriculture and Animal Husbandry recently attended the CICC Mid-Year Strategy Conference. The company exchanged views with participating investors on technical level, breeding management, and breeding models. We believe that the company's management, technology, and model advantages are remarkable, the cost level continues to lead the industry, and we are optimistic about the company's ROE growth potential.
reviews
With the support of high-quality pig breeding and efficient management, the company's total cost level in May was less than 14 yuan/kg. The company's overall cost and regional cost performance is excellent. According to company exchanges, the company's total cost in May was less than 13.8 yuan/kg. Among them, 3 regional companies cost less than 13 yuan/kg, and 8 regional companies cost 13-14 yuan/kg. We believe that the cost advantage mainly comes from two aspects: on the pig side, the company's breeding pigs have better performance, and the cost of weaning piglets is lower. According to the company's official account, the release time for E product generation (ELY Sanyuan pig) brand pigs cultivated by the company was 12 days shorter than DLY Sanyuan pigs, the meat ratio decreased by more than 0.1, and the efficiency of sows increased by thousands of yuan per baby. On the management side, the company grasps the field manager's skills and qualities, and promotes the implementation of standardized management actions by formulating team training tasks, etc. According to company communication, employees in the company's pig division trained an average of 5 times a month, and the contribution cost was reduced by 0.4 yuan/kg.
The No. 2 farm farming model achieves strong binding and high efficiency with cooperative farmers, helping asset-light growth. On the one hand, the company pioneered the “No. 2 Farm” sow surrogacy model, which has the characteristics of lighter assets. The No. 2 farm model was upgraded from the common surrogate model. Farmers are responsible for raising sows as surrogates and build sows and fattening houses, which helps Dekang to achieve asset-light expansion. We estimate that at the end of '23, the average net assets of the company's pigs were 544 yuan/head, and the industry generally exceeded 1,000 yuan/head. On the other hand, with strong binding and high efficiency, this model mobilizes the subjective activism of surrogate caregivers. We estimate that the ROA of 1H23 cooperative No. 2 farmer/No. 1 farmer (traditional company+farmer cooperative pig farmer) is 17%/17%, and No. 2 farmers can obtain higher return on investment, more systematic technical services and more cost-effective raw material supply, and achieve strong binding with Dekang.
It is asset-light, low-cost, and highly flexible. It is expected to release 9 million heads throughout the year, and the ROE may lead the industry. 1) Asset-light: Empowered by the company's No. 2 farm asset-light model, the average net assets of the company are lower than those of its peers. 2) High return:
The company has a strong cost advantage, or its contribution exceeds the revenue space. We estimate that the company's average initial net loss in '23 was 181 yuan. The loss margin was lower than the industry level. 3) High elasticity: We estimate that the company will be able to breed 38-400,000 sows in April. We believe or support the company to achieve the target of 9 million sows produced by 2024. In the context of the recovery of the pig cycle, we judge the company's ROE level or lead the industry.
Profit forecasting and valuation
Based on recent increases in pig prices and improvements in company costs, we raised our 24-year net profit forecast by 1.2 billion yuan to 2.6 billion yuan, and maintained our 25-year net profit forecast of 3.8 billion yuan. The current stock price corresponds to 7/5 times P/E in 24/25, maintaining an outperforming industry rating. Combined with profit forecast adjustments and the company's average market value, the target price was raised by 10% to 66 yuan, corresponding to 9/6 times P/E in 2024/25, corresponding to 21% upward space.
risks
Pig prices are lower than expected, upward pressure on costs, release is lower than expected, epidemic and policy risks.