Industry core view:
At the beginning of 2021, the current round of pig cycle entered a downward cycle. The pig price fluctuated from a high level in November 2019 and fell rapidly after 14 months, resulting in a large loss in the pig breeding industry. Based on the past market performance of pig cycle and foreign experience, in the long run, driven by the effect of economies of scale, the pressure of environmental protection and African swine fever, the improvement of the concentration of China’s pig breeding industry is the main logic; In the short term, the large losses of the industry since the second half of last year and the loose supply and demand of raw pigs after the spring festival may bring a new round of losses, which will accelerate the clearing of industrial capacity. The second half of 2022 is expected to usher in an upward turning point in the cycle of pig breeding industry. Although the share price of pig breeding sector has rebounded to a certain extent since September last year, according to the calculation of the head average market value of leading companies, the share price is still in the bottom area and there is still a large room for rise. It is suggested to actively pay attention to the investment opportunities of pig breeding sector and give the industry an investment rating of “stronger than the market”.
Key investment points:
This round of pig cycle has entered a downward cycle since the beginning of 2021, and the pig breeding industry has suffered a large loss: from January 2021, this round of pig cycle has ushered in a downward cycle due to multiple factors such as the recovery of pig stock, the growth of slaughter and the decline of consumption. The average price of pigs in 22 provinces and cities has fallen rapidly, with the largest decline of more than 70%. Although there was a slight rebound from October to November due to seasonal factors, the repeated winter epidemic in January this year has strengthened the sealing and control, reduced the demand for pork and further reduced the price of pigs. The listed leaders of pig breeding lost all their profits in the first three quarters of 2021, and the net profit of Jiangxi Zhengbang Technology Co.Ltd(002157) , New Hope Liuhe Co.Ltd(000876) , Wens Foodstuff Group Co.Ltd(300498) returned to the mother decreased the most.
In the long run, the improvement of concentration is the main logic of China’s pig breeding industry: China has a large number of pigs, but the market share of leading enterprises is very low compared with the American pig breeding market. The pig breeding industry has typical economies of scale. The gap between the cost and net profit per head of free range farmers and large-scale enterprises has gradually widened in recent years, and the large-scale breeding has accelerated. With the intensification of market competition, increasingly strict environmental supervision and the improvement of breeding requirements of the epidemic, the competitive advantages of large-scale breeding enterprises are becoming more and more obvious, and a large number of individual pig breeding investors are gradually withdrawing. We believe that the improvement of industry concentration in the future is the main logic of the development of the whole industry, and the development potential of China’s leading pig breeding enterprises is great.
In the short term, pig prices are expected to usher in a downward inflection point in the second half of 2022: according to historical experience, China’s pig cycle is generally 3-5 years, and the epidemic and environmental protection are important driving factors of the pig cycle. By analyzing the past pig cycle, we summarize the following characteristics:
① China’s pig cycle is generally short and long, and the speed of capacity removal is often slow, resulting in the decline cycle being longer than the rise cycle. However, we judge that this round of downward cycle will accelerate the clearing of capacity due to the rapid decline of prices from a higher level than previous cycles; ② Large pig cycles often include many small cycles. Due to the fluctuation of pig marketing, seasonal factors of pig demand, national collection and storage or release intervention, farmers’ fence pressing or early selling behavior, a complete pig cycle often includes more than two small cycles; ③ Breeding loss is a key indicator to judge the start and end of the pig cycle. In the past, before the start of the new cycle, the industry had a large-scale loss state, and there were at least two losses in the self breeding mode. At present, the data of pig marketing and stock are at a high level, and the pig price is still facing downward pressure. The number of fertile sows in stock can usually be used as a leading indicator of the number of pigs in stock. Although the number of fertile sows in China remained high at the end of 2021, it has decreased month by month for six consecutive months. According to this judgment, the slaughter volume of pigs in the second half of 2022 is expected to trend downward, and the pig price is expected to usher in an upward inflection point under the condition of unchanged demand.
Taking Muyuan Foods Co.Ltd(002714) as the representative, it is estimated that there is a large room for the share price of pig breeding enterprises to rise: under the expectation of cycle reversal, the share price of pig breeding sector rebounded from the bottom in September 2021, and the market performance was significantly stronger than that of the market. Taking Muyuan Foods Co.Ltd(002714) which is both benchmarking and representative as the representative, we calculate that under the three hypothetical scenarios of optimism, neutrality and pessimism, Muyuan Foods Co.Ltd(002714) the current head average market value indicators are at the bottom of history. Compared with the past two rounds of pig cycles, the stock price still has more room to rise, and the pig breeding sector has great prospects.
Risk factors: the macro-economy is less than the expected risk, the pig consumption is less than the expected risk, and the capacity clearing speed of the pig breeding sector is lower than the expected risk.
