1H24 results are in line with market expectations

The company announced 1H24 results: revenue of 6.42 billion yuan, -3.2% year-on-year, net profit loss of 0.23 billion yuan, profit of 0.21 billion yuan in the same period last year. The results are in line with previous company performance forecasts and market expectations.

Development trends

Yield and production continued to rise, and falling milk prices dragged down revenue growth. Benefiting from measures such as genetic improvement and technology improvement, 1H24 achieved a yield of dairy cows +3.2% to 13 tons; as of 1H24, the company's herd size was 0.445 million heads, a slight decrease of 1.3% from the end of '23, mainly due to the company's increased efforts to eliminate cows in the first half of the year. Benefiting from an increase in yield and an increase in the share of adult dairy cows (from 48.5% to 50.6% in '23), 1H24's raw milk production was +16% to 1.45 million tons year-on-year. In terms of milk prices, due to weak demand and increased supply, the industry is currently showing a pattern where supply exceeds demand. 1H24 domestic raw milk prices were -11.9% year-on-year, and the company's milk price was -10.5% year-on-year, performing better than the industry. Overall, 1H24 raw milk revenue was +1.3% year-on-year, achieving a slight increase.

1H24 Cost reductions have improved gross margin, and changes in fair value affect net interest rates; net cash flow after deducting non-operating cash flow has remained steady. The gross margin of 1H24's raw milk was +2.0ppt to 30.3%, mainly benefiting from a 15.5% year-on-year decrease in the feed cost of kilogram milk, offsetting the adverse effects of the decline in raw milk sales prices. The reduction in the cost of kilogram milk feed is mainly due to a decrease in bulk feed prices and an increase in yield, and internal benefits continue. The 1H24 sales rate was +0.7ppt to 3.3% year-on-year, mainly due to increased sales of raw milk, resulting in increased shipping costs. Furthermore, in the first half of the year, the company increased the number of cows eliminated, increasing losses due to changes in the fair value of dairy cows and reducing the cost of selling dairy cows by 0.6 billion yuan to 1.15 billion yuan, which dragged down net interest rate performance. Excluding the impact of mismatch in supply chain finance payment terms, operating cash flow remained relatively stable at 2.1 billion yuan in the first half of the year.

The decline in 2H costs may be expected to continue to hedge against the downward pressure on milk prices and keep an eye on the progress of the industry's supply clearance. According to data from the Ministry of Agriculture, social milk prices fell about 14% year on year in July-August this year. Considering that the supply of raw milk is still loose, we expect 2H24 milk prices to drop by double digits over the same period last year. In terms of cost, according to data from the Ministry of Agriculture, corn and soybean meal prices fell 14%/23% year on year, respectively, from July to August this year. We expect 2H24 feed prices to decline more than 1H year on year. We expect the decline in the sales cost of 2H24 kg milk to hedge against the downward pressure on milk prices, and gross margin is expected to continue to rise year on year. Furthermore, considering the decline in the number of cows eliminated in the second half of the year, we expect a loss of 2H's fair value change or less than 1H. Regardless of additional impairment, we expect to achieve breakeven in the second half of the year. According to our grassroots research, the upstream animal husbandry industry has now begun to lose production capacity. It is recommended to focus on the progress of the industry's supply clearance. We expect milk prices to stabilize in 25 years.

Profit forecasting and valuation

Considering the elimination of cow losses, the 24-year profit forecast was lowered by 158% to a loss of 0.15 billion yuan, and the 25-year profit forecast was maintained. The company traded 19 times 25-year P/E; considering that the company is at the bottom of the cycle, maintaining a target price of HK$0.75, corresponding 21 times 25-year P/E and 14% upward space, considering that the company is at the bottom of the valuation range for a long time, maintaining an outperforming industry rating.

risks

Demand is weak; milk prices are falling; feed costs are rising.