Company Profile

Guangdong Dahuanong Animal Health Products Company Limited (300186: SZ)researches, designs, produces and sells animal healthcare products. The company'smain products are veterinary vaccine products and veterinary pharmaceutical products.

Investment Highlight

As China’s biggest livestock enterprise, Guangdong Wen's Food Group Co., Ltd.has successfully transformed itself into an integrated agricultural serviceprovider. Recently, Guangdong Wen's Food Group (Wen’s) obtained regulatoryapproval to merge Guangdong Dahuanong Animal Health Products, paving way for itslisting on the ChiNext Board. We estimate that the market cap of Guangdong Wen'sFood Group will then reach CNY 140 billion, making it the absolute leader in the poultryraising industry.

Positioned as an integrated agricultural service provider, Guangdong Wen'sFood Group presents huge potential for business development. 1) The overallpoultry-raising conditions have improved amid increasing industry concentration. AsChina’s largest livestock enterprise, Guangdong Wen's Food Group is able to takeadvantage of economies of scale. 2) Guangdong Wen's Food Group has a proventrack record in maintaining high production level, which we believe is due to thefollowing three reasons. First, establishing close relations with farmers enables thecompany to maintain asset-light and expand at an accelerated pace. 2) Distribution ofinterest between farmers and Wen’s employees is relatively balanced. 3) Farmersexpress strong willingness to cooperate with Wen’s due to improved poultry-raisingexperiences.

The poultry-raising ecosystem has become relatively mature, which ensures thesustainability of the currently-adopted, highly-efficient poultry-raising mode.The company is quite effective in cost control. First, technological advancements helpraise the efficiency of poultry-raising and thus reduce the unit cost. Second, with acomplete supporting industry chain put in place, the company is able to run itspoultry-raising business with reduced intermediate costs. Third, enhanced businessinformatization helps ensure high efficiency and low wastage.

The poultry farming market mood remains upbeat and keeps on rising. Atpresent, the pork price has been increasing at a faster-than-expected pace. Whiledemand for pork has been stabilized, the supply has dropped by 20%, hitting ahistorical low. We hold an optimistic attitude towards the poultry-farming industryoutlook. In view of the relatively large supply-demand gap, we expect thepoultry-farming industry to perform even better in 2016 than in 2015. Boasting highearnings elasticity, the company is expected to sustain its sound growth momentumin the near future.

Investment Recommendations: We made our EPS forecast for the company atCNY 2.08 in 2015, CNY 3.39 in 2016 and CNY 2.87 in 2017, implying 18.9x 15E PE,11.6x 16E PE, and 13.7x 17E PE. We estimate that the market cap of GuangdongWen's Food Group would approach CNY 165 billion if benchmarking with suchindustry leaders as Muyuan Foodstuff and Fujian Sunner Development. Currently,the company’s valuation arrives at a discount of 30%. We give BUY rating to thecompany and keep recommending investment on it.

Potential Risk: Major epidemic risks