Large-scale farming drives growth in Jinxinnong feed sales
Chenghong Research philosophy:Make research reports honest, make investing simpler.
Chenghong Research? Big Consumer Studio:Farmer Lao Zhang, Huitou Xiangxiang, Zhizihua Kaigu Hai, Lingjin (lead author), Mahu, Tiandao Qiniu
[Introduction]
Since March last year, the live hog ex-farm price began to recover, but while the industry gradually entered a high-prosperity phase, the live hog inventory did not rebound; instead it continued to decline, and only at the beginning of this year did the live hog inventory begin to bottom out and recover. Under the high-prosperity market environment of farming, the live hog inventory is expected to recover rapidly in the second half of the year, thereby driving feed sales.
[Core Highlights]
1. The increase in the number of large-scale farmers drives feed sales growth;
2. The accelerated recovery of live hog inventory drives the rise in feed sales;
3. The contribution of equity-participation companies to feed sales and investment income.
[Company Profile]
Jin xinnong Feed was founded in 1999 and listed on the SME board in 2011. The company's main business is the research and development, production and sales of pig feed. Its main products include creep feed for suckling piglets, compound premix for pigs, compound feed for pigs and concentrated feed for pigs, among which creep feed and concentrated feed for pigs (including creep concentrate) are its core products. The company has established a gold-quality image for its "Chengnong", "Qingsong", "Yuanda" and "Jinxinnong" brand series products, fully satisfying the nutritional needs of a broad range of users for pigs at different growth stages, different levels and with different requirements.
[Industry Analysis]
Source: choice
Starting from the end of 2012, the source of live hogs - breeding sows - began to decline continuously, causing the national live hog inventory to keep falling, which led to continuously declining pig feed sales. However, at present, both the national live hog inventory and breeding sow inventory are already in a bottoming-out and recovery trend.
Ac cording to data from the Ministry of Agriculture, the live hog inventory began to recover slowly in March this year. The recovery in inventory will increase feed demand, and the data also confirm this. According to grassroots research information from Shenwan Agriculture, Jinxinnong's June sales growth rate was 52%, of which the growth rate of front-end feed was above 80%; the June sales growth rate rose 6 percentage points from 46% in May, and overall sales growth in the first half of the year was about 35%; Dabeinong's growth rate in early and mid-June exceeded 10%, roughly flat to slightly up from the 8%-10% growth rate in May; Haid Group's June pig feed growth rate slightly fell to 26-28%, from 32% in May, with overall pig feed growth in the first half of the year exceeding 20%; New Hope's June feed sales growth rate exceeded 10%, with the May growth rate between 5%-10%. As the live hog inventory recovery accelerates in the second half of the year, the growth rate will increase further.
[Benefiting from the Concentration of Large-Scale Farming]
According to the data, the number of large-scale farms in our country is gradually increasing.
The number of farms and the number of animals marketed in 2009 classified by market scale are as follows:
Source: 2010 China Animal Husbandry Statistical Yearbook
The number of farms and the number of animals marketed in 2013 classified by annual market scale are as follows:
Source: 2014 China Animal Husbandry Statistical Yearbook
From the above, it can be seen that compared with 2009, the number of smallholders with an annual market scale below 49 head decreased by 23.52%, while the number of farmers with an annual market scale above 50,000 head increased from 96 to 202, an increase of 110.42%. The number of medium and large farmers is growing. Although very slowly, it still shows that pig farming in our country is developing toward large-scale operations.
In the past one to two years, due to increasingly serious environmental problems, various regions have been designating prohibited farming zones, as shown in the figure below:
Source: China Feed Industry Information Network
The above is only the prohibited farming plans of some provinces and cities. Those interested can search on Baidu themselves; many other provinces also have such plans. It is precisely because of these plans, combined with the poor market conditions of the previous two to three years, that the exit speed of smallholders has greatly accelerated in the past one to two years. In contrast, medium and large farmers such as Wens and Muyuan are continuously building new farms, and large-scale farming is becoming more and more obvious.
On the basis of the above two paragraphs, let us look at another set of data:
Ma Youxiang, Director of the Animal Husbandry Department of the Ministry of Agriculture, said in May that, based on data from 150 large-scale pig farms with 10,000 head of commercial pigs, the live hog inventory in April increased by 0.5% year-on-year. Among this, the breeding sow inventory increased by 6.7% year-on-year, increasing month-on-month for 6 consecutive months; the gilt inventory reached a nearly two-year high, up 34.1% year-on-year.
However, the national breeding sow situation published monthly by the Ministry of Agriculture is currently still bottoming out, with only April showing a month-on-month increase of 0.3%. Why is this so?
