Investment highlights

For the first time, Xinwufeng (600975) was covered to give it an outperforming industry rating. The target price was 13.00 yuan, corresponding to the target market value of 16.7 billion yuan in 24 years based on the SOTP valuation method. Xinwufeng is a regional leader in pig breeding in Hunan Province under the Hunan Provincial State-owned Assets Administration Commission. We believe that on the basis of an asset-light breeding model and the layout of the entire industry chain, the company will acquire Tianxin Breeding Industry to supplement its breeding capacity reserves, and is expected to achieve rapid expansion. The reasons are as follows:

Based on tight capital, low pig prices are catalysts, and production capacity may be eliminated at an accelerated pace. 1) Tight capital: 1-3Q23 industry stock capital continues to be consumed, and the industry capital chain may have entered a tight range; 2) Low pig prices: increased supply pressure combined with slow recovery in demand, and pig prices continue to be weak. According to Steel Union, the month-on-month decline in breeding sows in December was -2.09% compared to -0.17ppt to -2.09% in November, and production capacity removal continued to accelerate.

The asset-light breeding model, sufficient breeding reserves, and the layout of the entire industry chain jointly build a moat. 1) The leasing model is asset-light expansion: The expansion of the company's production capacity mainly relies on a self-supporting model dominated by the leasing model. In 20-22, the number of caliber pigs released at the headquarters of Xinwufeng increased by 224% to 1.07 million heads; 2) The merger and acquisition of Tianxin to increase breeding capacity reserves: the company invested 1,498 billion yuan to consolidate the Tianxin Breeding Industry, a high-quality pig breeding asset under the Hunan State-owned Assets Administration Commission. In '22, Tianxin Breeding Co., Ltd. kept a list of sows and 760,000 pigs. We expect the number of sow farms/fattening farms to increase by 31%/38% to 31/1.57 million heads under the consolidated caliber; 3) The entire industry chain layout improves quality control and risk resistance: layout of feed, breeding, slaughter and meat products processing and sales. The live pig end has a 60-year history of exporting live pigs to Hong Kong and Macau, and “U Fresh” chilled meat is well known on the brand side.

Capacity expansion, cost reduction and efficiency, and downstream expansion help the company develop rapidly in the medium to long term. 1) Production capacity expansion: Expansion of leasing models, commissioning of fund-raising projects, mergers and acquisitions, and Tianxin's joint construction are more flexible.

We estimate that the company is expected to keep 156/225 thousand sows in early 23/24, and the annual number of pigs released is expected to reach 300/4.5 million, an increase of 64%/50%; 2) Cost reduction and efficiency:

We estimate that the full cost of the company's 3Q23 may have been reduced to around 17.7 yuan/kg, and is expected to continue to decline in the future through increased capacity utilization, improved management efficiency, improved pig breeding and nutritional formula optimization; 3) Downstream expansion: Relying on the advantages of the entire industry chain layout, we are promoting the initial processing of downstream slaughtered cold chain meat products and deep processing of branded food to continue to strengthen the advantages of live pigs and branded pork for Hong Kong and Macao.

What is our biggest difference from the market? We believe that the market has yet to fully appreciate the company's advantages of relying on the local State-owned Assets Administration Commission to expand through an asset-light model, as well as the synergy effects of Tianxin Seed's mergers and acquisitions.

Potential catalysts: Accelerated elimination of production capacity, rapid expansion of pig production, reduction in total breeding costs.

Profit forecasting and valuation

We expect the company's EPS to be -0.67 yuan, 0.09, and 0.75 yuan respectively in 23-25 years. For the first time, coverage gave an outperforming industry rating. The target price was 13 yuan based on the SOTP valuation method. There is room for 25% increase, corresponding to the target market value of 16.7 billion yuan in 24 years.

risks

Cost control is lower than expected; pig prices are lower than expected; sales volume is lower than expected; raw material costs are rising; epidemic and policy risks; risk of management changes.