NEW HOPE LIUHE(000876)：LOSSES FROM HOG BREEDING WEIGH ON 2021 EARNINGS;EXPECTING RECOVERY IN 2022-格隆汇

机构：中金公司
研究员：Yang SUN/Youqi LONG

　　2021 results in line with preannouncement
New Hope Liuhe announced that revenue rose 15.0% YoY in 2021 to Rmb126.26bn, and attributable net profit fell 294.0% YoY to a loss of Rmb9.59bn, in line with its preannouncement. In 4Q21, revenue dropped 9.3% YoY to Rmb31.79bn, and the attributable net loss increased Rmb3.05bn to Rmb3.19bn. The firm’s 2021 earnings were under pressure, mainly due to sluggish hog prices, rising breeding costs, and an asset impairment loss of Rmb2.89bn from the elimination of low-efficiency reproductive sows and commercial hogs.
　　Hog business: Revenue from this segment fell 30.6% YoY to Rmb17.2bn in 2021. The firm’s hog output maintained the robust growth momentum, rising 20.3% YoY to 9.98mn head in 2021. However, gross margin of hog business dropped 44.3ppt YoY to -21.2% due to sluggish hog prices.
　　Feed business: Revenue from this segment rose 37.1% YoY to Rmb70.82bn, with total sales volume rising 18.1% YoY. The sales volumes of hog feed, poultry feed, and aquatic feed increased 49%, 4%, and 23% YoY. We attribute the significant rise in sales volume of hog feed to hog restocking.
　　Poultry and food businesses: Declining hog prices and weak consumption amid COVID-19 headwinds affected revenue from the firm’s poultry segment, which declined 0.8% to Rmb18.23bn. Revenue at the food business rose 2.2% YoY to Rmb9.04bn.
　　The firm announced the drafts of its 2022 employee stock ownership plan and equity incentive plan. The earnings performance targets are related to sales volume of feeds and hogs, showing management’s confidence in the firm’s long-term growth.
　　Trends to watch
　　Hog prices hit a low; hog breeding business to recover. Hog prices are at a cyclical bottom and below the sector break-even cost, prompting industry capacity to decline. We expect hog prices to turn around in 2Q22 at the earliest. As we expect African swine fever (AFS) to be controlled and the firm continues adjusting the structure of its production capacity, we expect the breeding costs to trend downward.
　　As business operations return to normal and new production capacity gradually comes online, we expect hog output to increase about 50% YoY to 15mn head. Overall, we expect earnings of the firm’s hog breeding business to recover gradually. We also think that a turnaround in hog prices will boost poultry consumption and that an outbreak of avian influenza in overseas markets would lead to a decline in China's imports. We expect poultry prices to trend upward in 2022 and earnings of the firm’s poultry breeding business to recover.
　　Feed business grows steadily; watch cost trends. We think that the challenges facing the feed industry in 2022 are greater than the ones they faced in 2021. We believe that an upsurge in raw material prices YTD will weigh on the per-tonne profit of feeds. Transportation disruptions amid a resurgence of COVID-19 in some regions of China have weighed on feed sales, in our view. We think that New Hope’s competitive advantages in the feed market remain strong, and we expect the firm to take market share from small and medium-sized feed companies by employing various marketing strategies. The firm’s feed business should maintain steady growth in 2022.
　　Financials and valuation
　　The stock is trading at 1.9x 2022e and 1.7x 2023e P/B. Given that we expect hog prices to turn around in 2022, we leave our 2022 attributable net profit forecast unchanged at Rmb272mn, and introduce our 2023 forecast of Rmb4.98bn. We maintain OUTPERFORM and our TP of Rmb20 (2.7x 2022e and 2.3x 2023e P/B), offering 39.9% upside.
　　Risks
　　Disappointing hog output; volatile raw material prices; spread of infectious animal diseases.