On August 28, 2024, Shennong Group released its 2024 semi-annual report.

Key points of investment

The performance growth rate was impressive, and Q2 profit turned a loss into a profit

2024H1 Shennong Group achieved operating income of 2.494 billion yuan, a year-on-year increase of 46.04%, and impressive performance growth; achieved net profit of 0.124 billion yuan after deducting net profit of 0.137 billion yuan, net profit corrected compared to 2023H1, and the profit level increased rapidly; achieved a gross sales margin of 12.23%, an increase of 10.90 pcts year-on-year, and a net profit margin of 4.97%. Under the dual effects of high pig prices in Q2 and the continuous expansion of cost advantages, the company turned a loss into a profit in 2024Q2, achieving operating income of 1.412 billion yuan, an increase of 73.89% over the previous year, and achieved significant growth; achieved net profit of 0.128 billion yuan to mother and 0.131 billion yuan of net profit after deduction.

The company's breeding cost advantage remains at the top of the industry. It is expected that 2024Q3 pig prices will maintain a high price cycle, and profit margins are expected to expand further.

The cost advantage continues to be maintained, and there is still room for cost reduction

The average total cost of 2024H1 Shennong Group pig breeding is 14.2 yuan/kg, achieving a feed-to-meat ratio of 2.5-2.6, and the cost advantage continues to maintain the leading position in the industry. At the same time, farming cost control performance continued to improve. The total cost fell from 14.6 yuan/kg in January 2024 to 13.7 yuan/kg in June and July 2024. The cost decline was mainly due to falling feed raw material prices in the first half of 2024 and the continuous improvement of the company's production efficiency. Shennong Group clearly takes “quality improvement, efficiency increase, and cost reduction” as the core of its operations, and leverages the synergy between all links in the complete pig industry chain. The company is expected to continue to consolidate its breeding cost advantage by improving the genetic genes of breeding pigs, optimizing the procurement model of feed raw materials, and increasing scale effects. Against the backdrop of falling prices of feed raw materials, there is still room for reduction in the company's farming costs. It is expected that the full cost will drop below 14 yuan/kg in 2024, helping to further free up profit space.

Sow breeding is growing steadily, and pig production is expected to continue to increase 2024H1. Shennong Group achieved 1.0924 million pig sales (including external sales and sales to internal slaughter companies), an increase of 62.83% over the previous year. While the number of pigs released increased dramatically, volume and price rose sharply. The average sales price of 2024H1 commercial pigs was 14.70 yuan/kg, an increase of 5.60% over the previous year. As of the end of July 2024, Shennong Group was able to keep 0.104 million sows, which is a steady increase compared with the number of sows kept in June. It is expected that the company will continue to expand the scale of breeding sows and increase the utilization rate of production capacity. By the end of 2024, the number of breeding sows can be raised to between 0.12-0.13 million. At the same time, along with the increase in production indicators such as PSY, the number of pigs released is expected to continue to increase. The number of pigs released by the company is expected to be between 2.2-2.3 million in 2024.

The debt ratio has increased slightly, but it is still at the leading level in the industry

As of 2024H1, Shennong Group's balance ratio was 30.78%, up 1.25 pcts from 2024Q1. The slight increase in the balance ratio is mainly due to an increase in notes payable, which guarantees the company's abundant cash flow through financing. However, the company's debt ratio is still at the leading level in the industry, far below the industry average, and the financial situation is very stable.

Profit forecasting

The company's revenue for 2024-2026 is 6.235, 8.949 and 10.277 billion yuan, EPS is 1.14, 2.56, and 2.41 yuan, respectively. The PE corresponding to the current stock price is 24.3, 10.8, and 11.5 times, respectively, giving it a “buy” investment rating.

Risk warning

Risk of disease in the pig breeding industry; risk of natural disasters and extreme weather; risk of industrial policy changes; risk of pig price increases falling short of expectations; risk of market fluctuations in feed and raw materials markets; risk of capacity expansion falling short of expectations; risk of macroeconomic fluctuations.