We forecast 2Q24's profit of 2.49-2.74 billion yuan. The results are in line with our expectations of the 1H24 performance forecast: net profit to mother of 12.5 to 1.5 billion yuan, compared to -4.69 billion yuan in the same period last year; realized deducted non-net profit of 13.0 to 1.55 billion yuan, compared to -5.13 billion yuan for the same period last year.

The 2Q24 company achieved net profit of 2.49-2.74 billion yuan, compared to -1.94 billion yuan in the same period last year. The performance forecast is in line with our expectations. We are optimistic about leading the cost advantage of the release of the company's management optimization dividends, and steady growth driven by priority balance sheet restoration, which is expected to lead a new paradigm in the pig breeding industry.

Key points of interest

Farming costs hit a new low since the plague, and the cost advantage continues to lead the industry, growing steadily. 1) Sales volume:

There has been steady growth in sales. According to an announcement on July 10, 1H24 sold 14.37 million/ 0.55 billion piglets, or +22%/-1% year-on-year; 1H24 piglets sold 0.44 million heads, contributing marginally to profit growth. 2) Cost: The company focuses on basic production management, attaches importance to the construction and optimization of biosafety prevention and control systems, and promotes continued leadership in cost advantages, and hit a new low after the plague. We estimate that the company's comprehensive pork pig breeding cost/full cost of pig breeding in June was reduced to 13.8/11.8 yuan/kg; some of the company's production indicators reached the best level since '21, with 23 PSYs in May '24, compared to +3 in '21; the average number of healthy heads in May '24 was 11.3, +1.3 compared to '21; and the listing rate was 92%, +7ppt compared to '21. 3) Price: The average sales price of broilers and pork pigs in 2Q24 was 13.6/16.4 yuan/kg, +2%/+14% year over year.

Balance sheets or repairs, and financial strength remain stable to support the high-quality expansion of the company's production capacity. 1) The company's capital is stable, and the balance sheet is expected to be repaired. The balance ratio of the 1Q24 company is 63%, which is lower than the industry average; under the current situation of sharp loss reversal, we estimate that it is expected to fall back to less than 60% by the end of 2Q24; at the end of 1Q24, the company's current liabilities account for 54% of total liabilities, and the debt structure is good. 2) The company's financial strength supports the pace of high-quality production expansion. According to the company's announcement on May 11, the company was able to breed 1.57 million sows at the end of April, an increase of 0.02 million over the end of 23. We believe that the company's main work in the first half of the year was to improve the quality and production indicators of sows, and the results were obvious, and the strengthening of financial strength is expected to support the steady expansion of production capacity.

The company is a leading representative of “low cost, large volume, stable capital” farming, and is expected to lead a new paradigm in the industry.

1) The pig industry has entered a new paradigm. We believe that during the non-plague period, the three major dividends of “capital, epidemic prevention, and pig prices” weakened marginally, and that the period of rapid “capital competition” growth for enterprises returned to a period of high quality “cost competition” growth. Leaders seized strategic opportunities to achieve growth, and current scarcity was prominent. 2) The company represents “low cost, large volume, stable capital”. We believe that on the basis that the company continues to lead the way in cost advantages, the release of pigs is expected to reach 30 million in 24 years. We are optimistic that the company will lead a new paradigm in the industry and continue to grow at high quality.

Profit forecasting and valuation

Based on rising livestock and poultry prices and improving company costs, we raised our 24/25 net profit forecast by 50%/18% to 10.2/10.9 billion yuan. The current stock price corresponds to 13/12 times P/E in 2024/25, maintaining an outperforming industry rating. Taking into account profit forecast adjustments and the company's historical average market capitalization center, the target price was maintained at 25 yuan, corresponding to 16/15 times P/E in 2024/25, corresponding to 29.7% upward space.

risks

The risk of animal diseases such as non-plague; the risk that the company will be listed below expectations; the risk of rising feed costs.