Author: Xiao Li Feidao, Editor: Xiao Shimei
The Ministry of Agriculture and Rural Affairs previously released a data that in 2023, farmers will lose an average of 76 yuan in pig breeding, and according to the National Bureau of Statistics, 727 million pigs will be slaughtered in the country that year, and according to this calculation, the entire Chinese pig industry will lose at least 55 billion yuan in 2023.
One symptom is that the level of assets and liabilities in the industry continues to rise, and a number of large pig enterprises, including Tianbang, Aonong, and Zhengbang, have gone bankrupt and reorganized. The industry is going through the hardest, longest and most brutal pig cycle in history.
Despite this, the operation of Muyuan, the "King of Chinese Pigs", has continued to rise steadily, and its resilience far exceeds that of most peer pig companies. In the future, once the pig cycle reverses and rises, Muyuan is more exciting.
[Steady upward operation]
In 2023, at the lowest stage of the pig cycle, Wen's shares will lose 6.4 billion. In comparison, Muyuan, which has a larger business scale, recorded a revenue of 110.86 billion yuan and a net profit loss attributable to the parent company of 4.26 billion yuan, fully demonstrating the company's performance resilience.
Since the outbreak of non-plague, the pig industry has experienced several years of high pig price dividends and several years of trough periods. Many large pig enterprises have given back all their profits and are in trouble. From 2019 to the first quarter of 2024, New Hope has a cumulative loss of 2.75 billion, Tianbang has a cumulative loss of 2.9 billion, Wen's cumulative profit is 5.65 billion, and Muyuan's cumulative profit is 47.09 billion.
After the outbreak of non-plague, Muyuan still maintained a rapid expansion rate. Slaughter soared from 11 million in 2018 to 63.82 million in 2023. During the same period, Wen's increased from 22.3 million to 26.26 million. Zhengbang and Tianbang also greatly expanded their production capacity, reaching up to 14.93 million heads and 4.42 million heads, but later encountered an existential crisis.
In terms of breeding costs, the cost of complete breeding in Muyuan in 2023 will be about 15 yuan/kg, a significant decrease from 15.7 yuan/kg in 2022, and the expected target by the end of 2024 is less than 14 yuan/kg. In contrast, the breeding cost of other large-scale pig leaders is higher than that of Muyuan. (PS: Due to the difference in statistical caliber, the actual breeding cost of many pig enterprises is higher than the disclosed data)
▲Comparison of pig breeding cost levels (Muyuan as of 2023M12), source: Tianfeng Securities
In more than 5 years, the asset-liability ratio of most pig enterprises has risen sharply. Wen's rose from 34% to 63%, New Hope rose from 43% to 74%, and Tianbang rose from 62% to 81%, with the latter two approaching or exceeding the red line of debt ratios. Muyuan's performance was more stable, with the debt level increasing from 54% to 63.6%, which is still within the controllable range.
▲The asset-liability ratio trend chart of the three leading pig enterprises, source: straight flush
In addition, Muyuan has always attached great importance to cash flow. Since its listing in 2014, the net cash flow generated by operating activities has been positive every year, and the ratio to net profit has remained above 100% for most years, which also proves that the quality of earnings is good.
In 2023, the profit will be lost, and the net cash flow of Muyuan's operating activities will be as high as 9.9 billion. In the first quarter of 2024, it will continue to lose money, but the net cash flow inflow will still exceed 5 billion.
At present, the average price of pigs slaughtered is about 15 yuan, and the cost of cash breeding is about 13.5 yuan, as long as the follow-up slaughter price is higher than the latter, cash flow is a net inflow, plus 23 billion cash on the account, production and operation do not need to worry about it.
Based on the good performance growth in the past, the capital market has given Muyuan a reasonable price, and the stock price has risen more than 20 times in the past ten years of listing, and the market value has soared from billions to 250 billion today, bringing gratifying returns to investors. And the stock prices of more pig companies are jumping up and down, deducing a very obvious pig cycle market.
【Crossing the Mystery of the Cycle】
Compared with pig enterprises in the industry, Muyuan can go through multiple rounds of pig cycles, and can continue to expand safely and at a high speed, the main logic is that the difference in breeding costs brought about by the most basic business model - "company + farmer" VS self-breeding and self-raising.
In the "company + farmer" model, farmers are quite scattered and cannot effectively defend against non-plague. First, the assets of the pig barn belong to the farmers, and the company cannot force the upgrade of prevention and control measures. Second, the upgrading of prevention and control facilities requires additional capital expenditure from farmers, which is difficult to implement. This will lead to an increase in breeding-related indicators such as the dead rate of tao, which is not conducive to substantially reducing the cost of breeding.
In contrast, the Muyuan self-breeding and self-raising model can improve the level of pig breeding from the aspects of housing, eating, environment and health management through air filtration pig houses, intelligent environmental control, intelligent inspection, intelligent sound monitoring and other equipment, and can effectively prevent and control various diseases.
In addition, Makihara has also created a "binary reincarnation breeding system" that can be used for both commercial and seed purposes. In the trough of the cycle, the production rhythm can be independently regulated, and the production capacity can be rapidly expanded during the boom cycle, so that the breeding cost is lower than the industry average.
The "company + farmer" model adopts an external ternary breeding system, which is actually a dead-end road. When the price of pigs is low, sows need to eat cash flow all the time and are forced to unload production capacity. When the price of pigs is high, there are not many sows in the pen that can reproduce, and a large number of sows need to be purchased or directly retained, raising the cost of breeding.
