2016 earnings slightly missed expectations Haid announced preliminary earnings for 2016: revenue was Rmb27.19bn (+6.3%YoY); net profit attributable to the parent was Rmb880m (+12.5% YoY), 9.5%/5.6%lower than consensus/our expectations. Q416 revenue fell 9.5% YoY, mainly due tothe decline in the agricultural trade business, despite livestock/poultry feed salesmaintaining double-digit growth, according to our estimates. Given the arrival of theoff-season for high-margin aquatic feed sales, the company incurred a slight loss in Q416 (its net profit ranged from -Rmb1.2k to +Rmb50m in Q4 of the past five years). Feed growth set to quicken in 2017-18 as industry recovers/consolidates fasterHaid's 2016 feed sales outperformed industry growth despite unfavourable factors suchas natural disasters and declines in livestock/poultry inventories. We attribute theoutperformance to the broad-based improvement in the company's overallcompetitiveness (better product technology, marketing services and cost control). Inview of the industry's cyclical recovery and faster consolidation, we forecast thecompany to post faster feed sales growth of 29%/21% YoY in 2017-18: 1) we expectsow inventories and pig feed demand to pick up, driven by farming profits remainingabove a reasonable level despite falling pig prices in 2017; 2) in the absence of extremeweather conditions, we expect domestic aquatic feed to recover from the trough thisyear, with the overseas business continuing strong growth; 3) as farming shifts towardslarger-scale, large companies with superior products and technical services are set tograb market share more quickly. H7N9 outbreak may cause short-term negative impact, but a limited one Since Dec 2016, the H7N9 outbreak in China has become more severe, forcing manycities to close their live poultry markets and hitting the consumption of chicken meat.We believe the outbreak will have a short-term negative impact on Haid's poultry feedbusiness, but the impact will be limited: 1) we estimate feed for yellow-featheredbroilers and laying hens, which is likely to be greatly affected, contributed ~13%/8% oftotal revenue/gross profit in 2016; 2) according to the National Health and FamilyPlanning Commission's data for 2014-16, cases of H7N9 infections decreaseddramatically as temperatures became warmer after March. Valuation: Buy rating; price target of Rmb19.80 Our DCF-based price target of Rmb19.80 (WACC 7.5%) implies 23.6x 2017E PE. Wemaintain our Buy rating.

Q3 results were slightly worse than expected. 9M16 revenue was Rmb19.97bn, up 13.5% YoY, with net profit (NP) of Rmb880m, up20.5% YoY but slightly lower than the 25-30% NP growth expected by us and themarket. Q3 revenue grew 5% YoY, while NP grew 12% YoY. The company is guidingfor 0-30% YoY growth in NP during full-year 2016. Near-term earnings impact from flood-driven declines in aquatic feed sales. Central and eastern China experienced severe flooding in June-Aug, with aquatic feedand duck feed sales affected to varying degrees. That was the major culprit behind Q3'sslowdown in top- and bottom-line growth. We estimate that the company's Q3 aquaticfeed sales declined modestly YoY, while poultry feed growth slipped to 10-15% andhog feed growth was ~15% (sales of these products grew 7%/33%/18% YoY,respectively, in H116). Meanwhile, overall feed sales growth decelerated to 6-7%(H116: 23% YoY). Q3 gross margin contracted QoQ to 11% due to lower sales ofhigh-margin aquatic feed products in the quarter. However, net margin improved1.4ppt QoQ to 5.9% due to earnings from the company's hedging operations duringthe quarter. Waiting for downstream fundamentals to recover. We expect the business climate in the feed industry to start improving in Q416 and2017, driven by strong breeding industry fundamentals. Given the company's leadingposition and competitive advantages in the sector (including product performance,marketing services and cost control), we believe its revenue and NP growth couldaccelerate in 2017. Valuation: Buy rating, Rmb21.53 price target. Our DCF-derived Rmb21.53 price target assumes 7.7% WACC and implies 24x 2017EPE. We maintain our Buy rating.

