[market this week]
Shenwan agriculture, forestry, animal husbandry and fishery industry (1.65%), ranking of Shenwan industry (16 / 28); Shanghai Stock Index (2.02%), CSI 300 (2.23%), small and medium-sized 100 (2.94%);
[core view]
Breeding industry: in terms of pigs, [production data] on May 17, the data of the Ministry of agriculture and rural areas showed that the current national pig stock was 424 million. In April, the national pig stock decreased by 0.2% year-on-year, the first year-on-year decline after June 2020, but the pig market was still growing inertia, with a month on month increase of 1.2%. At the end of April, the number of fertile sows in China was 41.773 million, a month on month increase of – 0.2%, 101.9% of the normal population of 41 million.
[feed data] on May 17, China Feed Industry Association released the national feed production situation in April 2022. In April 2022, the total output of industrial feed in China was 22.49 million tons, a month on month decrease of 3.7% and a year-on-year decrease of 10.8%. The output of pig feed was 9.63 million tons, down 4.7% month on month and 15.2% year on year;
At the supply level, the pig stock and feed data released this week confirm each other, reflecting the marginal decline of the industry’s pig stock in April. From the perspective of the head pig listed enterprises that continue to expand the stock, the growth rate of slaughter has also slowed down significantly. Superimposed with regional transportation restrictions, the marginal supply of the industry was tightened in April. At the demand level, the epidemic has led to a greater suppression of local catering consumption, but the rise of home stock consumption has increased residents’ consumption and stock demand for basic Shenzhen Agricultural Products Group Co.Ltd(000061) . In terms of price, pig prices showed obvious signs of bottom rebound in April. We believe that there are the following reasons: 1) after the Spring Festival in the early stage, the consumption is weak, the overall supply is loose, and the adjustment of the marketing rhythm is superimposed. The pig price drops very fast and there is an oversold; 2) In April, the overall stock margin of the industry decreased, the pace of sales slowed down, and the supply was tightened due to the superposition of transportation restrictions; 3) The epidemic has led to an increase in home consumption, which is relatively insensitive to the price of upstream raw materials.
With regard to the trend of the future cycle, we believe that due to the rebound in prices and the recovery of breeding profits, the rate of capacity removal of sows in the industry has slowed down significantly. The depopulation degree of sows in the industry determines the high price of pigs in the later stage. At present, the degree of removal of sows is lower than expected, and the price of pigs may not be as high as expected at the beginning of next year. The pig futures contract has responded, and the share price of the sector has also responded. Historically, large cycle start-up can breed sows, which needs to be reduced by about 20%. We believe that the future cycle evolution of the industry has the possibility of further deep losses and further depopulation, waiting for the industry to accelerate the depopulation of breeding sows again. At that time, it will be a better window period for the pig cycle to rise again and intervene in the pig sector.
Sales of major pig listed enterprises in April: the price of pigs has increased, but it is still low, the feed cost is high, and the profits of pig enterprises are still under pressure. In terms of volume, major pig enterprises sold 101742 million pigs in April, with a month on month increase of 0.1%. In terms of price, the overall price of pigs showed an upward trend of shock, and generally rose month on month. Muyuan, Zhengbang, Wenshi, New Hope Liuhe Co.Ltd(000876) , tianbang were 7.6%, 10.9%, 9.5%, 9.0% and 12.1% month on month respectively. According to China pig network, the price of live pigs (foreign three yuan) was 16.01 yuan / kg on May 20, up 3.6% from last week, with obvious signs of rise.
We believe that the game of pig sector has entered the stage of 3.0. The classic cobweb model reflects the market logic of price reduction – production reduction – short supply – price increase – production increase – price reduction. From the historical and recent performance of the capital market, the game of the capital market against the pig sector has gradually evolved from the initial “price increase” (stage 1.0) to “production reduction” (stage 2.0) to “price reduction” (stage 3.0). The capital market has digested the expectation of price reduction at the beginning of the year and formed a certain expectation of production reduction and upward expectation in the future cycle in advance. “The more the price is reduced, the deeper the production reduction is, and the higher the share price is”. The logical chain of “cobweb model” of capital market game continues to move forward.
