1-3Q24 net profit to mother +631% YoY, in line with our expectations

The company announced 1-3Q24 results: 1-3Q24 revenue -10.7% YoY to 24.01 billion yuan, net profit to mother +631% YoY to 0.29 billion yuan; of these, 3Q24 revenue -11.2% to 9.04 billion yuan, and net profit to mother +398% YoY to 0.32 billion yuan; in line with our expectations, we believe that the high performance increase in 3Q24 mainly benefited from rising pig prices and improved pig and chicken breeding costs. The profit of the pig and poultry business increased year-on-year. At the same time, the company announced that it plans to repurchase 0.1-0.2 billion yuan of shares at a price of no more than 10.9 yuan/share to convert the company's convertible bonds.

Development trends

Benefiting from the rise in pig prices and the reduction in pig and chicken breeding costs, the profits of the pig, meat and poultry business improved markedly. 1) Feed business: According to the Feed Industry Association, pig and poultry feed prices fell month-on-month in 3Q24, but pig demand continued to improve and poultry demand increased steadily since June. Taking into account the significant drop in the prices of raw materials such as corn and soybean meal, we judge that sales of this business rebounded month-on-month in 3Q24, and profits also grew rapidly. 2) Meat and poultry business: According to Boya Hexun, the price of white feather broiler in 3Q24 was -12% to 7.4 yuan/kg. We believe that the pressure on chicken prices affects the company's meat and poultry business revenue, but considering the company's efforts to reduce and increase costs this year, the meat ratio continues to improve, and breeding costs have dropped significantly. The profit of this business is expected to increase month-on-month in 3Q24. 3) Pig business: According to the Ministry of Agriculture, the price of commercial pigs increased 22% year-on-year to 19.6 yuan/kg in 3Q24. We believe that the company is also benefiting from rising pig prices and improved breeding efficiency. The business's profit is expected to increase month-on-month in 3Q24.

The rise in pig prices and cost improvements both benefited, and 3Q24 profitability increased month-on-month. 1) Gross profit margin: 3Q24 gross margin was +2.7/+2.1ppt to 8.0% month-on-month. We believe it mainly benefited from rising pig prices and marginal improvement in pig and chicken breeding business costs, which led to an increase in gross margin. 2) Fee rate:

The expense ratio for the 3Q24 period was +0.3ppt to 4.4% year over year, and we think it may be due to a decline in revenue scale. 3) Investment income: 3Q24 investment income turned a year-on-year loss to a profit of 0.06 billion yuan (+65.8% month-on-month). We think it also benefited from the increase in farming efficiency of participating companies. 4) Under the combined influence, 3Q24 net profit margin was +2.9/+2.7ppt to 3.6% month-on-month, and profitability improved for two consecutive quarters.

The post-cycle performance of the feed business has been restored, and the farming business has reduced costs and increased efficiency, and is expected to continue to grow steadily for 25 years.

Looking ahead, we expect: 1) Feed business: The feed industry is expected to usher in post-cycle opportunities in '25. Combined with expectations of low corn and soybean prices, the feed business boom is expected to gradually pick up. 2) Meat and poultry business: The supply of white chicken may still be sufficient in 25 years. Progress in consumption recovery will be the key to marginal pricing. The company continues to reduce costs and expand, and the meat and poultry business performance is flexible. 3) Pig business: The pig production capacity of the industry is expected to be released slowly in '25, and the downward slope of pig prices is low. The company focused on improving its core pig farming capabilities this year, and breeding costs have improved markedly. We expect the pig business to maintain a certain profit in '25.

Profit forecasting and valuation

The current stock price corresponds to 24/25 14/9 times P/E. We kept our 24/25 net profit forecast of 0.5/0.77 billion yuan unchanged. Based on changes in market risk appetite, we raised the target price by 12% to 9.5 yuan, corresponding to 17/11 times P/E in 24/25, with 28% upward space. Maintain an outperforming industry rating.

risks

Fluctuating raw material prices; sluggish farming boom; risk of epidemic.