Q316 net profit up 44% QoQ, missing our estimate. Sunner's Q1-Q316 revenue was Rmb6.14bn, up 21.4% YoY, net profit was Rmb503m,up 244% YoY, and EPS was Rmb0.45. Q316 revenue was Rmb2.22bn, up 18.4% YoY,and net profit was Rmb257m, up 44% QoQ (positive turnaround YoY), missing ourestimate. The company also announced its full-year earnings guidance, with 2016 netprofit in the range of Rmb700m-900m. Price increases likely in Q416, with negative factors fully reflected. Hit by supply pressure, consumption weakness and a sharp increase in imports, chickenmeat prices undershot market consensus in Q316, but we believe the recent share pricecorrection has fully reflected this factor. For Q416, we expect a new rally in whitefeatherchicken meat (baby chick) prices, considering: 1) the arrival of the peak periodfor elimination of breeder birds that had undergone induced moulting after October2015; 2) weakened impact of imports; 3) decline in downstream inventory; and4) recovery in demand. According to the Ministry of Agriculture, white-feather chickenmeat prices stopped declining in the fourth week of October, with a rise of 0.7% fromthe previous week. Maintaining our optimistic outlook for 2017. Following the marked decline in grandparent breeder imports in 2015-16, the positivefundamentals are feeding through from the grandparent to the parent to thecommodity generation in the value chain. Based on the production cycle (a 14-monthfeed-through period from grandparent to commodity generation), we estimate thatchicken meat supply will further contract in 2017 (2016/17E gap is 7%/25%). Coupledwith the down cycle of raw grain prices, we remain optimistic about the company'ssustained earnings growth next year. Valuation: Maintain price target of Rmb35.79, Buy rating. Our DCF-based price target of Rmb35.79 assumes 7.4% WACC and implies 18x 2017EPE. We maintain our Buy rating.

Interim results preview: We expect revenue/net profit +15%/+35% YoY. We estimate Haid's feed sales volume rose 21% YoY in H116, driven mainly by stronggrowth for livestock and poultry feed (up 25%+ YoY). However, revenue growth couldslow to 15% YoY on lower feed prices and raw material trading revenue. Net profitgrowth could reach 35% YoY in H1, slightly above our prior estimate of 30%, helpedby a better product mix, declining raw material costs and higher breeding earnings. Floods weighed on July feed sales but are only a near-term headwind. Floods negatively impacted Haid's feed sales in July. Based on our channel checks, weestimate July aquatic feed sales volume contracted 15-20% YoY in central and northChina, which combined represent ~30% of total revenue. Poultry feed growth alsoslowed visibly compared with H1. However, we forecast feed sales to resume rapidgrowth in Aug-Sept as the impact from flooding fades. In general, we view the floodsas a purely near-term headwind with limited impact. We remain optimistic aboutaccelerating sales growth and sustained margin expansion over the next 2-3 years. Lowering 2016-18E earnings 9%/2%/1%. We are lowering our 2016-18E earnings 9%/2%/1% to Rmb0.67/0.91/1.15 fromRmb0.73/0.93/1.16, as: 1) we are lowering our 2016-18E feed sales 4.4%/1.4%/ 1.0%to 7.28/9.28/11.22m tonnes; and 2) we are lowering 2016E gross margin 0.4ppt to10.3% while leaving 2017-18E gross margin essentially unchanged, reflecting worsethan-expected aquatic feed growth in 2016E. Valuation: Trimming PT to Rmb21.53, maintain Buy. We are trimming our price target to Rmb21.53 (DCF, WACC 7.7%), implying 23.7x2017E PE, in line with the historical average. We believe the earnings impact fromflooding is overly priced in (Haid has underperformed the sector/CSI 300 by 14%/19%respectively since end-June) and the valuation is at a low level historically. Therefore, wemaintain our Buy rating.

Q2 earnings continued to improve on lower costs Revenue in H1 was Rmb3.92bn, up 23.1% YoY, and net profit attributable to theparent came to Rmb246m, up 170% YoY and near the upper end of the previouslyannounced range. Profitability continued improving in Q2 due to lower raw materialcosts (average corn/soybean meal costs fell 21%/15% YoY in H1); operating marginrose 7.7ppts QoQ to 10.9% and Q2 net profit was Rmb179m, up 170% QoQ. Inaddition, the company is guiding for net profit of Rmb545-600m in 9M16, equivalentto earnings of Rmb299-354m in Q3. White-feathered broiler prices entering a rapid upcycle Broiler supply remained abundant in H1 due to forced molting and other factors. Weestimate the company's chicken meat ASP at Rmb10,150 per ton in H1, flat YoY. However, given the time needed for grandparent breeder imports to recover and lateJuly's sharp dip in the stock of parent breeders, we believe the price of white-featheredbroiler meat could be about to begin a rapid upcycle. We expect the company's chickenmeat ASP to reach Rmb11,800/12,400 per ton in H216/2017, which translates into aper-bird profit of Rmb3.1/4.4 (H116: Rmb1.3). Ample capacity underpinning rapid sales growth Despite the large contraction in industry supply, the company's capacity expansion isproceeding according to plan (it successfully imported 18,000 breeder sets in June2016). As of end-June, the company's breeder stock had grown 29% from thebeginning of the period. This should help ensure quick expansion in chicken meatcapacity over the next 2 years and the ability to meet demand from large customers. We forecast the company's broiler production to reach 430/500/560m birds in2016/17/18, up 27%/16%/12% YoY. Valuation: Rmb35.79 price target, Buy rating Our Rmb35.79 price target is based on DCF (WACC 7.4%).

