1H22 results in line with our expectation
Revenue at COFCO Joycome declined 28.77% YoY in 1H22 to Rmb5.35bn. After adjusting for the fair value of biological assets, its attributable net loss fell Rmb36mn YoY to Rmb462mn, in line with the market and our and expectations. The firm’s earnings were under pressure due to low average prices of hogs and rising cost of feedstuffs.
Revenue of the hog production business fell 26.26% YoY in 1H22 to Rmb3.12bn, with output rising 35.7% YoY to 2.27mn units and the ASP of finishing hogs down 42.2% YoY to Rmb13.55/kg. Revenue at the fresh pork business was largely flat YoY at Rmb1.84bn, while earnings turned around YoY to Rmb16mn. Notably, the revenue contribution from branded pork reached 32.8%. The 1H22 revenue of meat import business declined 35.51% YoY to Rmb1.32bn due to the strategic decision by Joycome to cut meat imports. Revenue of meat product business dipped 1.23% YoY to Rmb375mn.
Trends to watch
Hog production cycle turning around; hog prices starting to rebound. Along with rising hog prices, profitability of hog production has returned normal. The average hog prices in 22 provinces rose 23.4% in August vs. end-1H22 to Rmb21.43/kg. Data from the National Bureau of Statistics shows that unit profit turned positive for both self-bred piglets and procured piglets in June. Given improving end-market consumption and the prospect of tightening pork supply in 2H22, we still see upside momentum for hog prices and expect the earnings of hog producers to improve.
Hog output steadily improving; upside potential for fresh pork business.
1. Hog production: End-June sow inventory rose around 60,000 head vs early 2022 to 306,000 units. We think the firm has advantages in cost control, an appropriate hog mortality rate and sow structure (comprising productive sow breeds). Given planned capex of Rmb2.0bn in 2022, we estimate that full-year hog output will reach 4.0-4.4mn units.
2. Fresh pork: Sales of fresh pork are improving, and rising hog slaughtering capacity helps align upstream and downstream businesses. Corporate filings show the firm’s sales volume of fresh pork rose 67.7% YoY in 1H22 and sales volume of branded pork rose 26.8% YoY. We estimate the gross margin of branded pork at 15%, as the firm enjoys premium prices thanks to its strong brand and product. We think that the rising sales volume of fresh pork and increasing contribution from branded pork will bring incremental revenue and earnings.
Financials and valuation
The stock is trading at 10.5x and 3.8x 2022-2023e P/E. We maintain our 2022 and 2023 attributable net profit forecasts at Rmb1.02bn and Rmb2.83bn, as we expect the loss from unrealized fair value change of futures contracts to be reversed following contract settlement. We maintain our TP at HK$4.0 (13.2x and 4.8x 2022-2023e P/E) offering 24.6% upside. Maintain OUTPERFORM.
Risks
Hog prices and/or output volume missing expectation; diseases; rising cost.