The Zhitong Finance App learned that CICC released a research report saying that the current pig cycle is characterized by a shift in the business model from “profit hedging losses” to “financing+profit hedging losses.” Pig companies increased their leverage proactively during the period of high pig prices. In the current context where pig prices continue to weaken, they generally face greater financial pressure.

The main views of CICC are as follows:

Stress test: The financial pressure on pig companies has reached its highest level since 2014, and the average cash flow rate in the industry is lower than the previous low in 18 years. Based on the classification of how easy it is to realise assets and how urgent debt repayment is, the bank estimates the “realizable capital” of pig companies under different circumstances. 1) Situations where assets are easy to be realized to repay urgent liabilities: Use highly liquid assets such as monetary funds to repay short-term loans and other liabilities that require urgent repayment. The bank estimates that the average cashable capital of the 3Q23 industry was 599 yuan/head, lower than the previous low of 611 yuan/head in '18, and the lowest in 14 years. 2) Easy to liquidate assets+discounted fixed assets to repay emergency debts: In addition to the easy-to-liquidate assets described above, the bank assumes that pig companies can dispose of pig farms, etc. included in fixed assets and projects under construction at a 50% discount. The bank estimates that the average cashable capital of the 3Q23 industry was 3,183 yuan/head, lower than the previous low of 4,920 yuan/head in '18, and the lowest in 14 years.

Assessment of recharging capacity: Debt pressure is directly related to the difficulty of financing, and the difficulty of indirect and direct financing has increased marginally. On the one hand, the current balance ratio of pig companies is generally the highest in history. The bank calculated that the balance ratio of pig companies in the 3Q23 sample was 70%, +20ppt compared to the end of '18; cash in the narrow/broad sense decreased by an average of 17%/19% compared to the end of '21. On the other hand, increased debt pressure has made new financing more difficult: 1) Indirect financing: The difficulty of indirect financing is directly correlated with the balance ratio. The bank estimates that after the balance ratio of pig companies exceeds 70%, there is a high probability of a net outflow from financing activities. 2) Direct financing: Affected by continuous losses and the pace of refinancing, etc., listed pig companies implemented a total fixed increase of 5.88 billion yuan to raise in 23 billion yuan, a decrease of 27%. 3) Equity pledge: The bank estimates that the majority shareholders of the sample pig companies can add a pledge amount of about 1,000-2,000 yuan/head.

Growth analysis: The cost level determines the rate of capital consumption, and capital reserves determine the guarantee of increasing production capacity. 1) Cost: Low cost provides a financial safety cushion for pig companies. The cost gap for pig companies in the 3Q23 sample exceeded 3 yuan/kg. Breeding management efficiency is the core source of cost differences. 2) Flexibility: Highly flexible production capacity required, highly dependent on financial support.

risks

Pig prices are lower than expected; raw material costs have risen sharply; epidemic and policy risks.