Six days have passed since the opening of the IPO. The pig breeding giant Tianzhao Pig Industry (01248) once again used its oversubscription performance to show its eye-catching ability.
Judging from the prospecting progress, the company officially started the IPO from October 29 to November 6, achieved more than 1.5 times the subscription on October 30, and received nearly 2 times the subscription on November 2. As of press release, the subscription ratio of Tianzhao Pig Industry had reached 2.10 times, and the expected subscription multiplier was over 6 times.
As far as the present is concerned, with the popularity of the current super pig cycle, leading position in the core circuit, blowout growth in performance, and strong impetus from the three driving forces in the future, the Tianzhao pig industry is expected to officially land in the Hong Kong stock market on November 16 and become the focus of market competition.
The story of two “leading” businesses supporting high growth
According to reports, the business of Tianzhao pig industry is mainly divided into two categories: breeding pigs and commercial pigs.
Among them, pig breeding mainly provides related services such as pig breeding resources and pig breeding proprietary technology to customers such as group pig breeding enterprises and large-scale farms, and earns revenue from them. Commercial pigs, on the other hand, refer to pigs used for trading and production of pork products. Customers include pig dealers, slaughterhouses, and food companies.
Needless to say, the pig breeding business of Tianzhao Pig Industry has always been its “trump card business”. Through the introduction of high-quality pig breeding resources and advanced breeding technology from abroad, it now has two complete and independent population and breeding systems, including Duroc, Changbai, and Dabai, which have a certain leading edge in the industry.
From 2017 to the first four months of 2020, Tianzhao Pig's pig breeding revenue was $198 million, $77 million, $224 million and $91 million respectively, accounting for 40.6%, 15.1%, 26.5% and 24.4% of total revenue during the period. Among them, in 2019 and the first four months of 2020, the company's pig breeding earnings even increased by 193% and 255.3% year-on-year, and the reason for the sharp increase was due to the sharp increase in market demand and the continuous rise in pig breeding prices caused by African swine fever.
Let's take another look at Tianzhao Pig's commercial pig business. It can be said that this business segment has grown rapidly in line with the pig cycle. From 2017 to the first four months of 2020, the company's commercial pig business achieved revenue of $229 million, $303 million, 473 million yuan and $217 million respectively, accounting for 47%, 59.7%, 55.7%, and 58.3% of total revenue during the period. In line with the growth rate of pig breeding earnings, this business segment also grew rapidly in 2019 and the first four months of 2020, with year-on-year increases of 64.1% and 66%, respectively.
(Data source: Tianzhao Pig Industry prospectus)
Judging from the revenue structure, it is easy to see that Tianzhao Pig's pig breeding business and commercial pig business are the pillars of its revenue. However, judging from the gross margin level, the gross margin advantage of pig breeding is even more prominent. From 2017 to the first 4 months of 2020, the gross margin of breeding pigs was 60.8%, 54.3%, 77.9%, and 87.4%, respectively, while the gross margins of commercial pigs were 15.3%, 10.2%, 34.1%, and 58.1%, respectively.
It is undeniable that it is the complementarity of these two core businesses that has enabled Tianzhao Pig Industry to create such a high growth performance story.
In terms of revenue, from 2017 to 2019, Tianzhao Pig Industry achieved revenue 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.
Furthermore, judging from profitability, Tianzhao pig's gross margin and net profit margin are currently maintained at a very high level.
From 2017 to 2019, the company's gross margins were 36.4%, 22.1%, and 48.4% respectively, which was 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” Muyuan shares 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%.
Three strong driving forces will accelerate development in the future
If the two core businesses are important components of the current Tianzhao pig industry's high growth performance story, then its three strong driving forces are the “fuel additives” driving its accelerated development.
Driver 1: High quality pig breeding resources and leading breeding technology further highlight core competitiveness.
