(Report Producer/Author: Guoyuan Securities, Yang Weixi)
1. Company Profile: Deep ploughing of the main business, the achievement of pig breeding industry leader
1.1 The company takes the commercial pig breeding business as the core, and opens the road of rapid expansion after listing
Makihara co., Ltd. is a leading enterprise in the domestic commercial pig breeding industry. The predecessor of Makihara Co., Ltd. is Neixiang County Makihara Breeding Co., Ltd. in Henan Province, which was successfully listed on the Shenzhen Stock Exchange in 2014. After 30 years of development, the company has established a complete closed pig industry chain integrating feed processing, breeding pig breeding, breeding pig expansion, commercial pig breeding, pig slaughtering, and meat processing. The company's main business is pig breeding and sales, the company's main products include commercial pigs, piglets and breeding pigs and pork products. In the first half of 2021, the company's pig breeding business achieved sales revenue of 39.73 billion yuan, an increase of 91.5% year-on-year, accounting for 95.7% of the company's total operating income. During the reporting period, the company sold a total of 17.437 million pigs, of which 14.966 million commercial pigs accounted for 84.3%, piglets accounted for 14.5%, and breeding pigs accounted for 1.5%.
After going public in 2014, the company embarked on a path of rapid expansion. Since the establishment of the company in 1992, after 22 years of development, until the listing, there were only 4 subsidiaries of Caoxian Makihara, Zhongxiang Muyuan, Wolong Muyuan and Dengzhou Muyuan. In 2014, six wholly-owned subsidiaries such as Tanghe Muyuan and Fugou Muyuan were established in the year of listing. From 2014 to the first half of 2021, in seven and a half years, the number of the company's holding subsidiaries increased by 259, equivalent to an average annual increase of 34.5, achieving a rapid expansion of production capacity. From a geographical point of view, the company's production capacity is mainly distributed in the north of the Yangtze River, of which the most concentrated in Henan Province, the number of holding subsidiaries set up is as many as 68, the pig production capacity is more than 30%, the number of subsidiaries set up in the Black, Kyrgyzstan, Liao, Mongolia region reached 47, the production capacity accounted for about 20%, Shandong Province, Anhui Province capacity accounted for about 10%, Jiangsu, Hubei and other provinces accounted for about 5% of the production capacity.
With the continuous release of production capacity and new construction, the company has rapidly grown into an industry leader. The company's annual pig sales volume in 2010 was 359,000 heads, and by 2021, the sales volume of live pigs reached 40.263 million heads, accounting for 6% of the total pig production in the country that year. In 11 years, the company's hog production has increased by about 111 times. With its strong expansion ability, the company has laid a leading position in the industry, and in 2020, it surpassed Wen's shares and became the largest pig breeding enterprise in the industry.
1.2 Founder holding, management team is young
The company has a stable shareholding structure and is controlled by the founders. The founders, Qin Yinglin and Qian Ying, directly hold 39.64% and 1.22% of Makihara's shares, respectively, and indirectly hold 13.01% of the company's shares through Makihara Industrial Group Co., Ltd. Together, the couple directly holds 40.86% of the company's shares and is the actual controller of the company. Management and shareholders have the same interests. Since the company's listing, a total of three employee stock ownership plans have been carried out, and some of the company's directors, senior managers, middle-level managers and core technical personnel have been equity incentives through the grant of restricted shares, which has helped to improve the enthusiasm of core management personnel and business personnel and enhance the stability of the team.
On October 19, 2021, the Company announced a preliminary plan for a non-public offering of A-shares. Once the fixed increase is completed, the total direct and indirect equity of the company held by Qin Yinglin and Qian Ying will increase from 53.88% to 55.16%. The further strengthening of the actual controller's control over the company will be conducive to the promotion of the expansion strategy and integration strategy of Makihara shares, and enhance the core competitiveness of the company.
The trend of rejuvenation of the company's management team is obvious. The company implements the "young general" talent strategy, selects talents from actual combat, and a large number of outstanding employees after 85 and 90 have stepped into leadership positions from the grass-roots level, and established a younger, more technical, independent, and echelon cadre team. Through the reserve and appointment of outstanding young reserve cadres, we will vigorously promote the rapid development of the company.
1.3 The company has outstanding profitability and maintains rapid growth for a long time
From 2016 to 2020, the company's operating income increased from 5.6 billion yuan to 56.3 billion yuan, and the net profit attributable to the mother increased from 2.3 billion yuan to 27.5 billion yuan. The compound annual growth rates of operating income and attributable net profit reached 78% and 85.43% respectively. Affected by the "pig cycle", the company's gross profit margin fluctuates greatly, but the company relies on its strong cost control ability to maintain the gross profit margin of more than 30%. In the first three quarters of 2021, affected by the rapid decline in pig prices, the company achieved operating income of 56.28 billion yuan, an increase of 43.7% year-on-year, and achieved a net profit attributable to the mother of 8.704 billion yuan, down 58.5% year-on-year. Although the company's profit fell sharply in the first three quarters of last year, its operating performance still led the way. In the first three quarters of 2021, the company's ROE was 16.2%, while the industry generally lost money during the reporting period.
