Key investment points
The second half of 2022 may usher in the inflection point of the pig cycle. China’s pork demand is relatively stable, so the trend of pig price is mainly affected by pig supply. At present, China is experiencing a new round of super pig cycle and is in the downward stage of pig price. 1) The stock of fertile sows is still high, and pigs are still facing oversupply. The number of fertile sows represents the production capacity of pigs and determines the supply level of pigs. In this round of pig cycle, the number of fertile sows ushered in a high inflection point in June 2021, reaching 45.64 million, and then entered the stage of capacity elimination. However, as of January 2022, the number of fertile sows in China was 42.9 million, which is still at a high level, and the supply of pigs is still facing a surplus situation. 2) The decline of pig price superimposed on the rise of cost, and the loss of breeding drives the de production capacity. Pig prices have entered the downward stage since January 2021, feed costs are also rising, and the pressure on pig farmers to lose money continues to increase, driving the process of capacity removal to speed up. Generally speaking, it will take about 10 months for the breeding sows to lead the pigs out of the market, which means that the highest level of pig supply may be ushered in around may 2022. Considering the slow removal speed of breeding sows, the sow stock is still at a high level. It is expected that the inflection point of pig cycle will be ushered in in the second half of 2022, and the pig price will reach the bottom twice.
In terms of fundamentals, Muyuan Foods Co.Ltd(002714) has strong profitability, cost advantage and abundant cash flow. Combing the fundamentals of the corresponding positive shares of the existing eight pig convertible bonds, we find that from the perspective of performance, Muyuan Foods Co.Ltd(002714) 2021 is expected to achieve a net profit of 6.5 billion to 8 billion yuan in the whole year, becoming the only pig breeding enterprise to achieve profit. From the perspective of profitability, the “self breeding” breeding mode brings cost advantages from the aspects of accurate epidemic prevention and control and the introduction of new equipment and technology. The gross profit margin of muyuan, Shenzhen Kingsino Technology Co.Ltd(002548) and aonong pig breeding business is at a high level. In terms of cash flow, in the first three quarters of 2021, only Muyuan Foods Co.Ltd(002714) , Tecon Biology Co.Ltd(002100) and Fujian Aonong Biological Technology Group Incorporation Limited(603363) operating cash flows realized net inflows, which were 13.292 billion yuan, 3.629 billion yuan and 342 million yuan respectively. The asset liability ratios of Tecon Biology Co.Ltd(002100) , Muyuan Foods Co.Ltd(002714) and Shenzhen Kingsino Technology Co.Ltd(002548) were relatively low; Muyuan Foods Co.Ltd(002714) with better cash flow and less capital pressure can calmly cope with the profit pressure in the downward stage of the pig cycle.
From the perspective of convertible bond valuation, muyuan’s convertible bond has a large survival scale, the convertible bond price and conversion premium rate are more appropriate, the safety margin is high and the elasticity is large. As of March 25, 2022, in terms of the balance of convertible bonds, muyuan convertible bonds / Wenshi convertible bonds / hope convertible bonds were higher, which were 9.548 billion yuan, 9.296 billion yuan and 8.150 billion yuan respectively. From the perspective of the conversion premium rate, the conversion premium rate of aonong convertible bond / Wenshi convertible bond / muyuan convertible bond is low, which are 0.21%, 2.88% and 10.70% respectively. In terms of the price of convertible bonds, they are mostly in the price range of 110130 yuan, while the current price of Tiankang convertible bonds / aonong convertible bonds is relatively high. From the terms of convertible bonds, except for hope convertible 2, which did not enter the stock conversion period, the other convertible bonds have entered the stock conversion period. Aonong convertible bonds and Tiankang convertible bonds have triggered the forced redemption terms, but both promised not to force redemption within a certain period of time. Muyuan convertible bonds / Wenshi convertible bonds / hope convertible bonds / Jinnong convertible bonds have not triggered the forced redemption.
Investment advice. Based on the fundamentals and valuation of convertible bonds, we suggest to focus on muyuan convertible bonds, an industry leader with strong profitability, cost advantage, abundant cash flow, high safety margin and greater flexibility of the subject matter of convertible bonds. We can focus on Wen’s convertible bonds and hope to turn 2.
Risk tip: the risk of capacity reduction is less than expected, and the risk of feed price rise.
