Zheshang Securities has released a research report stating that the future profitability of the pig industry will be lower than each cycle before 2018, and will fall in the range of 100-150 yuan, but higher than the irrational cycle of 2022. At present, the leading pig companies are leading a potential mining project, which will still be leading in the 3-5 year dimension. Perhaps long-term industry learning and catching up will result in a convergence of excess profits. Representing the industry leader, Muyuan Foods has roughly excess profits in the range of 100-150 yuan, and combined with industry profits, its profit capacity is roughly 200-300 yuan after leveling. The breeding stock is stable at more than 0.1 billion heads, representing an annualized cash flow of more than 20 billion. The competitive advantages of the industry leader are stable, and not taking risks means becoming a stable income asset, which first brings balance sheet repair within 2-3 years, followed by a significant increase in dividend rate after 3 years.

The main points of China Merchants Securities are as follows:

The central profitability of the pig industry is shifting downward, and the excess profits of leading pig companies are gradually becoming clear.

Looking back at the past 10 years, leading companies in the industry such as Muyuan Foods and Wens Foodstuff Group have long-term ROE and gross margins that are superior to the industry average, and their excess returns are obvious. Zheshang Securities judges that as the long-term central profitability of the industry shifts downward, the excess profits of head pig companies with cost advantages will gradually become clear. The current three major characteristics at the industry level are that the industry capacity removal has slowed down, the central profitability has shifted downward, and the industry differentiation has intensified. At the capital level, direct financing restrictions have significantly increased. Looking to the future, industry players no longer have illusions about the immense profits brought by industry growth and strong cyclicality, and their behavior has become less consistent. The profitability and opportunity costs of individual farmers are less attractive compared to corporate ones, which are gradually fading away. The era of listed companies relying on financing for blood support has come to an end, and more attention is paid to seeking internal growth through real strength. Poorly managed capacity will be integrated, accelerating the industry to change for the better.

The formation of excess profits from a comparison of pig enterprise cost items.

Low cost advantages ensure that pig companies achieve excess profits. Zheshang Securities believes that after the non-epidemic situation, affected by factors such as improved breeding efficiency and the fall of raw material prices for feed, the complete cost center of pig companies has shifted downward. Currently, leading pig companies such as Sunner, Muyuan Foods, Giantstar, and Wens Foodstuff Group have costs at the top of the industry's first echelon. It is not difficult to see that high-quality pig companies have significant advantages in three cost items: piglets/feed/fixed asset depreciation. From the three aspects of cost reduction caused by scale advantages leading to lower procurement costs, improved management/technical indicator progress, and lower amortization of upfront investment, it is judged that some pig companies have a large room for cost reduction in the future. For example, the future cost reduction space of Muyuan Foods is predicted to be around 1.1-2.5 yuan/kg, the expected cost reduction space of Tangrenshen Group is around 1-1.9 yuan/kg, and the cost reduction space of Dongrui is expected to be around 1.7-3 yuan/kg.

Driven by excess profits, head enterprises will become income-generating assets after repairing their balance sheets within 3 years in the future.

Historically, Muyuan Foods' excess profit ability has been significantly stronger. In the future, the excess profits obtained by Muyuan Foods may still be higher than those of other listed companies. From an industry perspective, the future average profit per head may be around 150 yuan, higher than 2022-2024, similar to the second cycle. But unlike the second cycle, Muyuan Foods' excess profits are now shrinking. The next round of Muyuan Foods' excess profit range is expected to be around 100-150 yuan, still higher than other listed companies. It is expected that the debt-to-asset ratios of head pig companies Muyuan Foods and Wens Foodstuff Group will drop to a reasonable range of 40-50% in 2026 or later. After that, without large capital expenditures, excess profits may gradually shift to high dividends, and shareholder returns are expected to increase.

Risk warning: pig price fluctuations exceed expectations; listed company sales and cost performance fall short of expectations; large-scale uncontrollable diseases suddenly occur; policy disturbances; major food safety incidents, etc.