The Zhitong Finance App learned that Guosheng Securities released a research report saying that the downward cycle is often the result of industry expansion, and for the pig industry, there is a relatively inevitable link between expansion and financing. This means that current industry participants not only face cash losses due to low prices, but also hard expenses for debt repayment. Removing production capacity is still a rational choice for returning capital. It is recommended to focus on allocation opportunities in the pig breeding sector during the expected reversal phase. Before the cycle reverses, we still recommend Muyuan Co., Ltd. (002714.SZ), and follow Wen's shares (300498.SZ); you can also follow Superstar Agriculture and Animal Husbandry (603477.SH), Huatong (002840.SZ), Tang Renshen (002567.SZ), and Jingji Zhinong (000048.SZ).

Guosheng Securities's views are as follows:

Financing pig farming is necessary. In the process of large-scale domestic pig farming, financing is an essential part.

1) Heavy asset investment in large-scale farming: Large-scale pig farming is an asset-heavy investment industry. The average capital expenditure for self-breeding is usually 1,400-1,600 yuan/head. Along with the increase in environmental protection and biosafety prevention and control requirements, the fixed asset investment faced by large-scale farming continues to increase.

2) Long investment period for pig breeding: The construction cycle of a pig farm takes 2 years. Considering the growth cycle of sows plus the fattening cycle of fat pigs, it will take at least 1 year to sell pigs. Therefore, before the new pig farm brings benefits, there is a net investment period of at least 3 years. 3) The downward cycle requires reserves or even expansion of production capacity: pig prices fluctuate drastically, and the downward cycle is an important means of stabilizing production capacity (or even expanding production capacity) to meet the boom.

Changes in financing structure and volume are closely related to pig prices.

Financing in the upward cycle is “expansionary financing” to increase production capacity. Usually, equity financing, debt financing, and long-term financing are the main ones. At the same time, the total amount of financing is high. Often in the same year or year after pig prices are booming, the amount of financing will increase significantly.

Financing in the downturn cycle is to overcome difficulties. At this point, expansion will be suspended, and long-term financing will shrink markedly. Relying on short-term financing to repay long-term financing left over from the previous period shows that short-term loan increases are still high, while long-term loan increases may turn negative.

The obvious impact of financing: interest costs have increased, and debt repayment pressure has increased.

1) The impact of interest increases on costs is relatively manageable: usually the interest rate for pig farming enterprises is 2-3%, and the corresponding interest fee is about 0.4-0.5 yuan/kg. The impact of a 1% change in the fee rate may be 0.15-0.2 yuan/kg. The increase in financial expenses has little impact on the cost for enterprises with controllable debt expansion. 2) Increased debt repayment pressure increases corporate capital management requirements: We estimate that the average amount of cash paid by listed pig companies to repay debts in the third quarter of 2023 was 2.1 times that of book money. Under the demand for debt repayment capital, “blood transfusions” from the company's operating activities or incremental financing are required.

Implicit effects of financing: Continued production is blocked, and production capacity is passively eliminated.

Debt repayment pressure in the downturn cycle is no longer possible to obtain blood transfusions through operating profits and conventional long-term financing. In addition to increasing short-term loans, we found that under report losses, the operating cash flow of listed companies would increase abnormally, reflecting that the company obtained cash flow from operating activities through unconventional operating methods: 1) Increased accounts payable: As of the third quarter report of 2023, the total notes payable and accounts payable of the sample listed pig companies accounted for 18.9% of operating income, an increase of 4.2 pct from the end of 2022, a record high, but the credit flow of breeding companies was unsustainable; 2) Sales capacity: After sows were eliminated, the expected expenses due to incremental production capacity fell to zero, and cash flow pressure was reduced to zero. As of the 2023 three-quarter report, the total productive biological assets of the listed pig companies in the sample were 25.08 billion yuan, a year-on-year decrease of 9.1%. Since the month-on-month increase in the third quarter of 2022, it has declined for four consecutive quarters. Along with the current low and stable price of sows, the current decline in biological assets may be mainly due to volume reduction.

Compared to listed pig companies, it is more difficult for unlisted companies to carry out equity financing. With higher leverage and relatively weak refinancing capabilities, they face even greater difficulties. According to statistics from the New Pig Group, the decline in production was most obvious. By the end of 2023, the year-on-year declines of 200,000 to 500,000 heads and 100,000 to 200,000 prolific enterprises had year-on-year declines of 28.7% and 21.1%, respectively, followed by 20,000 to 10,000 heads, with a decrease of 14%.

Risk warning: pig price fluctuation risk, epidemic risk, consumer demand risk, etc.