1.4 The company has strong upstream and downstream bargaining power and less capital occupation
Thanks to the leading position of the company's industry, as well as the pig breeding industry's "money and goods" trading method. The company has a very strong bargaining power in the upstream and downstream of the industrial chain. Specifically, the company's downstream main customers are pig traders and a small number of slaughtering enterprises, etc., when trading with them, basically adopt the "one hand to pay, one hand to deliver" model of "money and goods clear". The company's notes receivable and accounts receivable/operating income are extremely low, only 0.03% in 2020. This greatly reduces the cost of capital occupation. On the other hand, when the company purchases raw materials, due to its own scale effect, the bargaining power of upstream grain traders is extremely strong. The company's bills payable and accounts payable/operating costs have remained high for a long time, reaching 74.9% in 2020. The large scale of bills payable and accounts payable have served as a stable source of funds for the company to a certain extent.
2. The whole industry chain to create core competitiveness
2.1 Three major advantages to build a competitive advantage at the feed end
The company has established a complete closed pig industry chain integrating feed processing, pig breeding, breeding pig expansion, commercial pig feeding, and pig slaughter. Under the asset-heavy operation model, the company has exerted its cost leadership to the extreme by implementing refined management in all aspects of pig breeding.
Feed supply belongs to the upstream of the pig breeding industry chain and is also a key link in pig breeding. In general, feed costs account for about 56% of the total pig farming costs. Basic agricultural products such as corn and soybean meal are the main raw materials for pig feed. Among them, corn, as the main energy feed of pig feed, accounts for 67% of the total cost of pig feed. Therefore, the cost of pig breeding enterprises is easily affected by the price of corn. For pig breeding enterprises, controlling feed costs is crucial to reducing costs and increasing efficiency.
The company's feed is all self-produced and self-used, and has formulated high quality standards in all aspects of raw material procurement, processing and production, transportation, etc., strictly controls feed quality, and ensures the feed safety of pigs at all stages of breeding. We believe the company has at least three advantages on the feed supply side:
1) Outstanding R & D advantages: the company has its own feed R & D team, in fully assessing the nutritional needs of pigs in different growth periods, formulated accurate nutritional standards, such as designing a total of 6 types of 32 kinds of feed formulas for different pigs, and formulating up to 11 formulas according to different weight stages in the nursery and fattening stages alone. Through the refined management measures of pig breeding, on the one hand, we will give full play to the growth potential of the pig herd and enhance the health of the pig herd, on the other hand, we will reduce the ratio of feed to meat and improve the feed return rate. The "feed combination for early weaning suckling pigs" developed by the company has the advantages of good palatability, easy digestion and absorption, low cost and high conversion rate, and has obtained the national invention patent. In addition, on the basis of the existing "corn + soybean meal" type formula technology, combined with the characteristics of the main wheat producing areas in Nanyang City, the company has developed the "wheat + soybean meal" type feed formula technology according to local conditions, and actively developed application technologies such as barley, sorghum, and raw material by-products to achieve the full application of raw materials. In feed nutrition, wheat and corn belong to energy raw materials, soybean meal belongs to protein raw materials, so corn and wheat have certain substitution, and the protein content of wheat is higher than that of corn, and the use of wheat can also save the use of soybean meal to a certain extent. When the price of feed raw materials rises, the company can adjust the main materials in the formula in time according to the cost performance of raw materials, so as to minimize the risk of rising raw material prices, while ensuring the cost advantage of enterprises. For example, in 2016, the price of corn was significantly lower than the price of wheat, and corn accounted for about 27% of the company's feed raw material costs that year, and wheat accounted for only 9%; and in the first half of 2021, the price of corn was significantly higher than the price of wheat, and the price difference was even more than 400 yuan / ton, and the amount of wheat used in the company's feed formula in the Central Plains reached more than 80%, more than 70% of the northeast used rice raw materials, and the proportion of corn used was not more than 10%.
2) Procurement advantages: First of all, the company is located in Henan Province, a major grain producing province, rich in wheat, corn, soybeans and other grain crops. This provides a full guarantee for the supply of raw materials for the company, and the company's pig breeding capacity is mainly concentrated in Henan Province, and the distribution of production capacity and the supply of raw materials match geographically, reducing the transportation cost of raw materials. Secondly, the company's huge scale of aquaculture has reduced the unit cost of procurement.
3) Production advantages: the company has realized the whole process of intelligent production in the feed processing link, the ingredients are precise, the waste is less, the use of less people, all feeds use 85 °C, 8 minutes (keep 3 minutes + keep warm for 5 minutes) of high temperature sterilization process, sterilization temperature real-time online monitoring, to ensure the high temperature sterilization effect; cooling air three-stage filtration; finished material bulk closed transportation, farm intelligent feeding, the whole process of no man-made contact, feed biosecurity zero risk, to ensure the health of the pig herd. (Source: Future Think Tank)
2.2 Innovate the reincarnation binary hybrid breeding system to highlight the competitive advantage of the breeding end
As an important part of the pig breeding industry chain, pig breeding is the most specialized, time-consuming and most lasting economic benefit in the industrial chain, which also requires a lot of capital investment. As early as 1996, the USDA found that genes played the largest role in determining the economic benefits of pigs, reaching about 40%. China started late in pig breeding, and the investment in the later period was insufficient, resulting in a certain gap in the efficiency of domestic pig breeding compared with the united States and major pig breeding countries in Europe.
