CJF reported a net loss of RMB180m for 3Q22. The loss, mainly due to losses from hog futures trading, has disappointed the market despite the turnaround of hog market. Mgmt. reiterated the target to achieve a small profit for the full year of 2022, but this could be challenging, given that 9M22 net loss has accumulated to RMB1,579m (9M21: net profit of RMB2,411m). We believe whether the earnings and valuation could see a meaningful improvement would depend on the proper execution of hedging policy, i.e. lowering the hedging ratio when the cycle is favourable. Despite recent bullish signals of the industry, we maintain HOLD due to limited earnings visibility.
　　Key Factors for Rating
　　3Q22 reported a loss of RMB180m: a miss. COFCO Joycome Foods (CJF) reported a net loss (before FV adjustments of biological assets) of RMB180m for 3Q22. With a net loss of RMB1,399m in 1H22 already, it implies the 9M22 net loss would be RMB1,579m, a significant deterioration (9M21: net profit of RMB2,411m). While CJF did not disclose the exact numbers, most of the losses would be related to hedging losses, as CJF’s short position of hog futures suffered when hog prices soared in 3Q22. Also, profits of pork segment also suffered due to inflation and as new production facilities started operating.
　　4Q22 pivotal to meeting full-year production target. CJF reiterated that for the full year of 2022, it would be on track to achieving the previous operational target: hog production volume at 4m to 4.4m heads, the cumulative hog production volume in 9M22 at 3.025m heads. To achieve this, it would require CJF to boost 4Q22 production by 17% YoY to 975k heads. This may be possible, but it would require a convincing execution, given that 3Q22 production was down 19% YoY. 3Q22 volume was down, likely due to an intentional delay to enjoy rising hog prices in 4Q, the peak season of pork consumption.
　　Adjustment to hedging policy is what investors need. CJF also reiterated its target to achieve a small profit for the full year of 2022. This would mean 4Q22 net profit would need to be over RMB1.4bn. This may be difficult to achieve, unless CJF: (1) ramps up the hog production volume in 4Q, and (2) lower the hedging ratio to reap the full benefits of rising hog prices. Yet, the hedging positions are not disclosed to the market, which could lower the earnings visibility, and may hinder re-rating in the near term.
　　Valuation
　　We now forecast CJF to report a net loss in FY22, and cut our EPS forecast for FY23-24 by 33-47%, as we assume CJF to make periodic hedging losses under the 2022-2024 favourable hog cycle. We also lower our TP to HK$2.20, based on 3.5x 2023 P/E (previous: 4x), given the recent huge losses and uncertainty in earnings.
　　Key Risks for Rating
　　Key downside risks to our call included slower-than-expected recovery of hog cycle in China; sharp rise in feed cost; weak consumer demand, and unexpected hedging gains/losses. Key upside risks to our call included a rapid recovery of hog industry due to market consolidation and strong recovery of catering leading to strong demand for pork.