1H24 net profit to mother of -67.6% YoY, in line with our expectations Yisheng Co., Ltd. announced 1H24 results: 1H24 revenue of 1.38 billion yuan, net profit of 0.18 billion yuan, year-on-year, -25.8%/-67.6% year-on-year, +0.3% month-on-month/loss turned into profit; of these, 2Q24 revenue was 0.69 billion yuan, net profit to mother 0.074 billion yuan, year-on-month, -26.8%/-70.7% year-on-year, and +0.1% month-on-month /- 32.7%; The performance is within the company's forecast range, in line with our expectations. The company's performance declined year on year. We think it was mainly due to the year-on-year decline in chicken seedlings sales, and the price base for chicken seedlings was relatively high during the same period last year.

Development trends

Sales volume and price of white chicken seedlings also fell, and revenue fell from a year-on-year high level. 1) 1H24 sells 0.28 billion white feather broiler chicken seedlings, -15.6%; revenue 1.05 billion yuan, or -33.7%; unit price 3.8 yuan/feather, -21.5%; we believe that the decline in sales volume is mainly due to the industry-level impact of the introduction and reduction of ancestral chickens from overseas since May 2022. The year-on-year decline in prices is due to the high 1H23 base. Considering that the seedling price is still quite impressive and the company's unit cost has declined steadily, we estimate that the business contributed more than 0.2 billion yuan in profit. 2) “Prebiotic 909” chicken seedlings sold 0.045 billion feathers, +6.2% year over year; revenue 0.057 billion yuan, -19.5% year over year; unit price 1.3 yuan/feather, -24.2% year on year. 3) Breeding pigs sold 0.0085 million heads, +631.8%; revenue was 0.023 billion yuan, +412.8%; unit price was 2,699 yuan/head, -29.9% YoY. The company's breeding capacity was gradually released, and the overall pig farming business was profitable in 2Q24.

Profitability declined year over year due to high base figures. 1) Gross profit margin: 1H24 gross profit margin was 27.2%, year-on-year - 15.3ppt. We think the main reason is that 1H23 chicken seedlings have a high price base, and 1H24 chicken seedlings prices have declined year on year.

2) Expense ratio: 1H24 sales/management (including R&D) /finance expense ratios were 1.1%/9.3%/1.2%, respectively, +0.3/+2.4/-0.9ppt. Among them, the year-on-year decline in financial expense ratios benefited from the decline in overall debt levels, while other cost rate fluctuations stemmed from changes in revenue scale. 3) Under the combined influence, 1H24 net margin -17.2ppt to 13.3% year-on-year.

The 2H24 chicken breeding boom is expected to pick up. “Probiotic 909”, pig breeding layout, and employee dividends are in the long term. 1) In the short term, the price of chicken seedlings has been picking up since July. According to Yisheng's official website, on August 1, the price of chicken surrogate seedlings was +8% compared to the same period last year to 4.2 yuan/bird; according to the Poultry Industry Association, the price of chicken seedlings for parents was 51 yuan/bird on July 21, which is close to the high level of the same period last year. Looking ahead, we judge that the reduction in ancestral chicken imports since 2022 has begun to affect this year's supply. It is expected that the 3Q24 white chicken supply may shrink, and higher pig prices are also expected to strengthen the chicken price market. It is expected that the 2H24 chicken fry price boom may continue to rise marginally. 2) In the long run, the company continues to expand its main chicken breeding capacity, while actively expanding business outreach such as “Probiotic 909” and pig breeding, and successfully implemented a 24-year employee stock ownership plan in July, which is conducive to long-term development.

Profit forecasting and valuation

The current stock price corresponds to 2024/25 15/16 times P/E. Considering the decline in sales, the 2024 net profit forecast was lowered by 24% to 0.65 billion yuan, maintaining the 2025 forecast of 0.61 billion yuan; the target price was lowered by 19% to 10.5 yuan, corresponding 18/19 times P/E in 2024/25, with 17% upward space. Maintain an outperforming industry rating.

risks

The risk of large-scale animal outbreaks; the risk of a sharp rise in introduction; uncertainty about import policies.