MUYUAN FOODS(002714)：BUSINESS OPERATIONS STEADY;TURNAROUND IN HOG PRICES TO BOLSTER EARNINGS GROWTH-格隆汇

机构：中金公司
研究员：Yang SUN/Youqi LONG

　　1Q22 results in line with market expectation
Muyuan Foods announced its 2021 and 1Q22 results: For 2021, revenue grew 40.2% YoY to Rmb78.89bn, and attributable net profit fell 74.9% YoY to Rmb6.9bn, largely in line with its preannouncement. In 1Q22, revenue declined 9.3% YoY to Rmb18.28bn, and attributable net profit dropped 174.4% YoY to -Rmb5.18bn, roughly in line with market expectation. The firm’s 2021 and 1Q22 earnings came under pressure mainly due to sluggish hog prices and rising feed costs.
　　The firm’s hog output maintained steady growth in 1Q22. Sales volume of its hogs rose 122.3% YoY in 2021 to 40.26mn head and 79.0% YoY in 1Q22 to 13.82mn head. Notably, sales volume of commercial hogs surged 220.1% YoY in 2021 to 36.89mn head and 112.1% YoY in 1Q22 to 12.98mn head.
　　The firm announced that it had 2.75mn fertile sows as of 1Q22, with fixed assets rising 43.8% YoY. The firm expects its hog output to increase 24-39% YoY to 50-56mn head in 2022. We estimate the firm’s all-in cost at around Rmb15/kg, lower than the industry average.
　　Trends to watch
　　Hog prices likely to turn around in 2Q22 at the earliest. Due to disrupted hog transportation amid the COVID-19 resurgence in multiple regions of China in April and relatively low capacity utilization at some slaughterhouses, some farmers were reluctant to sell their hogs, pushing up the hog prices in the short term. We note that the current hog prices are at a cyclical bottom and still below the sector all-in cost line. The continuous losses and tightening cash flow pushed weak hog breeding firms to exit the market. Data from the National Bureau of Statistics showed that inventories of fertile sows in 1Q22 declined 8.3% from 2Q21. Looking ahead, we expect hog prices to turn around in 2H22, and earnings of hog breeding stocks to gradually pick up.
　　Hog output grows steadily; competitive advantages in costs. Thanks to the firm’s effective prevention and control measures targeting African swine fever (AFS), its hog output has continued to trend upwards. However, we also note the impact of relatively low hog prices on the speed of its capacity expansion. Given the base of the firm’s hog output and its low-cash condition, we believe the firm will likely hit its output target of 50-56mn hogs for 2022. Under our conservative case scenario, we expect the firm’s hog output to reach 50mn head in 2022. We also believe that the firm enjoys strong competitive cost advantages thanks to its integrated value chain, strict disease prevention and control measures, and strong management capability. We expect the firm to maintain its cost advantage and its cost to remain stable in 2022.
　　Financials and valuation
　　The stock is trading at 5.2x 2022e and 3.1x 2023e P/B. Given rising raw material costs and our expectation for a turnaround in hog prices in 2022, we lower our 2022 attributable net profit forecast 66.6% to Rmb5bn, and introduce our 2023 forecast of Rmb35.51bn. Considering the heightening expectation for a turnaround in hog prices and rising average valuation of the sector, we maintain OUTPERFORM and our TP of Rmb70.0 (6.9x 2022e and 4.2x 2023e P/B), offering 34.0% upside.
　　Risks
　　Disappointing hog prices and sales volume; risks related to infectious diseases; higher-than-expected raw material prices.