Dekang has long been deeply involved in the pig and yellow feather chicken breeding industry. The breeding advantages it has accumulated over time make its livestock and poultry costs ahead of its peers. In the future, the company will focus on relying on the No. 2 family farm model to drive the scale expansion of pigs, use the family farm model to achieve steady development in the poultry farming business, and look forward to medium- to long-term development prospects.

Dekang Agriculture and Animal Husbandry: Hengzhe has gone far, and the Southwest pig and chicken giant is moving to the whole country. Since establishing a strategic development direction in 2006, the company has been focusing on breeding and breeding pigs and yellow feather chickens for a long time, and is striving to expand towards high-end food manufacturing. From 2018 to 2023, the company's revenue grew from 3.28 billion yuan to 16.16 billion yuan, with a CAGR of about 38%. In 2023, the company released about 7.08 million pigs, with a market share of about 0.98%, ranking 7th in China; the number of yellow feather chickens released was about 88.73 million, corresponding to a market share of about 2.6%, ranking third in China.

Pig: If you ask Denmark, the value of the entire industry chain is being explored in depth. The pig breeding industry has entered an era of marginal profit, and pig companies with cost advantages will reap excessive profits. The level of pig farming in Denmark is among the highest in the world. By learning from Denmark's advanced experience and internalizing it, Dekang has attracted a large number of highly qualified talents: 1) innovating breeding models, especially the No. 2 family farm model; 2) strengthening the breeding system to cultivate Dekang E-series pigs. The cost of pork can be reduced by about 100 yuan/head; 3) cooperating with Tonnes to explore high-end meat products. The company plans to expand from the southwest to the South China and East China markets. While steadily expanding its own farm and No. 1 family farm, it will focus on developing the No. 2 family farm model. It is estimated that in 2027, the No. 1 Family Farm and Family Farm No. 2 will reach 8 million heads and 9 million heads respectively.

Poultry: The national chicken dances, and the advantages of breeding sources build core support. Currently, the production capacity of yellow feather chicken parents has dropped to a relatively low level in history. The recovery in food and beverage and high pig prices have all boosted demand for yellow feather chicken and driven up chicken prices.

In the medium to long term, the trend of live poultry innovation and the rise of fresh chilled fish is accelerating. Dekang has outstanding advantages on the yellow feather chicken breeding side. It not only takes into account the demand for cost savings and efficiency, but also conforms to the development trend of the transformation from “live poultry” to “frozen” on the yellow feather chicken consumer side. The marketability of high-quality yellow chicken raised independently is outstanding. The company will make full use of its chicken breeding resource advantages to achieve steady expansion of the poultry farming business with an asset-light model of family farm farming. The growth rate of yellow feather chicken production is expected to be around 5-10% in 2024.

Give an “increase in wealth” investment rating. 1) Currently, the pig breeding industry is gradually entering an era of marginal profit, and enterprises with a cost advantage can still be expected to obtain excess profits; after nearly three years of cyclical downturn, the industry's production capacity reduction effect is remarkable, and chicken prices have an upward foundation. 2) The company's self-cultivated Dekang E breed pigs have been promoted on a large scale since 2023, with significant cost reduction results; the company estimates that 2024Q2 may have dropped below 14 yuan/kg. The growth rate of the company's pig production is expected to be around 20-30% in 2024. 3) The company will make full use of its advantages in breeding chicken resources to further expand the scale of breeding and increase the proportion of medium to slow speed and medium speed yellow feather broilers. The growth rate of yellow feather chicken production is expected to remain around 5-10% in 2024. The company is expected to achieve operating income of 22.5/27.1/34.2 billion yuan from 2024 to 2026, net profit adjusted to fair value of biological assets of 2.63/0.77/3.37 billion yuan, respectively, and corresponding EPS of 6.77/1.99/8.66 yuan, respectively. Covered for the first time, giving an “increase in wealth” investment rating.

Risk warning: the rise in livestock and poultry prices falls short of expectations; risk of natural disasters; risk of rising feed raw material costs; risk of animal diseases; risk of food safety.