The results from 1 to 3Q24 are in line with our expectations

Tiankang Biotech announced 1-3Q24 results: 1-3Q24 revenue -11.0% year-on-year to 13.087 billion yuan, net profit to mother increased 1.07 billion yuan to 0.566 billion yuan; 3Q24 revenue -11.3% year-on-year to 5.094 billion yuan, and net profit to mother increased 0.346 billion yuan to 0.289 billion yuan year-on-year. The 3Q24 performance was in line with our expectations. The company's year-on-year loss was mainly due to rising pig prices and continuous improvement in breeding costs.

Development trends

Costs have been steadily improving, and pig production is growing steadily. According to the company announcement, 1) sales side: 1) sales side: 2.144 million pigs were released from 1 to 3Q24, maintaining steady growth; 2) cost side: According to company announcements and investor questions, the company's 3Q24 costs showed a steady downward trend. From July to September, the complete cost of pig breeding was 14.75/14.32/13.91 yuan/kg, respectively. We think it is mainly due to falling feed raw material prices and optimization of production capacity utilization; in terms of efficiency, PSY in July increased by 3.5/ From 0.6 to 27.6, the results of population renewal continued to be realized.

Animal insurance and feed operations are steady, and profits from oil processing and corn storage businesses are under pressure in the short term. We estimate that the animal insurance and feed businesses will continue to contribute to stable gross profit and operating cash flow. 1) Animal insurance: According to the National Veterinary Drug Basic Database, the number of batches issued in the 3Q24 industry was -3.9%. We believe that weak industry demand is putting pressure on the growth rate of the animal protection business, but the steady release of the bird flu vaccine and the steady increase in sales of the blue ear market may show some resilience. 2) Feed: We believe that the feed business is operating steadily, and that the development of new markets such as Qingqing, Gan, Shaanxi will drive continuous growth in sales. 3) Other businesses: We estimate that profits in the protein and oil processing and corn storage business will be under pressure in the short term, causing a certain drag on performance, due to a high drop in raw material prices during the year.

Cost reduction and efficiency support the release of profits, and the balance sheet continues to be stable. 1) Business side: On the one hand, we believe that the company's breeding costs are expected to continue to improve with population updates, capacity utilization increases, and feed cost reduction; on the other hand, the company's production target is increasing steadily. Currently, the breeding target is about 0.14 million heads, PSY, or continues to rise. We judge that the annual listing target of 3 million heads or more is expected to be achieved. We are optimistic that the company's farming business will continue to benefit from declining costs, steady growth in sales, and support the gradual release of profits. 2) Capital side: Under the new industry paradigm, we believe that the company's balance sheet has steadily expanded. The company's balance ratio at the end of 3Q24 was 49.9%, down 1.2ppt from the end of 1H24, which is at a lower level in the industry; under stable profits and cash flow from the health insurance and feed businesses, the company's financial strength is strong, and 3Q24 monetary capital increased 27.5% to 3.65 billion yuan compared to 1H24.

Profit forecasting and valuation

Considering the continued improvement in company costs, we raised our 24-year net profit forecast by 17% to $0.894 billion, leaving the 25-year forecast unchanged. The current stock price corresponds to 11/11 times P/E for 24/25. Keep the outperforming industry rating and target price of 11 yuan unchanged, corresponding to 15/15 times P/E in 24/25, corresponding to 42% upward space.

risks

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