Since the main purebred pig breeds such as the great white pig, the long white pig, the Duroc pig, etc. are native to foreign countries, large domestic pig breeding enterprises need to introduce seeds from abroad to maintain the size of the population. In 2020, the number of purebred pigs imported in China reached a record high, approaching 30,000 heads, an increase of 2.8 times year-on-year. From January to September this year, more than 24,000 breeding pigs were imported, which is close to the total annual introduction of breeds last year. At present, we mainly import breeding pigs from Denmark, France, the United States and other countries, of which Denmark is the largest source of purebred pigs in our country.
Introduction of purebred pigs is highly vulnerable to the outbreak. Affected by African swine fever in 2019, the number of domestic introductions fell by nearly 80% year-on-year. This has caused a great negative impact on the domestic pig breeding industry. First, the traditional pyramid-shaped breeding system has been destroyed, and ternary sows are prevalent in the industry as binary sows. Breeding pigs are less efficient in breeding. Second, after the outbreak of African swine fever, the structure of domestic fertile sows has undergone great changes, and the proportion of ternary sows has risen rapidly. However, the reproductive efficiency of ternary sows is lower than that of binary sows, which is an important reason for the rapid rise in the cost of fattening pigs. The average fattening cost of the industry has risen from 12 yuan / kg before African swine fever to the current 15 to 16 yuan / kg.
Pig breeding plays a very important role in stabilizing pig prices and promoting the stable and healthy development of the pig breeding industry. The traditional pig breeding system is a ternary hybrid breeding system. Because it maximizes the use of genetic complementarity, and makes use of the hybrid advantages of hybrid sows in reproductive performance, the ternary hybrid breeding system is widely used in the production of commercial pigs at home and abroad.
The company has strong strength in pig breeding. At present, the company has established a relatively complete pig research and development, breeding and breeding system composed of national core breeding farms, provincial-level original breeding farms, breeding boar stations and expansion farms. Essentially, it no longer relies on imports from overseas to renew core populations. The company has established 9 pig breeding seed companies nationwide, and in the future, the company will continue to increase investment in research and development funds, focusing on improving the performance of breeding pigs, and continuously improving the independent innovation ability of pig breeding.
The company has been committed to high-value breeding pig breeding, now has Makihara Duroc, Makihara Changbai, Makihara York, Makihara binary sow, Makihara ternary piglet and other high-quality products, with fast growth rate, high feed conversion rate, thin back fat, more calves, strong disease resistance and other characteristics, products sell well in Henan, Hubei, Shanxi, Shaanxi, Shandong, Anhui, Hebei, Xinjiang, Gansu and other provinces. The company has also set up a professional breeding research and development team of more than 30 people, established a pork quality control laboratory, and carried out research on breeding by joining the national "Pig Genome Selective Breeding Platform" and with the help of the technical strength of universities and research institutes.
The binary reincarnation breeding system is less affected by the introduction of breeding pigs. The most significant feature of the company's reincarnation binary breeding system is that the binary sow is also bred with a large white / long white boar, the binary sow is long white, and the blood of the big white accounts for 50% each, and after the breeding of the big white or long white boar is used again, the blood relationship between the sow and the long white will undergo some changes, but the result is still the binary sow. At this time, the blood of the great white accounts for 75%, and the blood of the long white accounts for 20%; or the blood of the long white accounts for 75%, and the great white accounts for 25%. Instead of producing commercial sows, but to produce binary sows, the breeding performance of this sow will be a little worse than that of traditional binary sows, but it will be much better than that of ternary sows. Through the large-scale application of the binary reincarnation breeding system, the impact of African swine fever on the company's production capacity has been minimized, so that the company still maintains a cost competitive advantage for its peers.
2.3 "full self-cultivation, full chain, intelligent" breeding model to create a competitive advantage at the breeding end
The breeding link belongs to the midstream link of the pig industry chain, which is also an important source of profit for the company. At present, there are two main breeding modes in the industry, one is the "self-propagation and self-cultivation integration" model, and the other is the "company + farmer generation" model. The "full self-support, full chain, intelligent" breeding mode adopted by the company is actually the "self-propagation and self-support integration" model. The company uniformly builds pig houses, puts feed and animal protection, concentrates on breeding pigs, breeding piglets, breeding fattening pigs, and finally unified sales. Under the "company + farmer" model, the pig breeding company signs a contract with the farmer, and the contracted farmer is responsible for the fattening of the piglets, while the breeding company is only responsible for the core production links such as breeding.
The "self-propagation and self-support integration" model is essentially an asset-heavy operation model. The proportion of non-current assets in total assets is high. This model requires a lot of capital investment and requires strong cost control capabilities. Since Makihara shares are fattened by themselves, the fixed asset investment in fattening and conservation accounts for about 40% of the company's entire fixed assets.
