The company's recent situation

Recently, we invited the management of Wen's Co., Ltd. to attend the 2024 China Finance Annual Strategy Meeting. The company exchanged views with the market on issues such as recent business conditions, capital planning, and development strategies. We believe that the company has significant advantages in production management level, stable production capacity and capital conditions, and is expected to continue to lead the new paradigm of pig breeding.

reviews

Production performance is continuously optimized, and management efficiency is steadily improved. On the cost side, the company's comprehensive cost of breeding pork pigs and the full cost of selling chicken in October was reduced to 13.4/11.4 yuan/kg, compared with -2.2/-1.6 yuan/kg in January, and -2.2/-1.6 yuan/kg compared to -2.2/-1.6 yuan/kg compared to January. Efficiency side: 1) In terms of pork: The company's production and operation are stable, reaching the best level in a single month since 2021, and the core indicators continue to improve. The market rate of pork pigs in October was 93%, compared with +1ppt in June; the number of pork pigs was 11.2, which was the same quarter-on-quarter; the production cost of pig seedlings was 290 yuan/head, down 40 yuan/head from May; and the meat ratio was 2.56, -0.04 compared to June. We believe that there is still room for improvement in the company's production efficiency compared to before the plague, and the cost may be further optimized. 2) Broiler side: Production efficiency remains stable at a high level. In October, the company's broiler market rate was 95.3%, with a ratio of 2.75 to meat.

The balance sheet was repaired relatively quickly, and shareholder returns continued to strengthen. First, the company's balance sheet was repaired relatively quickly. The company's balance ratio fell to 53%-54% in October, down 1-2 ppt from 3Q24. Second, the company actively rewards shareholders, demonstrating confidence in long-term development. The company announced a share repurchase plan of 0.9-1.8 billion yuan on September 18, and implemented a repurchase of 0.6 billion yuan before October 30; the company implemented a profit distribution plan for the third quarter and completed dividends to all shareholders on November 18. Third, the company develops an asset-light model, has sufficient production capacity reserves, and maintains a moderate pace of capital utilization. The completed production capacity/effective breeding capacity of the company's pig breeding farm during the fattening stage is about 46/37 million yuan; the company has set a fixed asset investment plan of 2-3 billion yuan for 2024, which will mainly invest in projects such as the upgrading of some pig breeding farm fences, pig breeding communities, and broiler production capacity.

Low-cost, high-volume, scarce aquaculture leaders are expected to grow steadily over the long term. 1) Leading a new paradigm of growth: On the one hand, we judge that pig prices will fall slowly in 2025, and the company can still expect to be profitable throughout the year due to its low cost advantage. On the other hand, we believe that the company “seeks from within” to achieve continuous cost breakthroughs, expand the scale of profit retention with large volume advantages, and have sufficient potential for endogenous growth. At the end of October, the company was able to breed sows +7% to 1.68 million. Combined with the increase in the company's production efficiency, we believe that the number of pigs released by the company is also expected to increase by about 10% in 2025. 2) Benefit from a new paradigm of investment: We believe that pig cycle investment is shifting from traditional pig buying prices and flexibility, and piglets growing to king, to buying large volumes and excessive profits. The company, as an established pig farmer, is expected to benefit first.

Profit forecasting and valuation

We maintain our 2024/25 net profit forecast of $10.2/10.9 billion. The current stock price corresponds to 12/11 times P/E in 2024/25, maintaining an outperforming industry rating. Maintain the target price of 25 yuan, corresponding to 16/15 times P/E in 2024/25, corresponding to 39% upward space.

risks

The risk of animal diseases such as non-plague; the risk that the company will be listed below expectations; the risk of rising feed costs.