Key points of investment:

The company released its 2024 interim report. In the first half of 2024, the company achieved operating income of 1.38 billion yuan, -25.8% year-on-year, and realized net profit of 0.183 billion yuan, or -67.6% year-on-year, with basic earnings per share of 0.17 yuan/share, or -70.2% year-on-year. Among them, in the second quarter of 2024, the company achieved operating income of 0.688 billion yuan, and realized net profit of 0.074 billion yuan, or -70.7% year-on-year in the second quarter of 2024. The company had previously issued a performance forecast, and the actual performance was close to the forecast center level, which was in line with expectations.

The price of commercial chicken seedlings continued to fall, and the price of parent breeding chickens picked up month-on-month. Affected by the decline in the introduction of 22H2-23, the company's supply of chicken seedlings declined in the first half of 2024. Referring to the company's monthly sales report, the company sold a total of 0.277 billion white feather chicken seedlings during the reporting period, -15.6% compared with the same period last year. At the same time, consumption was sluggish, and the overall white feather broiler industry chain was under pressure, and the price of chicken seedlings declined markedly. The average sales price of the company's white feather chicken seedlings was 3.78 yuan/piece (including commercial chicken seedlings and parent-generation chicken seedlings), or -21.5%; sales revenue of chicken seedlings was 1.05 billion yuan, or -33.7% year-on-year. There is a divergence in price trends between parent breeding chicken and commercial chicken seedlings. Chicken breeding sales are expected to contribute to the company's main profit in 24Q2. Referring to data from the Animal Husbandry Association, in the second quarter of 2024, the average sales price of parent breeding chickens nationwide was 39.1 yuan/set, -34% year-on-year, +9% month-on-month; the average sales price of commercial chicken seedlings was 2.33 yuan/feather, -29% year-on-year and -33% month-on-month. It is estimated that the company's parents will both make a profit of 15-20 yuan, maintain a marginal profit for commercial chicken seedlings, and the chicken seedlings sales business will contribute a total profit of 0.06-0.07 billion yuan.

Probiotic 909 maintained steady growth, the pig breeding business continued to expand, and the revenue scale grew rapidly. The company's self-developed white chicken variety, Yisheng 909, maintained steady growth, but sales prices declined. In the first half of 2024, 909 chicken seedlings were sold at 0.045 billion feathers, +6.2% year-on-year; the average sales price was 1.28 yuan/feather, -24.2% year-on-year. During the reporting period, the company's chicken business achieved a total revenue of 1.21 billion yuan, a year-on-year revenue of -31.6%, gross profit margin of 30.0%, and -14.0pct year-on-year. With the company's pig breeding farm put into use, the company's binary pig breeding farm began to be put on sale, and production capacity was gradually released. In the first half of 2024, the pig business achieved a total operating income of 0.089 billion yuan, +299%, gross profit margin of 5.5%, and 4.4pct year on year. The pig business began to be profitable in the second quarter of this year. Looking backwards, the pig breeding business is expected to continue to expand and expand as the company's fixed production capacity is built and implemented one after another.

I am optimistic that the white feather broiler market will pick up in the second half of the year and maintain the company's “increase” rating. At the end of 2022, there was a high decline in the number of ancestral breeding chickens, which was transmitted to parent-generation chicken breeding in mid-2023. It is expected that the national supply of commercial chicken seedlings will decline somewhat in 2024. Consumption was sluggish in the first half of 2024, suppressing the overall price performance of the white feather broiler industry chain. In the second half of the year, against the backdrop of continued contraction in supply and marginal improvement in demand, the industry boom is expected to bottom out and rise. Since the sales price of chicken seedlings in the first half of the year was lower than previously expected, we lowered the company's assumption of the average sales price of chicken seedlings in 24 (from a 12% year-on-year increase to the same level as in '23) and adjusted the company's profit forecast at the same time. The company is expected to achieve operating income of 3.38/3.34/3.4 billion yuan in 24-26, and achieve net profit of 0.85/0.71/0.6 billion yuan (the previous forecast value was 1.21/0.84/0.68 billion yuan). The PE valuation level corresponding to the current stock price is 12X/14X/16X, referring to the 2024 valuation level of comparable companies (Shengnong Development, Minhe Co., Ltd.), and maintain the “increase” rating.

Risk warning: the price of chicken seedlings fluctuates greatly; the risk of an avian influenza epidemic; the price of raw materials fluctuates greatly.