Matters:
Company announcement: The company announced its 2024 semi-annual performance forecast. It is estimated that 2024H1 net profit loss attributable to shareholders of listed companies is 0.095 billion yuan to 0.12 billion yuan, and net profit loss due to mother for the same period last year is 0.356 billion yuan.
Guoxin Agriculture's opinion: 1) Huatong Co., Ltd. announced its 2024 semi-annual results forecast. It is expected to achieve a net profit of 3,700 to 62 million yuan in 2024Q2 (loss of 0.252 billion yuan in the same period last year), turning a year-on-year loss into a profit. 2) From the perspective of breeding costs, we estimate that the total cost of pig breeding in 2024Q2 is close to 16 yuan/kg. It is expected that breeding will increase rapidly in the second half of the year, and the rate of cost reduction may accelerate. 3) The company is a high-quality growth stock for the new pig cycle. The growth rate of pig farming companies mainly depends on the balance sheet. At the bottom of the cycle, Huatong Co., Ltd. has ample capital, low balance ratio, and strong financing capacity. It is one of the fastest growing companies to list in the next few years. 4) Risk warning: An uncontrollable pig epidemic death occurred in the industry, cost pressure brought about by an uncontrollable rise in raw food prices, and profit fluctuations caused by large fluctuations in pig prices. 5) Investment advice:
The company is expected to become a new round of cyclical growth stocks. The company's production capacity is growing steadily, costs are expected to continue to improve, there is sufficient room for growth and valuation repair, and Zhejiang's pig production capacity is scarce. It is a core asset in agricultural farming. It continues to be highly recommended and maintains the “superior to market” rating. Considering the adjustment of the company's listing target, we adjusted the company's forecast assumptions for 2024-2026. It is estimated that 2024-2026 pigs will be released at 3.5/5/6 million heads (originally estimated to be 4.5/6/7 million heads, respectively). Furthermore, considering that the company's breeding costs are expected to benefit from improved feed raw material prices and achieve a larger decline, we have lowered the company's 2024-2026 breeding cost forecast. The estimated net profit for 2024-2026 is 0.91/2.02/2.04 billion yuan (originally estimated at 1/2.11/2.26 billion yuan, respectively), and the corresponding PE is 11/5/5X, respectively.
Commentary:
The company's 2024Q2 single-headed fat pig breeding profit reversed losses, and the full cost of breeding fell to close to 16 yuan/kg. Huatong Co., Ltd. issued a 2024 semi-annual performance forecast. 2024Q2 is expected to achieve net profit to mother of 3,700 to 62 million yuan (the forecast profit for the center 2024Q2 is 49.5 million yuan, a loss of 0.252 billion yuan for the same period last year, turning a loss into profit over the previous year). Looking at the detailed breakdown, we expect the company's total profit for pigs in 2024Q2 to be close to 80 million yuan, the slaughter business profit is expected to be close to 10 million yuan, and poultry losses and headquarters expenses are close to 40 million yuan. In terms of breeding costs, we estimate that the company's full cost of pig farming in the second quarter has dropped to close to 16 yuan/kg, a further decrease compared to the full cost of 16.4 yuan/kg in the first quarter, showing a positive trend in the steady development of its pig farming business.
Management improvements have achieved remarkable results, and aquaculture production capacity has been put into operation at an accelerated pace
In terms of breeding management, the company continues to promote the digitalization and refinement of the entire breeding process, and the optimization results of breeding and assessment systems are gradually reflected, further accelerating the reduction of breeding costs. Furthermore, the company expanded around the three-hour drive circle in Zhejiang, effectively controlled the management radius, and is expected to continue to maintain pig costs and regional sales price advantages. Currently, the company is able to breed close to 0.16 million sows. Considering that the company will upgrade efficient breeding pigs starting in the second half of 2022, it is expected that the monthly sow inventory will increase significantly from the second half of this year. The company is expected to release 3.5 million sows in 2024, an increase of nearly 50% over 2023. In addition, the company has diversified funding sources and is expected to maintain steady expansion in the future. Currently, the average market value of the company's breeding assets corresponding to the release of pigs in 2025 is only 1,700 yuan, and there is enough room for future valuation repair.
The three core advantages create cyclical growth stocks with “excess earnings per unit+rapid growth rate”. Companies with higher average market capitalization should have three core advantages, which are expected to shape cyclical growth stocks. Specifically, 1) Regional advantages cause excess revenue per unit. Zhejiang's breeding assets are scarce. First, because Zhejiang is a pig sales area, and the average price of local commercial pigs is close to 1-2 yuan/kg; second, Zhejiang has almost no farmers and is a natural breeding unaffected area. It has natural advantages in preventing and controlling African swine fever and other diseases, so Zhejiang's farming production capacity has the natural advantage of “excess income+good epidemic prevention”. 2) The latecomer advantage brings excessive profits from farming. Huatong is a dark breeding horse that emerged after the plague. At the bottom of the cycle, the company not only benefited from the talent accumulation and technology upgrade dividends brought about by the sharp expansion of the industry, but also had a clear cost advantage in breeding pigs and other resources. 3) Financial advantages establish the growth of the list. The company has diversified funding sources such as convertible bonds, fixed increases for major shareholders, and government farming subsidies. After the fixed increase is completed, the company's balance ratio declined further, opening up future financing space; in addition, the main business slaughter cash flow has also been stable throughout the year, which is expected to guarantee the company's rapid expansion.
Investment advice: continue to focus on recommendations
The company is expected to become a new round of cyclical growth stocks. The company's production capacity is growing steadily, costs are expected to continue to improve, there is sufficient room for growth and valuation repair, and Zhejiang's pig production capacity is scarce. It is a core asset in agricultural farming. It continues to be highly recommended and maintains the “superior to market” rating. Considering the adjustment of the company's listing target, we adjusted the company's forecast assumptions for 2024-2026. It is estimated that 2024-2026 pigs will be released at 3.5/5/6 million heads (originally estimated to be 4.5/6/7 million heads, respectively). Furthermore, considering that the company's breeding costs are expected to benefit from improved feed raw material prices and achieve a larger decline, we have lowered the company's 2024-2026 breeding cost forecast. The estimated net profit for 2024-2026 is 0.91/2.02/2.04 billion yuan (originally estimated at 1/2.11/2.26 billion yuan, respectively), and the corresponding PE is 11/5/5X, respectively.
Risk warning
There have been uncontrollable pig deaths in the industry, cost pressure brought about by uncontrolled increases in raw food prices, and profit fluctuations caused by large fluctuations in pig prices.