The company's "full self-support, full chain, intelligent" operating model has a large capital investment, but its advantages are also very obvious, mainly in the following aspects:
1) The company's breeding efficiency is higher. Under the mode of "self-breeding and self-breeding integration", the company can put the production links such as feed processing, pig breeding, breeding pig expansion, and commercial pig breeding in a controllable state, and through various planning and design, production management system, it has realized standardized and standardized operations in various production links. Based on the "self-propagation and self-rearing integration" model, the company can use a large number of advanced and efficient automation equipment in the fattening process. The company is currently implementing the intelligent pig breeding strategy and actively exploring the application of intelligent technology in pig breeding scenarios, such as cloud computing, big data, Internet of Things, intelligent equipment, etc. At present, the company's intelligent R & D external partners include Hikvision, Huawei, Ali, Midea, Chint Appliances, Luxshare Precision, Jinguan Electric, Jinbaize and so on. The company takes the results as the orientation of R&D innovation, mainly focuses on internal independent R&D innovation, and actively introduces external applicability technologies, equipment, etc. Through internal R&D and external technology introduction, promotes the continuous improvement of the company's intelligent technology, accelerates product update iteration, and improves product stability and simple operability. In the future, the company will continue to strengthen the innovation and research and development of intelligent equipment, improve the digital and intelligent level of pig breeding, improve the internal environmental quality of the pig house through intelligent feeding, intelligent environmental control and other intelligent management systems, improve the health level of the pig herd, improve the breeding performance, and reduce production costs.
In the "full self-raising, full chain, intelligent" breeding mode, the company's fattening efficiency has been greatly improved, in the fattening stage, the company's 1 breeder can raise 2,700-3,600 pigs at the same time (according to the conditions of the pig house), the production efficiency is higher than the domestic industry average.
2) The "self-propagation and self-rearing integration" model saves the cost of commissioned breeding. The company's breeding model can save commissioned breeding costs. According to the announcement of Makihara shares, enterprises that adopt the "company + farmer" model average about 200 yuan per head in the cost of entrusted breeding.
3) Under the mode of "self-propagation and self-support integration", epidemic prevention and expansion are both. The advantage of the company's breeding model is that it can carry out refined management of the fattening process and reduce the loss caused by the occurrence of unfavorable factors such as the epidemic. In January this year, the Ministry of Agriculture and Rural Affairs announced the second batch of African swine fever disease-free communities list, of which Makihara shares had the largest number of subsidiaries on the list, reaching 13 and 113 production units. From the listing in 2014 to the end of 2020, the company's pig production increased from 1.859 million to 18.115 million, an increase of 8.7 times in 7 years. Even during the African swine fever epidemic, the company's hog production has maintained a rapid growth momentum. In 2018, the annual pig output was 11.01 million heads, and the company's pig output reached 40.26 million heads in 2021. In the 3-year period, the number of columns increased by about 2.7 times.
The company's whole industry chain to create a cost leading edge, through fine management, cost reduction and efficiency, the end of last year the company's complete cost has dropped to less than 14.7 yuan / kg, the lowest cost of the whole industry, the cost of individual excellent pig farms has dropped to 12.5 yuan / kg. In contrast, it was found that the company has obvious advantages in the average head feed cost and the average head labor cost, although the average depreciation cost of the head is higher than that of Wen's shares, but the depreciation cost is a non-cash cost and will not affect the company's operating cash flow. The company's cost target this year is to control at 13 yuan / kg, and there is still a large room for decline in cost.
3. The cycle continues to build a bottom, optimistic estimates and the second half of this year is expected to reverse
3.1 The main contradiction at present is overcapacity
At present, we are still in the bottoming period of this round of pig cycle. This pig cycle began in May 2018 and has now lasted more than 44 months. Pig prices rose from 10.1 yuan/kg in May 2018 to a cycle high of 40.98 yuan/kg in October 2019. Subsequently, after a period of high consolidation, the pig price officially entered the downward cycle. The pig price went all the way down from the high point of 40.98 yuan / kg to the cycle low of 10.78 yuan / kg. In 2021, there was a wave of rebound in pig prices, but after the end of the low rally in December, it returned to the downward channel, and as of January 22, 2022, the pig price was 14.18 yuan / kg.
The main contradiction at present is overcapacity. According to the growth law of pigs, the number of breeding sows determines the amount of pigs produced after the next 10 months, so the number of breeding sows is an important indicator to measure the production capacity of pigs, and it is also a forward-looking indicator to judge the cycle reversal. According to the data released by the Ministry of Agriculture and Rural Affairs, the national stock of fertile sows in December 2021 was 43.29 million heads, equivalent to 105.6% of the normal ownership. Although the number of fertile sows began to decline month-on-month from July 2021, and the destocking of pig production capacity in December 2021 has lasted for 6 months, the situation of oversupply in the industry has not been reversed. With the weakening of demand in the first half of the year and the increase in pressure to leave the barn, pig prices are still in the process of bottoming out before April and May.
3.2 Optimistic estimates will open a new cycle in the second half of this year
Capacity de-capacity has formed a trend. The destocking of hog capacity has lasted for 6 months from 7 servings in 2021 to December 2021. The number of fertile sows and the normal holdings are in the process of convergence. Although in absolute terms, the number of fertile sows in December increased from November, due to the difference in statistical samples between the Ministry of Agriculture and Rural Affairs and the National Bureau of Statistics, there was no comparison between the fertility data in December and November. From the trend point of view, the trend of pig production capacity is still unchanged.
