Main points of investment

Event: the company released three quarterly reports, from January to September 2016, the company achieved operating income of 3.34 billion yuan, an increase of 107.0% over the same period last year; the net profit attributed to the owner of the parent company was-57.819 million yuan, a decrease of 306.6% over the same period last year, and the performance was lower than expected.

The interest rate of the project during the training period is on the low side and the performance is lower than expected. The company's operating income continued to maintain rapid growth in the first three quarters, mainly due to the introduction of the company's introduction business and the promotion of beef cattle strategy, livestock sales and beef and mutton product sales increased by 180.1% and 144.5% compared with the same period last year. Compared with the substantial increase in operating income, the company's net profit loss further expanded, mainly because: 1) due to the increase in the scope of introduction business and consolidation in the reporting period, the corresponding increase in expenses resulted in an increase of 42.2% in expenses over the same period last year. 2) under the influence of the sharp decline in the sales price of imported Holstein cows, the company's overseas subsidiaries' breeding livestock sales gross profit further decreased, and because its income accounted for 68.1%, resulting in a substantial loss in the breeding livestock sales business; 3) the frozen semen sales with high gross profit margin decreased by 71.5% compared with the same period last year due to the postponement of the national replenishment tender. We believe that the company's performance is expected to pick up somewhat in the fourth quarter of this year with the launch of the national subsidy tender, but the full-year performance will most likely remain at a loss. In the long run, with the strengthening of the coordination of the business of various sectors of the company, the improvement of the layout of the beef industry and the warming of the market, the cost during the company is expected to be effectively controlled and the gross profit margin is expected to increase.

The strategic layout of large beef cattle has been carried out steadily, and Angus beef products have opened the space of imagination: under the strategy of large beef cattle, the company takes high-quality germplasm resources as the leader and introduces and promotes breeding through Australian purebred Angus beef cattle. Gradually build the whole industry chain of "breeding base-fattening base-beef slaughtering-beef sales". At the same time, the listing of Angus beef products will open up the domestic scarce high-end beef market. At present, the scale of the company's own breeding is about 2000 Angus cattle, and there are more than 10,000 Angus cattle under the "company + peasant household" breeding mode. We believe that although the company loses money in the short term, the profitability of the company will be greatly improved with the introduction of Angus beef and the improvement of the overall layout of the company's industrial chain.

Profit forecast and investment advice. Considering the current operating situation of the company this year, we downgrade the profit forecast for the company. It is estimated that the EPS of the company from 2017 to 2018 is 0.10 yuan and 0.17 yuan respectively, corresponding to the dynamic PE of 2017-2018 is 162,98 times respectively. We believe that although the company's current performance is lower than expected, the layout has been basically completed with the help of the "Big Beef" strategy, and the profitability of the company will be greatly improved with the introduction of Angus beef and the completion of the corresponding channel construction next year. Considering that the current market capitalization of the company is relatively small and its performance is at the bottom, it is an era of hard times, so it is recommended to pay attention to it for a long time.

Risk hints: the risk of improved seed subsidy policy; the adverse impact of the slowdown in national economic growth; the risk of epidemic disease; the risk of seasonal fluctuation of business performance caused by government bidding procurement.