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Recently, the price of live pigs has regained its upward trend. According to Yongyi Consulting, as of July 12, the national commercial pig price was 18.72 yuan/kg, up 3.20% week-on-week. Against the backdrop of a continued contraction in the supply of live pigs, pig prices continue to rise in the state of destocking. At present, the overall holding and secondary fattening of the industry are in a normal state. As the gap on the supply side gradually emerges, the central price of live pigs is expected to continue to rise.

Institutions generally believe that with the transmission of the previous capacity-boosting destocking, the supply of live pigs is expected to show a downward trend, coupled with the seasonal recovery of consumption, the prosperity of pig prices is expected to continue. At present, the industry's restocking speed has slowed down, and the profit time of this cycle is expected to be extended. Which live pig farming companies are expected to enjoy the high prosperity of the industry and achieve long-term high-quality development? Live pig farming companies with strong cost reduction capabilities, excellent cash flow, and strong R&D efforts are expected to cross the cycle and achieve sustained high-quality development.

The non-GAAP net profit in the first quarter ranked first in the industry

As pork prices continued to be low, pig farming companies experienced widespread losses last year. Data showed that 16 major pig farming companies lost nearly 18 billion yuan last year, with non-GAAP losses exceeding 35.8 billion yuan, and 10 companies had non-GAAP losses exceeding 1 billion yuan.

In the first quarter of this year, the profitability of pig farming enterprises is still not optimistic, with an overall loss of more than 6.4 billion yuan and a loss of more than 7.6 billion yuan after deducting non-recurring items. Only two companies achieved profitability - ST Tianbang and Tiankang Bio; and only two companies had positive net profits after deducting non-recurring items - Tiankang Bio and Shennong Group. Tiankang Bio is the "only" pig farming enterprise with positive net profits and net profits after deducting non-recurring items, with a net profit of 56.6773 million yuan after deducting non-recurring items, ranking first among major pig companies.

Tiankang Bio's performance in the first half of the year was also very impressive. The company recently released a performance forecast, predicting that the net profit attributable to shareholders from January to June 2024 will be 230 million to 330 million yuan, and the non-net profit will be 223 million to 323 million yuan. In the first half of the year, the company's performance showed an upward trend in both quantity and price. The forecast shows that the company sold a total of 1.4014 million pigs in the first half of the year, an increase of 7.00% over the same period last year. Pig prices began to pick up in the second quarter. The company's average sales price of fat pigs in June 2024 was 17.04 yuan/kg, a month-on-month increase of 14.67%. At the same time, the company's continuous cost-reduction measures have gradually shown results, and the cost of pig sales has shown a downward trend. The company's profit level has increased significantly compared with the previous year.

According to the data, Tiankang Bio is one of the first batch of key leading enterprises and high-tech enterprises in the country's agricultural industrialization. The company has more than 30 feed production enterprises across the country and is one of the top 30 feed industry enterprises in the country; the company is the only designated veterinary biological product production enterprise in Xinjiang by the Ministry of Agriculture and Rural Affairs, one of the 8 designated foot-and-mouth disease vaccine and 11 designated avian influenza vaccine production enterprises in the country, and is a designated production enterprise for swine fever vaccine, blue ear disease vaccine, and peste des petits ruminants vaccine designated by the Ministry of Agriculture and Rural Affairs. At present, the company has entered the top 10 veterinary biological product enterprises in the country. It has successively won honors such as "National Biological Product Engineering Laboratory", "Top 100 Enterprises in the National Pig Industry", "National Pig Core Breeding Farm", "National and Local Joint Engineering Laboratory for Animal Biological Product Technology", "Science and Technology Reform Demonstration Enterprise", the first batch of "National Food Emergency Guarantee Enterprises", and "National Postdoctoral Research Station".

The company has achieved complete closure of the four key links of modern animal husbandry: breeding of fine breeds of livestock and poultry - feed and feeding management - animal medicine and livestock and poultry disease prevention and control - processing and sales of livestock products, forming a full industrial chain structure of feed and feed raw materials, animal vaccines, breeding of breeding pigs, pig farming, slaughtering and processing, sales of meat products, and construction of a breeding service system.

