The downturn in the downstream farming sector has temporarily put pressure on the company's performance, and the overall risk of accounts receivable is manageable. The rise in 24H2 pig prices may drive demand for sports insurance to reach an upward inflection point, and the inflection point in the company's performance is getting closer. In addition, commercialization of major single products such as the non-plague vaccine & cat trifecta may open up room for growth for the company. Maintain a “Highly Recommended” investment rating.
The company's overall 24Q1 performance is under pressure. The company released its 2024 quarterly report. During the reporting period, the company achieved operating income of 205 million yuan (yoy -27%) and net profit to mother of 87.23 million yuan (yoy -36%). The company's overall 24Q1 performance is under pressure, mainly due to: 1) the continued slump in downstream farming and continued deterioration in cash flow, leading to weak demand for upstream sports protection products, putting pressure on the company's revenue and profits; 2) in order to cope with the risk of bad debts on the downstream farming side, the company actively reduced the size of accounts receivable, which had a certain impact on the revenue side; 3) 23Q1, the company's revenue and profit base were relatively high.
Gross margin is under pressure, and accounts receivable risk is manageable. In terms of gross margin, in 24Q1, the company's gross profit margin was 67%, up 0.4 percentage points from 23Q4, but it is still at the bottom level of the company's history. The main reason may be that the downstream farming side continues to lose money, and direct sales from the company's major customers account for relatively high direct sales, or concessions on the price side. In terms of accounts receivable, in 24Q1, the company's credit depreciation was 478,000 yuan, -99% month-on-month. Meanwhile, by the end of 24Q1, the company's notes and accounts receivable were 312 million yuan, -5.8% month-on-month, showing a narrowing trend for 3 consecutive quarters. The main reason may be that the downstream farming side continued to lose money, and the company took the initiative to reduce the size of accounts receivable.
Demand may meet an upward inflection point, and large single products will open up room for the company to grow. 1) From a cyclical perspective, from January '23 to March '24, production capacity for breeding sows was reduced by 9.1%. Corresponding to 24H2 pig prices, which were sustainable or better than 22 years, health insurance demand may have reached an upward inflection point. The company's pig vaccine revenue accounted for more than 90%, and profits were flexible or fully released during the period when pig prices rose. 2) From the perspective of large single products, the company's forward-looking layout commercialization of large single products such as the African swine fever live vector vaccine, subunit vaccine, and feline triple vaccine, non-plague vaccine & cat trifecta may open up room for growth for the company.
Maintain a “Highly Recommended” investment rating. Affected by the continued slump in downstream farming, the company's 24Q1 revenue and profit side were under pressure. As the reduction in sow production capacity gradually spreads to the supply side, 24H2 pig prices are expected to show an upward trend, which is expected to drive demand for sports insurance to reach an upward inflection point. Furthermore, the company's forward-looking layout of major single products such as the anti-plague vaccine and the cat trifecta may open up room for the company to grow. We expect profit forecasts for 2024-26 to be 475 million yuan, 586 million yuan, and 662 million yuan, respectively, and the corresponding PE is 18/15/13X, respectively. Maintain a “Highly Recommended” investment rating.
Risk warning: The recovery in pig prices falls short of expectations, commercialization of non-plague vaccines falls short of expectations, sudden uncontrollable outbreaks, production and operation risks, and the risk of terminating cooperative research and development with Huazhong Agricultural University.