Financial Services Association, March 20 (Reporters Liu Jian and Wang Ping An) Behind the sluggish cycle, some pig companies lost their arms to survive, but under the heavy pressure of continued losses and high debt, many pig companies still “thundered” the current cycle and entered a debt vortex one after another.

A CFA reporter noticed that after *ST Zhengbang (002157.SZ), Aonong Biotech (603363.SH), and Tianbang Food (002124.SZ), which have the top three debt ratios in this round, have successively entered a situation of restructuring and applying for restructuring, some other pig companies are also facing high debt ratios and tight cash flow.

In this context, “high-risk” pig companies urgently need a cycle reversal to get out of trouble. Zhu Zengyong, a researcher at the Beijing Institute of Animal Husbandry and Veterinary Medicine of the Chinese Academy of Agricultural Sciences, said in an interview with a reporter from the Financial Federation, “Actually, the second half of the year was more about a market recovery, and there were no conditions for a cycle reversal.” Other industry insiders believe, “The core of an enterprise still needs to reduce costs, reduce leverage, and reduce liabilities, rather than lying back and waiting for the market to recover or the cycle to reverse. In a downward cycle, enterprises should shift their core to cost reduction in a timely manner.”

Huge losses compounded by high debt pig companies have experienced thunderstorms

Recently, the established pig company Tianbang Foods made a surprise announcement to apply to the competent People's Court for restructuring and pre-restructuring on the grounds that the company is unable to pay off its maturing debts and clearly lacks solvency, but has restructuring value. It immediately sparked a buzz in the pig industry: “Pig farming companies are changing too fast,” “it's difficult,” and “I hope it will have no impact on production and operation.”

In fact, in the context of two consecutive years of losses in the pig industry, Tianbang Foods was not the first pig company to enter into debt distress. In 2022, *ST Zhengbang experienced a sudden debt storm, which was then applied for restructuring by creditors, kicking off the “high-risk” pig companies queuing up to ICU in this round of the pig cycle. Entering the beginning of January of this year, Aonong Biotech had a sudden debt crisis, bank loans, and even the pig farm equipment was seized, and later applied for restructuring by creditors.

Furthermore, the People's Court of Wusheng County of Sichuan Province recently issued a notice revealing that pigs from the pig farm of Wusheng Tianzhao Animal Husbandry Technology Co., Ltd. will soon be sold.

(Image source: Court Notice)

The tight cash flow behind the rapid expansion has become an important factor in the collapse of pig companies. According to the Huatai Securities Research Report, Zhengbang, Aonong, and Tianbang have been restructured/applied for pre-restructuring one after another, or it shows that some of the group's capital chains have broken. Insufficient cash flow is the core driver of this cycle, and the main players of production capacity removal have gradually spread from retail investors to underoperated group markets.

In an interview with a reporter from the Financial Federation, an industry insider said, “Judging from the recent two and three cycles, from young eagle farming and animal husbandry in the early stages to Zhengbang and Aonong in this cycle, in fact, problems with enterprises are not simply due to low pig prices; they have a lot to do with mistakes in strategic decisions and management problems in the operation of these enterprises. In fact, there are few cases where companies collapse due to falling pig prices and losses alone, just like in August and September of last year. If the cost of the enterprise is relatively reasonable, it can also make a certain profit.”

A Financial Services Association reporter combed through and found that “Thunderstorm” pig companies all have three high debt ratios, high breeding costs, and high listing growth rates. Take Tianbang Foods as an example. As of the end of the third quarter of 2023, its debt ratio was 87.3%; by the end of the fourth quarter of 2023, the full cost of fattening was 16.6 yuan/kg; in 2023, nearly 7.12 million pigs were released, an increase of 61.07% over the previous year.

It is worth noting that in addition to the three companies*ST Zhengbang, Aonong Biotech and Tianbang Foods, some listed pig companies also have high debt ratios. Among them, companies such as New Hope (000876.SZ), Jin Xinnong (002548.SZ), Xinwufeng (600975.SH), and Huatong (002840.SZ) all had debt ratios of over 70% as of the end of the third quarter of last year.

The industry urgently needs a cycle reversal to save the difficult situation, but “lying flat” is not the way out

Downstream retail investors are also in trouble. Judging from last year's full year, pig prices have been low for a long time, which is quite difficult for farmers. Judging from farming earnings, pig farmers lost 76 yuan throughout the year. “I've been losing money last year. I've lost all the money I had earned before. The price of pigs has risen recently, but now I'm lying back and forth. The market is recovering further in the second half of the year, and I can't help but make trouble.” A farmer told reporters.

There seems to be a consensus that the industry urgently needs a recovery in the market or even a cycle reversal to save the difficult situation. In fact, since entering March, pig prices have slowly begun to rise, and the downstream pig industry has gradually seen hope. According to Choice data monitoring, as of March 19, the national pig price was 14.55 yuan/kg, up 0.42 yuan/kg during the month.

Zhu Zengyong told the reporter, “The core elements of price increases are supply and consumer demand, but consumption is still relatively stable in the short term. The recent rebound in prices is mainly due to changes in supply. First, after the fourth quarter of last year, there was a surge in sales volume, especially at the peak before the Spring Festival. The number of medium and large pigs declined for three consecutive months, and the oversupply of commercial pigs has been alleviated to a certain extent since March. Second, after the Spring Festival, pig prices did not drop as deeply as expected, and people's expectations for the future market also began to rise, which led to secondary fattening, the diversion of some standard pigs, and the supply situation improved.”

Can the rise continue? According to the news, the latest data from the Ministry of Agriculture and Rural Affairs recently showed that 40.42 million sows were kept in the country in February, -0.6% month-on-month (previous value -1.8%) and -6.9% year-on-year. Although there has been a decline in the month-on-month rate, overall elimination is still progressing.

The rise in pig prices and continued decline indicates that everything is moving in a positive direction, and “high-risk” pig companies seem to be about to wait for “dawn.”

However, according to Zhu Zengyong, “The second half of the year was more about a market recovery, and there were no conditions for a cycle reversal. In the past, the first cycle was a continuous and passive reduction in the production capacity of sows, but the current changing situation of breeding sows is only driving the supply and demand situation to ease supply and gradually shift to a basic balance of supply. The seasonal impact of supply will drive pig prices to rise relatively well seasonally in some time. The recovery in the second half of the year is also phased; it can only be said that the overall situation is better than last year.”

Looking at it now, the cycle reversal still needs to wait. A dividend model such as “lying flat” for “high-risk” pig companies is not advisable. Improving the company's own operations is the way to save itself. Tianbang Foods is not the first company, and may not be the last company forced to apply for restructuring. “Some companies still have high debt ratios and farming costs. Even if the market recovers, the core of the enterprise still needs to reduce costs, reduce leverage, and reduce liabilities, rather than waiting for cyclical dividends. In the downturn cycle, enterprises should shift their core to cost reduction in a timely manner, and not be fooled by the dividends that may reverse the cycle. If they cannot maintain a good operating and production model, even if high-risk enterprises escape this round of downturn, there is no guarantee that they can safely get through the next downturn cycle.” The aforementioned industry insiders think.