This week's industry opinion on pig breeding: pig prices continue to decline, and there is limited room for short-term price declines. The average price of lean pork pigs in the country this week was 13.50 yuan/kg, down 7.09% from the previous month. This week, the price ratio of pork food was 7.07, down 0.58 from the previous month. Looking at the short term, snowfall in some regions of China affected local transportation in the early stages, and farmers were reluctant to sell due to price increases expectations. Recently, transportation resumed supply. The demand side entered the gap period between the bacon production period in the south and before the New Year's pig slaughter in the north. Supply and demand were relatively relaxed. In addition, the fall in pig prices caused some fearless farmers' willingness to go public has increased compared to some time ago, and pig prices have fluctuated and weakened in recent years. However, considering that pork demand is still gradually picking up, we expect pig prices to rise steadily a few years ago. It should be pointed out that in addition to pig prices, the key factors affecting the efficiency of enterprise farming include grain prices. Currently, pig prices are similar to the bottom level of the previous cycle in 2013. Breeding enterprises generally lost money in 2013, and pig food ratio is below 7. Currently, pig food ratio is 7 or more and there is considerable breeding profit of 200-300 yuan/head. Although profit margins are consistent with pig price cycle fluctuations, the absolute level of breeding profit determines the company's valuation level. The market's excessive reliance on pig prices and relative neglect of the cost side has caused the company's valuation level. We believe that the current sector is still relatively undervalued and overvalued. Large repair space. Looking at the big cycle, effective supply continues to recover, and the cycle is slowly declining. Due to the impact of the increase in sow production efficiency and weight of released pigs brought about by large-scale breeding, effective supply is gradually picking up. Currently, the pig cycle is still declining. However, supply recovery was slow due to environmental policies and the slowdown in pork imports. According to pig storage data from 400 counties monitored by the Ministry of Agriculture, pig storage in December 2017 fell 2.1% month-on-month, down 6.8% year on year, and breeding sows fell 1.2% month-on-month, down 6.4% year on year; according to data from the Ministry of Agriculture, pork imports in the first half of 2017 were 662,000 tons, a decrease of 13.1% compared to the same period last year. It is worth noting that despite the year-on-year decrease in imported pork volume, domestic and foreign pork prices still exist, and pork imports will continue to remain high. Overall, there is no basis for a sharp decline in pig prices in this round of pig cycle. There is no basis for a sharp decline in pig prices. It is recommended to focus on leading enterprises in the industry that have relatively low valuations and have maintained progress in capacity expansion. Poultry farming: There are mixed ups and downs in hairy chickens and chicken seedlings. This week, the purchase price of chicken in Yantai, Shandong was 3.73 yuan/kg, up 3.04% from the previous month, and the ex-factory price of chicken seedlings was 2.75 yuan/feather, down 9.84% from the previous month. Looking at the medium to long term, the logic of introducing discontinued poultry chains has not changed. The white-winged broiler boom will gradually materialize later, and the chicken price boom will rise or stay there for a long time. In terms of the introduction and storage of ancestral chickens, in 2015, due to customs clearance incidents caused by foreign diseases, only about 630,000 sets of ancestral breeders were introduced throughout 2016. In 2017, the H5 subtype disease ravaged the world. In January-January 2017, China introduced a total of about 128,000 sets from Spain and Poland. Currently, Poland has been closed due to a recurrent disease, and New Zealand is still under technical customs closure (involving amendments to inspection and quarantine regulations). According to statistics from the China White Feather Broiler Alliance, as of the first half of 2017, only about 200,000 sets were introduced. The population of ancestral chickens affected by forced feather changes was slightly higher than the number introduced, but it had little effect on the amount of eggs produced by ancestral chickens. In terms of parent-surrogate chicken storage, according to data from the China Animal Husbandry Association, as of the beginning of October 2017, some enterprises across the country were keeping about 14.3 million sets on behalf of parents, down 4.7% from the beginning of September. We expect that there will be a substantial shortage of broilers on the supply side, combined with a seasonal recovery in chicken consumption. We believe that the cycle span of the poultry chain has increased and the inflection point in the economy has reached. Feed: Affected by large-scale farming, industry integration has accelerated, and leaders in integrated aquaculture layout have benefited. On the one hand, as production capacity in the pig breeding industry continues to recover and the large-scale process is further accelerated, the demand for feed in the breeding industry tends to be service-dependent and high-end, forcing the integration of the feed industry to accelerate. Low-end