The pig breeding giant Tianzhao Pig Industry (01248), which began an IPO on October 29, has now been oversubscribed.
Specifically, the company will sell 386.26 million shares globally, accounting for 10% of the public offering, 90% for international placement, and 15% over-allotment rights. HK$26.00 per share — HK$38.80, 200 shares per lot. It is expected to be listed on November 16. Judging from the prospecting progress, Tianzhao Pig Industry has already subscribed more than 1.5 times on October 30 and received nearly 2 times the subscription on November 2. As of press release, its subscription multiplier had reached 2.24 times, so it can be said that it has oversubscribed in a relatively short period of time.
I have to say that the reason why Tianzhao Pig Industry was able to complete the oversubscription in a short period of time, in addition to the “external cause” superpig cycle and the support of the investment team at the cornerstone of strength, is mainly because the company's “internal” fundamentals are very hard core.
In 2019, Tianzhao pig's revenue was 784 million yuan, an increase of 75% over the previous year; net profit was 485 million yuan, a year-on-year increase of more than 11 times. As of April of this year, its performance growth continued to maintain a high growth rate. Revenue increased 85% year on year to 352 million yuan, while net profit soared 572% year on year to 234 million yuan. Judging from the above growth rate, the Tianzhao pig industry is an up-and-coming “small but beautiful” pig farmer.
Looking closely at the prospectus, how “hard core” is the fundamentals of the Tianzhao pig industry?
Pig breeding scale, leading technology, and emerging small but beautiful pig farmers
According to information, Tianzhao Pig Industry, founded in 2004, mainly focuses on breeding pigs upstream in the pig breeding chain. The products are mainly divided into two categories — breeding pigs and commercial pigs. With high-quality pig breeding resources and breeding technology, the company is currently a famous pig breeder in the industry.
First, let's look at scale. By the end of 2019, the Tianzhao pig industry had a population of 18,000 purebred sows nationwide; as of January 1, 2020, the maximum production capacity had reached 300,000 heads; up to now, it has operated 47 pig farms in China. Also, in terms of the benefits of pig breeding sales in 2019, Tianzhao Pig Industry ranked first among all domestic pig breeding companies.
From a technical point of view, the Tianzhao pig industry also has a certain leading edge. It introduced 866 purebred pigs and their breeding techniques from a Canadian company in 2008, and 975 purebred pigs from a French company in 2017. It has now completed the introduction of the “breeding pig+freezing+system” breeding model, and has two complete independent populations and breeding systems, including Duroc, Changbai, and Dabai.
(Picture source: Tianzhao Pig Industry prospectus)
Furthermore, in terms of breeding technology, the main goal of the Tianzhao pig industry is to genetically improve the productivity of each pig in the shortest possible time to obtain higher quality pigs from it. Based on this efficient breeding model, the company now has a very stable customer base.
It is worth mentioning that the Tianzhao pig industry has not only taken the lead in breeding techniques, but is also constantly improving in pig breeding models. According to the Zhitong Finance App, at present, the pig farm in Tianzhao Pig Industry has evolved from the traditional pig house “Yu Style Pig Farm 1.0” to “Yu Style Pig Farm 5.0,” focusing on “building pig raising.” The boar and sows in the pig farm live smart lives, live in buildings, and ride elevators, greatly saving costs and investment. According to reports, compared to traditional pig farms, this type of pig farm can save 80% of land, 30% of investment, 50% of energy consumption, and 50% of labor.
As we all know, in the pig farming race, as long as relevant enterprises master the important resources and technology required for pig breeding, it is tantamount to having a very important core competitiveness. Today, in the context of the two-wheel drive of technological advantages and scale effects, the Tianzhao pig industry is a “new pig farmer.”
Revenue and profit have both soared, and the financial structure continues to be optimized
At present, the scale advantages and technical advantages of the Tianzhao pig industry have been verified in its rapidly growing performance.
In terms of operating performance, from 2017 to 2019, Tianzhao Pig Industry achieved operating income of 475 million yuan, 449 million yuan, and 784 million yuan respectively, with a compound annual growth rate of 28.5%; realized net profit of 159 million yuan, 0.4 billion yuan, and 485 million yuan respectively, with a compound annual growth rate of 75%. As of the first four months of this year, its revenue increased 85% year over year to 352 million yuan, while net profit soared 572% year on year to 234 million yuan.
