Incident: On January 25, 2024, the company released the 2023 annual performance forecast. The company is expected to achieve net profit of 1.10 billion yuan to -1.40 billion yuan in 2023, an increase in losses over the previous year; net profit deducted from non-mother is 1.12 billion yuan to -1.42 billion yuan. Among them, Q4 is expected to achieve net profit attributable to mother - 351 million yuan to -651 million yuan, and net profit deducted from non-return to mother - 377 million yuan to -677 million yuan, turning a year-on-year loss. Due to the drop in pig prices, the company has prepared for inventory price drops for expendable biological assets stored in storage.

The number of pigs released is increasing rapidly, and there is a lot of room for cost reduction. The company's pig business will continue to expand rapidly in 2023. It is estimated that about 3.2 million pigs will be released throughout the year, an increase of 75% over the previous year, of which about 1.178 million will be released in Q4, an increase of 120% over the previous year. The company's losses are mainly due to the continuous decline in pig prices in 2023. The bottom of pig prices forced pig companies to reduce costs. Currently, the company's full cost has reached less than 18 yuan/kg. As feed costs drop and PSY increases, there is still plenty of room for cost reduction. It is expected that the volume of sales will continue to grow rapidly, and the compounded costs will continue to decline. The subsequent cycle is reversed, and the company is expected to achieve a steady increase in volume profit.

Industrial chain collaboration, feed improvement and seed source optimization promote cost reduction and efficiency. By the end of 2023Q3, the company's feed production was 424,400 tons, an increase of 134% over the previous year, to ensure that the company's pig market expanded rapidly while achieving self-sufficiency in feed. At the same time, the company carries out research and development of liquid fermented feed technology for pig breeding. Through precise nutrition, bacterial enzyme collaborative fermentation, and liquid feeding technology, the company has improved pig herd health and reduced production costs. It has been using fermented feed in some pig farms in 23 years. The company has always used American breeding pigs before, and PSY was lower. After acquiring Tianxin Breeding, breeding pigs were replaced and upgraded, PSY increased simultaneously, and production efficiency improved.

Backed by the Hunan State-owned Assets Administration Commission, there are obvious advantages in obtaining capital. As of the end of 2023Q3, the company's book monetary fund balance was 1.25 billion yuan, and capital reserves were quite abundant. The actual controller of the company is the Hunan Provincial State-owned Assets Administration Commission, which relies on the Hunan Agricultural Group. Group shareholders have participated in the fixed increase several times to provide financial support. The company's bank credit limit is high, which helps the company get through the bottom of the cycle. In addition, the company's production capacity expansion is mainly based on the leasing model. Due to the high time and capital requirements for building its own pig houses, leasing pig farms is beneficial for the company to rapidly expand production capacity with less assets.

Profit forecast and investment rating: We expect the company to achieve revenue of 71.49, 100.95, and 12.999 billion yuan respectively in 2023-2025, and realized net profit of -11.02, 7.59, and 1120 billion yuan respectively. Corresponding PE for 2024-2025 is 17.66 and 11.97x, maintaining the “recommended” rating.

Risk warning: Production capacity release falls short of expected risk; risk of pig price fluctuations; risk of epidemic disease in the breeding industry.