Zhitong Financial APP learned that Tianfeng Securities released a research report stating that under the situation where the previous capacity reduction has fully driven the reversal of pig prices and the progress of replenishing farms is limited, the industry has considerable profit space given the extended cycle length. Strong cost control companies with high growth elasticity will significantly emerge as alpha stocks. Additionally, the valuation is currently at a relatively low level and pig plate value highlights.

Since the Spring Festival, the trend of pig prices reversing has been clear. As of July 16th, the average national price of live pigs was 19.31 yuan/kg. With the continued expansion of the supply-demand gap, there is considerable room for pig price increases. In addition, considering that the industrial side is more cautious in supplementing fields due to subjective and objective factors at present, it may be conducive to prolonging the current pig cycle prosperity, which is beneficial to pig farms. As for the demand situation this year, there are limited substitutes for other meat protein. Pork is still the main way for Chinese residents to consume meat protein, with a low proportion of beef. From the comparison of the historical cycle of pig slaughtering volume with the decline in beef prices in the recent period, the demand (slaughtering volume) has not been significantly affected. Therefore, we believe that the impact of beef price declines on pork consumption demand is relatively limited. In addition, the demand for the second half of the year will show seasonal growth, which usually presents a seasonal change within the year, with weak demand in the first quarter, marginal improvement in the second and third quarters, and reaching the annual peak in the fourth quarter.

Tianfeng Securities' main points are as follows:

Where is the pig cycle headed?

In this round of efforts to achieve maximum dispersal, production capacity in the industry has declined. From January 2023 to April 2024, except for a small profit in August 2023, the rest of the industry was in a loss state. With the continued clearance of production capacity, according to data from the Ministry of Agriculture and Rural Affairs, the cumulative maximum decline in the stock of sows in this round of national efforts to breed sows is about 11% (as of May 2024). The stock of sows has also hit a new low in 21 years, with the maximum cumulative decline in the last cycle (2021-2022) being 9% (corresponding to the high point of pig prices of 28 yuan/kg+ in the 22-year cycle). The degree of decline in this round is magnified compared to the previous cycle, with the maximum cumulative decline in the stock of sows in its sample reaching 12% according to Yongyi Consultation data.

The pig price trend this year is clear. As of July 16th, the average national price of live pigs was 19.31 yuan/kg, with considerable room for pig price increases as the supply-demand gap continues to widen. In addition, considering that the industrial side is more cautious in supplementing fields due to subjective and objective factors at present, it may be conducive to prolonging the current pig cycle prosperity, which is beneficial to pig farms.

How to view recent stocking and second-feeding?

Second feed production is in a normal state. Based on data from Yongyi Consultation, the second feed has risen in a step-wise manner since this year. The peak in the initial stage was mid-March to mid-April. Based on a weight gain of 110kg as the basis, it takes about two months to reach 150kg. Given that there has been no obvious premium for fat pigs since April, the previous stage of second-fed pig production is basically completed. The proportion of second-feed pigs in June did not exceed the peak in October 2023, and the industry is mostly for rolling outfeed (cautiously optimistic about pig prices). We believe that it is difficult to form additional supply pressure (the slight increase in sales of third-party fattening feed in June also reflects that the behavior of second-fed pigs is not serious). With the rise in pig prices, the entry of second-fed pigs has become more cautious. The proportion of second-fed pigs in actual sales in the latter half of June was 3.88% (compared to 7.26% in mid-May, and 9.61% in the peak year of 23).

Since the Spring Festival, there has been a significant premium for fat pigs, which has driven the growth of feedlot pigs in the industry and the increase in the average weight of pig slaughtering. But with the decrease in fat pig demand from April to May, the price of fat pigs has not been significantly premium, even discounted, thus accelerating the outflow of large pig inventories. At present, the inventory of big pigs has decreased significantly. As of July 11th, the average weight of pig slaughtering in the industry was 125.66kg, which is basically consistent with the level of the same period in 22 years. The proportion of pigs weighing more than 150kg accounted for only 4.89%, which is at a relatively low level in recent years. In addition, the phenomenon of discounted fat pigs has been significantly alleviated recently, reflecting that the current inventory of large pigs is in a normal state.

What about this year's demand?

1) There are limited substitutes for other meat protein. Pork is still the main way for Chinese residents to consume meat protein, with a low proportion of beef. From the comparison of the historical cycle of pig slaughtering volume with the decline in beef prices in the recent period, the demand (slaughtering volume) has not been significantly affected. Therefore, we believe that the impact of beef price declines on pork consumption demand is relatively limited.

2) Demand in the second half of the year shows a seasonal increase. According to a review of history, demand has shown seasonal changes within the year, with weaker demand in the first quarter, marginal improvement in the second and third quarters, and reaching the annual peak in the fourth quarter.

What is the current state of field reinforcement in the industry?

Field reinforcement at present is slow. Based on the results of the Tianfeng Agriculture questionnaire and related data, we believe that the reasons mainly include subjective and objective factors: 1) Subjective factors: both the Tianfeng Agriculture questionnaire results and the situation of futures and binary sow prices show that the industry is more cautious about pig price expectations, which hinders the enthusiasm for field reinforcement. 2) Objective factors: The industry's previous financial losses have been severe, and it is difficult for short-term profit recovery to solve the problem of tight industry funds. In addition, financing has not yet been in place, which weakens the market's enthusiasm for field reinforcement.

How to view current sector investment opportunities?

1) Sector recommendation logic: The ample clearance of previous production capacity has driven pig price reversal and the limited progress of replenishing fields. In terms of a longer length of the prosperity cycle, companies with strong cost control abilities and high growth elasticity will obviously emerge in the α market. In addition, the current valuation is relatively low, and the value of the live pig sector is highlighted.

2) Specific symbol: For the symbol, the top recommendation is Wens Foodstuff Group and Muyuan Foods. New Hope Liuhe is the next suggested target. For small symbols, it is suggested to focus on Zhejiang Huatong Meat Products, Shennong Group, Tecon Biology Co. Ltd, Leshan Giantstar Farming & Husbandry Corporation, Tangrenshen Group, Dehong Hog Breeding, and Hunan New Wellful, etc.