Pigs, like the vast majority of the sector, followed the sediment of the market for 3 years and had no resistance. Looking forward to the cycle of doing things, they fled after running out of patience, saw a decline in stock prices, feared that valuation logic would deteriorate, and pessimism interacted with stock prices.

Since February 18, 2021, the pork concept has declined by nearly 50%. Among them, Muyuan shares plummeted 56%, New Hope plummeted 64%, *ST Zhengbang plummeted 85%, and Aonong Biotech plummeted by more than 80%.

Listed pig companies are facing many difficulties, and the capital market is also voting with their feet. It is the most realistic portrayal of pig prices in an extremely cold winter where pig companies find ways to survive.

01

According to statistics, 22 A-share listed companies involved in the pig breeding business disclosed their 2023 performance forecasts. Of these, 18 companies recorded losses in net profit returning to their mothers, with a total loss of 24.866 billion yuan to 29.165 billion yuan.

Looking at the entire industry, pig breeding lost 76 yuan in 2023. This is also the first year since 2014 that the general ledger lost money for the whole year.

Among large listed pig companies, Muyuan Co., Ltd., which is the most expensive to raise, also predicted losses of 3.8 billion yuan to 4.6 billion yuan. This is Makihara's first annual loss since financial data were available in 2009.

Makihara is like this, and other pig companies are even worse. Wen's forecast to lose 6 to 6.5 billion yuan in 2023, and Aonong Biotech expects to lose 3 to 3.6 billion yuan. In addition, those that lost more than 1 billion dollars include Tianbang Foods, Dabeinong, Tang Renshen, Tiankang Biotech, and Xinwufeng.

New Hope is expected to make a profit of 300 million yuan, mainly due to selling assets to survive. According to the announcement, the introduction of strategic investment in the white feather meat, poultry and food deep processing business affected the net profit of 5.1 billion yuan to 5.2 billion yuan.

This move avoided the embarrassment of New Hope losing money for 3 years in a row. However, many pig companies have been losing money for 3 consecutive years, including Xinwufeng, Zhenghong Technology, and Aonong Biotech.

As losses continue, pig companies' balance sheets continue to deteriorate. At the end of the third quarter of 2023, 20 listed pig companies, including Makihara, Wen's, and New Hope, had a total debt of 455.6 billion yuan, with an overall debt ratio of 66.7%. The debt ratio of 15 out of 20 companies showed an upward trend.

Among them, Zhengbang reached 162%, Aonong Biotech and Tianbang all close to 90%, and Jingji Zhinong, Huatong Co., Ltd., New Hope, Jinxinong, and Xinwufeng all exceeded 70%. 4 companies including Wen Clan and Tang Jinshen are over 60%.

Furthermore, pig companies' cash flow is also tight. According to statistics, at the end of the third quarter of 2023, 20 pig companies had a total monetary capital of 60.2 billion yuan. Among them, 13 declined from the end of June.

Faced with operating and cash flow risks, pig companies began crazy financing practices. New Hope plans to raise 7.35 billion dollars, Muyuan 8 billion, and Tianbang 2.7 billion. However, capital market performance is weak, and many pig companies' fixed increases have been postponed or aborted, making their operations worse.

Pig companies' difficulties stem from the double impact of pig prices and feed costs. In 2023, the average price of pigs fluctuated roughly between 14 yuan and 17 yuan, and remained below 15 yuan for most of the time. The price of this pig is quite high compared to the cost of breeding.

Last year, the cost of complete breeding in Makihara was 15 yuan, and the cost disclosed by other large pig companies was slightly higher than Makihara. However, this is not in line with reality, because their statistical caliber is inconsistent, and the actual cost of farming should be much higher than disclosed.

An important factor in the slump in pig prices is the continued imbalance between supply and demand. In 2023, 7266.2 billion pigs were released in China, an increase of 26.68 million heads over the previous year, with a growth rate of 3.8%. It set the highest number of pigs released since 2016, breaking through 700 million heads, making it the second highest in history.

Furthermore, annual pork production was 57.94 million tons, an increase of 4.6% over the previous year, the highest level since 2015. On the demand side, pork consumption, including food and beverage channels, was not as optimistic as expected after the COVID-19 pandemic was liberalized, and is still affected in part by the economic downturn. Of course, the slump in pig prices is mainly due to sufficient supply.

In terms of raw materials for breeding, the average price of mixed feed for fattening pigs nationwide was 3.9 yuan/kg last year, up 0.39% year on year, and rising year on year for 5 consecutive years. This is a cumulative increase of 28.7% compared to 2019.

Under heavy pressure, surviving is king.

At the end of September 2023, Liu Chang, chairman of New Hope, issued a letter from all employees stating that in recent years, global economic uncertainty has increased, domestic and foreign situation is complicated, raw material prices fluctuate frequently, pig prices continue to be sluggish, social inventories are high, terminal consumption is weak, and various external passive factors have left the company in an “unprecedented difficult environment.”

New hope is like this. Imagine the suffering of other farmers.

02

In this pig cycle, the first large pig company that can't handle it is Zhengbang Technology. The number of pigs sold has dropped sharply from 14.93 million heads in 2021 to 5.48 million heads in 2023. The original actual controller Lin Yinsun implemented debt repayment with shares. The shareholding ratio of Zhengbang Group and the co-actors dropped from 14.83% to 5.25%. After the disposal of subsequent shares is completed, the shareholding ratio will drop to 0.87%.

