Incident: The company released its 2024 mid-year report on August 29. 2024H1 achieved revenue of 7.99 billion yuan, or -10.8%; realized net profit of 0.28 billion yuan, turning a year-on-year loss into profit; of these, 2024Q2 achieved revenue of 4.22 billion yuan, -16.9% year-on-year, and +11.6% month-on-month; and realized net profit of 0.22 billion yuan, which turned a year-on-year loss into profit, +311.8% month-on-month.

The increase in feed volume and price reduction are under slight pressure, and the animal insurance business is growing steadily. 2024H1, the company's feed business achieved sales volume of 1.349 million tons, +7.6% year over year; achieved revenue of 2.84 billion yuan, -5.6% year over year; gross profit margin +13.4%, +3.3PCT year on year. The main reason is that fluctuations in the prices of raw materials such as corn and soybean meal have been transmitted downward to the feed industry, and feed prices have also declined in response. The animal insurance business grew steadily. Product sales volume and profitability were basically the same as in the same period last year, achieving revenue of 0.5 billion yuan, +12.0% year over year, gross profit margin +67.5%, and -0.6 PCT year over year.

The pig business turned losses into profits, and production efficiency improved rapidly. 2024H1 sold 1.401 million pigs, +7.0% year over year, including 1.25 million fat pigs and 0.15 million piglets; the average sales price was 14.4 yuan/kg, +2.0% year over year. 2024Q2 sells 0.754 million pigs at an average sales price of 15.5 yuan/kg. The company's breeding costs were gradually reduced, and the total cost of pig breeding by 2024H1 was reduced to 15.6 yuan/kg, of which 2024Q2 had dropped to 15.2 yuan/kg. Based on an average weight of 120 kg, the company's average initial profit for the second quarter was about 36 yuan, turning a loss into a profit from month to month. The company's production capacity is basically stable. As of June 2024, the company was able to breed 0.14 million sows, which is basically the same as at the end of 2023; production efficiency increased rapidly, and PSY increased from 24.12 at the end of 2024Q1 to 27 at the end of 2024Q2. In the future, the company will focus its construction on Gansu. With the improvement of the supporting construction of the breeding base in Gansu and the gradual release of production capacity utilization, the scale of the company's launch and production efficiency are expected to further improve.

Monetary reserves have gradually recovered, and the financial structure is relatively stable. As of 2024H1, the company's monetary capital was 2.86 billion yuan, +6.7% month-on-month, and capital reserves were gradually recovered; 2024Q2's net cash flow from operating activities was 1.11 billion yuan, changing from negative to positive month-on-month, and pig prices restored the hematopoietic capacity of the company's pig breeding business. Furthermore, as of 2024H1, the company's balance ratio was 51.1%, -2.6 PCT month-on-month. It is still at a low level in the industry, has strong resilience to risks, and the company's financial structure is relatively stable.

Investment advice: We expect the company's net profit to be 0.698, 1.132, and 1.548 billion yuan respectively in 2024-2026, and EPS of 0.51, 0.83, and 1.13 yuan, respectively, and the corresponding PE is 13, 8, and 6 times, respectively.

Pig prices are expected to continue to be booming in the second half of 2024. The company is the largest pig breeding enterprise in Northwest China. It has natural epidemic prevention advantages. Pig breeding and later business will gain strength at the same time, maintaining a “recommended” rating.

Risk warning: The release of pigs falls short of expectations; policy implementation falls short of expectations; risk of sudden major animal diseases.