Looking at the historical review, the business philosophy of “steady expansion, cost reduction, light assets, and high liquidity” of Wen's shares enables it to go through the cycle, overcome phased barriers, and accumulate cost advantages for business step by step. The accumulation and innovation of breeding models and the industry-university-research integration of breeding and formulation technology are the source of the company's core cost competitiveness. Since 2023, the company's pig breeding costs have entered an accelerated downward channel, and various breeding indicators have been significantly optimized. The comprehensive cost has dropped from 18 yuan/kg in early 2023 to the level of 13.8 yuan/kg in July 2024, and has returned strongly to the first tier of the industry. Looking to the future, with the pig and chicken resonance boom, Wen's shares may have outstanding profit elasticity. Currently, the average market value is at 0% of the historical quartile, which is at an all-time low. They are optimistic about the company's future development, and are highly recommended.

Reviewing Wen's shares: Steady development is a step by step, returning to high-quality development after long-term verification. Through retrading of Wen's shares, we found that in the past development process, the company was not disturbed by cyclical fluctuations, expanded steadily, always took cost as the first principle of development, and maintained an industry-leading level of liquidity ratio and steady capital management. Since 2021, the company's ability to continuously improve at the management level has been verified over a long period of time. Along with the change in market style, the company's net market ratio was restored from 1.7X in July 2021 to 4.0X. Looking at it in stages (1) From 2016 to 2018, the company adopted a steady expansion strategy after listing. Under low leverage management and low cost production, the company's average ROIC reached 25% during this stage, leading the industry by a large margin. (2) In 2019-2021, the list was affected by the epidemic. In order to quickly resume production and operation, capital expenditure and balance ratio rose at the same time. The current ratio was still leading the industry, but costs increased in stages. (3) Since 2022, the company has returned to a stage of high-quality development, and the valuation center has gradually risen. Under the condition that the balance ratio is stable at around 60%, the number of listings has grown rapidly for three consecutive years.

How do you view the continuous improvement in the cost level of Wen's shares?

The company's accelerated cost optimization and implementation since 2023 has stemmed from long-term experience accumulation and R&D accumulation, including (1) extending and completing the “company+farmer” production system, improving the size, equipment and specialization level of farmers, and continuing to explore the “company+breeding community” intensive model; improving household fee settlement and incentive methods to control fluctuations in fattening costs; and carrying out a “special operation to reduce pig breeding costs” to increase the value in the front-end stage of breeding; compared to the beginning of 2022, the company drastically reduced the cost of weaned piglets from 450 yuan/head to 320 yuan/Head, survival rate from fattening by 88% steadily increased to 92%; (2) Continued efforts in breeding. The company has been engaged in pig breeding for more than 20 years. In 2021, the breeding company established SMIC breeding company independently to accelerate the industry-university-research integration process. PSY steadily increased from 20 in early 2022 to 23, the meat ratio was reduced from 2.8 to 2.6, and after the population performance increased by another 10%, there is still room for a cost reduction of 270 yuan/head. (3) Rapid follow-up of feed formulation and procurement capabilities. Currently, the company's soybean meal procurement volume has dropped to 8.3% of raw material procurement, which has basically settled with the industry's excellent level. Compared with the industry's excellent level, feed production costs have decreased by about 600 yuan/ton compared to the beginning of 2023.

How do you view the investment value of Wen's shares at this time?

As production capacity for pigs and yellow feather chickens was reduced and realized, the profitability of the breeding industry began to recover rapidly in the second quarter. We believe that in the context of weak demand, the continued rise in pig prices is more reflected in supply shortages, combined with the pace of early capacity removal and seasonal demand recovery. The profit level of breeding enterprises is expected to increase further in the second half of the year, and in the context of high leverage and weak expectations, the industry is less motivated to fill up the column, and the pig price boom may continue until 2025. Benefiting from cost improvements and sales area premiums, the average profit of Wenshi Co., Ltd. in the second quarter was 256 yuan/head (about 238 yuan/head after headquarters expenses), and the cost of weaned piglets continued to decline in the first half of the year, and the inertia of cost decline in the second half of the year was still there. Under the continuing boom in piglet resonance, the company may have outstanding profit elasticity. Judging from the valuation level, there is currently a certain degree of mismatch between the company's average market value and average profit. As of September 1, the average market value of Wen's shares is still at 0% of the historical quartile, which is a historically low level, and is highly recommended.

Risk warning

1. The impact of the outbreak of animal diseases has caused the company's performance and release scale to fall short of expectations; 2. Demand for pork has declined significantly in the short term; 3. Prices of feed raw materials have risen significantly; 4. Profit prediction assumptions are unfounded or fall short of expected risks.