According to the Securities Times app, Donghai Securities published a research report stating that the swine cycle fluctuates around 3-5 years, with factors such as epidemics, demand, policies, and capital influencing the length of the cycle. The loss period of this round of cycle is prolonged, the degree of capacity digestion is reduced, profit margin narrows, post-profit capacity recovery is slow, and short-term factors affecting pork price volatility increase. After the industry has gone through sufficient expansion, the growth rate of production capacity has slowed down in the past two years, entering a stage of stable growth, and the profit cycle may be extended. The current asset-liability ratio of pig enterprises is still high, and the industry is cautious about resuming sow stocking. Sow inventory has been decreasing since January 2023, leading to a gradual reduction in current supply pressure. With limited short-term supply growth and seasonal improvement in consumer demand, it is expected that pork prices will remain brisk in the fourth quarter, pork companies' performance will improve season by season, and the industry will enter a phase of profit realization.

Production capacity is the main influencing factor of the swine cycle. The swine cycle refers to the cyclical changes in the price and supply-demand of pigs. Pig breeding reacts with a certain lag to price fluctuations, resulting in a cyclical pattern in pig breeding. The upward cycle path is as follows: pork prices rise, breeding becomes profitable, sow restocking increases, supply increases, and prices begin to fall. The reverse is true for the downward cycle. The change in sow inventory is an important leading indicator for judging pork prices, with sow inventory levels determining pig supply about 10 months later. Short-term factors affecting the swine cycle include sow breeding and feeding density. Long-term factors affecting the swine cycle include costs, funds, efficiency, etc. The breeding efficiency, management capability, facility equipment, and cost control capability of breeding companies determine the long-term profitability of the enterprise. After the African swine fever epidemic, a large amount of capital entered the industry, and large pig companies quickly built new pig farms to expand, significantly increasing the industry's scale.

Since 2021, the industry's profitability has returned to normal levels, with quality improvement becoming the core goal of pig companies. The slaughter volume and frozen product storage capacity reflect the slaughter companies' expectations of pork prices and current consumer demand. Slaughter volume is more affected by seasonal fluctuations, with overall slaughter volume this year showing a decrease from the previous year, and frozen product storage decreasing from the high levels in the first half of the year, indicating weak pork consumption demand.

Current capacity recovery is slow, and the profit cycle may be elongated. Reviewing the past few cycles, the cycle fluctuates around 3-5 years, with factors such as epidemics, demand, policies, and capital impacting the cycle length. The loss period of this round of cycle is prolonged, the degree of capacity digestion is reduced, profit margin narrows, post-profit capacity recovery is slow, and short-term factors affecting pork price volatility increase. After the industry has gone through sufficient expansion, the growth rate of production capacity has slowed down in the past two years, entering a stage of stable growth, and the profit cycle may be elongated. The current asset-liability ratio of pig enterprises is still high, and the industry is cautious about resuming sow stocking. Since this year, listed pig enterprises have strengthened cost control, with some companies reducing breeding costs to temporary lows, making cost control level a core competitive advantage for pig companies.

Investment advice: According to the Bureau of Statistics data, as of September 2024, the sow breeding capacity is 40.62 million heads, with a quarterly increase of +0.6% compared to the previous quarter and a year-on-year decrease of -4.2%. Sow breeding capacity is recovering slowly, with a 1.9% increase in total capacity after sow breeding turned positive in May. Sow inventory has been decreasing since January 2023, leading to a gradual reduction in current supply pressure. With limited short-term supply growth and seasonal improvement in consumer demand, it is expected that pork prices will remain brisk in the fourth quarter, pork companies' performance will improve season by season, and the industry will enter a phase of profit realization. It is recommended to closely monitor Muyuan Foods (002714.SZ), Wens Foodstuff Group (300498.SZ), Shen Nong Group (605296.SH), Leshan Giantstar Farming&Husbandry Corporation (603477.SH), and Jiangsu Lihua Animal Husbandry (300761.SZ).

Risk warning: macroeconomic performance below expectations; large-scale epidemic outbreaks; fluctuation in raw material prices.