The Zhitong Finance App learned that CICC released a research report saying that from a corporate perspective, the current financial pressure on pig companies has reached a historical extreme, and the period of upward pig prices is a critical window for balance sheet repair. From an investment perspective, the current round of the market did not beat pig prices; the inflection point on the right side of pig prices is a key catalyst. Expectations for a reversal of the pig cycle have strengthened, and the sector has entered a layout period, and low-cost, highly flexible pig companies will benefit first. The market switched from a reduction in production capacity on the left side of the transaction to an increase in pig prices on the right side of the transaction. It is recommended to choose “low cost, stable capital, and high flexibility” targets.

Recommended targets: Muyuan Co., Ltd. (002714.SZ), Wenshi (300498.SZ), Dekang Agriculture and Animal Husbandry (02419), Superstar Agriculture and Animal Husbandry (603477.SH), Tang Renshen (002567.SZ), Tiankang Biology (002100.SZ), Xinwufeng (600975.SH), and New Hope (000876.SZ). It is recommended to focus on Shennong Group (605296.SH) and Huatong (002840.SZ).

The main views of CICC are as follows:

The basis for restoration: From 2Q24 to the end of the year, pig prices had a basis for a continuous upward trend

First, production capacity has been removed, and the pig cycle has an upward foundation. According to CICC estimates, from December '22 to March '24, the country's total sow production capacity was reduced by about 9%. Second, the pace of supply is shrinking from season to season. Since the number of pigs listed in 2Q24/3Q24/4Q24 was 4,269/4,203/4Q24, the average number of sows kept per month was 4,269/4,203/40.84 million heads, CCC judged that the pace of pig prices was improving season by season. Third, short-term inventory pressure also continues to decrease. The average weight of commercial pigs released on May 2 was 125.8 kg/head, down from the April high; on May 2, the price difference of 200 kg of fertilizer was 0.1 yuan/kg, and the fertilizer price spread continued to decline.

The key to restoration: Low-cost, high-flexibility pig companies can fully benefit from the 24-year upward cycle

1) Portrayal of financial pressure: The current financial pressure on pig companies is at a historically high level, characterized by “exhaustion of financing markets+increased difficulty in adding new financing”. In the case of easy to realise assets+discounted fixed assets to repay emergency debts, the 1Q24 industry had an average realizable capital of 2,615 yuan/head, the lowest since 14 years; the balance ratio of pig companies in the 1Q24 sample was 66%, compared with +16ppt in '18; the cumulative cash raised by the 1Q22-1Q24 sample companies showed a net outflow of cash raised.

2) Level of repair: CICC believes that the key to balance sheet repair is low cost, flexibility to amplify profit differences, while pressure on high-cost and highly flexible enterprises may increase further.

Investment logic: There is no rush in this round and valuations are still low. The inflection point on the right side of pig prices is a key catalyst, and companies that prioritize balance sheet repair are expected to benefit

1) Investment pace: Looking at the sector, due to the characteristics of “deep losses, high debt, and slow removal” in '23, this round of the market did not start rushing during the period of falling pig prices, but is awaiting confirmation of the upward inflection point in pig prices. The current average market value of the sector is 2,326 yuan/head, while the historical average market capitalization center/low is 5,567/1,943 yuan/head, which has strong safety pads and large upward space. Looking at individual stocks, the increase performance is closely related to the flexibility of their listing expectations.

2) Target: The rise in pig prices is a key window for pig companies to repair their balance sheets as soon as possible, so low costs and stable capital are the core, and capital accumulation is sufficient for the next round of elimination cycle. On the cost side, the full cost gap for 1Q24 pig companies was 2.7 yuan/kg, and the profit gap was about 320 yuan/head. On the capital side, the balance ratio of Shennong/Tiankang/Superstar/Wenshi/ Makihara in 1Q24 is lower than that of the industry center. On the field side, Huatong/Shennong/superstars are growing at a high rate, and Makihara/Wen remains steady.

risks

Pig prices are lower than expected; raw material costs have risen sharply; epidemic and policy risks.