Huachuang Securities released a research report saying that long-term losses may have led to tight cash flow in the industry. Against the backdrop of continued sluggish pig prices, capacity reduction is expected to accelerate and be highly sustainable. Currently, the pig sector has ushered in a key layout window, and the market can be expected for the next six months.
The Zhitong Finance App learned that Huachuang Securities released a research report saying that long-term losses may have led to tight cash flow in the industry. Against the backdrop of continued sluggish pig prices, capacity reduction is expected to accelerate and be highly sustainable. Currently, the pig sector has ushered in a key layout window, and the market can be expected for the next six months. In terms of planting. As the commercialization and promotion process of genetically-modified genes begins, it may significantly open the ceiling of the seed industry and push the pattern to the head. It is expected that companies with forward-looking technical capabilities and technical reserves and breeding enterprises with excellent varieties will fully benefit.
The views of Huacheng Securities are as follows:
Market trend: The Shanghai and Shenzhen 300 Index declined overall this week (1.15-1.21), down 0.44% from last week. The Agriculture, Forestry and Animal Husbandry II (Shenwan) Index closed at 2641, down 4.50% from last week. The aquaculture sector (-3.86%) saw the smallest decline. Judging from the valuation, PE/PB in the planting, aquaculture, animal health, and feed industries are all below average (1 year), aquaculture PE is above average (1 year), and PB is below average (1 year).
Pigs: In 2023, we will be able to breed 41.42 million heads, and production capacity removal will accelerate. It is recommended to increase the layout of the pig sector.
The overall market is weak, and agriculture is also affected, but expectations of a cyclical reversal in fundamentals are becoming more certain. The Bureau of Statistics announced that the number of breeding sows in China at the end of 2023 was 41.42 million, -2.3% month-on-month (previous value -1.3%) and -5.7% year-on-year (previous value -2.8%). Production capacity reduction accelerated markedly in the fourth quarter. The bank believes that under the influence of multiple factors, such as tight cash flow and winter shortages, the industry's production capacity reduction has already entered the deep-water zone, and non-linear capacity reduction may occur. According to the 3% reduction in the quarter, the Bureau of Statistics's energy harvesting column will be reduced to less than 39 million heads by the end of the second quarter of '24.
In terms of market conditions, the average price of pigs in Yongyi on January 21 was 14.01 yuan/kg. Although the price of 15 kg piglets rose slightly from the low level of 300 yuan/head, sales were weak. In the short term, demand support is gradually weakening. Slaughter volume at slaughterhouses on a scale of Yongyi has been declining for 3 consecutive weeks. The La-8 season has passed, and it may be difficult for pig prices to rise significantly before the Spring Festival. Looking ahead to the future market, there is still a month-on-month increase on the supply-side basis. The number of newborn piglets in the country was +5.9% year-on-year in April-September '23, which indicates that the pork market supply is sufficient within half a year from October '23, and the current frozen product storage capacity remains high. The demand side gradually weakened in the first half of the year. The price of pig futures contracts 2403 was 13.69 yuan/kg this week. Although the market is worried that pig prices will rise after the holiday season, it is difficult for Eryu to form a large synergy due to overall oversupply. The Ministry of Agriculture and Rural Affairs said, “After the Spring Festival, there may be a “double encounter” between the low consumption season and an increase in pig production, and the level of pig farming losses may even be heavier than in the same period in 23 years.” The bank believes that the industry's cash flow is already tight, and weak pig prices expect production capacity to continue to decline in the first half of the year.
Long-term losses may have led to tight cash flow in the industry. Against the backdrop of continued sluggish pig prices, capacity reduction is expected to accelerate and be highly sustainable. Currently, the pig sector has ushered in a key layout window, and the market can be expected for the next six months. The prudent standard proposal focuses on Muyuan shares (002714.SZ), Wen's shares (300498.SZ), and New Hope (000876.SZ); the flexible standard focuses on Dongrui shares (001201.SZ), Xinwufeng (600975.SH), superstar agriculture and animal husbandry (603477.SH), Shennong Group (605296.SH), Huatong shares (002840.SZ), Tang Renshen (002567.SZ), Tiankang Biotech (002100.SZ), Jingji Zhinong (000048.SZ), etc.
