The company is a leading pig farming enterprise in the Greater Bay Area with high-quality expansion. Thanks to its location advantage, the company's pig business has an obvious profitability advantage. The average gross margin in the last cycle exceeded Makihara, Wen's, and superstars by more than 10 pct. It is also one of the few pig companies in the pig sector where profits were all positive in the 20-22 year period. The company's share of the pig market supplied to Hong Kong is expected to rise to 30% in 2025, and there is room for doubling the amount of pigs supplied to Hong Kong. Furthermore, the company is expected to further increase its average profit margin by reducing costs and increasing efficiency through measures such as population improvement and production optimization. At present, the company has built a production capacity of 1.5 million heads. At the end of 23, an increase will be launched to help the company expand its production capacity, and will further expand to more than 2 million heads in the future. Relying on a high-quality expansion strategy, the company is expected to achieve significant profit growth in the next pig cycle.

Production capacity is being removed at an accelerated pace, and a cycle reversal can be expected. Production capacity removal is expected to accelerate under low pig prices, and a cycle reversal can be expected.

In the next six months, against the backdrop of excessive supply and poor demand, pig prices may continue to be low, and the low demand season after the Spring Festival will not rule out a further drop in prices. At the same time, long-term losses may have caused the industry's cash flow to dry up. We believe that against the backdrop of gradual deterioration in cash flow, continued sluggish pig prices will lead to accelerated loss of production capacity and strong sustainability. The second half of 2024 may usher in a new upward cycle, and the boom for the whole of '25. Corresponding to the investment level, 2023 proved that the investment layout at the bottom of asset prices and the bottom of the industry cycle can achieve relatively good returns. Currently, pig production capacity is being removed faster than in 2023, the direction is more clear, and the sector's valuation is still at an all-time low. We believe that the pig cycle has already ushered in a key layout period, and the market can be expected for the next six months.

Where does Dongrui's average profit advantage come from? The company's location advantage is outstanding. The Guangdong-Hong Kong-Macao Greater Bay Area market has a clear premium compared to other regions in the mainland. According to historical data, the average price of pigs supplied to Hong Kong is about 9 yuan/kg higher than the mainland market. The Guangdong market is 2 yuan/kg higher than the Northeast market. The significant price advantage makes the company's average profitability in the industry the highest. The gross margin of the pig business ranked in the top two in 19-21, and was 10pct higher compared to the cost industry-leading Muyuan in 18-22. Looking forward to the future, the company's management has a scientific business philosophy, and the integrated model of self-cultivation and self-care adopted has a scientific and efficient epidemic prevention and control system, which provides solid support for the company's high-quality expansion. As one of the top three major suppliers of live pigs from the Mainland to Hong Kong, the company's market share in Hong Kong is expected to further increase to more than 30% in the future, and there is still room to double the absolute volume compared to the present. Furthermore, the company's costs are currently in a steady decline channel. The target is 16 yuan/kg by the end of 24, and the continued decline in farming costs is expected to increase the company's average profit one step further.

The four elements of high-quality “money, people, land, and pigs” development help rapid expansion: 1) In terms of capital, the company's financial situation is clearly superior to the industry, and fixed growth and landing at the bottom of the cycle to help the company expand production capacity; 2) In terms of talent, the company's actual controllers are deeply involved in the frontline all year round, the core management is stable, and has a relatively complete talent training and incentive mechanism. Internally, it uses old and new “mentoring”. The outside cooperated with various professional colleges to establish a talent reserve base for the target of 2 million heads. “National Worker Pioneer Award” honor; 3 ) In terms of land, Heyuan City and Huizhou City, where the company's pig farms are located, are production areas in the sales area. Production capacity covers the entire Guangdong-Hong Kong-Macao Greater Bay Area, and the land reserves have reached more than 2 million heads.

4) In terms of pig breeding, the company has more than 20 years of pig breeding experience. It is the core breeding farm for pigs in the country, and enhances population performance through continuous introduction of excellent foreign breeding pigs, and achieves a balance between pig production efficiency and quality for the sales market. By the end of '24, the number of breeding pigs is expected to reach more than 90,000, which is enough to support the release of more than 1.8 million pigs.

Investment advice: The company is located in the Guangdong-Hong Kong-Macao Greater Bay Area, an area where pigs are sold at a high price. The four elements of “rich man pig” are well prepared and are expected to achieve high-quality expansion. We expect the scale of the company's pig production to grow rapidly. We expect to produce 620,000, 1 million, and 1.6 million heads in 23-25. The company is expected to achieve revenue of 1,111 billion yuan, 1,904 billion yuan, and 3,905 billion yuan respectively in 23-25 years, with year-on-year increases of -8.7%, 71.3%, and 105.1% year-on-year net profit of -485 million yuan, 0.03 billion yuan, and 697 million yuan, respectively. The corresponding EPS is -1.88 yuan, 0.01 yuan, and 2.70 yuan respectively. Refer to the company's historical valuation and similar comparable company valuations to provide high-quality and steady growth pigs The company's 25-year 10XPE, corresponding to a target price of 27 yuan, was covered for the first time, giving it a “strong push” rating.

Risk warning: Production capacity has fallen short of expectations, pig prices have fluctuated greatly, large-scale uncontrollable epidemics have occurred, extreme climate disasters have caused large-scale crop production cuts to drive up food prices, the increase in the scale of the company's listing has fallen short of expectations, the company's breeding costs have fluctuated greatly, and the quota system for the Hong Kong pig market has changed.