Matters:

The company released a quarterly report, achieving revenue of 687 million yuan, -24.75% year-on-year, and +21.38% month-on-month; net profit to mother of 109 million yuan, -65.16% year over year, a significant improvement over 23Q4 net profit of -143 million yuan.

Commentary:

Downstream prices picked up, and the profits of the poultry breeding business improved month-on-month. We estimate: 1) In 24Q1, the company's parent generation sold about 3 million sets of chicken seedlings, with an average price of about 30+ yuan/set, and a profit of about 0.3 billion yuan. Although the number of overseas ancestor introductions has declined sharply since '22, the company's parent surrogate sales have remained stable. At the same time, imported varieties have benefited from the shortage of breeding, and the parent generation chain has remained profitable. 2) The 24Q1 company's product sales volume was about 130 million birds', the average price was about 3.6 yuan/feather, and the profit was about 120 million yuan. After the incubation period, the price of chicken seedlings rose rapidly, up about 80% from Q4, but sales were affected by weak enthusiasm for breeding, and both declined from month to month. 3) 909 Little White Chicken Q1 sold about 22.76 million birds, with an average price of about 1.28 yuan/feather. The company expects to maintain a sales scale of around 600 million chicken seedlings in 24 years. At the same time, the comprehensive benefits of its own white chicken varieties are obvious. It is expected to accelerate the replacement of the small white chicken and yellow feather chicken market. By the end of the 14th Five-Year Plan, 909 production is expected to increase to 300 million birds, or become a new profit contribution point.

The market for chicken seedlings in the Q1 industry fluctuated sharply, and the future market is worth looking forward to. 1) In terms of chicken seedlings, Steel Union data showed that the national average price in Q1 was 3.32 yuan/feather (-21.14%, month-on-month +90%). After the incubation period, the price of chicken surrogates rose rapidly. The price of chicken seedlings sprinted to a high of 4.50 yuan/feather around the Spring Festival, mainly due to a decrease in the amount of seedlings produced after the incubation period, and the supply gap catalyzed the price increase. The price dropped to 2.9 yuan/feather at the end of the quarter. 2) In terms of chicken, Steel Union data showed that the national average price in Q1 was 7.8 yuan/kg (-16%, +1% month-on-month). Theoretical farming profit was 0.77 yuan/piece, and overall supply declined due to poor downstream sales. Among them, the profit of theoretical breeding of chicken was -1.23 yuan/piece (-155% month-on-month) in March, mainly affected by the increase in chicken seedlings costs. In terms of introduction, 289,700 units were updated in Q1 in 2024, of which 110,500 units were imported (accounting for 38%) and 179,200 units were self-produced (accounting for 62%). Import introduction continued to be restricted. Looking ahead to the future market, the Association monitored sales of 23H2 parent-generation chicken seedlings, which was only 33.44 million units, or -8.1%. This will have an impact on the storage of chicken for parents after 7 months. Combined with improved demand for broiler products, the chicken seedlings market is expected to rise.

Investment advice: As the animal protein with the lowest meat ratio, white feather chicken's cost performance ratio and economic advantages will be further reflected. The long-term growth of the industry has been highlighted. At the same time, in the context of continued restrictions on the introduction of imported varieties, the company's high-quality seedlings are expected to enjoy excess profits. We expect the company's net profit to be 11.71/8.04/529 million in 2024-26, up 116.6%/-31.3%/-34.3% year-on-year. The corresponding PE is 9/13/20X, respectively. Based on the company's imported varieties, it enjoys excess revenue. Referring to comparable company valuations, we will give 13.8XPE in 24, with a target price of 14.62 yuan, maintaining a “strong” rating.

Risk warning: pig prices have fluctuated greatly, the introduction of ancestral chicken from overseas has recovered beyond expectations, domestic breeding epidemics such as bird flu have broken out, and chicken prices have declined.