The 1H24 results are within the scope of the performance forecast and are in line with our expectations for 1H24 results: 1H24 revenue +13.5% to 46.74 billion yuan, net profit to mother reversed the year-on-year loss to 1.33 billion yuan; 2Q24 revenue was 17.3% year-on-year to 24.9 billion yuan, and net profit to mother changed to 2.56 billion yuan year-on-year. The 1H24 results are within the forecast range and are in line with our expectations. The company's performance was reversed mainly due to rising livestock and poultry prices and significant improvements in compounded company costs.

Development trends

The pig and broiler business is developing steadily, and the sharp rise in volume and price is driving revenue growth. According to the company announcement on August 26, 1) Pigs: 1H24's pork and pig breeding revenue was +29% to 28.16 billion yuan, pig sales were +22% year-on-year to 14.37 million head, and the average sales price of hairy pigs was +5.1% year-on-year to 15.3 yuan/kg.

1H24 piglets sold 0.44 million heads, contributing marginally to revenue and profit growth. 2) Broiler: 1H24's broiler breeding revenue was -0.9% to 16.68 billion yuan, sales volume was -1.0% to 0.55 billion feather, and the average sales price of chicken was +1.5% to 13.3 yuan/kg.

Livestock and poultry production and operation are improving, and financial strength has been further consolidated. According to the company announcement on August 26, 1) Increased efficiency and reduced costs: the company's production performance improved, and the cost reached a new low after the plague. ① In terms of cost, we estimate that the company's comprehensive cost of breeding pork pigs and the complete cost of selling chicken in June was reduced to 13.8/11.8 yuan/kg, and the cost advantage remained in the first tier of the industry. ② In terms of production efficiency, some pig production indicators reached the best level since 2021. In May 24, the company had 23 PSY heads, +3 heads compared to 21; the marketing rate was 92%, +7ppt compared to 21. The core production index for yellow feather chicken remained historically high. In May, the company's broiler breeding market rate exceeded 95%, and the meat ratio dropped to 2.79. 2) Financial strength: The company is committed to financial stability and financial security, and is optimistic about the strengthening of the company's financial strength in the context of a recovery in livestock and poultry prices. The balance ratio of the company at the end of 1H24 was 58.9%, down 4.4ppt from 1Q24; current liabilities at the end of 1H24 accounted for 52.8% of total liabilities, and the debt structure was healthy; the available capital of 1H24 was 8.44 billion yuan, and the net operating cash inflow was 5.81 billion yuan, and the cash flow situation improved.

The company has the characteristics of low cost, large size, and stable capital, and is expected to become a representative of the new paradigm of pig breeding.

According to the company announcement on August 26, 1) New industry paradigm: We believe that the three major dividends of “capital, epidemic prevention, and pig prices” weakened marginally during the non-plague period, and that the industry's growth drive ranged from “looking outward” capital to “looking inward” profit driven, and that the scarcity of Wen's low cost and large size characteristics was highlighted. 2) Cost leadership: With “cost reduction and profit protection” as the primary goal this year, the company insists on basic production management and carrying out special actions to improve efficiency, etc., and its cost competitiveness and financial strength are expected to be consolidated. 3) Release growth: The company can breed sows and production capacity is increasing steadily, which is expected to support the increase in production volume. At the end of 1H24, the company's productive biological assets were +1% month-on-quarter. We determined that because the company was able to breed sows, it may be expected to support the goal of 30 million pigs released in 24 years.

Profit forecasting and valuation

Keep profit forecasts unchanged. The current stock price corresponds to 12/11 times P/E in 24/25, maintaining an outperforming industry rating and target price of 25 yuan, corresponding to 16/15 times P/E in 24/25, corresponding to 43% upward space.

risks

Pig prices and release volumes fell short of expectations; risk of the epidemic; raw material prices rose more than expected.