In terms of trading, we suggest to continue to pay attention to the opportunities of the pig sector. At the same time, pay attention to the investment opportunities brought by the reversal of pig cycle to the animal protection sector. The reasons are as follows: 1) the reversal of pig cycle will improve the breeding profit, increase the demand for animal protection, and the animal protection industry will also reverse. From the historical trend of the sector, the market of pig and animal protection sector is highly consistent (see the figure on the next page), and the start of animal protection sector lags slightly, which is also in line with the logic of industrial profit transmission. 2) Vertically, the overall valuation of the animal protection industry has been at a historically low level with high cost performance. Wande animal health concept index pe-ttm has fallen to the lowest level in 10 years. 3) Horizontally, there is also a cost performance ratio with the valuation of overseas dynamic insurance enterprises. The five-year PE average of zoetis, the global animal protection giant, is about 42 times. Although there is still a gap in the core R & D and service capabilities of Chinese mobile insurance enterprises, Chinese enterprises also have explosive potential in mobile insurance segmentation, domestic substitution and overseas business expansion, with prominent valuation and cost performance.
In terms of broilers, we believe that the supply and demand fundamentals of yellow feather chicken will promote the market cycle upward. 1) On the supply side, the long-term breeding loss in the early stage makes the industry’s production capacity obvious. According to the China Animal Husbandry Association, the stock of parents of yellow feather broilers has been in a low position for nearly four years. We believe that the overall production of yellow feather broilers in 22 years will be at a low level in recent years. 2) On the demand side, as the market of live pigs and other animal proteins bottoms out, the substitution squeeze of yellow feather broiler demand will gradually ease and the margin will be better. In addition, the consumption of live poultry suppressed by the epidemic has been fully digested in the past two years, with marginal improvement. The Yellow Feather Broiler sector is expected to usher in a business cycle. Pay attention to Jiangsu Lihua Animal Husbandry Co.Ltd(300761) , Hunan Xiangjia Animal Husbandry Company Limited(002982) , Wens Foodstuff Group Co.Ltd(300498) and other related subjects.
In terms of industrial chain integration, we believe that head breeding enterprises extend to downstream slaughtering and processing, food manufacturing and even terminal sales by virtue of their advantages of upstream integration and large-scale, with continuous enrichment of business and continuous improvement of value. Head breeding enterprises are expected to rely on their core advantages to continuously improve their competitiveness and open the performance growth curve.
Highlights: China’s leading large-scale aquaculture [ Muyuan Foods Co.Ltd(002714) ] with obvious cost advantages, new forces of large-scale aquaculture [ Fujian Aonong Biological Technology Group Incorporation Limited(603363) ] with capacity advantages and expansion potential, [ New Hope Liuhe Co.Ltd(000876) ] and [ Fujian Sunner Development Co.Ltd(002299) ] with rapid progress in industrial chain integration.
Planting industry: global grain supply and demand may continue to be tense. According to the forecast of global grain supply and demand in the USDA may report for the year 22 / 23, the global grain output is expected to decline by 28.23 million tons in the year 22 / 23, the largest reduction in output in recent three years. In terms of inventory, the global grain inventory is expected to decline by 20.58 million tons at the end of the year 22 / 23, the largest decline in inventory in recent ten years. In terms of stock to sales ratio, the global grain stock to sales ratio is expected to be 28.1% in 22 / 23, a year-on-year -0.7pcts, the lowest since 2018.
The situation in Russia and Ukraine has also put pressure on global fertilizer supply. Russia is the world’s largest exporter of nitrogen fertilizer and potash fertilizer in 2021. Russian potash fertilizer accounts for about 20% of the global supply, while the exports of Russia and Belarus account for about 40% of the total global potash fertilizer exports. The uncertain situation in Russia and Ukraine has brought many uncertainties to the export trade of agricultural materials such as chemical fertilizer.
We believe that the situation in Russia and Ukraine and the impact of climate are still likely to continue to affect the overall global food production. In addition, considering that the situation in Russia and Ukraine is not clear, the supply chain under the global epidemic still needs to be repaired, the global food still has the risk of continued high costs of agricultural materials such as chemical fertilizers and pesticides, and disturbance of food trade supply.
