1H24 results are in line with our expectations

The company announced 1H24 results, with revenue -0.8% YoY to $52.3 billion, and net profit to mother +93.2% YoY to 2.13 billion yuan. Among them, 2Q24's revenue reached 29.12 billion yuan, -0.9% year over year, and net profit to mother reached 1.26 billion yuan, +82.6% year over year, in line with our expectations. The main year-on-year increase in profit was mainly due to good growth in market share and profit in the main feed industry, while the farming business turned a loss into a profit.

Development trends

1. Domestic feed business: Market share continues to increase, improve quality and efficiency, and grow with high quality. We believe that 1) Market share bucked the trend: the company 1H24 achieved 10.81 million tons of feed export sales, +8% year-on-year. Among them, sales of aquatic products/poultry/pig feed were +10%/+14%/-7% year-on-year, while general water/shrimp and crab/special water ingredients increased 15% to 20%/increased 8% year-on-year, respectively. According to statistics from the Feed Industry Association 1H24, the country's overall feed/aquatic feed production was -4.1%/-2.4% year on year, of which freshwater/seawater feed production was -2%/-5.4% year on year; 2) Improving quality and efficiency driving tonnage profit improvement: As the basic layout of the company's domestic production capacity is completed, the balance ratio is expected to decline, and the decline in depreciation, amortization, financial expenses, etc. is expected to support the continuous increase in the company's tonnage profit. 1H24's financial expenses were -30% to 0.21 billion yuan, and the balance ratio and financial expense ratio were -3.39pp/ -0.17ppt to 56.24%/0.41%, respectively.

2. Overseas feed business: technology, management and service go overseas, and enter the fast track of quantitative growth. 1H24's overseas feed export sales volume exceeded 1 million tons, an increase of more than 30% over the previous year. Revenue in overseas regions reached 7.41 billion yuan, an increase of 67% over the previous year, and achieved a sharp rise in volume and price. At the same time, the company's profitability in 1H24 overseas regions was further enhanced. The gross margin was +0.48ppt to 12.54% year-on-year, higher than the domestic feed gross profit margin of 10.04%. We believe that the company has completed the core production capacity layout in Southeast Asia, South America, and Africa, where breeding resources are abundant, and continues to develop markets in neighboring countries. It is expected to replicate the successful experience of the “Golden Triangle” of domestic seedlings, animal protection, and feed, export technology, management and service advantages, and continue to increase overseas feed market share. We expect that the company's overseas feed product structure will be better and the competitive advantage will be more prominent. Overseas feed tonnage profit may be significantly higher than domestic feed, supporting the release of profits from the main business.

3. Breeding business: The asset-light platform-based pig farming model has been implemented, and raw fish and prawn farming is progressing steadily. We believe that 1) Pig breeding: 1H24 sold about 2.7 million fat pigs, turning a year-on-year loss into a profit. The asset-light platform-based farming model of the company's outsourced piglet farming is becoming more mature, and profits are more stable; 2) Fish farming: According to Tongwei Agriculture and Animal Husbandry, the raw fish price was +30% to 9.3 yuan/kg on July 26, '24, and the company's 1H24 raw fish farming business reduced losses. We expect losses to narrow throughout the year; 3) Prawn farming: The factory prawn farming model explored by the company has declined markedly, and the farming scale is expected to rise steadily.

Profit forecasting and valuation

The profit forecast remains unchanged. The current stock price corresponds to 19/15 times P/E in 24/25, maintaining the outperforming industry rating and target price of 62 yuan, corresponding to 27/21 times P/E in 24/25, with 45% upward space.

risks

Aquatic product prices are sluggish, industry competition is intensifying, and hedging risks.