Pig prices continue to fall, creating strong conditions for the subsequent de-industrialization of production capacity. Due to the rapid rebound in pig prices in late November 2021, the consumption momentum in the later period was overdrawn in advance. Pig prices start to turn downwards in mid-December 2021. Coupled with the outbreak of the new crown epidemic, the impact on catering and tourism is relatively heavy, resulting in the overall weakness of pork consumption. After New Year's Day, pork consumption showed a peak season and accelerated its decline. As of February 6, the price of live pigs has dropped to 13.70 yuan / kg, still running below the cost line. Under the background of the continuous decline in pig prices, the trend of capacity de-capacity has been strengthened.
The duration of the sustained loss is close to the previous cycle. In this cycle, the main body of self-breeding and self-breeding has experienced two consecutive losses, namely From May 2018 to July 2018, and from June 2021 to November 2021, the duration of losses is 2 months and 5 months, respectively, and the cumulative time is 7 months. Compared with the 9-month continuous loss period of the previous cycle, it is very close. However, the profit highs and loss highs of this cycle are far more than the previous cycle, especially the profit highs, so the duration of continuous losses may also be different from the previous cycle. In general, capacity bottoms out later than profits bottoms out. (The high point of the loss reached 771.46 yuan / head, far more than the previous round of 326 yuan / head).
Affected by the epidemic, consumption is less than expected. According to the law of previous years, in the period before the Spring Festival, the price of live pigs is basically 8 to 9 yuan / jin, but this year's pig price is only about 7 yuan / jin. The phenomenon of poor peak season is very obvious. From the perspective of pork prices, consumption is also less than expected, before the Spring Festival, the average price of white strip pork in Beijing Xinfadi is less than 20 yuan / kg, which also reflects that demand is flat compared with previous years, but the monthly slaughter volume of pig fixed-point slaughtering enterprises has increased significantly, which reflects the current situation of oversupply. After the holiday, it will enter the off-season of pork consumption, facing the continuous weakening of pork demand, and the downward pressure on pig prices is greater.
Comprehensive pig prices, breeding profitability and consumption and other factors, we believe that pig production capacity will continue to dematerialize, pig prices will be the second bottom after the Spring Festival, optimistic estimates that the second half of this year will open a new round of pig cycle.
4. The industrial chain integrates and develops to achieve the evolution from large to strong
4.1 The integrated development of "breeding + slaughtering" has become an industry trend
With the improvement of the concentration of the pig breeding industry, the integration and development of the industrial chain has become a trend. In 2019, the scale of pig breeding with an annual output of more than 500 pigs in the country reached 53%, an increase of 9.7 percentage points over 2015, and the scale rate of pig breeding with more than 5,000 pigs per year was 21.8%, an increase of 7 percentage points over 2015. By 2022, the scale rate of pig breeding will reach 58%. With the continuous deepening of the standardization, scale and intensive development of the pig breeding industry, as well as the guidance of the national industrial policy, the integrated development of the pig industry chain will become a new development trend.
1) Industry policies force aquaculture enterprises to adopt a vertical integration development strategy. After the outbreak of African swine fever in China, in order to strengthen the management of the epidemic, the national and local levels have successively formulated policies to restrict the transfer of live pigs. At present, the central and southern regions, the eastern region, and Henan Province have clearly promulgated specific policies for transportation: In principle, except for breeding pigs and fattening piglets, pigs in major animal disease-free areas such as African swine fever and pigs in disease-free areas and disease-free communities, pigs over 30 kilograms are prohibited from entering their respective jurisdictional areas. In the future, it is not excluded that more areas will take stricter measures to restrict the transfer of live pigs. As the space for live pig transportation becomes smaller and smaller, the change from "adjusting pigs" to "adjusting meat" will gradually become the main trend in the industry. Since the sales model of pig breeding enterprises is basically live pig sales, the change in transportation policy will have a certain negative impact on the inter-provincial and inter-regional sales of pigs. By adopting a vertical integrated development strategy, pig breeding enterprises have changed from simply selling pigs to combining pig sales with meat sales, which can effectively reduce the sales risks brought about by the transportation policy.
2) Breeding and slaughtering enterprises penetrate each other, and the integrated development of the industrial chain has begun to take shape. After the outbreak of African swine fever, pig slaughtering enterprises and breeding enterprises have seen mutual penetration. In 2019, Longda Meat Food carried out a strategic pig breeding layout around the east and west points, with more than 10,000 breeding pigs in the eastern region and an annual output of 300,000 high-quality pig seedlings. The western region and the people's government of Shibu Town, Anqiu City, signed a strategic cooperation framework for the 600,000 pig industrialization project per year. In terms of national layout, Longda Meat has set up Heilongjiang Longda Aquaculture Co., Ltd. in Anda City, Heilongjiang Province, to promote its aquaculture industry layout in the northeast region. In May 2020, Shuanghui Development is set to increase by 7 billion yuan to expand upstream pig and broiler breeding. Among them, the total investment of pig breeding capacity construction project is 1.26 billion yuan, after the project reaches production, the company will form a complete pig breeding system of 1,000 great-grandparent pigs, 2,000 ancestral pigs, more than 20,000 parent pigs, and a total of about 50,000 pigs and pigs per year. In the future, Shuanghui will develop pig breeding capacity of 30-50% of its slaughtering capacity. Slaughtering enterprises extending upstream will obtain a stable supply of raw materials, and then gain a greater right to speak. Under the new development situation, pig breeding enterprises have also laid out slaughtering and food business. At present, the five major pig breeding enterprises have deployed slaughtering business in addition to Zhengbang Technology. Wen's shares will be 20% of the pig production capacity in the future to support the slaughtering, New Hope will also be based on 20% of the pig scale to build their own slaughterhouse, Tianbang shares is planning 6 single 5 million head scale slaughterhouse. With the deepening of the mutual penetration of the breeding industry and slaughtering enterprises, the integration of pig production, slaughtering, processing and sales can improve the competitive advantage, anti-risk ability and comprehensive production capacity of the pig industry, and the integrated development mode of the pig industry chain will become the direction of the future development of the pig industry in the mainland. The pig slaughtering industry is connected to pig breeding and pork consumption, and it is also a key link to ensure the quality and safety of pork, so the pig slaughtering business will become the driving force for breeding enterprises to implement the integration strategy. We believe that the operating model of industry chain integration will gradually become the mainstream of the industry.
