Muyuan aims to increase its live pig output from 7.34 million to 11 million! Here’s how the capital market is analyzing this...

The national pig-to-feed price ratio is 3.68:1, down year-on-year. 34.26% The pig-to-feed price ratio is 5.07:1, down year-on-year. 37.75% 。

Calculated this way, the average loss per head at market for self-sufficient breeding and rearing reaches: 215.51 Yuan—that is, for every pig sold, there’s a loss. 215.51 Yuan!

Against such a backdrop, Muyuan is poised for rapid expansion, planning to sell between 11 million and 13 million live pigs in 2018—representing an increase of 37.63 million to 57.63 million heads compared to the 7.237 million heads sold in 2017.

Next, let’s take a look at how the capital market views and analyzes this.

The annual report released by Muyuan on February 10, 2018, The annual report shows Net profit for the year came in at 2.4 billion, meeting expectations.

2017 Revenue and Net Profit 100.4 and 23.7 100 million yuan, representing year-on-year increases of 79% and 1.88%, respectively. Among them, the net profit attributable to shareholders for the fourth quarter alone... 553 million yuan , down year-on-year 1.2% — Down from the previous month 9.6% Performance met expectations.

Rapidly boosting volume to counter downward pressure on pork prices—demonstrating growth beyond the cyclical pattern.

In 2017, pig prices compared to the same period last year... Down 19% Under these circumstances, the company’s high revenue growth primarily relies on a significant increase in the number of animals sold.

A total of 7.2374 million live pigs were sold throughout the year. +132% ), including 5.2432 million market pigs (+135%), 1.9382 million piglets (+126%), and 56,000 breeding pigs (+92%).

Affected by rising employee compensation and other expenses, the company’s full cost per kilogram of live pigs increased by 5% year-on-year to RMB 11.36/kg, resulting in a corresponding 55% drop in profit per pig to RMB 336/pig.

Capacity expansion continues.

At the end of 2017, the company’s productive biological assets increased by 42.6% year-on-year. These productive biological assets directly reflect the company’s breeding pig inventory, and their historical growth trend closely aligns with the following year’s live pig shipments.

In conjunction with the investment progress of the company’s capacity expansion, Muyuan is expected to increase its live pig shipments in 2018 by 38% year-on-year, reaching between 10 million and 13 million head.

On the contrary, Muyuan Shares achieved operating revenue of 2.7 billion yuan in the first quarter of 2018, a year-on-year increase of 40%, but its net profit was 136 million yuan, a year-on-year decrease of 80%.

How does the capital market view the 2018 hog price trend?

Regarding pork prices, CITIC Securities maintains its view that the pig cycle has entered a downward phase.

It is expected that, driven by three factors—the replenishment of herds at large-scale pig farms, which has significantly boosted pig farming efficiency (such as PSY), increased average slaughter weights, and the continued growth in imported pork volumes—domestic pork supply is already recovering. As a result, the average price of live pigs in 2018 could decline by 10% to RMB 13.5 per kilogram.

Muyuan Shares’ medium- and long-term growth potential continues to be highly regarded by the capital market!

With the tightening of environmental protection policies and rising labor costs, China’s hog farming industry is expected to undergo rapid scaling and consolidation in the coming years.

By actively securing the most suitable land resources for pig farming across the eight provinces in central China, coupled with its own cost advantages, management strengths, and technological expertise, the company is poised to maintain its position as an industry leader and achieve a rapid increase in market share.

Why does the pork cycle exist?

“According to data from the Ministry of Agriculture, as of 2017, approximately one-third of China’s live pigs still came from small-scale farmers raising fewer than 50 pigs per year; the proportion of specialized farms and large-scale pig farms raising more than 500 pigs per year was about 38%; and farms with a capacity of over 10,000 pigs accounted for less than 2% of total output.” (Excerpted from Muyuan’s 2018 Annual Report)

It is precisely because of the large number of small-scale, free-range farmers that the pig cycle continues to repeat itself endlessly:

Since 2000, the national hog farming industry has roughly gone through the following cyclical fluctuations: from 2000 to 2002, from 2002 to 2006, from 2006 to 2010, and from 2011 to 2014—all constituting complete cycles. The years 2015 and 2016 marked the upward phase of the fifth cycle, after which the market entered a general downward trend starting from the second half of 2016.