In terms of trading, it is suggested to pay attention to investment opportunities in planting, seed industry and circulation of agricultural materials
The seed industry has ushered in a historic opportunity of “superposition of three phases”. During the policy period, on February 11, the State Council issued the “14th five year plan” to promote agricultural and rural modernization. In the chapter “promoting innovation driven development”, it once again emphasized the revitalization of the seed industry – strengthening the protection of germplasm resources, carrying out breeding innovation, strengthening the construction of seed industry base and strengthening the supervision of seed industry market. During the industrial period, bulk grain prices remained high, farmers’ willingness to grow grain increased, and corn and rice seed stocks, supply and demand were optimized, promoting the prosperity of the seed industry. The technical period is 22 years, and biological breeding is expected to be popularized. It is expected that the biological breeding promotion scheme is expected to be clear: 1) the low version of the scheme only involves the promotion in Inner Mongolia and Yunnan; 2) On the basis of the low version, the medium version also popularizes the main corn producing areas in Northeast China; 3) The higher version will be fully released. We believe that considering the national determination to promote the revitalization of the seed industry and the current actual situation of planting, there is a high probability that the Chinese version will be finally launched.
In the medium and long term, we are firmly optimistic about the prospects of the national seed industry and the improvement of the fundamentals of relevant seed enterprises. Under the banner of seed industry revitalization, the iteration and reconstruction of the industry are constantly implemented from top to bottom, which is highly deterministic. “Iteration” refers to the iteration of biological breeding technology. In January, relevant policies on transgene and gene editing were implemented to support the efficient approval of relevant varieties and show the determination and strength of the policy. “Reshaping” is the reshaping of the industry pattern. At the national conference to promote the work of supporting excellence of seed enterprises, it was once again emphasized that “we should improve and strengthen a number of seed industry leading enterprises with integrated innovation ability and adapt to market demand, and create the backbone force for the revitalization of seed industry”. The leading seed enterprises with scientific research advantages will become more and more prominent. “Top down” refers to the implementation of policies, systems, supervision and law enforcement under the banner of seed industry revitalization. The overall industry fundamentals will be better and better.
In terms of trading, we believe that although there is a time cycle for the achievement of the industry performance, the revitalization of the seed industry is sustained and certain. The cashing cycle will inevitably lead to the settlement of “impetuous” funds and fluctuations, but it also brings opportunities for bargain hunting allocation to “long-term” funds. Retreat from the “floating foam” with high short-term expectations, and with the style suppression coming to an end, there will be better trading opportunities.
Key recommendation: seed industry leader [ Yuan Longping High-Tech Agriculture Co.Ltd(000998) ] with genetically modified trait reserve, and [ Beijing Dabeinong Technology Group Co.Ltd(002385) ] with leading genetically modified technology and multiple businesses.
Pet industry: pet industry is a high-quality track catering to social development and consumption trend. According to the white paper on China’s pet industry, China’s pet industry has a market scale of 100 billion, with a compound annual growth rate of nearly 20%. At present, overseas giants occupy a high share of China’s pet food and medical market segments. We believe that the branding of domestic OEM enterprises will continue to accelerate, and have comparative advantages in understanding and deepening Chinese traditional and modern channels. The pet industry will usher in opportunities for domestic substitution, and we will continue to follow up and pay attention.
Key recommendation: China’s pet food industry leader [ Yantai China Pet Foods Co.Ltd(002891) ].
Grain and oil industry: affected by the Shenzhen Agricultural Products Group Co.Ltd(000061) cycle, the disturbance of global supply chain under the epidemic and other factors, the prices of soybean and other oilseeds have risen, the cost side pressure of grain and oil enterprises has become prominent, and the squeezed profits have declined significantly. We believe that the performance of grain and oil enterprises is expected to boost with the marginal improvement of the pressure on the cost side – the future Shenzhen Agricultural Products Group Co.Ltd(000061) cycle and the recovery of consumption after the easing of the epidemic on the demand side. Focus on integrated supply chain management and operation of leading enterprises.
Key recommendation: grain and oil leader [ Yihai Kerry Arawana Holdings Co.Ltd(300999) ], which is expected to develop in the overall kitchen business.
Prompt: the epidemic situation is less than expected, and the risk of economic recovery is less than expected.
