CJF issued a profit warning stating that its 2022 full year net loss would be in the range of RMB250m-450m. This would imply a 4Q22 net profit of RMB1,129m-1,329m, a significant improvement over 3Q22 which recorded a net loss of RMB180m. Still, the numbers are apparently lower than its guidance and what we previously forecasted, likely on weak catering demand in 4Q22 under escalating COVID-19 infections.
　　We believe CJF’s fundamentals should improve in 2023. Yet, whether it could manage better positions and P&L on hog futures remains to be seen. Maintain HOLD for low earnings visibility.
　　Key Factors for Rating
　　4Q22 below expectations despite QoQ improvement. The profit warning issued by COFCO Joycome (CJF) stated that its 2022 full year net loss (before biological assets fair value adjustments) would be in the range of RMB250m- 450m. Since it recorded a 9M22 net loss of RMB1,579m, it would imply 4Q22 net profit could be RMB1,129m-1,329m. Despite a notable QoQ improvement, the numbers are below what CJF targeted at early 4Q22 (net profit in full year basis) and our expectations (RMB79m net loss for full year).
　　Escalating COVID-19 infections hurt its 4Q22. We believe a key reason for the 4Q22 profit miss would be the weak demand for meat products during the quarter due to escalating COVID-19 infections. We view that CJF suffered from an unfortunate timing to ramp up its production. CJF increased its hog production MoM in Dec 2022 to 407k heads, so the full year production volume reached 4.1m heads, in-line with its full year target. Yet, the ASP in Dec 2022 dropped to RMB18.78/kg, 20% lower than the ASP in Oct 2022 (RMB26.02/kg).
　　This could hurt the revenue and profit for its hogs and pork products.
　　Meanwhile, weak catering demand also unexpectedly lowered the revenue for imported beef business, which further dragged down profit.
　　2023 should be better, if no hedging losses incurred. Previously, CJF targeted to achieve a full year hog production volume of 5m heads in 2023.
　　This would imply a 22% YoY increase, which should support the revenue of hog production segment. Also along with relaxed COVID-19 restrictions, we expect that demand for meat products should improve. However, we expect hog prices in 2023 to remain volatile, which could make hedging difficult. We believe a key catalyst for CJF to re-rate would be a clearer hedging strategy, which could enhance earnings visibility. Otherwise, we believe unpredictable hedging P&L could still weigh on its valuation despite better fundamentals.
　　Valuation
　　We raise our TP to HK$2.6, based on 4.5x 2023 P/E (previous: 3.5x) and a HKDCNY rate of 0.87 (previous: 0.81). Maintain HOLD due to low earnings visibility.