4.2 The slaughtering industry is in the recovery stage, and the competition pattern will be further optimized in the future
At present, the pig slaughtering industry is in the recovery stage, and the competitive pattern of the industry is constantly optimized, which provides an excellent external environment for the integrated layout of pig breeding enterprises.
1) The pig slaughtering industry is in a recovery period after the epidemic. The slaughtering industry belongs to the downstream of the pig industry chain, and the market size is directly related to the amount of pigs produced. Before the outbreak of African swine fever in 2018, the scale of the industry was relatively stable, and the annual slaughter of pigs was about 700 million heads. After the outbreak of African swine fever, the slaughtering industry has been greatly affected, and the slaughter volume has fallen sharply. In 2019, the national pig output was 540 million heads, down 21.6% year-on-year, and pork output was 42.553 million tons, down 21.3% year-on-year. According to the data released by the National Bureau of Statistics, the annual pig output in 2021 exceeded 671 million heads, an increase of 27.4% year-on-year, which was almost the same as the level before African swine fever. Pork production was 52.96 million tons, an increase of 28.8% year-on-year. According to the data released by the Ministry of Agriculture and Rural Affairs, the slaughter volume of pig designated slaughtering enterprises nationwide will reach a record high of 265 million heads in 2021. With the gradual recovery of pig production capacity, the slaughtering industry has also ushered in a recovery.
2) The supervision of the slaughtering industry is becoming stricter, which is conducive to the long-term development of the industry. The mainland slaughtering industry implements a strict access and fixed-point slaughtering system, and the newly revised "Regulations on the Administration of Pig Slaughter" in 2021 clearly stipulates the fixed-point slaughtering and centralized quarantine of live pigs. The regulation prohibits any unit or individual from engaging in pig slaughtering activities without permission. The exception is for individuals in rural areas who feed themselves. After the outbreak of African swine fever, the state issued a series of policies to regulate the slaughtering industry. The "Circular of the Ministry of Agriculture and Rural Affairs on Further Strengthening the Supervision of Pig Slaughter" particularly emphasizes: "Small pig slaughtering plants, based on the county, are only reduced and not increased." The establishment of the remaining pig slaughtering enterprises must comply with the "design annual slaughtering capacity of not less than 150,000 heads" stipulated in the "Industrial Structure Adjustment Catalogue" of the Development and Reform Commission and the requirements of the provincial people's government to set up planning. The municipal people's governments under their jurisdiction should organize strict examinations, and the provincial-level competent departments of animal husbandry and veterinary medicine should strictly check and promptly report the list of newly built pig slaughtering enterprises to the Ministry of Agriculture and Rural Affairs; key organizations should carry out self-inspections in counties (cities, districts) with more than 10 pig slaughtering enterprises, and resolutely shut down enterprises with environmental protection facilities and equipment that do not meet the requirements, slaughtering facilities and equipment are outdated, and the slaughtering process is backward; as soon as possible, realize the connection between the list of pig slaughtering enterprises and the animal quarantine electronic certificate certificate system, starting from January 2020. Animal health supervision agencies shall not appoint official veterinarians to pig slaughtering enterprises that are not included in the list, and it is strictly forbidden to issue animal quarantine certificates." In 2015, there were 12,200 pig slaughtering enterprises in the mainland, which dropped to 11,000 in 2016, decreased to 9,475 in 2018, and further reduced to 5,005 in 2019. Under the norms of industrial policy, the pig slaughtering industry is gradually moving towards standardization and intensification.
3) The competition pattern of the industry is scattered, but it shows a trend of centralized scale. The main body of the pig slaughtering industry can be divided into handicraft workshops (including self-feeding and illegal slaughtering) according to the size of the pig slaughtering industry, the national designated slaughtering enterprises and pig slaughtering enterprises above designated scale. According to statistics, among the slaughtering enterprises registered in 2019, the proportion of enterprises with an annual slaughter volume of less than 20,000 heads is as high as 56%, and the proportion of enterprises with an annual slaughter volume of more than 100,000 heads is only 12.6%. Before the outbreak of African swine fever, the slaughter volume of pig slaughtering enterprises above designated size in the country accounted for about 35%. After African swine fever, this proportion has declined, but with the gradual recovery of pig production capacity, the slaughtering industry has shown a clear trend of centralized scale. In 2021, the slaughter volume of pig slaughter enterprises above designated size will account for 39.5% of the total slaughter, which has exceeded the pre-African swine fever level.
