1H24 results are in line with market expectations

COFCO Jiajiakang announced 1H24 results: 1H24 revenue was -21.4% to 4.57 billion yuan, profit before and after adjustment to fair value of biological assets was -0.39/0.25 billion yuan, and -5.6/+0.74 billion yuan year-on-year. 1H24's performance was in line with market expectations. Profits before the fair value of the company's biological assets was adjusted, causing pain due to management adjustments such as population rotation and the shutdown of some northern farms in the company's pig breeding business.

Development trends

The pig breeding business has been affected by phased management adjustments, and the fresh and import business is developing steadily. According to the company's announcement on August 28, 1) Pig breeding: 1H24's pig breeding revenue was -25.2% to 2.66 billion yuan, sales volume was -35.3% YoY to 1.584 million heads, and the average sales price of commercial pigs was +4.6% YoY to 15.3 yuan/kg. 2) Fresh pork: 1H24 fresh pork revenue was -1.4% to 2.1 billion yuan, with brand revenue accounting for +0.5ppt to 26.7% year over year; fresh pork sales volume was -2.2% to 0.12 million tons, of which flaxseed pork sales exceeded +100% year on year. 3) Meat products and meat imports: 1H24 meat products revenue was -2.7% to 0.38 billion yuan; meat import revenue was -25.4% to 1.05 billion yuan. Due to the sluggish domestic beef market, the company took the initiative to adjust the meat import business, and sales fell 9.1%.

Farming costs have gradually improved, and the balance sheet has remained stable. According to the company announcement on August 28, 1) Production management: The company focuses on improving the level of refined management, such as exploring smart breeding, installing intelligent equipment in project pilots, etc.; the company is making efforts to prevent and control the epidemic, such as improving standardized epidemic prevention systems, strengthening farm benchmarking, and narrowing the gap in internal farming performance. We estimate that the company's full cost of 1H24 is about 16.2-16.5 yuan/kg, and improvements in production management are expected to help the 2H24 cost decline. 2) Financial situation: The company's balance ratio at the end of 1H24 was 44.3%, +1.3ppt at the end of 2023, maintaining a low level among peers. We believe that the company's good financial situation supports the construction of new production capacity; if the company's business adjustments proceed in an orderly manner, the financial situation is expected to remain stable in 2024.

With pig farming boosting efficiency and expanding production and strengthening brand building in the fresh food business, the company is expected to return to steady growth.

According to the company's announcement on August 28, 1) Pig breeding: In terms of production management, the company uses technology to enable production, and the genomic breeding platform operates smoothly to promote population performance optimization. In terms of resuming production and expanding production, the company accelerated the adjustment and supplementation of the pig breeding system. Compared with the end of 2023, 1H24 breeding pigs and reserve breeding pigs were +42.2% to 0.337 million heads, ensuring growth; building new pig breeding capacity in the Jilin region is expected to give full play to the cost advantages of regional feed materials and pig breeding groups. 2) Fresh pork: The company accelerated product research and development, upgraded and launched non-flaxseed resistant pork products, and built a healthy and safe brand image; improved the production capacity layout, and the Beijing split center was put into operation in August. We think it may respond efficiently to the needs of the fresh food market in North China and expand the brand influence in the sales area.

Profit forecasting and valuation

Maintain profit forecasts, corresponding to 14.4/6.5 times P/E for 24/25. Maintain outperforming industry ratings. Considering changes in market risk appetite, the target price was lowered by 25% to HK$1.80, corresponding to 17.6/8.0 times P/E in 24/25, with 22.4% upside.

risks

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