Combining the above analysis of large-scale farming and the designation of prohibited farming zones, we infer that because environmental protection problems are increasingly serious, various regions have designated prohibited farming zones, smallholders are gradually exiting, and medium and large farmers remain. Therefore, medium and large farmers are actually continuously restocking, but because smallholders are continuously exiting, one offsetting the other, the breeding sow inventory on the whole has not shown growth. This can explain the contradiction between the above two sets of data.
And for Jinxinnong, customers with more than 500 sows account for 30% of total customers, but contribute more than 70% of sales. What does 500 sows mean? Calculated at PSY15 (this number is relatively low), the annual market volume is 7,500 head. Calculated at 18 yuan/kg and 110 kg marketed, the output value is 14.85 million yuan. That is absolutely a large farming household, not an ordinary smallholder.
Therefore, for Jinxinnong, medium and large farmers themselves contribute 70% of revenue, and so far, based on information, those restocking should also be medium and large farmers, so this is very favorable for Jinxinnong.
[Impact of Earlier Acquisitions]
In the past year, Jinxinnong carried out quite a few acquisitions and equity participations, as shown in the figure below:
(1) Impact on feed sales
Tian zhong has already used Jinxinnong feed for nearly 90% [of its needs] last year. In-depth cooperation with Xinda and Dongjin gradually unfolded at the end of the third quarter last year. At present, all feed used by Xinda Animal Husbandry is provided by Jinxinnong, and about 90% for Dongjin Agriculture and Animal Husbandry. Xinda and Tianzhong each have an annual market volume of about 300,000 to 350,000 head, and Dongjin about 200,000 head. On average from birth to marketing, one pig consumes about 0.3 tons of feed, that is, Xinda contributes 30*0.3=90,000, Dongjin contributes 20*0.3*0.9=54,000, totaling 144,000. Last year's sales were 545,800, and the two together total 688,900. This year's planned sales are 780,000 tons. If sales to last year's existing customers grow a little, this year's 780,000 tons can be reached, so there is a certain degree of confidence in completing this.
In 2015, total operating cost was 2.394 billion yuan, operating cost was 2.153 billion yuan, so other expenses were 241 million yuan. In the first quarter of 2016, expenses grew by about 20%. Assuming full-year growth is also about 20%, then other expenses will be 290 million yuan.
Assuming this year's sales are 730,000 tons, and gross profit per ton rises by 40 yuan to 600 yuan (there is an analysis of gross profit per ton below), gross profit would be 438 million yuan, and after deducting expenses it would be 148 million yuan.
(2) Impact on investment income
As suming Tianzhong markets 350,000 head and Xinda 300,000 head, with an average profit of 500 yuan per head (500 is a conservative estimate), then Tianzhong contributes investment income of 35W*500*32%*8/12 (because the acquisition was in early May, only 8 months of investment income can be counted) = 37.3 million yuan, Xinda contributes 30W*500*30% = 45 million yuan, and Yinghua Xunfang's 50 million yuan performance commitment contributes 0.5*80% = 40 million yuan, totaling 122 million yuan.
[Financial Analysis]
Jinxinnong's current revenue composition mainly includes feed, raw material trading, farming and animal health, among which feed is its most important business, and the others can basically be ignored.
Let us look at revenue from 2013-2015:
Source: Wencai
It can be seen that Jinxinnong's revenue is basically composed of feed revenue, and only in 2015, due to the large increase in raw material trading, did the proportion of feed revenue fall to 77.31%. The reason for the surge in this part of revenue is that the company made full use of national policies, reasonably predicted the trend of raw material prices, and laid out in advance. Judging from past raw material trading revenue, this revenue is not sustainable, so the focus of the analysis of Jinxinnong is still on feed.
Feed revenue has basically changed little over the three years, but sales volume has indeed been growing. The reason lies in the decline in unit price, and the decline in unit price is mainly due to the synchronous downward adjustment of unit price following the decline in raw materials. For feed companies, the level of unit price and gross margin are not the most important, because feed companies will adjust prices in the same direction according to changes in raw material prices. Sometimes when the gross margin is higher, the gross profit per ton instead declines. Therefore, for feed companies, the most important thing is gross profit per ton; this is the core. So how is Jinxinnong's profit per ton? As can be seen from the figure below, Jinxinnong's gross profit per ton has been rising year by year, showing Jinxinnong's outstanding profitability.
Speaking of profit per ton, one must mention feed raw materials. Feed raw materials are mainly soybean meal (about 22%) and corn (54%).
