Zhengbang set sail with restructuring. Short-term optimistic about resuming production and long-term restructuring can be expected

After returning from the restructuring, Zhengbang quickly returned to the right track of business development, continued to restore the original idle production capacity, and pioneered new feed and fattening systems. Looking at the short term, we are optimistic that Zhengbang Technology's current progress in resuming work and resuming production will continue to accelerate, eventually implementing an internalized twin feed and pig breeding system. Cost control and production efficiency are expected to reach the upstream level of the industry. From a long-term perspective, we are optimistic that the Twin Group will fulfill its overall listing promise for related businesses within 4 years and achieve a merger with Zhengbang Technology. According to our estimates, if the two companies merge successfully, the scale of the farming business and the scale of the feed business can reach the leading position in the industry, and the industry will welcome new giants. At the same time, since both companies use the current twin system and use the twins' production performance to compare, the company's cost control is expected to occupy an advantageous position in the industry after the restructuring, and production efficiency is expected to reach the upstream level of the industry.

The results of the return of Zhengbang's restructuring are beginning to show, and the operation is back on the right track of development

Zhengbang's resumption of work and production continues to accelerate. The 2024Q3 performance turned a loss into a profit, achieving net profit of 0.428 billion yuan to mother. At the same time, the balance ratio dropped significantly to 47.05%, which has reached the excellent level of the industry.

Looking at the pig breeding business, the sale of twin piglets helped treat the symptoms. The business situation improved at an accelerated pace, and the pig breeding business took the lead in turning a loss into a profit. The breeding farm has steadily recovered, and has recovered to 0.257 million heads and 0.0585 million backup sows; fattening production capacity continues to expand in an asset-light model, with 1.2 million new high-quality slots developed in 2024; breeding costs and production efficiency are also being continuously optimized. In September 2024, the operating costs and fattening operating costs for weaned piglets dropped to less than 400 yuan/head and 15 yuan/kg, respectively. Under the twin support strategy, Zhengbang's progress in resuming production continues to accelerate. It is expected that in the future, Zhengbang will gradually approach the twins' excellent cost control and production efficiency performance. In addition, Zhengbang and the twins set up 3 incremental joint venture subsidiaries, which helped the twins to continue to invest various industry resources, breeding technology, capital, etc. into Zhengbang's operations. It also benefited the twins from their overall commitment to listing related businesses within 4 years after completing the restructuring. The two companies eventually realised a merger.

Looking at the feed business, the Zhengbang feed production and marketing team was re-established after restructuring, reusing the twins' advanced feed production and marketing methods, and the business quickly began to recover. Total feed sales in the first three quarters of 2024 exceeded 0.9 million tons. The twins also support Zhengbang in terms of feed raw materials and processing, which will help Zheng Bang design differentiated feed products and form a multi-brand strategy for the two companies. We are optimistic that Zhengbang's feed business will continue to recover, reuse the twin system to further increase profits and efficiency, and achieve recombination in the future to complement each other's feed product matrices and build an industry-leading feed production, product, and marketing system.

Twin management advantages are turned into system advantages, and integrated platforms help reshape Zhengbang

Twins Group Feed started and established a leading position in the industry. The business industry chain was continuously improved during the development process, and the number of fat pigs released in 2023 ranked 4th in the industry. Company executives have been deeply involved in the industry for many years, turning management advantages into industrial chain system advantages. At the same time, the “striver” corporate culture stimulates the vitality and enthusiasm of employees, not only creating the twins' glorious development history, but also continues to promote the acceleration of Zhengbang's resumption of work and production.

In terms of feed business, the twins built a complete product matrix, distributed production capacity across the country, and sold more than 13 million tons of feed in 2023. One-stop service creates a first-class platform in the country, gives full play to the synergy of all links, and system advantages create efficient and low-cost business processes.

In terms of pig breeding business, using the “company+farmer” cooperative asset-light pig farming model, 0.55 million sows can be raised by the end of 2023, and production capacity for sows is expected to increase significantly in 2024. In 2023, it achieved 13.52 million fat pigs, ranking 4th in the industry in terms of production volume. System advantages have established a dominant position in farming costs. The full cost in June 2024 was 13.8 yuan/kg, which is in the first tier of the industry. It is expected that there will still be room for decline in the second half of 2024. The industry has an excellent reputation. In the long run, it can broaden the maximum potential of twins to continue to expand fattening production capacity; in the short term, it can help Zheng Bang promote the resumption of work and production of fattening production capacity.

The process of review and restructuring, aggressive expansion met with a debt crisis, and the twins entered the market to help them be reborn

Reviewing the restructuring process, the superpig cycle continued for two years with high revenue and high profits fueled Zheng Bang's ambition to continue to expand production capacity, and internally formulated a “four-grab” aggressive production capacity expansion strategy. However, behind the rapid expansion of production capacity, the balance ratio has increased quarterly since the end of Q3 2020. Entering the loss period of the supercycle, Zhengbang entered the pre-restructuring process on October 24, 2022 due to its obsession with capacity expansion and not paying attention to efficiency improvements. Operating performance was drastically lost, cash flow turned drastically negative, and faced a liquidity crisis until it was unable to pay off maturing debts. On July 22, 2023, the twin Cinda Consortium officially entered the market as investors in the restructuring. After the implementation of the restructuring plan, the twins continued to help Zheng Bang resume work and resume production. The support strategy treated the symptoms, and comprehensively upgraded Zheng Bang in the four areas of resuming production, improving efficiency, reducing costs, and underwriting. At the same time, the twins made various promises of assistance to Zhengbang, including setting targets for improving various production indicators between the two parties within 2 years, as well as a commitment to launch asset injection within 2 years after the completion of the restructuring and the overall listing of related businesses within 4 years.

Profit forecasting

In terms of pig breeding business, we estimate that by the end of 2024, 2025, and 2026, Zheng Bang's sow production capacity will return to 0.285, 0.4, and 0.5 million heads respectively; the number of pigs released in 2024, 2025, and 2026 will be 3.927, 7.024, and 9.858 million, respectively, and assuming 50% of piglets and commercial pigs in 2024Q4, 2025, and 2026. The estimated release prices for 2024Q4, 2025, and 2026 pigs are 17.5, 16.0, and 15.0 yuan/kg; the operating costs of weaning for 2024Q4, 2025, and 2026 are 400, 350, and 330 yuan/head, respectively, and the operating costs of fattening are 16.5, 14.0, and 13.8 yuan/kg, respectively. In terms of other business, the feed business is expected to grow rapidly with the recovery of production capacity, and profitability will return to normal levels; the veterinary drug business will partially shrink in 2024, and the scale is expected to grow steadily in the future. The company's revenue for 2024-2026 is 8.406, 13.338, 17.525 billion yuan, and EPS is 0.06, 0.11, and 0.07 yuan respectively. The PE corresponding to the current stock price is 52.1, 29.4, and 44.7 times, respectively, giving a “buy” investment rating.

Risk warning

The risk of epidemic diseases in the pig breeding industry; the risk of natural disasters and extreme weather; the risk of changes in industrial policy; the risk of rising pig prices falling short of expectations; the risk of fluctuations in the feed and raw materials market; the risk of macroeconomic fluctuations, the progress of resuming production falls short of the expected risk, the twin asset injection situation falls short of the expected risk; and the synergy with twin groups falls short of the expected risk.