production capacity is gradually being eliminated. Industry leaders rely on advantages such as products and services to gain more share, and performance elasticity is greater as breeding stocks recover. However, it is important to note that large-scale farmers are also gradually equipped with feed equipment, and the threshold for the feed industry is still low. In the long run, the profitability of enterprises extending the industrial chain to the downstream aquaculture industry will steadily increase, their ability to withstand risks will be strengthened, and competitive advantages will gradually become apparent. Therefore, we believe that the feed industry will show a trend of integrated breeding. On the other hand, raw material costs are still facing downward pressure to increase profit margins. This week, the spot price of soybeans was 3524.74 yuan/ton, the same month on month. The spot price of soybean meal was 2964.24 yuan/ton, down 0.01% from the previous month, and the average spot price of corn was 1871.75 yuan/ton, up 0.04% from the previous month. In terms of corn, although the gap between supply and demand is gradually widening due to a reduction in cultivation area and an increase in downstream processing demand, China's corn stocks are still high, and the process of removing stocks will take some time. It is expected that domestic corn prices will still face downward pressure in the short to medium term. In terms of soybeans, the USDA's January soybean supply and demand report predicts that the US soybean yield for 2017/18 will be 49.1 bushels per acre, a slight decrease compared to last month's forecast. Currently, the critical growth period for soybeans has passed, and abundant production can be determined basically. According to customs statistics, China imported 9.55 million tons of soybeans in December 2017, an increase of 6.11% over the same period last year. Soybean prices will still face downward pressure in the next year due to abundant global soybean production in 2018 and supply and demand remaining relaxed. The feed industry will benefit from the continued decline in raw material costs, and profitability is expected to continue to rise. It is recommended to focus on leading feed companies, such as Jin Xinnong and Haida Group, which have reduced the risk of performance fluctuations and increased profitability due to accelerated aquaculture integration processes. Sugar industry: Sugar prices have continued to weaken, mainly due to the recent widening of domestic and foreign price spreads. This week, the spot price of white sugar in Liuzhou was 6015 yuan/ton, down 0.08% from the previous month. Judging the trend of sugar prices at home and abroad, we focus on two indicators: the gap between supply and demand and the ratio of stocks to sales. In terms of international raw sugar, we are currently in the inventory removal cycle. Despite the USDA's expectations of an oversupply in the 17/18 season, sugar stocks continue to decline. It is estimated that the stock sales ratio of sugar in the 17/18 season will drop to 22.74%. We judge that the stock sales ratio that has been declining year after year will strongly support international raw sugar prices. In terms of domestic sugar prices, the USDA expects China's sugar gap to reach about 3.3 million tons in 2018, and the stock sales ratio will drop to 47.25% from 60.7% in 2016. Considering, on the one hand, that sugar cane cultivation area is basically stable in the future, yield and sugar yield will increase, sugar production will grow steadily, and at the same time, raw sugar imports will be drastically reduced under the premise of tariff policy protection. On the other hand, sugar consumption is expected to continue to grow steadily when the use of starch sugar substitutes becomes more saturated. Combined with the bottom support in domestic sugar prices above, it is expected that there will be a steady recovery in the medium to long term. Fishery: Participation prices maintain price levels, and the seafood industry remains prosperous. This week, the bulk price of sea cucumber was 120 yuan/kg, which was flat month-on-month. The current unit prices for abalone, scallops, and prawn were 170 yuan, 8 yuan, and 180 yuan per kilogram, respectively, the same month on month. Despite a recent correction in participation prices, the seafood industry as a whole is still in an upward phase of prosperity due to continued demand recovery and supply side contraction due to capacity restructuring. Before 2011, sea cucumber products focused on the concept of “luxury food” and set off a boom in the high-end consumer market. The gross profit and growth rates of major sea cucumber farming and processing enterprises reached 66% and 64% respectively. As manufacturers continued to join, leading to overcapacity in the industry and the introduction of consumption restriction policies, sea cucumber prices began to decline sharply, falling rapidly from a high level of more than 200 yuan/kg in 2011 to 80 yuan/kg in the first half of 2016. Prices have dropped by more than 50% within 5 years. Since then, the process of removing production capacity in the sea cucumber market has continued, and the industry has begun to pick up. Tall Boom. We judge that the sea cucumber market is still in a period of capacity adjustment, and it is expected that the industry will continue to improve. We recommend that you pay attention to Haojiao, Oriental Ocean. This issue of “Excellent Promotion” portfolio: Haodanjia (600467), Yasheng Group (600108).