R&D investment hits new high

The entire industry chain is one of Tiankang Bio's core competitiveness and an important support for the company's good performance in the first quarter. In fact, in addition to the net profit index ranking at the forefront of the industry, Tiankang Bio also ranks at the forefront of the industry in many key indicators such as R&D intensity and cash flow, which continues to highlight the company's core industrial competitiveness.

In 2023, Tiankang Bio's R&D expenditure reached 268 million yuan, a record high. In terms of R&D intensity, the company's R&D expenditure accounted for 1.41% last year, a record high since 2019. This R&D intensity is also at a relatively high level in the entire industry, slightly lower than the industry leader Muyuan shares, ranking fourth.

As Tiankang Bio continues to increase its R&D investment, the company's scientific and technological innovation capabilities have been significantly improved, forming a rich product and technology reserve. The company's R&D center is a "national enterprise technology center". The company's biopharmaceutical business insists on technological innovation and has established R&D centers in Xinjiang, Shanghai, and Jiangsu. For three consecutive years, the annual investment in product R&D and technological innovation has accounted for more than 10% of the sales revenue of the biopharmaceutical business.

The company's completely independently developed inactivated vaccine for the E2 subunit of classical swine fever virus pioneered the development of a vaccine for classical swine fever virus in China, providing strong scientific and technological support for the elimination of classical swine fever in my country. In 2020, the company's 12-year-long Brucellosis gene-deleted live vaccine was launched on the market, providing a powerful means for the country to prevent and control major zoonotic infectious diseases; in 2021, the company's independently developed and produced porcine epidemic diarrhea inactivated vaccine (XJ-DB2 strain) obtained the "New Veterinary Drug Registration Certificate" issued by the Ministry of Agriculture and Rural Affairs, which has a good immune effect on the prevention of porcine epidemic diarrhea. In 2020, the National High-level Biosafety Level 3 Laboratory (P3), with an investment of more than 200 million yuan, was completed and put into use, and passed the review of the China National Accreditation Service for Conformity Assessment (CNAS) in March 2022, and obtained the laboratory accreditation certificate and accreditation decision issued by it.

Sufficient cash flow and low debt-to-asset ratio

Net cash flow from operating activities can better reflect the quality of a company's operating activities and its inherent competitiveness. In 2023, Tiankang Bio's net cash flow from operating activities reached 1.752 billion yuan, ranking fourth in the industry after the three leading companies New Hope, Muyuan and Wens.

The company's strong cash reserves and low debt-to-asset ratio are expected to ensure the company's continued high-quality development. As of the first quarter of this year, Tiankang Bio's cash on hand reached 2.684 billion yuan, ranking sixth in the industry; its debt-to-asset ratio was 53.75%, the fifth lowest in the industry. Against the backdrop of the pig farming industry's headwinds, Tiankang Bio's debt-to-asset ratio has remained at a relatively low level, which highly reflects the company's stable operating characteristics: from 2021 to 2023, the company's debt-to-asset ratios were 54.71%, 50.26% and 52.75% respectively.

Crossing the cycle and moving forward steadily

Tiankang Bio's cost reduction capability also helps the company to survive the cycle and move forward steadily. According to research information, the company's full cost of breeding in May was 14.88 yuan/kg, a decrease of nearly 7% compared with the full cost of 15.99 yuan/kg in the first quarter. It has achieved the cost target of 15.5 yuan/kg set at the beginning of the year and has a strong cost advantage in the industry.

The company's growth potential is also promising. In 2023, the company will produce 2.8158 million pigs, a year-on-year increase of 38.90%. The company expects to produce 3 million to 3.5 million pigs in 2024, a year-on-year increase of 6.54% to 24.30%. In a recent survey, the company stated that it will increase the number of sows in a timely manner according to market conditions and its own production and operation conditions. With the update of the company's breeding pig varieties and the continuous improvement of production efficiency, various production indicators will also be further improved, and strive to complete the production target set at the beginning of the year by the end of the year.

Zhejiang Securities said that Tiankang Bio's pig sector has continued to grow in output, and has steadily advanced efficiency and cost reduction. With the recovery of pig prices, pig farming profits are expected to recover strongly, and the feed and vaccine sectors will also benefit from the upward trend in pig prices. According to the consensus forecast of institutions, the company's net profit this year, next year and 2026 will reach 499 million yuan, 1.217 billion yuan and 1.132 billion yuan respectively.