The Zhitong Finance app learned that Everbright Securities published a research report saying that since they have a stronger ability to obtain financing and credit, and large-scale enterprises have a higher degree of patience and ability to withstand losses, the increase in the level of scale has greatly extended the bottoming out time of the cycle. However, the essence of production and operation is still the pursuit of profit. After a long period of losses, the cash flow and operating confidence of enterprises are gradually being damaged, and enterprises with high costs and insufficient capital reserves will gradually accelerate the removal of production capacity, driving the pig industry to accelerate the removal of production capacity. From a realistic perspective, under the accumulation of financial pressure, some listed pig companies have recently actively adopted multiple methods to survive the cold winter. If the industry maintains a loss situation in the first half of next year, large-scale markets are also expected to accelerate the removal of production capacity and drive a reversal of the cycle.

▍ The main views of Everbright Securities are as follows:

If the short-term rebound in pig prices does not change, the trend can be reduced

According to Boya Peace News, on December 15, the price of pigs was 14.72 yuan/kg, up 8.55% from week to week, and the price of 15 kg piglets was 21.18 yuan/kg, +3.93% week over week. According to Yongyi Consulting, the average weight listed this week was 123.64kg, an increase of 0.21% over the previous month. The storage capacity of frozen products in slaughterhouses was 17.78%, down 0.31pct from month to month. Despite a recovery in short-term consumption, the increase in pig prices at the end of the year was limited, and the removal of production capacity was still the main line of the sector.

(1) The pattern of strong supply and weak demand will continue, and it is difficult to see a sharp rebound in pig prices during the year. On the demand side, affected by a new round of cold waves, pickled meat consumption expectations have gradually come true. On the supply side, large-scale markets entered a centralized launch period in late December, and the supply pressure on the market increased. Under the short-term game, pig prices will continue to fluctuate in a narrow range. (2) Accumulation of financial pressure on the industry. According to sales data from large-scale enterprises, the average price of pigs dropped sharply from month to month in November, and losses continued, and financial pressure on breeding entities is still accumulating. (3) Autumn and winter are periods of high incidence of swine disease. At the bottom of the cycle, farmers' investment in epidemic prevention was reduced, increasing corresponding risks. Local epidemics are fermenting, and the subsequent situation still requires continued attention. In summary, under the influence of low pig prices, tight capital, and swine disease, the industry's active and passive capacity removal is strong, and the removal of sows that can breed in the future is still the general trend. (This week: 20231211-20231217)

Decommissioning capacity is getting better, and we are optimistic about the extent and sustainability of subsequent removal

(1) Extent of removal: The removal rate is expected to remain above 1% for the next few months. In the current context of high numbers of fat pigs, low piglet prices, financial constraints, and epidemic disturbances, the removal of sows that can reproduce is expected to continue to accelerate. (2) Continuity of decontamination: It is expected that the trend of capacity removal will continue until the first half of next year. Due to the turbulence of the winter epidemic and tight cash flow, short-term industry correction sentiment is sluggish. Looking at the medium to long term, since the peak of production capacity under long-term asset transmission has passed, the number of reserve sows kept has continued to decline since May this year, and the contraction in marginal growth that can proliferate has become irreversible.

Judging from actual supply and demand, the current stock of breeding sows is still relatively high, so the supply of H1 commercial pigs is still relaxed in 2024. With long-term demand levels stable, it is foreseeable that the momentum for pig price recovery in the first half of next year will be weak, and it will remain volatile at a low level. It is expected that the H1 degeneration trend will not change in '24, but the short-term pace may fluctuate with pig prices.

Increase the level of scale without changing production behavior dominated by profit

Looking at the profit situation of self-raised pigs in 2023, with the exception of July-October, the industry is in deep losses. Financial pressure continues to accumulate, compounded by the interference of the autumn and winter epidemics. Under internal and external pressure, small and medium-sized retail investors have reduced production capacity on a large scale. Currently, market suppliers are mainly large-scale and group markets. As the ability to obtain financing and credit is stronger, and large-scale enterprises have a higher degree of patience and ability to withstand losses, the increase in the level of scale has greatly extended the bottoming out time of the cycle.

However, the essence of production and operation is still the pursuit of profit. After a long period of losses, the cash flow and operating confidence of enterprises are gradually being damaged, and enterprises with high costs and insufficient capital reserves will gradually accelerate the elimination of production capacity, driving the industry to accelerate the elimination of production capacity. From a realistic perspective, under the accumulation of financial pressure, some listed pig companies have recently actively adopted multiple methods to survive the cold winter. If the industry maintains a loss situation in the first half of next year, large-scale markets are also expected to accelerate the removal of production capacity and drive a reversal of the cycle.

Risk analysis:

Prices of livestock and poultry products fell short of expectations; large-scale outbreaks of livestock and poultry diseases; and prices of raw materials fluctuated greatly.