After a long season, the pig industry seems to have finally smelled the smell of recovery.

According to the latest data, as of last weekend, the average price of pigs nationwide was 15.2 yuan/kg, up 0.73% from the Ching Ming Festival. Looking ahead, the average sales price of commercial pigs from major listed pig breeding companies rose one after another in March, continuing the rise at the beginning of the year.

Take COFCO Jiajiakang (01610) as an example. In the first three months of this year, the average sales price of the company's large commercial pigs was 14.2 yuan/kg, 14.46 yuan/kg, and 14.63 yuan/kg, respectively. Prices showed a moderate upward trend.

Pig prices are not weak in the off-season, which is clearly a good sign for investors in the secondary market. The Zhitong Finance App noticed that in the past, in 2023, pig prices were running low throughout the year, and price volatility dropped significantly, and consumption flexibility weakened. The length of the current bear market cycle was unrivaled in the traceable historical cycle. In this context, pig companies' performance is generally under pressure.

Taking Hong Kong stock related companies as an example, Wanzhou International (00288) and COFCO Jiajiakang's performance on both business and profit sides last year was unsatisfactory. In the first quarter of this year, COFCO Jiajiakang's net loss (before fair value adjustment for biological assets) also reached 445 million yuan. However, as pig prices continue to buck the trend during the off-season, pork stocks, which were previously shrouded in pessimistic expectations, may re-enter the stock pool of active investors.

Has the low performance passed?

In 2023, the consumer market played a “script” of structural differentiation under strong expectations. As far as the pig industry is concerned, although pigs as a whole are less affected by macroeconomic events. Overall, pig prices fluctuate in the upper and lower ranges of 2 yuan/kg around the price center of 15 yuan/kg throughout the year, industrial profits have generated the longest loss period, and the “cold feeling” of the market has exceeded external expectations. According to statistics, the average price of pigs in 22 provinces and cities across the country was 15.24 yuan/kg in 2023, down 19.4% year on year, and the industry continues to suffer deep losses.

Against the backdrop of continued slump in pig prices, the performance of relevant listed companies has been tested. Take COFCO Jiajiakang as an example. In 2023, the company released 5.2 million pigs, an increase of 26.7% over the previous year, slightly exceeding the target at the beginning of the year. Despite a steady increase in production capacity, due to sluggish pig prices, COFCO Jiajiakang's annual revenue fell by more than 10% year-on-year to 11.568 billion yuan. This is also the third year in a row that the company's revenue has grown negatively. At the same time, the company's profit hovered near the break-even line. Net profit to mother before adjustment to the fair value of biological assets was 51 million yuan, while net profit to mother after adjustment based on pig prices at the end of the year was -136 million yuan.

Coincidentally, the performance of Wanzhou International, another representative company in Hong Kong stocks, was also weak. According to the data, the company's revenue for the whole year was US$2,623,600, while net profit to mother before the fair value of biological assets was US$606 million, down 56.8% from the previous year; adjusted net profit to mother was US$629 million, which is also significantly lower than the previous year's US$1.37 billion.

It should be pointed out that compared to ordinary pig companies, Wanzhou International accounts for a higher share of overseas business. As far as 2023 is concerned, the company's domestic business accounted for 33.3% and 64.4% of total revenue and operating profit, respectively, while its business in the US and Mexico accounted for 54% and 22.4% of total revenue and operating profit, respectively. In addition, Wanzhou International also contributed some of its revenue and operating profit from its European business.

Judging from the data trends in Wanzhou International's pork sector, not only did the domestic business experience a decline in sales and profit in 2023, but the performance of the rest, such as the US and Mexico business, was not optimistic. According to the data, the company's revenue from the pork business in the US and Mexico fell 8.9% year over year, while losses further expanded to US$624 million.

The information revealed by Wanzhou International Financial Report is not surprising. If you expand your gaze to the world, the price of pigs in 2023 really means “the world is cool and hot”. Taking the US as an example, data released by CME shows that the average pig price in 2023 was 1.36 US dollars/kg, down 17.1% year on year; in addition, according to data from the US Department of Agriculture, the average pork price in 2023 was 1.98 US dollars/kg, a decrease of 13.5%.

Can we expect an inflection point in the cycle?

The past is undeniable, and there is probably no need to be overly pessimistic when looking to the future. In the analysis framework of the pig cycle, the main factor affecting pig price trends is the relationship between supply and demand. Since pork consumption demand in China is relatively stable, the influencing factor of pig prices is mainly supply-side changes.

At this stage, the pace and magnitude of the reduction in pig production capacity may indicate that the inflection point of the cycle is approaching. According to public information, since entering a new cycle of capacity removal in early 2023, this round of capacity removal has taken more than a year. According to data from the Ministry of Agriculture and Yongyi Consulting, as of March of this year, the current round of capacity removal had reached 10% and 12%, respectively, and the magnitude was close to the cumulative reduction range (9% and 15%) of the previous cycle (2021-2022). Also, according to public data, as of the end of February this year, the number of breeding sows in the country was 40.42 million, which is also the lowest number since 2021.

Furthermore, considering that current pig prices are still lower than the full cost of large-scale farms, the level of supplementary production capacity in large-scale farms is limited when losses are not completely reversed, and the contraction of reserve sows will continue to spread to the ability to reproduce, so it is expected that pig production capacity will remain at the current low level for a long time to come.

It is worth mentioning that earlier this year, the Ministry of Agriculture and Rural Affairs issued the “Implementation Plan for the Regulation and Control of Pig Production Capacity (2024 Revision)”, which adjusted the national target for normal breeding sows from 41 million to 39 million, while also adjusting the lower limit of normal fluctuations in breeding sows from 95% to 92% of normal breeding. This time, the Ministry of Agriculture and Rural Affairs lowered the normal amount of sows that can breed sows. This is seen by some market observers as a sign that there is still room for production capacity to be cleared in this round.

The Zhitong Finance App believes that although from the perspective of pig supply and demand, there are still some differences in the market about to bottom out, large losses in all aspects of the farming side are unlikely to become the norm in recent years. However, judging from the financial reports of various listed companies, even leading companies are currently facing greater operating pressure. This situation may also point to the near inflection point of the cycle.

Finally, back from the perspective of the capital market, the “coldest” pig cycle has already caused related companies' performance and stock prices to go through deep adjustments. Although the current fundamental data does not yet support the conclusion of a complete reversal of the industry, the appeal of the cycle also lies in fluctuations and poor expectations. For aggressive investors, the present may already be a time window for early reversal of the game cycle.