The prudent standard proposal focuses on Muyuan shares (002714.SZ), Wen's shares (300498.SZ), and new hope (000876.SZ). The flexible standard focuses on Xinwufeng (600975.SH), superstar agriculture and animal husbandry (603477.SH), Huatong shares (002840.SZ), Tang Renshen (002567.SZ), Tiankang Biology (002100.SZ), Jingji Zhinong (000048.SZ), Dongrui shares (001201.SZ), etc.
White chicken: Overseas introduction or continued restrictions, medium- to long-term industry prosperity can be expected.
This week, Yisheng Co., Ltd. announced its annual results forecast. Benefiting from the recovery in the chicken seedlings sector in the industry, the company's 23-year performance reversed year-on-year losses. The net profit to the mother is estimated to be 540 million yuan - 600 million yuan. The bank estimates that the company's poultry breeding sector will make a profit of about 630 million, of which parent surrogate chicken seedlings will make a profit of about 390 million, and commercial chicken seedlings will make a profit of about 220 million. The scale of the company continues to grow, and as a supplier of high-quality seedlings, the product price is expected to maintain a long-term advantage, and it can enjoy cyclical profits and barrier profits when the cycle arrives.
In terms of market conditions, seedling prices and chicken prices continued to rise in a restorative manner. On the side of chicken, when supply contracted near the Spring Festival, dealers prepared goods at low prices, and breeding losses narrowed. On January 14, the price of broilers in Yantai was 3.85-3.95 yuan/kg; in terms of chicken seedlings, most small poultry factories on the supply side were still closed, and there was some demand to fill the gap after the Spring Festival was released. Chicken seedlings continued to rise. The price of chicken seedlings in the Yantai region rose to 2.60-3.30 yuan/feather, of which large manufacturers quoted 3.5 yuan/feather. Looking ahead to the future market, some companies entered the incubation period earlier, with a long gap in supply during the Spring Festival, and there may be a supply gap for chicken seedlings after the holiday; in the medium to long term, with the transmission of upstream ancestral production capacity gaps and a marginal recovery in demand-level consumption, it is expected that commodity prices will be high this year.
The US reported 45 cases of commercial farm outbreaks in December, and the global bird flu situation is still grim.
According to the latest WOAH report, from November 17 to December 7, 2023 (3 weeks), a total of 137 new cases of highly pathogenic avian influenza were reported globally, an increase of 136% over the previous month, and the development situation of avian influenza in the world became even more serious. Brazil, the largest chicken exporter, has reported 3 cases of poultry and 148 cases of bird flu in wild birds as of January 14. If a poultry outbreak occurs in the world's largest chicken exporter, it will have a big impact on global chicken trade, and global genealogy tension may continue. At the same time, the worst bird flu outbreak in US history continues. There have been no HPAI commercial farm outbreaks in the US for 5 months in 23 years, but the outbreak has continued to increase since the fall and winter migratory bird migration season arrived. 53 cases and 44 commercial farm outbreaks were reported respectively in November and December. As of January 14, '24, the last 30 days of the bird flu outbreak in the US had 18 cases of HPAI in commercial farms and 14 cases of domestic breeding, and culled more than 4 million birds. In the short term, it may continue to be one supplier state, and import introduction may continue to be restricted.
The bank anticipates the upcoming chicken cycle. From a long-term perspective, in the context of continued high food prices, white chicken as the animal protein with the lowest meat ratio will be further reflected, and the long-term growth of the industry has already been highlighted. On the other hand, the size of leading companies has clearly expanded compared to the previous cycle, and the ability to redeem profits in this cycle is expected to increase significantly compared to the previous cycle. Industrial chain profits are concentrated in the upstream breeding chain, and advantageous breeding companies may obtain excess profits. At present, the valuation is at a low level after the sector's correction. It is expected that the long-term logic of overseas introduction restrictions will continue to be verified, and the sales price and average market price of excellent seedling companies will continue to maintain their advantage in the context of import introduction restrictions. The focus is on Yisheng shares (002458.SZ) that continue to grow in scale and are expected to obtain cyclical profits and barrier profits, and the undervalued Baiyuji Longtou Hefeng Co., Ltd. (603609.SH). It is recommended to focus on Xiantan Co., Ltd. (002746.SZ), Minhe Shares (002234.SZ), and Shengnong Development (002299.SZ) etc.
Animal insurance: Pig prices picked up, and the operation of animal insurance companies improved month-on-month in the third quarter, focusing on investment opportunities brought about by the promotion of anti-plague vaccine research and development.
