The company's recent situation

Recently, we invited the management of Muyuan 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, growth strategies, and capital utilization. We believe that the company has leading production indicators, fast balance sheet recovery, and sufficient momentum for capacity expansion, and is expected to continue to lead the new paradigm.

reviews

The cost advantage continues to strengthen, and the full cost target of 13 yuan/kg can be expected to be achieved. 1) Benefiting from falling feed costs and improved farming efficiency, the company's cost level has declined steadily. The full cost of the company in October was 13.3 yuan/kg, down 2.5/0.4 yuan/kg from the beginning of the year/end of September; reduced feed prices/improved production performance and reduced amortization of expenses during the period contributed by 50%/50%. 2) Efficiency improvements are expected to be further transmitted, and the full cost target of 13 yuan/kg by the end of the year can be expected. The company's overall survival rate in October was 85.5%, compared to +2.9ppt in May; PSY was close to 30 heads, up 3-4 heads from May; the cost of weaned piglets in April/October was 300/260 yuan/head, and we estimate that this is expected to contribute about 0.3 yuan/kg of cost reduction in the future.

Production capacity reserves are sufficient and are still expanding steadily, and sales volume is expected to increase by more than 10% in 25 years. 1) In the short term, the company is steadily improving the breeding of sows, and the new piglet sales plan helps marginally increase the utilization rate of sows production capacity.

According to the announcement, the company was able to increase production volume by about 10% to 3.316 million in September. We judge that a further increase in October is expected to support the same increase in sales volume of more than 10% in 25; the company introduced a “new fixed-price piglet sales plan” earlier, or marginally increase sales of piglets in 25 years, and is expected to smooth out fluctuations in the pace of sow production, increase the utilization rate of sows production capacity, and further reduce piglet production costs. 2) In the medium term, the company has sufficient fattening production capacity.

Currently, the company's pig production capacity is 80.86 million heads/year, and there are also certain projects and land reserves under construction. If production efficiency, management capacity, and pig house turnover increase, it is expected to further increase the space for pigs to be released.

Low-cost, high-volume, scarce breeding leaders lead a new paradigm of pig breeding. 1) New industry paradigm: We believe that the three major dividends of “capital, epidemic prevention, and pig prices” have weakened marginally in the post-pandemic period, leading pig companies are scarce in large numbers, and the growth window for small pig companies is closing. Pig prices may fall slowly in 25 years, and Makihara is expected to still be profitable with a low cost advantage, providing endogenous growth momentum. 2) New paradigm of growth: We believe that the company focuses on pig breeding, biosafety, and health management around the cost reduction target of 600 yuan, and is expected to feed back growth certainty with endogenous profits due to the scarcity of “low cost, large volume, and stable capital”. 3) New valuation paradigm: We believe that as Muyuan shifts from rapid development to a stage of high-quality development, the peak depreciation period has passed, and the convergence of capital expenditure is expected to lead to an increase in free activity cash flow, and the potential for improving discounted value and dividends is expected to gradually become prominent.

Profit forecasting and valuation

We maintain our 2024/25 net profit forecast of 18.7/20.5 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 56 yuan, corresponding to 16/15 times P/E in 2024/25, corresponding to 33% upward space.

risks

Pig prices and release volumes fell short of expectations; risk of the epidemic; raw material prices rose more than expected.