Large companies in the pig slaughtering industry include Shuanghui Development, Yurun Food, Jingong, Longda Meat and New Hope. Shuanghui Development has the largest market share, but only 2.4%. Hog slaughtering industry CR5<7%. The market concentration is not high, and the competition is fierce. However, with the guidance of industrial policies, consumers' emphasis on food safety, and the increase in the scale of the upstream pig breeding industry, the concentration of the slaughtering industry will also increase, and large slaughtering enterprises will gain greater voice rights. (Source: Future Think Tank)
4.3 Follow the trend to increase the slaughtering business
In order to comply with the development of the situation, in 2019, the company began to accelerate the layout of the slaughtering business, and nearly 20 slaughtering subsidiaries were established that year, completing a closed-loop management mode that can be controlled and traceable from site selection, raw material procurement, feed processing to pig feeding, slaughtering and processing. As of the first half of 2021, the company has established 20 slaughtering subsidiaries in Henan, Shandong, Anhui, Northeast and other areas where pig production capacity is more concentrated. At the end of January this year, the company has 8 slaughterhouses officially operated, and the production and slaughtering capacity has reached 22 million heads / year, and the full coverage of pig production capacity will be achieved in the future. Before the Spring Festival, the company slaughtered 48,000 heads per day. At present, the actual production capacity of domestic key slaughtering enterprises is the highest for the development of Dahongmen and Shuanghui, and its annual slaughter volume is 12 million and 11.39 million heads, respectively, if calculated according to the slaughter volume before the Spring Festival, Makihara shares will be super red gate and Shuanghui to become the largest domestic actual slaughtering enterprises. In January this year, the company's 205 pig factories were successfully selected into the list of "point-to-point" pilot agreement supply farms in Beijing, accounting for more than 92%.
The company's slaughtering production line has a high degree of automation and advanced technology. Through the introduction of advanced meat processing machinery and supporting equipment, the company realizes the automation of the whole process from pig herding, slaughtering and segmentation to finishing. The company's slaughterhouse has experienced three generations of design innovation, of which the second and third generation slaughterhouses are more intelligent than the first generation of slaughterhouses. Automated slaughtering production lines and intelligent plant design will greatly enhance the competitiveness of the company's slaughtering business. The slaughterhouses currently put into production by the company are equipped with cold storage and have the storage capacity of frozen products.
The sales side is still dominated by B-end customers and actively expands to the C-end. The customers faced by the company's slaughterhouse are mainly B-end customers such as large-scale agricultural markets, supermarkets, and food processing enterprises. At present, the company has more than 500 meat sales personnel, and has cooperated with more than 4,000 customers in more than 70 cities across the country, including some large food processing enterprises, catering enterprises and supermarkets. At the same time, the company is also actively exploring C-end sales. In 2016, the company's major shareholder Makihara Industrial Group Co., Ltd. established Henan Juai Digital Technology Co., Ltd., and launched the Juai Preferred APP and began to try C-end sales. At present, the app has launched 5 pork gift boxes, including frozen meat and cooked food. In the future, the company will also actively expand a variety of sales channels.
The company mainly sells white strip meat, supplemented by frozen meat and cooked food. Considering the demand for new retail and the market environment, it is planned to increase the fine segmentation process in the future and sell non-standardized segmented products in a targeted manner. It will also be more open in meat products.
4.4 Developing the slaughtering business is conducive to exerting upstream and downstream synergies
We believe that the company's in-depth layout of the slaughtering industry has its unique advantages. First of all, pig slaughtering and pig breeding industry are heavy asset operation industries, the degree of product homogenization is high, the industry concentration is not high, but the company has obvious scale advantages, can follow the cost-leading competitive strategy, better play the breeding and slaughtering business synergy effect.
1) The company has a large scale of pigs every year, which can ensure adequate supply at the slaughtering end and improve capacity utilization. Generally speaking, the main business cost of slaughtering enterprises can be divided into pig acquisition costs, slaughterhouse fixed costs and variable costs, and the pig acquisition cost accounts for about 95% in the middle of the period. Fixed costs, in turn, include depreciation of plant and machinery, and variable costs include labor, utilities and quarantine costs.
The average capacity utilization rate of pig slaughtering enterprises above designated size in the country is only 30%. It is difficult for large slaughterhouses to utilize capacity by more than 60%. There are two main reasons for this phenomenon, one is because the concentration of the upstream pig breeding industry is not high, most of them are free-range households, and the radius of coverage of slaughtering enterprises is limited, which makes it more difficult for slaughtering enterprises to acquire pigs. This situation becomes even more severe in the event of a major outbreak. Taking Shuanghui Development as an example, the slaughtering capacity utilization rate of Shuanghui Development was 65.6% in 2018, and the slaughtering capacity utilization rate dropped to 30% by 2020, and the gross profit margin of the slaughtering business in 2020 decreased by 2.8 percentage points compared with 2018. Second, there are many illegal "underground slaughterhouses" in the industry, and the phenomenon of private slaughter and indiscriminate slaughter is serious, making the competition in the coverage area very fierce.
