The dilemma can be mitigated, a reversal can be expected, and the “buy” rating is maintained
Factors such as the reduction in raw material costs led to a reduction in losses in the pig breeding business. 24Q1, the company's net profit to mother decreased significantly from year to month. Considering that the pig cycle is expected to reverse upward in 2024, and the commercialization of genetically modified corn domestically may drive improvements in the company's characteristics and profit in the seed business, we believe that the company's difficult situation can be reversed and that the net profit forecast for 2024/25/26 is 0.23/11.1/16.01 million yuan. Referring to the 2024 comparable company Wind's average PB average of 2.1 times, considering the company's leading position in genetically modified traits, the company was given a PB valuation of 2.85 times in 2024, with a target price of 5.61 yuan, maintaining a “buy” rating.
Improvements in the farming business led to loss reduction in 24Q1. The main feed business was still under pressure in the short term, and the 2024Q1 company achieved operating income of 6.71 billion yuan (yoy -13.8%) and net profit to mother of 209 million yuan (year-on-year and month-on-month loss reduction). Referring to the performance of similar companies, we analyzed the company's 24Q1 net profit loss or mainly due to factors such as price reduction of feed ingredients such as corn and soybean meal, reduction in piglet procurement costs, and management improvements that led to the narrowing of the company's pig breeding business losses. During the reporting period, the company listed a total of 1.452 million pigs (yoy +0.97%), of which the holding company listed 865,000 pigs (yoy -1.93%).
The decline in the company's 24Q1 revenue was mainly due to a contraction in the scale of the trade business and pressure on sales in the feed business.
The commercialization of genetically modified genes opens, focus on the blueprint for the seed industry
In the 2023/24 seed sales season, as the Ministry of Agriculture and Rural Affairs announced the results of the national audit of the first two batches of genetically modified corn and soybeans, commercial sales of domestic genetically-modified corn seeds were officially launched. Referring to overseas experience, we expect the penetration rate of genetically modified corn to increase rapidly in the past 5 years, and the profit elasticity of companies with related traits and varieties can be expected to unleash. As a leading company in genetically modified traits, Daebei Nong's traits accounted for about 59% and 56% of the quantities approved in the first two batches of genetically modified corn, respectively. At the same time, through its subsidiaries Yunnan Datian and Beijing Fengdu, the company also obtained 3 product reviews in the variety category, accounting for about 4.7%. We anticipate that the company may be able to use its leading advantages in the characteristic chain to obtain patent licensing fees, and at the same time use its subsidiaries to enter the sales process of genetically modified corn varieties to achieve double profits.
A reversal in pig prices can be expected, and profits in the main business may gradually improve
Domestic breeding sow breeding shows an accelerated trend of elimination at 23H2, and there are no signs of steady recovery, or it is expected to drive the pig cycle to reverse in 2024 and the pig breeding industry to enter a relatively continuous profit period, and the company's pig breeding business may benefit accordingly; considering the post-cycle nature of the feed industry (sows are eliminated or gradually transformed into a decline in pig storage, feed demand will gradually rise after breeding profits improve), the company's feed business is expected to be under pressure in 2024, or in 2025. The company has obvious advantages in genetically modified biotechnology, and there may be a trend of overtaking cars in curves. We expect that the company still has plenty of room for long-term development. After considering the revenue and profit contribution of GM, we maintained the 2024/25/26 net profit forecast of RMB 0.23/11.1/16.01 million.
Risk warning: promotion progress or effects of genetically-modified varieties/strong breeding industry supervision/pig price performance falls short of expectations, etc.