Zhongjin released a research report stating that it maintained the 'outperform' rating of Dekang Agriculture and Animal Husbandry (02419). Based on the recent rise in pig prices and cost improvements, it raised its net profit forecast for 2024 by 1.2 billion yuan to 2.6 billion yuan and maintained its net profit forecast for 2025 at 3.8 billion yuan. Taking into account profit forecast adjustments and the company's per capita market value, the target price was raised by 10% to HKD 66. The company recently attended the mid-year strategy meeting of Zhongjin in 2024 and exchanged views on technology level, breeding management, and breeding methods with participating investors. The bank believes that the advantages of the company's management, technology, and model are significant, and the cost level continues to lead the industry, and it is optimistic about the company's ROE growth potential.

CICC's main points are as follows:

Supported by high-quality breeding pigs and efficient management, the company's complete cost in May was already lower than 14 yuan per kilogram.

The company's overall and regional costs are relatively outstanding. According to the company's communication, the complete cost in May was less than RMB 13.8 per kilogram, of which the cost of three regional companies was lower than 13 yuan per kilogram, and the cost of eight regional companies was between 13-14 yuan per kilogram. The bank believes that the cost advantage comes mainly from two aspects: on the sow side, the company's sow performance is better, and the cost of weaned piglets is lower. According to the company's official account, the commercial three-way crossbred piglets of the E series products (ELY three-way crossbred pigs) bred by the company are slaughtered 12 days earlier than those of the DLY three-way crossbred pigs, and the feed-to-meat ratio decreases by more than 0.1, and the cost per piglet increases by over a thousand yuan. On the management side, the company tightly grasps the skills and qualities of the farm manager, and promotes standardized management actions through the development of team training and combat tasks. According to the company's communication, the average number of training and combat for employees in the company's pig business department is five times per month, contributing to a cost reduction of 0.4 yuan per kilogram.

The No. 2 farm breeding model and cooperative breeding households are strongly bound and highly efficient, supporting light asset growth.

On the one hand, the company pioneered the 'No. 2 Farm' sow breeding model, which has more light asset characteristics. The No. 2 farm model is upgraded on the basis of the common breeding piglet breeding model. The farm owner is responsible for sow breeding and builds sow and fattening sheds, which is conducive to De Kang's expansion of light assets. The bank estimates that the net asset per capita of the company's pigs at the end of 2023 is 544 yuan/head, which is generally more than 1000 yuan/head in the industry. On the other hand, this model relies on strong binding and high efficiency to mobilize the subjective initiative of the breeding households. The bank estimates that the ROA of the cooperative No. 2 farm owner/No.1 farm owner (traditional company+farmer-cooperative breeding household) in 1H23 is 17%/17%, and the No. 2 farm owner can obtain higher investment returns, more systematic technical services and higher cost-effective raw material supply, achieving strong binding with De Kang.

Light assets, low cost, high elasticity, expected annual slaughter of 9 million heads, and ROE leading the industry.

1) Light assets: The No.2 farm light asset model of the company empowers, and the net assets per capita is lower than that of its peers. 2) High returns: the company has a stronger cost advantage, or may contribute to over-earnings per capita. We estimate that the company will have a net loss of RMB 181 per head in 2023, which is lower than the industry level. 3) High elasticity: The bank estimates that the company had a sow inventory of 380,000-400,000 in April, and believes that this level could support the company's target of 9 million heads in 2024. Against the background of rising pig cycles, the bank judges that the company's ROE level may lead the industry.

Risk

Lower-than-expected pig prices, cost pressure, lower-than-expected slaughter, epidemic and policy risks.