As a leading enterprise in the pig breeding industry, the company can make full use of the advantages of large-scale breeding to meet the pig demand of the slaughtering business. Since the company's pigs will be preferentially provided to the internal slaughtering department, the production capacity of the slaughtering end can theoretically reach more than 80%, thereby improving the gross profit margin of the company's slaughtering business.
2) The company's slaughtering capacity layout and pig production capacity layout basically match can save pig circulation costs. The high degree of decentralization of upstream pig breeding makes slaughtering enterprises most of the time when purchasing pigs, they are connected with the pig economy or pig traders, rather than with the main body of breeding. In this case, the cost of purchasing pigs by slaughtering enterprises also includes the cost of circulation of pigs. If you take the pig dealer pulling a cart of pigs as an example, the average circulation cost of each pig is about 124 yuan, and this part of the cost needs to be borne by the slaughtering enterprise. By matching the slaughtering capacity in the main pig production area, the company can greatly reduce the circulation cost of this pig, so as to obtain stronger competitiveness.
3) Smooth out the fluctuations in the company's profits during the pig cycle. The company's current main business structure determines that the correlation between the company's profitability and the pig cycle is very high. ROE fluctuations in a cycle are very dramatic. Taking the current pig cycle as an example, in 2018, the company's ROE was 2.8%, and at the high point of the 2020 cycle, the ROE reached 74%, a difference of 71.2 percentage points. In the long run, large fluctuations in profitability are not conducive to the long-term development of the company. We believe that with the continuous release of the company's slaughtering capacity, we can use the "seesaw phenomenon" between slaughter and frozen meat release to reduce this profit volatility to a certain extent.
Specifically, when the pig price is in a downward cycle, the profit at the breeding end is under pressure, but the slaughtering end benefits from the downward cost, which can expand the slaughtering volume, increase the fresh pork delivery, reduce the amount of frozen meat, increase the frozen meat inventory, and then thicken the slaughtering end profit, smoothing the impact of the pig cycle on the company's overall profitability. When the price of pigs is in an upward cycle, the breeding end benefits, and the slaughtering end profits are under pressure. However, the integrated farming-slaughtering operation model makes the slaughtering end cost lower. In addition, companies can make up for the loss of the slaughter end by putting in frozen meat stocks. Overall, the company's profitability will be affected by the pig cycle will be reduced.
4) Laid a solid foundation for the company to expand into the meat quality business. Slaughtering is just an intermediate link between agricultural and animal husbandry products and the food industry. To increase the value of the company's products, it is necessary to expand into the downstream meat industry. The company's layout of slaughtering business has laid the foundation for the future to enter the meat products business. On the one hand, the slaughtering business can increase the premium by improving the product structure, including the shift from raw pigs to fresh meat sales, as well as the extension to deep processing and even pre-made dishes with higher added value, enriching the company's product matrix. At present, the company's products are mainly white strip pork. Considering the demand and market environment of new retail, it is planned to increase the fine segmentation process in the future and sell non-standard split products in a targeted manner. On the other hand, improve sales channels, from the traditional multi-level wholesale channels, direct supply to chain supermarkets, chain restaurants, food processing enterprises, and even directly docking end consumers, improve the value of the company's products. In addition, to create their own product brands, promote the transformation of unbranded meat to branded meat, take a differentiated competitive route, and thus improve product gross profit margins.
5. Profit forecast
1) Hog business. The pig breeding business is the core business of the company. As the current pig production capacity is still excessive, the industry as a whole is still in the process of capacity delineation, the supply pressure of pigs in the first half of the year is larger, and pig prices are difficult to improve. Starting from July 2021, the number of fertile sows continues to decline, corresponding to the pressure on the supply of live pigs in the second half of this year, but the annual pig output is still excessive. This year,s pig prices will most likely show a situation of low before and after high, and the average price of the whole year is 15-16 yuan / kg. In 2023, due to the improvement of the supply and demand pattern and the improvement of the industry prosperity, the average price of live pigs for the whole year will be expected to be 18-19 yuan / kg. In 2021, the company produced a total of 40.263 million pigs, including 36.887 million commercial pigs, 3.095 million piglets and 281,000 breeding pigs. With the gradual release of the company's new production capacity, we expect that the pig output in 2022 and 2023 will be 61 million and 70 million heads, respectively, and the corresponding pig breeding business sales revenue growth rate will be 41.8% and 40%, respectively, and the corresponding gross profit margin will be 15.5% and 31%, respectively.
2) Slaughtering business. The slaughter business is expected to become another core business after the pig breeding business. At present, the number of registered slaughtering business subsidiaries of the company is about 20, and the total production capacity is about 40 million to 50 million heads. Overall, it matches the company's pig output next year. With the continuous release of the company's slaughtering capacity, the company's slaughtering business revenue will show rapid growth, and we expect the company's pig slaughtering business revenue (unactivated) from 2022 to 2023 to be 21.9 billion yuan and 41.39 billion yuan, respectively. The corresponding gross margins were 8.2% and 13%, respectively.
(This article is for informational purposes only and does not represent any of our investment advice.) For usage information, see the original report. ）
Featured report source: [Future Think Tank]. Future Think Tank - Official website