Zhongtai Securities released a research report stating that the current position of the pig cycle does not match its valuation position. The core contradiction is the certainty and sustainability of the pig price increase, and the cycle expectation has room for upward revision. The core factor driving the price increase is the disposal of previous excess production capacity; the current round of capacity expansion is hesitant and lacks momentum. Continuing to clear inventory and slow capacity expansion can drive the current long-lasting new cycle, rather than a short-term fast-paced small cycle. Under the weak expectation and strong reality, the current spot price has already led the rise, and exceeded the expectation of the high point. Even if following the spot price, there is still room for related companies' valuation to be repaired.

Analysis of the livestock breeding industry: the cycle logic is gradually advanced, and the 2024Q2 pig price deviates from the index. 1) 2015-2016: the stock price changed synchronously with the pig price, and the stock had obvious excess returns during the pig price increase process; 2) 2018-2021: the cycle logic continued to revolve around the price or price expectation, but the start time of the main uptrend was advanced by one quarter, and most of the returns were still completed during the pig price increase phase; 3) 2021Q3-to present: the index trend began early in the early stage of capacity reduction, and the index deviated from the pig price after the launch of the 2024Q2 pig price.

The current position of the pig cycle does not match its valuation position. The core contradiction is the certainty and sustainability of the pig price increase, and the cycle expectation has room for upward revision. 1) Certainty of pig price increase: there is a secondary fattening process during the pig price increase, but it is not the main reason. The disposal of previous excess production capacity is the core factor driving the price increase; 2) Sustainability of pig price increase: based on the reductio ad absurdum analysis, the potential elimination time of this cycle is longer. The current round of capacity expansion is hesitant and lacks momentum. Continuing to clear inventory and slow capacity expansion can drive the current long-lasting new cycle, rather than a short-term fast-paced small cycle.

There is room for valuation repair in the sector. 1) The current market value per head is at the same level or lower than the valuation level of the deep loss period in history. The market value per head of some companies ranging from 1,000 to 2,000 yuan is already equivalent to the reset cost. Even if the industry marginally deteriorates and there are potential bearish factors, it is difficult to constitute downward driving of valuation, and there is room for valuation repair. 2) From the perspective of the high point expectation, the current expectation of the high point price is low. Under the weak expectation and strong reality, the current spot price has already led the rise, and exceeded the expectation of the high point. Even if following the spot price, there is still room for related companies' valuation to be repaired.

Investment recommendation: The current position of the pig cycle and sector valuation do not match. The upward trend of the breeding sector comes from the valuation repair and the repair of future cycle expectations. At this stage, the breeding sector is recommended based on the beta perspective, and the recommended symbols are Muyuan Foods and Wens Foodstuff Group.

Risk warning: Price fluctuation risk of bulk agricultural products, epidemic risk of breeding, risk of natural disasters.