(Data source: Tianzhao Pig Industry prospectus)
Looking at the split business, pig breeding and commercial pigs are still the “go-to” businesses of Tianzhao pig industry. As of the first 4 months of 2020, its pig breeding revenue increased 255.3% year on year to 90.8 million yuan. The reason for the increase was the sharp increase in market demand and the continuous rise in pig breeding prices due to African swine fever; how did commercial pig revenue compare to 64.1% to 210.7 million yuan? The reason for the increase was also due to the continuous rise in commercial pig prices. In 2019, these two major business segments also grew rapidly. Among them, pig breeding revenue surged 193% year on year, while commercial pig revenue increased 66% year on year.
Based on what can be seen above, under the favorable “pig cycle”, the Tianzhao pig industry, which has scale and technical advantages, has some potential to explode in terms of business performance.
Furthermore, as business continues to improve, the financial structure of the Tianzhao pig industry is also in a state of continuous optimization. In terms of cash flow, from 2017 to the first 4 months of 2020, its net cash income from operating activities was 150 million yuan, 43 million yuan, 312 million yuan, and 212 million yuan. It has maintained a positive value and gradually increased in recent years. It can be seen from this that its good cash flow operating capacity is evident.
However, under the asset-light operating model, Tianzhao Pig's balance and liability structure is also relatively healthy. According to the prospectus, as of the first 4 months of 2020, the company's current liabilities were 386 million yuan and current assets were 527 million yuan. Current assets can cover current liabilities, and there is no pressure to pay debts in the short term. At the same time, its balance ratio also declined, from 52.52% in 2018 to 49.14% in 2019.
From the above data, it is easy to see that in the context of the super pig cycle, the fundamentals of the pig breeding giant Tianzhao pig industry are still very impressive.
High gross margin+high net profit+high ROE, there is room for growth
Of course, compared to rapidly growing operating data, what is even more astonishing is Tianzhao pig's “three highs” data, that is, high gross profit margin, high net profit margin, and high return on net assets.
According to the prospectus, from 2017 to 2019, the company's gross margins were 36.4%, 22.1%, and 48.4% respectively, which is higher than the gross margin level of “Pig King” Muyuan shares in the same period. At the same time, its net interest rates were 33.4%, 8.9% and 61.9% respectively, which was also higher than the net interest rate level of “Pig King” in the same period. As of the end of April this year, its gross margin and net profit margin continued to be high, recording gross margin of 65.9% and net profit margin of 58.6%.
Judging from the above gross margin and net profit margin data, which are above the industry average, the profitability of the Tianzhao pig industry can be described as very strong.
At the same time, the core business indicator of Tianzhao pig industry, the return on net assets (ROE), is also very high. From 2017 to 2019, its return on net assets was 47.0%, 9.2%, and 74.7%, respectively, and the average ROE for the past three years was as high as 43.6%. In 2019, the company was also ahead of industry bosses in this indicator.
However, the reason why Tianzhao Pig Industry has been able to achieve such a high return on net assets is mainly due to its excellent cost control ability.
According to estimates from industry sources, from 2017 to 2019, the full costs were 14 yuan/kg, 12.9 yuan/kg, and 13.80 yuan/kg, respectively, which is comparable to the full costs corresponding to the new and old “Pig King” Muyuan shares and Wenshi shares. As of the first 4 months of 2020, the company's full cost was about 14.20 yuan/kg, significantly lower than the industry's range of 16.31-18.45 yuan/kg.
As we all know, gross profit margin, and ROE are the three major indicators of “stock god” Buffett's stock selection. In order to facilitate stock selection, stock experts have even set a standard — gross margin above 40%, net interest rate above 5%, and return on net assets above 15%. If all three indicators are met, then this company is a “good company” that is very profitable, has low sales costs, and is extremely efficient in using the invested money.
As can be seen from the above data, the Tianzhao pig industry, which has a high gross profit margin, high net interest rate, and high ROE, seems to have already met the stock selection criteria of the stock market. It is a potential stock that only has growth potential, growth potential, and profit profit.
At the end of the article, let's take a look at the valuation of Tianzhao Pig Industry. Based on a rough calculation of the central issuance price, the company's issuance market value is about HK$5 billion, which is about 9.25 times the valuation. In fact, if the net profit for the first four months of 2020 is estimated at 234 million, the price-earnings ratio is only about 6.5 times, which is significantly lower than A-share pork stocks such as New Hope and Zhengbang. Based on this, it can be seen that the current valuation of the Tianzhao pig industry is low, and there is plenty of room for appreciation after listing.