We expect Q2 earnings to grow c30% YoY. Haid attended our conference for consumer goods companies held in Hong Kong. Management said livestock/poultry feed maintained strong growth in April-May andaquatic feed posted solid growth. Although the recent rise in farm product prices putpressure on feed gross margin (GM), Haid offset the related risks by stocking up inadvance and raising prices. We expect Haid's Q2 earnings to grow c30% YoY. Accelerated feed sales growth and value chain expansion are highlights. Management sees robust feed sales growth in 2016-17 and accelerated value chainexpansion. 1) Feed: High value-added products; in-depth, extensive marketing service;and cost advantage are core components of Haid's competitiveness. Haid looks for20%+ feed sales growth (10-15% for aquatic feed and 25-30% for livestock/poultryfeed) in 2016-17, driven by a recovery in downstream breeding fundamentals andaccelerated industry integration. 2) Breeding: Management views the present as thegolden window for development of the hog breeding sector. Farmers will continue toexit the market on higher opportunity costs and environmental standards, while firmswith technology/cost advantages will benefit over the long term. Haid has acceleratedinvestment in the upstream section of the breeding value chain (eg, animal health, feedand breeding) in recent years and expanded rapidly under the "company + farmers"model. Management estimates hog breeding volume at 800-1,000k heads in 2017. Risks of higher material prices controllable; better product mix drives up GM. Recently, domestic/foreign corn and soybean meal prices rose quickly but managementviews the related risks as controllable: 1) Large state reserves and domestic/foreign pricespreads will continue to weigh on domestic corn prices and management expects pricesto resume a downward trend after the new season's corn hits the market. Additionally,downstream livestock/poultry breeding is lucrative and Haid can pass on rising pricesdownstream. 2) Management attributes the spike in soybean meal prices to weatherspeculation and believes the rally's sustainability has yet to be determined. Haid movedto stock up in advance and raise prices to offset the related risks. Furthermore, due togood product performance, sales of high-end extruded feed and piglet creep feedcould maintain rapid growth, pushing feed GM up further. Valuation: Maintain Rmb22.85 price target and Buy rating. We maintain our 2016/17/18E EPS of Rmb0.73/0.93/1.16 and DCF-based price targetof Rmb22.85 (WACC 7.7%). We maintain our Buy rating.

Initiating coverage with Buy rating. As a top feed producer in China, Haid is likely to see its feed sales growth and marketshare gain accelerate further in 2016-18 thanks to recovering downstream demand, itsstrong products and technical service teams. In addition, product mix optimization,lower raw material costs and breeding segment capacity expansion are likely to helpHaid to continue improving its profitability. We estimate a 32% net profit CAGR in2016-18. Haid is currently trading at 17.6x 2017E PE, below its historical (24.6x) andthe A-share feed sector average (20.3x). In our view, the current valuation does notreflect Haid’s strong growth momentum. We initiate coverage with a Buy rating. Strong core competency; feed sales growth to accelerate in 2016-18. Due to its leading technologies, complete services and scientific procurement system,Haid’s feed sales volume growth has been among the fastest in the sector and is likelyto benefit from accelerated sector integration. In addition, as the fundamentals of thelivestock & poultry breeding and aquiculture industry recover, we think feed demandwill see a turning point and Haid’s feed sales volume will reach a CAGR of 22% in2016-18, faster than the 13% seen in the past 3 years. Optimized product mix + extended product lines likely to improve profitability. Thanks to their high quality and good value for money, Haid’s mid-range and high-endproducts (extruded feed, porket creep feed) continue to gain market share. We believethis, along with substantial decreases in raw material prices, will continue to improvegross margins of Haid’s feed business. Additionally, given synergies among its segmentsand its “company + farmer” asset-light model, we think Haid’s hog breeding segmentwill post rapid growth in the next 3 years, with 450k/800k/1.5m hogs ready for sale in2016-18. This would make the segment the main driver of the company's ROE. Valuation: DCF-based price target of Rmb22.85 (7.7% WACC). We think Haid deserves a higher valuation, as the market does not fully reflect its feedsegment's reaccelerating growth and improving profitability. Our 2016-18E EPS areRmb0.73/0.93/1.16. Our DCF-based price target of Rmb22.85 implies 24.6x 2017E PE,in line with Haid’s historical average. We initiate coverage with a Buy rating.