Matters:

Company announcement: The company issued a semi-annual performance forecast for 2024. It is expected that 2024H1 will achieve net profit of -4,900 to -32 million yuan, net profit of non-net profit of -2,400 to -16 million yuan, net profit to mother of 348.3213 million yuan for the same period last year, after deducting non-net profit of -310.5444 million yuan, and overall year-on-year loss in the first half of 2024.

Guoxin Agriculture's opinion: 1) Superstar Agriculture and Animal Husbandry announced the 2024 semi-annual results forecast. It is expected that 2024H1 will achieve net profit of -4,900 to -32 million yuan, after deducting non-net profit of -2,400 to -16 million yuan, a year-on-year reduction in losses. Among them, net profit due to mother is expected to be 8905 to 106.05 million yuan in 2024Q2, after deducting non-net profit of 8828 to 96.28 million yuan, turning a year-on-year loss into a profit. 2) 2024H1's net profit loss mainly comes from the leather business. Among them, the company's pig breeding business continued to reduce costs and increase efficiency, while benefiting from a recovery in pig prices, the pig business turned a loss into a profit in 2024H1; however, the leather business was affected by poor demand in the downstream market, and sales and revenue declined year-on-year, causing losses. 3) The company is one of the high-quality growth stocks in the new pig cycle. Judging from the listing, the company released 1.09 million pigs in 2024H1, of which 1.06 million were big pigs, an increase of 25% over the previous year. According to the company's May 2024 announcement, the current pig breeding farm has a production capacity of more than 0.15 million heads, and the planned pig breeding farm production capacity for the second half of 2024 can reach 0.2 million heads or more. It is expected that the pig market will continue to expand steadily in the future, or benefit from the sharp increase in volume and price dividends brought about by the recovery in the pig cycle. 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 scale of the company's pig breeding is expanding steadily, with sufficient growth. At the same time, it is leading the industry in terms of average profitability, and continues to focus on recommendations. Considering that the company's cost benefits in 2024 fell slightly above expectations, the company's profit forecast for 2024 was raised, and the company's average pig sales price forecast for 2025 (from 21.7 yuan to 17.8 yuan per kilogram of commercial pig sales) was lowered due to prudent and conservative principles, thereby lowering the company's profit forecast for 2025. In the end, we expected net profit to the mother for 2024-2026 to be 0.739/1.708/1.643 billion yuan (originally estimated net profit to mother for 2024-2025 was 0.706/ 3.68 billion yuan), EPS is 1.45/3.35/3.23 yuan respectively. Corresponding to the current stock price PE is 18.5/8.0/8.3 X, maintaining the “superior over market” rating.

Commentary:

The company's 2024Q2 performance turned a loss into a profit. Benefiting from the recovery in pig prices, superstar agriculture and animal husbandry announced the 2024 semi-annual results forecast. It is expected that 2024H1 will achieve net profit to mother of -4,900 to -32 million yuan, after deducting non-net profit of -2,400 to -16 million yuan, a year-on-year reduction in losses. Among them, it is estimated that in 2024Q2, net profit attributable to mother will be 8905 to 106.05 million yuan, after deducting non-net profit of 8828 to 96.28 million yuan, turning a year-on-year loss into a profit. 2024H1's net profit loss mainly comes from the leather business. Among them, the company's pig breeding business continued to reduce costs and increase efficiency, while benefiting from a recovery in pig prices, the pig business turned a loss into a profit in 2024H1; however, the leather business was affected by poor demand in the downstream market, and sales and revenue declined year on year, causing losses. Judging from the listing, the company released 1.09 million pigs in 2024H1, of which 1.06 million were big pigs, an increase of 25% over the previous year. The company's breeding market is expected to expand steadily. According to the company's May 2024 announcement, the current pig breeding farm has a production capacity of more than 0.15 million heads, and the planned pig breeding farm production capacity for the second half of 2024 can reach 0.2 million heads. It is expected that in the future, pig production will continue to expand steadily, or benefit from the sharp rise in volume and price dividends brought about by the recovery in the pig cycle.