Due to the restructuring, in 2023, Zhengbang generated revenue of 17.5 billion yuan to 18.5 billion yuan, which can turn losses into profits of 8 billion yuan to 10 billion yuan, avoiding delisting. Zhengbang was taken over by a group of twins who are also in Jiangxi.

After years of painstaking management, Lin Yinsun's family eventually lost Zhengbang Technology, which is astonishing.

Zheng Bang is ahead, and Aonong Biotech is behind.

In 2021-2022, Aonong Biotech lost 1,512 billion yuan and 1,039 billion yuan respectively. The forecast loss for 2023 is over 3 billion yuan.

On January 30, Aonong also announced that its net assets are expected to be negative at the end of the 2023 fiscal year, and the company's shares may be subject to a delisting risk warning by the Shanghai Stock Exchange. At the same time, it was mentioned that as of January 23, 2024, the total principal and interest on overdue debts of banks, financial leasing companies and other financial institutions was about 1,438 billion yuan, accounting for 57.45% of the latest net assets. From November 2022 to January 30, 2024, the cumulative lawsuit amount was 1,949 billion yuan.

Impacted by the news, Aonong Biotech has been falling to a standstill for 6 consecutive trading days.

As of the end of the third quarter of 2023, Aonong's current liabilities reached 11.555 billion yuan. Of this, short-term loans amounted to $4.51 billion, notes payable and accounts payable amounted to $3,918 billion, and non-current liabilities maturing within one year were $1,751 billion.

From 2020 to 2023Q3, Agnong's liquidity ratio declined sharply from 0.56 to 0.36, the quick ratio dropped sharply from 0.29 to 0.14, and the cash ratio declined sharply from 0.09 to 0.03.

Currently, Aonong Biotech's latest balance ratio is as high as 89.41%, second only to the bankruptcy and restructuring of Zhengbang. Coupled with a loss of at least 1.7 billion yuan in the fourth quarter, the debt ratio may have broken through 100%. If this is the case, it is insolvent, and the risk of bankruptcy is increasing day by day.

The debt is at its peak, but the cash on hand is less than 300 million.

Of course, Aonong has already begun to save himself. Since 2023, funding has been raised through various methods, including equity pledges, fixed increases, actual controller holdings reduction and cash out, etc., but the results have not been ideal.

Also, starting in the second half of last year, Aonong released pigs early to return cash flow. The average weight of fat pigs released throughout the year is only 97.97 kg, which is far below the standard weight of 110 kg to 120 kg.

Looking at it now, Aonong is likely to follow in the lead, and will require the actual controller to transfer a controlling interest before it can survive.

On December 12, 2023, Dabeinong plans to invest no more than 600 million yuan to acquire no less than 51% of the shares of Xiamen Aonong, the controlling shareholder of Aonong Biotech. However, there is uncertainty that the deal will be completed within 9 months.

Over the past few years, Aonong, like Zheng Bang, has been a big dark horse in pig farming. In 2018, only 420,000 pigs were released, compared to 660,000 in 2019. After African swine fever, it expanded to 1.35 million heads in 2020, and reached 5.19 million in 2022, surpassing Tianbang and Dabei Nong in one fell swine to become fifth in the industry. In 2023, the number of releases continued to rise to 5.859 million.

In 2018-2023, Aonong's compound annual growth rate reached 69.4%, ranking first among 18 comparable listed companies.

Unfortunately, Aonong does not use the Muyuan model of completely self-breeding and self-supporting. The cost remains high, and production capacity expansion is becoming more and more dangerous.

Both Zheng Bang and Aonong are big dark horses, but now they are bad brother, bad brother, and are in a state of trouble.

03

The only thing that can save pig companies from trouble is to reverse the pig price cycle. Regrettably, the reversal has been slow to come.

Against the backdrop of the continuing existence of African swine fever, when pig prices are insanely high, removing leverage will make it very difficult to remove production capacity. It will also take longer to remove production capacity, and the four-year pig cycle will come to an end.

According to the rules of the past, the cycle will reverse around May 2022, but in fact, it will usher in a false cycle. From May to October of that year, pig prices also rose from around 15 yuan to 27 yuan, which is also quite a big increase. However, it was short-lived, and pig prices soon fell back to less than 14 yuan within 3 months, and have continued to sluggish until now.

The main reason why pig prices fluctuated greatly in a short period of time is that pig farmers are too consistent in their expectations for the future upward cycle. There were delays in raising large pigs and fattening twice during this period, leading to a mismatch between supply and demand over a period of time, and pig prices rose sharply. However, pigs are live and cannot be raised all the time. After a few months, they will inevitably be forced to be released. As a result, supply far exceeds demand in a short period of time, and pig prices have begun to stampede again, falling below the average cost line of the industry.

Since losses began in May 2021, with the exception of Muyuan, the industry as a whole has lost money for nearly 3 years. The large-scale production capacity balance sheet under leverage has deteriorated rapidly, cash flow has continued to lose blood, and credit crowding has occurred among entities of various sizes. Listed companies such as Zhengbang Technology and Aonong Biotech all hang their lives on the line.

In 2024, there is a significant probability that pig prices will usher in a cycle reversal. Due to its cyclical nature, the layout or game opportunities in the pig sector are not small, and the win rate and odds are OK.

Currently, we should not be accompanied by pessimism and pessimism in the general market; we should see more opportunities after the collapse, especially leading pig companies with a self-sustaining business model and good growth.