The farming boom picked up in the 3rd quarter of '23, and the sales side of animal insurance companies recovered. Judging from the three-quarter report, the performance side improved markedly from month to month. With the release of high-quality production capacity on the supply side of the industry, industry competition intensifies, leading companies continue to increase R&D investment and new technology and new process layout. In the future, R&D and innovation in the animal insurance sector will become the key to enterprise success. At the investment level, research and development of anti-plague vaccines is progressing steadily. Among them, Asian units are leading the technology route in stages. Currently, they have entered the stage of preparing efficacy evaluation tests and formulating test plans for emergency evaluations. It is expected that relevant review work will be accelerated after the formal plan is implemented.
The bank believes that if the vaccine is not successfully commercialized, or if it brings room for more than doubling the swine vaccine market, it is recommended to focus on the potential beneficiaries of Zhongmu Shares, Biotech Shares, Placo, and Biotech. In addition, the cat triple vaccine developed by many companies, including Reipu Biotech, has passed an emergency evaluation by the Ministry of Agriculture, and can be marketed and sold later after obtaining a product approval number, breaking the monopoly of imported brands for more than 10 years and solving the problem of stuck necks in the field of cat vaccines. The bank is optimistic about the future import substitution of domestic brands of the cat triple vaccine, and suggests focusing on Ruipu Biotech (300119.SZ).
Planting chain: Focus on the main line of food security and focus on the commercialization process of genetically modified varieties.
The National Conference of Directors of Agriculture and Rural Affairs emphasized the need to focus on promoting agricultural production focusing on food security and rural revitalization focusing on rural development, construction, and governance. Ensure that the country's grain production is stable at over 1.3 trillion kg, and focus on the continuous increase in soybean oil production capacity and self-sufficiency rate. Currently, the Ministry of Agriculture has announced genetically modified varieties that have passed approval. On December 26, 23, 26 enterprises obtained the first batch of genetically modified corn and soybean seeds production and operation licenses, kicking off the commercialization of genetically modified varieties. Subsequent planting areas should comply with national breeding industrialization arrangements. As the commercialization and promotion process of genetically-modified genes begins, it may significantly open the ceiling of the seed industry and push the pattern to the head. It is expected that companies with forward-looking technical capabilities and technical reserves and breeding enterprises with excellent varieties will fully benefit. It is recommended to focus on Dabeinong (002385.SZ), Longping Hi-Tech (000998.SZ), Syngenta, and Denghai seed industry (002041.SZ).
Pets: The industry continues to expand, and leaders are expected to enjoy the dividends of growth.
According to the “2023-2024 White Paper on China's Pet Industry (Consumption Report)” published by the Pet Industry Big Data Platform, the size of the urban pet (dog and cat) consumer market in 2023 was 279.3 billion yuan, up 3.2% from 2022. Among them, the size of the dog consumer market increased slightly by 0.9% compared to 2022, and the size of the cat market increased 6% compared to 2022. At the industry level, domestic substitution has basically been completed, and the logic of accelerating leading expansion and increasing industry concentration has gradually been implemented. At the investment level, the focus is on the pace of profit margins being realized at the same time as leading companies' domestic market concentration is increasing. In addition, attention can be paid to profit inflection points brought about by the bottoming out of overseas inventory cycles.
The focus is on recommending Gibao Pet (301498.SZ) and Zhongchong Co., Ltd. (002891.SZ), which not only conform to the brand logic where domestic business growth is higher than the industry and profit margins are realized; at the same time, Gaibao uses methods such as acquiring Waggin Train and building its own overseas factories as ballast stones for stable overseas business profits. We recommend Tianyuan Pet (301335.SZ) and pay close attention to the marginal opportunities of Petty's shares (300673.SZ) and Yuanfei Pet (001222.SZ). Overseas customers have basically stopped going to the warehouse, and the profit inflection point is about to arrive.
Risk warning: Fluctuations in pig prices, sudden large-scale uncontrollable epidemics, major food safety incidents, macroeconomic systemic risks, and extreme climate disasters have led to large-scale crop production cuts and boosting food prices. The introduction of ancestral chickens from overseas has recovered beyond expectations, domestic breeding epidemics such as bird flu have broken out, and chicken prices have declined. Exchange rates fluctuated, and the recovery in consumption fell short of expectations.