Key points of investment:

The company released its 2024 interim report. The Q2 results all rebounded sharply year on month, and the debt ratio continued to decline. In the first half of 2024, the company achieved operating income of 46.76 billion yuan, +13.5% year-on-year; realized net profit of 1.33 billion yuan to mother, turning a year-on-year loss into a profit (loss of 4.69 billion yuan for the same period in '23). Among them, in the second quarter of '24, the company achieved operating income of 24.91 billion yuan, +17.4% year-on-year, and realized net profit of 2.56 billion yuan to mother, turning a year-on-year loss into profit (loss of 1.94 billion yuan for the same period in '23).

Previously, the company had issued an interim performance forecast (1.25-1.5 billion). The actual performance was close to the forecast center and in line with expectations. At the end of the reporting period, the company's balance ratio fell to 58.95%, down about 2.5% from the year-end level.

Pig breeding: The scale of production has increased steadily, and cost optimization is obvious; reserve capacity is sufficient, and growth continues to be realized. In the first half of 2024, the company sold 14.37 million pork heads, +22% year over year (with sales volume of 7.194 million heads in the second quarter), achieving sales revenue of 28.16 billion yuan, +28.7% year over year. The average sales price of pigs was 15.3 yuan/kg, +5.1% year over year. Referring to the company's investor relations activity record table, in the second quarter of 2024, the company's pig farming business made a profit of about 1.8 billion yuan, and it is estimated that the average profit level reached about 250 yuan/head. In terms of breeding efficiency, the company's cost control in the first half of '24 was ideal. The overall cost of pig breeding dropped to about 14.8 yuan/kg, down about 2.4 yuan/kg from the same period in '23. Among them, the comprehensive cost of pig breeding in the second quarter was 14.2 yuan/kg, down about 1 yuan/kg from the previous quarter. By the end of the reporting period, the company was able to breed about 1.64-1.65 million sows, and there were plenty of backup sows. 44%-48% of the 30-33 million target set for the whole year had been achieved. It is expected that the sales target will be achieved with a high probability of achieving steady growth throughout the year.

Broiler breeding: Excellent breeding performance, stable broiler sales, and stable profit contribution. In the first half of 2024, the company sold 0.548 billion broilers (including hairy chicken, fresh products and cooked food), which was -1.04% year-on-year, with an average sales price of 13.3 yuan/kg, +1.5% year-on-year. Of these, 0.28 billion broilers were sold in the second quarter, or -2.2%. The sales scale remained relatively stable. Referring to the company's investor relations activity record table, in the second quarter of 2024, the company's chicken farming business made a profit of about 0.8 billion yuan, and it is estimated that the average profit level of the feather was about 2.86 yuan/feather. In terms of breeding efficiency, the company's broiler production continued to maintain a high level of stability during the reporting period. The broiler market rate in June was 95.3%, the feed-to-meat ratio dropped to 2.79, and the total cost of putting out chicken fell below 12.4 yuan/kg, down about 1.6 yuan/kg year on year, and further dropped to 11.8 yuan/kg in June.

Thanks to the continued decline on the cost side, the company's broiler breeding business recorded a relatively stable profit contribution during the reporting period (slight profit in the first quarter, with a total profit of about 1.5 yuan/feather in the first half of the year).

I am optimistic that the farming boom will continue. There is strong certainty about the company's performance implementation, and it maintains a “gain” rating. Starting in the second quarter of 2024, pig prices began to rise cyclically. At the same time, benefiting from the decline in raw material prices, breeding costs were also clearly optimized. It is expected that the company's pig and chicken business will all achieve a good level of profit in the second half of 2024. At the same time, the pace of the industry's resumption of production tends to be cautious, and the ability to expand production both subjectively and objectively is limited. I am optimistic that the industry will continue to profit in 2025. Based on the company's interim report data, we slightly adjusted the company's profit forecast. We expect the company to achieve operating income of 111.8/121.6/127.7 billion yuan in 2024-2026 and achieve net profit of 8.02/10.37/7.43 billion yuan (the estimated value before adjustment was 8.01/10.33/6.85 billion yuan). The current PE valuation level corresponding to the stock price is 14X/11X/15X, maintaining an “increase in holdings” rating.

Risk warning: Livestock and poultry prices continue to be low; raw material prices fluctuate greatly; risk of farming epidemics.