Focusing on the pig breeding business, multiple advantages help continue to release performance The company's cost control capabilities are at the leading level in the industry. Its core strengths are outstanding in both pig breeding and breeding management. In terms of breeding, the pig breeding company PIC reached a strategic cooperation with the company in 2017, and is currently the company's main supplier of breeding pigs. The company's breeding pigs on the basis of great-generation boars, great-generation, and ancestral sows provided by PIC have the characteristics of high yield rate, high survival rate, and low feed-to-meat ratio, and excellent production indicators. According to the company's disclosure, at present, the company's Dragon Pig Farm and Gaoguan Pig Farm both use PIC high-quality breeding pigs. The average PSY for both was 29.17 in actual operation in 2019 and 2020, leading the industry. According to the company's announcement, the company's main production indicators for pig breeding continued to improve in 2024. Among them, the PSY of the company's outstanding pig farms in Sichuan has now broken through 30, and the benchmark farm has reached the international benchmark level of PSY 32. It is expected that the company's 2024 PSY will increase significantly compared to the previous year's PSY level.

The construction of the Dechang project is progressing steadily, and the scale of the company's breeding business is expected to reach a new level. According to the company announcement, the introduction of the Dechang Superstar Pig Breeding Integrated Project has been completed as planned in May 2024. Production and operation work is being carried out according to the plan, and it is expected to reach full production in 2024Q4. Dechang will adopt a full self-raising model. All breeding pigs in the farm will use PIC high-quality breeding pigs. The average PSY is expected to reach 29. It is estimated that the sow storage scale will reach 0.036 million in the future, which can support 0.972 million heads in the year of the pig. The company's pig business may usher in a new round of high-quality expansion.

Investment advice: continue to focus on recommendations

The scale of the company's pig farming has been steadily expanding, and the growth rate is sufficient. At the same time, the cost improvement results have been steadily realized. It is leading the industry in terms of profitability, and continues to be recommended. Considering that the company's cost benefits in 2024 fell slightly above expectations, the company's profit forecast for 2024 was raised, and the company's average pig sales price forecast for 2025 (from 21.7 yuan to 17.8 yuan per kilogram of commercial pig sales price) was lowered due to prudent and conservative principles, thereby lowering the company's profit forecast for 2025. In the end, we expected net profit to the mother for 2024-2026 to be 0.739/1.708/1.643 billion yuan (the net profit for 2024-2025 was originally estimated to be 0.706/3.68 billion yuan), EPS is 1.45/3.35/3.23 yuan respectively, corresponding to the current stock price PE is 18.5/8.0/8.3 X, maintaining the “superior over market” rating.

The company's profit forecast adjustments are mainly due to adjustments to future pig price expectations. Specifically, it is based on the following assumptions:

Pig breeding business: The company's breeding business is in a period of rapid expansion. It is expected that in 2024-2026, the number of pigs released will reach 3.3 million heads, 5 million heads, and 600 elbows, respectively. In terms of cost, farming costs are expected to continue to decline as aquaculture capacity utilization increases and population health management is strengthened.

In terms of price, according to our industry judgment, the company is expected to sell 16.8 yuan, 17.8 yuan, and 16.9 yuan per kilogram of commercial pigs in 2024-2026 (the average sales price in Sichuan Province is expected to be slightly lower than the national average). In the end, we expect the revenue of the company's pig breeding business in 2024-2026 to be 5.685/7.608/8.549 billion yuan, respectively, with gross margins of 19.97%/29.68%/26.56%, respectively.

Feed business: The company's feed sector is a subsidiary business of the pig breeding chain and is expected to maintain a steady growth rate in the future. Feed sales are expected to grow at 10%, 12%, and 11% respectively in 2024-2026. The sales price per ton is expected to decline slightly as raw material prices improve. Ultimately, the company's feed business revenue for 2024-2026 is 0.462/0.513/0.564 billion yuan, with a gross margin of 8.5%/8.8%/8.6%, corresponding to gross profit of 0.039/0.045/0.048 billion yuan.

Other business: The company's other business revenue mainly includes leather products, commercial chicken, etc., which are not strategic priorities. Considering that this part of the business is not the main business focus of the company and that revenue and sales volume will decline in 2023, we have given its business contraction expectations. Ultimately, the revenue of other businesses in 2024-2026 is 0.119/0.116/0.114 billion yuan, corresponding to gross profit of -0.006/0.006/-0.006 billion yuan.

In summary, revenue for the next 3 years is expected to be 6.267/8.237/9.226 billion yuan, +55.1%/31.5%/12.0% year over year, gross profit margin 18.65%/27.89%/25.07%, gross profit 1.169/2.297/2.313 billion yuan.

Based on the above assumptions, we obtained the company's 2024-2026 revenue of 6.27/8.24/9.23 billion yuan, net profit to mother of 0.739/1.708/1.643 billion yuan, and earnings per share of 1.45/3.35/3.23 billion yuan, 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.