2Q24 net profit to mother was the same and turned a profit month-on-month, in line with our expectations that Hefeng Co., Ltd. announced 1H24 results: 1H24 revenue -10.4% to 14.971 billion yuan, and net profit to mother increased 0.009 billion yuan to -0.034 billion yuan; of these, 2Q24 revenue was 0.775 billion yuan, -12.6%/+7.3% month-on-month, and net profit to mother 0.068 billion yuan, and the results were in the company's forecast Within the range, it met our expectations. We believe that the decline in the company's revenue is mainly due to the year-on-year decline in feed sales, feed prices, and chicken prices. The 2Q24 reversal of losses benefited from higher pig prices and lower costs.

Development trends

The feed business is developing relatively steadily, and the cost of breeding business continues to improve. 1) Feed business: 1H24 exported 1.815 million tons of feed, -6.9% year-on-year. Among them, pig/poultry/ruminants were -19%/+1%/-9%, respectively, and 1H24 sales and prices declined year on year. However, considering the significant year-on-year decline in the prices of feed ingredients such as corn and soybean meal this year, we expect the profit of this business to be relatively stable in 2Q24. 2) Meat and poultry business: 1H24 Holdings slaughtered a total of 0.42 billion white chickens, +14% over the same period, and the feed-to-meat ratio dropped to 1.47 (1.55 in 2023). Considering the company's continued cost reduction and increase, we expect the business to reduce losses month-on-month in 2Q24. 3) Pig business: 1H24 Holdings listed a total of 0.58 million pigs, +9% year-on-year, including 0.55 million fat pigs, +26% year-on-year. Benefiting from rising pig prices and falling costs, the company's pig business turned profitable since March. We expect the business to record positive profits in 2Q24.

Marginal cost improvement, 2Q24 profitability increased month-on-month. 1) Gross profit margin: 1H24 gross margin was +0.4ppt to 5.1% year over year, and 2Q24 was +0.9/+1.4ppt to 5.8% month-on-month. We believe that the main reason is the marginal improvement in farming costs and feed raw material costs, driving the increase in gross margin. 2) Expense rate: Expense rate +0.5ppt to 5.2% YoY during 1H24, +0.5/-0.4ppt to 5.0% YoY in 2Q24, or due to a decline in revenue scale. 3) Under the combined influence, 1H24 net profit margin was -0.1ppt to -0.2% year on year, 2Q24 was +1.4/+2.3ppt to 0.9% year on month, and 2Q24 profitability improved year on month.

The feed business is stable, the farming business provides flexibility, and there is room for improvement in performance. 1) Feed business: We expect that the company's feed export targets this year may be dragged down by the downturn in downstream cattle and sheep farming, and there is pressure to deliver.

However, considering that corn and soybean prices remain low and downstream pig farming profits are improving, we expect the feed business performance to remain relatively stable throughout the year. 2) Meat and poultry business: We expect the supply and demand pattern of the 2H24 white chicken industry to improve. Combined with the company continuing to reduce costs and expand, the flexibility of the meat and poultry business performance is expected to gradually unleash. 3) Pig business: We determine that there is a basis for quarterly increases in pig prices from 2Q24 to the end of the year. The company focused on improving its core pig farming capabilities in 24, breeding costs have improved markedly, and the company's export target for pigs in 24 was +3% to 21% to 120 to 1.4 million head. We expect to continue to contribute to the increase in performance.

Profit forecasting and valuation

The current stock price corresponds to 24/25 13/8 times P/E. Considering the decline in feed sales, the 24-year net profit forecast was lowered by 13% to 0.5 billion yuan, keeping the 25-year forecast of 0.77 billion yuan unchanged, and reducing the target price by 9% to 8.5 yuan, corresponding to 16/10 times P/E in 24/25, with 24% upward space. Maintain an outperforming industry rating.

risks

Fluctuating raw material prices; sluggish farming boom; risk of epidemic.