2021 results in line with market expectations
　　COFCO Joycome Foods announced its 2021 results: Revenue fell 30.1% YoY to Rmb13.23bn, and attributable net profit declined 111.5% YoY to -Rmb460mn. Revenue of the hog production segment rose 5.6% YoY to Rmb6.7bn, with hog output volume up 68.0% YoY to about 3.44mn units and ASP of commercial hogs down 43.5% YoY to Rmb18.3/kg. Revenue of the fresh pork segment fell 0.7% YoY to Rmb3.68bn, with sales volume up 52.3% YoY to 166,000t. Notably, revenue contribution from branded fresh pork fell 4.3ppt YoY to 34.6%. Revenue of the meat product segment rose 13.5% YoY to Rmb786mn, while revenue of the meat import segment fell 58.0% YoY to Rmb3.89bn.
　　Trends to watch
　　Improving expectation for turnaround in hog prices; likely to emerge　in mid-2022. Due to oversupply of hogs in China, hog price is lower than the breakeven level of farmers, who are suffering from operating loss and tightening cash flow. Data from the Ministry of Agriculture shows the per-unit profit of self-raised hogs is about -Rmb547.2, and that of hogs raised from procured piglets is -Rmb258.1, implying that the whole sector is in loss-making territory. However, as deteriorating cash flow may prompt farmers to reduce production capacity, we note the inventory of fertile sows in China has been falling and hog supply may thus peak in 2Q22 at the earliest. We therefore think that hog price may start turning around and rising afterwards. Overall, we still foresee about a 30% YoY decline in hog ASP in 2022. We think that hog prices will stay weak in 1H22, but gradually strengthen in 2H22, which should help enhance farmers’ operating conditions.
　　Hog output rising steadily; cost control strong. The firm has　maintained steady growth in hog output. Assuming capex of Rmb2.0bn in 2022, we think the firm is highly likely to accomplish its guided output of 4.0-4.4mn units. For now, we estimate its hog output will grow 22.2% YoY to about 4.20mn in 2022. The firm’s production has gradually recovered thanks to its advantages in hardware and facilities, as well as normalizing containment measures for African swine fever. Its structure of fertile sows and mortality rate of hogs have turned reasonable. We estimate the firm’s all-in-cost will stay at around Rmb16/kg in 2022. However, we suggest watching possible upward pressure in the cost of feedstuff and raw　materials from the conflict between Russia and Ukraine.
　　Financials and valuation
　　The stock is trading at 11.0x and 4.0x 2022e-2023e P/E. We raise 2022　forecast attributable net profit 2.2% to Rmb1.02bn based on the expectation that hog price may start turning around and rising, and introduce 2023 forecast of Rmb2.83bn. Considering improving　fundamentals of the hog production sector and margin of safety in valuations, we raise TP 33.3% to HK$4.0 (13.2x and 4.8x 2022e-2023e P/E with 19.8% upside). Maintain OUTPERFORM.
　　Risks
　　Disappointing hog prices and/or output volume; uncertainty in diseases; rising cost pressure.