1H24 results are in line with our expectations

Tiankang Biotech announced 1H24 results: 1H24 revenue -10.8% year-on-year to 7.993 billion yuan, and net profit to mother reversed year-on-year loss to 0.277 billion yuan; of these, 2Q24 revenue -16.9% year-on-year to 4.216 billion yuan, and net profit to mother reversed the year-on-year loss to 0.223 billion yuan. The results were within the forecast range and in line with our expectations. We believe that 1H24's year-on-year loss was mainly due to rising pig prices and continuous improvement in company costs.

Development trends

Costs continued to improve, combined depreciation was reversed, and losses were reversed in the farming business. 1H24's pig breeding industry chain achieved revenue of 2.876 billion yuan, +11.2% year-on-year. 1) Sales side: 1H24 listed 1.4014 million pigs, +7.0% year over year, maintaining steady growth; 2) Cost side: the company's population update gradually showed results. According to the announcement, PSY increased from 24 at the end of 1Q to 27 at the end of 2Q, and production efficiency continued to be optimized; compounded by the decline in feed raw material prices, the company's costs declined steadily. The total cost of 1Q24/2Q24 pig breeding reached 15.99/15.15 yuan/kg respectively. 3) Profit side: Based on the rise in 2Q pig prices and the improvement in company costs, we determine that the company's breeding business losses have been drastically narrowed. Combined with expendable biological assets and inventory impairment and resale 0.38 billion yuan, we believe that the net profit of the breeding business has changed.

Animal insurance and feed operations are steady, contributing to the basic profit market. 1) Animal insurance: Under the weak economy of the industry, 1H24's health insurance business achieved revenue of 0.5 billion yuan, compared to +12%. We think it is mainly due to the merger of the Jilin crown and the lower base last year; in terms of profit, 1H24 contributed 0.34 billion yuan in gross profit, and gross margin remained flat. Under reduced cost control costs, we estimated net profit or achieved the same high growth rate. 2) Feed: Revenue was -5.6% to 2.84 billion yuan, and sales volume was +7.6% to 1.349 million tons. We believe that the main reason was the development of new markets and the release of ruminants; in terms of profit, 1H24 achieved gross profit of 0.38 billion yuan, which strongly supported the company's overall profit.

The company's listing targets have increased steadily, cost reduction and efficiency have continued, and its financial strength is relatively stable. 1) Business side: We are optimistic that the company's listing goals will be fulfilled and the trend of cost reduction will continue. In terms of publication, the company is currently able to prosper about 0.14 million, and population updates and management optimization continue to drive up production indicators. We believe that the PSY28 target is or expected to be achieved. We judge that the target of 3 million or more can be achieved; in terms of cost, we believe that cost improvements brought about by falling feed prices, production efficiency optimization, and increased capacity utilization in Gansu will continue to show, and there is room for further cost reduction in the second half of the year. 2) Capital side: Under the new industry paradigm, external capital drive returns to endogenous profit drive. We believe that the company's capital advantage is gradually reflected, stemming from a healthy debt structure, abundant capital, and the animal insurance and feed businesses providing stable cash flow and basic profit markets. The balance ratio of 1H24 was 51.1%, down 1.7 ppt from the end of 23, and the monetary capital was 2.86 billion yuan.

Profit forecasting and valuation

Based on rising pig prices and improving company costs, we raised our 24/25 net profit forecast by 66%/16% to 0.766/0.886 billion yuan. The current stock price corresponds to 11/10 times P/E in 2024/25. Taking into account profit forecast adjustments and the company's historical average market capitalization center, the target price was maintained at 10 yuan, corresponding to 18/15 times P/E in 2024/25, with 56% upward space. Maintain an outperforming industry rating.

risks

Pig prices, release volumes, and vaccine development fall short of expectations; risk of animal epidemics; fluctuating feed raw material prices.