Why, even though the downturn phase of the pork cycle has arrived, Muyuan Shares’ stock price is still trading sideways around 50 yuan?

1. The market is pinning its hopes on “pollution prevention and control in livestock and poultry farming” to stem the ongoing downturn in the hog market. In other words, the market may believe that this cycle will be relatively short-lived.

2. Muyuan’s Aggressive Expansion in 2017: By the end of 2016, Muyuan had 39 wholly-owned subsidiaries engaged in pig farming. By 2017, that number had surged to 80, spread across 13 provinces and regions (Henan, Hubei, Jiangsu, Anhui, Hebei, Shandong, Shanxi, Shaanxi, Gansu, Heilongjiang, Jilin, Liaoning, and Inner Mongolia).

If the market’s assessment of scenario 1 is correct, then thanks to the existence of scenario 2, Muyuan will reap huge profits in the near future. After all, listed companies in the pig farming industry—such as Wenshi, Chuying, and Zhengbang—have not expanded during this current cycle.

Of course, Muyuan’s rapid expansion is also intended to... Take on great risks Yes, for example: the growth in marketable output falls short of expectations, pork prices fluctuate beyond projections, there’s a risk of volatile raw material prices, and unusual weather conditions.

What would happen if pork prices remained low throughout 2018?

1. Muyuan may operate at low profit margins or even incur slight losses (refer to Muyuan’s annual report from 2014, when the entire industry was experiencing losses). Muyuan boasts a complete swine industry chain that integrates multiple links—including feed processing, pig breeding, boar and sow propagation, and commercial pig farming—thus giving it a clear competitive edge in areas such as production cost control.

2. Behind Muyuan’s aggressive expansion in 2017 was an increase in the company’s debt. Muyuan held 4.1 billion yuan in cash and cash equivalents, had short-term borrowings of 3.5 billion yuan, and long-term borrowings of 1.5 billion yuan.

Industry Development Status

1. Environmental policies are becoming stricter.

2. Cyclical fluctuations in market prices of commercial pigs

The total price of commodities exhibits a clear cyclical fluctuation pattern, with a typical fluctuation cycle lasting 3 to 5 years.

Since 2000, the hog farming industry has roughly gone through the following cyclical fluctuations: 2000–2002, 2002–2006, 2006–2010, 2011–2014. The period from 2015 to 2016 marked the upward phase of the fifth cycle, and in the second half of 2016, the industry as a whole entered a downward phase.

Was 2019 really the end of a cycle?

3. The industry has enormous potential.

In 2017, the number of pigs marketed reached 689 million head, accounting for more than half of the global total, and the industry’s market size exceeded 1 trillion yuan. (Actually, after calculation, it’s 8 trillion RMB.) ; Annual pork production reached 53.4 million tons, accounting for 63% of total meat production.

4. Low concentration

In 2011, there were 162 farms nationwide that marketed more than 50,000 pigs. By 2015, this number had grown to 261, representing a 61% increase.

Around one-third of live pigs marketed come from small-scale farmers who raise fewer than 50 pigs per year, while large-scale pig farms with more than 10,000 pigs account for less than 2% of total marketings.

5. Production efficiency needs to be improved—PSY, MSY, and RSY.

In China, the PSY is 15 pigs, with high-level farms able to reach 20-22 pigs. In European and American countries, the figure ranges from 25 to 28 pigs.

This article is a comprehensive compilation of content from “Lao Tan Reads Annual Reports,” “Qi Junjie on Finance,” and “CITIC Securities.”