As we all know, pig breeding is located in the upper reaches of the entire pig breeding industry chain. The quantity and quality of pig breeding determines to a certain extent that an enterprise can breed sows and keep piglets. Therefore, once relevant enterprises master high-quality pig breeding resources and the important technology required for pig breeding, it is equivalent to having a very important core competitiveness. However, judging from the scale of pig breeding and breeding technology of the Tianzhao pig industry, it now seems that it already has the competitive advantage described above.
In terms of scale, in terms of the benefits of pig breeding sales in 2019, the company ranked first among all domestic pig breeding companies. By the end of 2019, there were 18,000 purebred sows nationwide; as of January 1, 2020, the maximum production capacity had reached 300,000 heads. Technically, the company currently has two complete and independent population and breeding systems, additive and legal systems, and has made greater improvements in breeding technology, seeking to genetically improve the productivity of each pig in the shortest possible time, and obtain better quality pigs from it.
Driver 2: Taking advantage of the favorable pig cycle, commercial pig business and pig breeding business will continue to go hand in hand.
Although the current pork price has been adjusted due to the improved relationship between supply and demand, pig prices that are still operating at a high level tell us that the favorable trend in the pig cycle has not stopped. In addition, according to Insight Consulting, it is predicted that the number of sows kept in 2020 will continue to be bottomed out, and it will not be possible to fully recover until 2024 until about 2024. This means that the supply of commercial pigs will slowly recover, and pork prices will remain high for a long time to come. In addition, the number of breeding sows kept will increase, which will inevitably generate greater demand for the purchase of breeding pigs, thus continuing to maintain a high level of volume and price.
In this context, the commercial pig business of Tianzhao Pig Industry is expected to still have some room for growth in the future. As mentioned earlier, the company's commercial pig business has become its new revenue pillar. The revenue achieved in the four months from 2019 to 2020 was 443 million yuan and 217 million yuan respectively, accounting for 55.7% and 58.3% of total revenue. Based on this incremental space, the pivotal role of the aquaculture business sector will be even more obvious.
Driver 3: Scientific pig farming model, reduction of pig farming costs, and reduction of interference caused by events such as African swine fever.
Looking at the present, the Tianzhao pig industry has not only taken the lead in breeding techniques, but is also constantly improving in pig breeding models. According to reports, 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,” which focuses on “raising pigs in buildings.” The boar and sows in the pig farm live smart lives, live in buildings, and ride elevators, greatly saving costs and investment. Compared with traditional pig farms, this new type of pig farm can save 80% of land, 30% of investment, 50% of energy consumption, and 50% of labor.
In addition to this, the company's pig farm has now also built an efficient disease prevention and control system. For example, it has developed a “Tianzhaoyun Intelligent Pig Management System” and a “breeding monitoring, analysis and management system” for pig farms using Internet big data technology.
By adopting this scientific pig farming model, it has greatly reduced the interference caused by external factors such as African swine fever — in 2019, the company sold about 294,000 pigs, an increase of 19% over the sales volume of 247,000 in the same period in 2018, while the number of pigs sold in China dropped sharply during the same period.
Finally, it is worth mentioning that under the strong impetus of the three driving forces mentioned above, Tianzhao pig's revenue scale may rise to the next level in the future.
As mentioned earlier, the actual number of sows in Tianzhao Pig Industry as of January 1, 2020 is 18,000. Using this data to estimate, in the context of the PSY of sows in the country in 2020 (number of weaned piglets per year) of about 20 heads, the number of pigs released by the company throughout 2020 was about 360,000.
Combined with rough estimates of pig sales in 2019, breeding pigs (80kg), commercial pigs (110kg), and piglets (30kg commercial pigs) were 712,000, 262,000, and 26,600, respectively. Finally, based on relevant data, it is estimated that the price of 80kg breeding pigs in 2020 may reach 5525.9 yuan/head, and the average price of commercial pigs may reach 32 yuan/kg. The revenue of Tianzhao pig industry in 2020 is roughly around the level of 1.3 billion yuan, reaching a new level compared to the revenue of 784 million yuan in 2019.