The Zhitong Finance App learned that Huatai Securities released a research report saying that pig stocks are currently facing multiple catalysis: pig prices are not strong during the peak season, costs for some pig companies are rising in the short term, some low-cost group farms have begun to lose production capacity, and the December sow removal data is impressive. The core focus of current sector investment should return to actual pig price data and the nature of the cycle (cash flow), judging that sows that can be raised in the next 2-3 quarters are expected to continue to disappear. The cyclical trend is gradually becoming clear, and sector valuations are still at a historically low level. A positive layout is recommended.

▍ The main views of Huatai Securities are as follows:

Recently, the sector has faced multiple catalysis, and the December sow removal data exceeded expectations

Recently, the sector has faced multiple catalysis: 1) Pig prices continue to be poor during the peak season. Judging from the pig price performance since 2006, there is a 60%-80% probability that pig prices will rise in December and January, but recently pig price performance has continued to be weak. Since December 2023 and January 2024, the average pig price has fallen 3.5% and 3.0% month-on-month, respectively. As of January 11, the average price of pigs in the country was only 13.5 yuan/kg, a new low since 2023, and lower than the industry's cash cost level. 2) Breeding costs for some pig companies have risen in the short term due to factors such as the epidemic. For example, the full cost of farm farming rose to 15.3 yuan/kg in December, and 14.7/14.9/14.9 yuan/kg respectively in 9/10/11. The pressure on cash flow has intensified in stages, and the certainty of the trend of capacity removal has increased.

3) Research shows that some low-cost group farms have also begun to remove production capacity, verifying the earlier idea that capacity removal will spread from retail investors to some large-scale pig companies. 4) The decimation data of sows in December is impressive.

Increased pressure on cash flow is the core, and sows that can breed are expected to continue to die out

Looking back at the pig breeding sector since the end of October 2023, it was mainly due to the rise of the epidemic in the north in the early stages. At the time, it was emphasized that the pig epidemic was only a symptom. Increased pressure on cash flow at the bottom of the cycle, farmers and pig companies reduced investment in epidemic prevention, or relaxation of the epidemic prevention mentality was the core behind it. After the epidemic abated in December, various data showed that breeding sows were still being kept at an accelerated pace. This also verified the understanding and judgment of the nature of the cycle from the side. It is judged accordingly that sows that can be bred for the next 2-3 quarters are expected to continue to degrade.

The cyclical trend is gradually becoming clear, and the aquaculture sector is being actively laid out

The aquaculture industry is one of the few tracks where supply-side influence is clearly stronger than demand-side influence. Currently, the average valuation of the sector head is about 3,000 yuan/head, which is still at an all-time low. Active layout is recommended. Against the backdrop of increasingly clear cyclical trends, this will be a sector-based opportunity. Except for some backward pig companies to eliminate production capacity, most pig stocks may have upward elasticity.

Risk warning:

The progress and extent of production capacity removal fell short of expectations, pig price performance fell short of expectations, and large-scale major animal epidemics broke out.