Starting in April this year, corn prices began to rise, but were still far below the same period last year. However, they have recently begun to fall back, as shown in the figure below:
Source: Zhinongtong
But we believe that corn does not have the impetus to continue rising in price; on the contrary, it has the impetus to continue falling in price, because in previous years the state often stepped in to support the market and carried out temporary storage purchases in order to protect farmers' incomes, causing the current corn state treasury inventory to remain high. This year, temporary storage purchases were cancelled and replaced by market-price transactions, with the state directly subsidizing farmers. Under market-oriented conditions, and with foreign corn far cheaper than domestic corn, domestic corn has the impetus to move toward international market prices.
As for soybean meal, although it has risen rapidly since the beginning of the year, as stated above, feed prices will rise along with raw material price increases. Since the beginning of the year, feed companies have already raised prices in two rounds, with Jinxinnong's increase at around 50-200 yuan/ton. Although since June the live hog ex-farm price has been falling all the way (it has now begun to rebound slightly), in terms of absolute prices, farming companies' profits are still very substantial; compared with the previous period, it is only a matter of earning more or less. Therefore, with relatively substantial profits, they will not be so sensitive to feed prices.
[Major Shareholder Reduction]
Recently, major shareholder Chengnong Investment plans to reduce its holdings by no more than 10.8454% of shares. After the reduction, its shareholding will be no less than 32.5362%. The reduction proportion is very large and worth examining in depth. Is it because the major shareholder is not optimistic about the company's development? Or is it something else?
The figure above shows the shareholders of Chengnong Investment. There are very many. According to the Partnership Agreement, the partners' meeting is the highest authority of Chengnong Investment, and no single partner can individually control Chengnong Investment. The dispersion of shareholders is also a reason for this reduction, as follows:
Let us look separately at Chairman Chen Junhai:
In Chengnong Investment, after internal equity transfer (according to a check of the National Enterprise Credit Information Publicity System, before and after Chengnong's 2014 equity change, registered capital remained unchanged at 10 million, only the shareholding ratios of different shareholders changed, so it should only be an internal equity transfer), Chen Junhai's shareholding ratio increased from 31.99% to 38.39%. After Chengnong reduces its holdings in Jinxinnong this time and distributes investment income to partners, it cannot be ruled out that Chen Junhai will continue to increase his shareholding in Chengnong through internal equity transfers.
In the listed company, in 2015, through directly increasing holdings of company shares and participating in private placements (other senior executives also participated in the private placement, while Chengnong itself did not participate), the cumulative direct increase in company shares was 3.78%.
Therefore, from the above it can be seen that Jinxinnong's senior executives are still very confident in Jinxinnong. This reduction occurred only because some people within Chengnong Investment had the idea of exiting the company. If the exit of these people instead strengthens Chen Junhai's control over Chengnong, then it is not a bad thing.
[Summary]
Compared with the previous high of 23.23 yuan, the current stock price has already fallen 26%. The increase in the number of large-scale farms, combined with the expected accelerated recovery of live hog inventory in the second half of the year and the contribution of equity-participation companies to performance, is expected to enable the company to maintain high performance growth this year. According to our previous estimate, feed will contribute 148 million yuan this year, and equity-participation companies will contribute 122 million yuan in investment income, totaling 270 million yuan. Corresponding to the current market value, the valuation is 24 times.
[Risk Warnings]
1. Slow recovery of live hog inventory affects sales;
2. Continued decline in live hog ex-farm prices in the second half of the year affects the income of equity-participation companies;
3. The impact of a large reduction by the major shareholder on the stock price;
4. Raw material prices rise too much, and companies cannot effectively pass it on to downstream farmers.
[Disclaimer]
Disclosure of interests:Some members of the studio already hold the stocks or other investment portfolios mentioned in the article.
The information in the studio's series of reports all comes from public sources. We make no guarantee as to the accuracy and completeness of this information, nor do we guarantee that the information and suggestions contained therein will not change. We have strived to make the report content objective and fair, but the views, conclusions and suggestions in the article are for reference only. The information or opinions in the report do not constitute a bid or offer for the purchase or sale of the securities mentioned, and any investment decision made by investors based on this has nothing to do with our company, the studio or the subordinate authors.
Chenghong Research · Big Consumer Studio philosophy:We focus on clear logic and well-supported analysis, pursue and articulate forward-looking views, and do reliable analysis, without exaggeration or impatience. We take company value as the basis of research and timing as the choice for buying and selling, doing research with care and investing with patience. We are a team pursuing steady investment returns.
The copyright of this article belongs to Chenghong Finance, and Chenghong Finance reserves all rights to this article. If you need to use this article or part of its content, please contact QQ: 599910746. Violators will be held legally responsible.
This article is an original work by the Toutiao account author. Without authorization, it may not be reproduced.