The Zhitong Finance App learned that CICC released a research report saying that due to supply pressure constraints, the peak season for 23Q4 pig prices was not strong and showed a downward trend from month to month. The rebound during this period lasted a short period of time and was weak, and the average loss in the pig breeding industry generally increased. However, listed pig companies continued the pace of listing volumes. The year-on-year and month-on-month growth rates in 23Q4 were in double digits. The bank anticipates that listed pig companies in 23Q4 may generally increase losses during the peak season. Currently, the breeding sector market is still in the first stage of the three stages of investment in the pig cycle (capacity removal, price increase, profit realization), and there is still enough room for catalyst. It is recommended to actively seize reversal opportunities. In addition to large-scale expansion, combined with financial barriers and business quality, it is recommended to select low-cost and high-expansion pig companies.
CICC's views are as follows:
Pig prices are still low during peak season, and listed pig companies may increase their losses
Supply pressure was constrained. The peak season for pig prices in 23Q4 was not strong, showing a monthly downward trend at a low level. The rebound during this period lasted for a short time and was weak, and the pig breeding industry generally experienced an increase in average losses. However, listed pig companies continued the pace of listing volumes. The year-on-year and month-on-month growth rates in 23Q4 were in double digits. The bank anticipates that listed pig companies in 23Q4 may generally increase losses during the peak season.
Pig prices may fall below 12, and production capacity may be reduced or exceed expectations
The increase in MSY driven by factors such as the introduction of overseas breeding pigs is an important variable that has been overlooked in pig supply analysis in the past two years. The decline in 23H1 sow storage was small, or was offset by an increase in MSY, so the pressure on 24H1 fat pigs remained high; however, frozen meat stocks were still high, and the number of sows eliminated in the winter increased or the supply of pork increased in the short term due to rising pig epidemics and breeding losses. The bank expects the 24H1 pork supply pressure to remain high. However, support for pork consumption and feed costs may have weakened markedly, and the bank expects 24H1 pig prices to fall below 12 yuan/kg, hitting a new low. The deterioration in cash flow or the removal of sow production capacity has exceeded expectations. Reviewing history, the bank found that production capacity removal at the bottom of the cycle is usually divided into two stages: removal during the period when pig prices fall, and lag behind in filling up after pig prices bottomed out and rebounded. The latter is mainly due to the fact that it will take time to recover cash flow, and it will take about 4 months for backup sows to be converted to breeding sows. Based on comprehensive considerations, the bank expects the reduction in sow production capacity to continue until at least 24Q3, and the storage drop may reach 15% to 20%. After excluding the impact of the MSY increase, the reduction in production capacity may support the increase in pig prices by more than 1 times.
The third phase of pig cycle investment has just started, and the average market value of the sector is still low
Reviewing historical stock prices, in a complete cycle reversal, pig stocks will experience three waves of upward market driven by loss of production capacity, rising pig prices, and profit cashing out. The overall increase may be 2 to 3 times; in each cycle, stock prices are becoming more and more leading compared to pig prices, and being able to keep sows will gradually become a leading indicator of stock prices. However, the pig stock sector rose by only 25% in 2023Q4, and the decline in breeding sows is still accelerating. The bank believes that the sector's catalyst is still strong. Judging from the average head market value valuation method commonly used in the market, the average market value of pig stocks in the pig cycle generally fluctuates between 1,500 yuan and 10,000 yuan; currently, the average head market value of the pig breeding sector is about 3,000 yuan, which is about 1 times the upward space compared to history.
Pig stock investment needs to be wary of expansion traps, pay attention to capital barriers and business quality
Combining the delisting of young eagles farming and animal husbandry, the reorganization of Zhengbang Technology, and the development history of other pig companies, the bank believes that: 1) pig companies will experience the three important thresholds of 1 million heads, 5 million heads, and 15 million heads during the expansion process, and gradually transition from the “economy of scale” period to a “period of uneconomical scale”; 2) Improper scale expansion may increase financial pressure on pig companies and amplify their management bottlenecks, leading to narrowing or even passive contraction of their excess earnings; 3) 80% balance ratio or the pig company may experience financial risk warning lines The average profit of the enterprise is significantly lower than the industry average and and/or Peer companies also need to pay special attention to risks. Furthermore, the current pig breeding industry is still facing an actual overcapacity situation in pig houses. Therefore, the bank believes that investment in pig stocks must not only be based on volumetric theory of heroes; it is still necessary to combine financial barriers and operational quality to give different pig companies different average market values. Among them, the short-term financial barrier lies in the cash flow generated by operations and the support that financing may receive. From a medium- to long-term perspective, the core is the cost of farming.
Risk warning: Market games have led to incomplete removal of production capacity, sharp contraction in pork demand, insufficient flexibility in pig prices after cycle reversal, increased corporate capital risk under low pig prices, and the quality/scale expansion of business operations falls short of expectations, etc.