On the feed cost side, Muyuan also has a lot of advantages. After the raw grain is transported into the pig farm, the integrated processing is directly used for pig breeding, which saves most of the cost of feed in the circulation link. Under the "company + farmer" model, feed processing enterprises need to make profits, provinces, cities, counties and townships need expenses and basic profits for transportation, packaging, storage, loading and unloading links need expenses, and farmers need to pay interest on selling feed on credit.
In addition, Muyuan has also developed a unique low-protein diet formula - in 2023, the use of soybean meal in Muyuan feed will only be 5.7%, and the industry average is 13%, which alone has a cost advantage of 15 yuan per head. Muyuan has also designed a variety of feed formulas for different pig herds and seasonal changes, and can adjust the main materials in the feed formula in time according to the cost performance of raw materials, thus forming an advantage in cost control. In addition, Muyuan is a national layout, and the main battlefield is located in Henan, which has the advantages of raw grain procurement and scale.
In short, Muyuan can continue to invest in R&D in 20 aspects such as seeds, feeds, health, raising, slaughtering, and housing (R&D expenses in 2023 will be 1.658 billion, an increase of 45% year-on-year; 6,681 R&D personnel, an increase of 8.9% year-on-year) to reduce costs and form a unique core competitiveness. On the other hand, "company + farmer" does not have a favorable starting point and cannot effectively reduce costs significantly.
With technological innovation, Muyuan has achieved a super result of 1137g of daily weight gain of batch fattening, exceeding the top 5% of Denmark, and Muyuan benchmarks excellent breeding results, and finds that the growth potential of pigs is deeply tapped, and there is a cost space of 600 yuan/head.
If Muyuan finally reaches this level through cost reduction in various links in the future, according to the calculation of 120 kg standard weight, on the basis of the current breeding cost, there is at least 4 yuan/kg of room for decline. This will significantly widen the cost gap with peers, and will greatly increase the profitability of Muyuan.
【Potential Flashpoint】
In the past many years, the market structure of the pig industry from feed, breeding and fattening to slaughtering and sales has been very fragmented, and the integration rate is not high. After the rise of the scale of animal husbandry farming, the future trend must extend to the whole industrial chain, integrate the industrial chain, and ask for value from the industrial chain.
This may be underestimated by the capital markets. At present, Muyuan has been involved in the combination of upstream planting and breeding, midstream vaccines and veterinary drugs, and downstream slaughtering, and may continue to extend downstream to food processing in the future, cultivate the whole industry chain ecosystem, and have potential performance flashpoints.
At present, the slaughtering business in the downstream of Muyuan is progressing quite rapidly. In 2023, the number of pigs slaughtered will reach 13.26 million heads, which has surpassed the 12.69 million heads of Shuanghui Development, becoming the largest pig slaughtering enterprise in China.
In the future, if two-thirds of the slaughter volume of Muyuan is slaughtered by itself, according to the company's goal of the next 1-2 years, the average profit of 103 yuan is roughly estimated, and the slaughtering business will steadily contribute more than 6.5 billion yuan of profits every year (roughly calculated according to the forward 100 million heads).
Muyuan's deep involvement in slaughtering may completely change the ecology of the entire industry. At present, the capacity utilization rate of the industry is only 30%, and it is likely that it will continue to decline in the future, and many small and medium-sized slaughtering enterprises will be forced to withdraw from the market. For Muyuan, the slaughtering business has natural advantages, including the reduction of transportation loss caused by nearby transportation, the reduction of slaughtering loss caused by intelligent equipment, and the reduction of labor costs caused by the automation of slaughtering process.
As the downstream of slaughtering, Muyuan can also carry out breeding backtracking, provide data support for the upstream breeding links, promote the breeding end to market demand-oriented pig production, and produce synergies through the linkage management of breeding and slaughtering, so as to enhance the value of products. In addition, Muyuan is also making every effort to expand high-value customers such as supermarket Internet platforms and high-end food companies that pay more attention to food safety, stability and traceability, trying to increase the unit price of pork sales. With these foundations, there is a lot to be done in the future for C-end business development and pork brands.
Of course, for the capital market, the most anticipated performance flashpoint in the short and medium term is undoubtedly the high profits brought by the reversal of the pig cycle.
According to market expectations, the pig cycle is expected to usher in a reversal in the second half of 2024.
Logically speaking, the current round of pig cycle to production capacity and credit has taken up to 6 years, and it is probably time for a reversal. In May 2021, the pig price fell below 20 yuan, and by May this year, the whole industry has been losing money for 3 consecutive years. The large-scale expansion of production capacity in the early stage, coupled with the continued low pig prices, the rapid deterioration of the scale capacity balance sheet under leverage, the continuous loss of cash flow, and the occurrence of credit runs in different scale entities. Zhengbang, Aonong, and Tianbang have successively broken out major business problems is the best example.
▲生猪均价走势图,来源:Chocie
It is worth noting that the ironclad 4-year pig cycle law in the past after the non-plague has been terminated, and there is no law to judge the pig cycle in the future. In fact, as early as 2022, the pig price once soared from 14 yuan to 28 yuan, so that the main body of breeding and the capital market thought that the pig cycle had reversed, but it turned out that what was waiting for was a false pig cycle, and the pig price soon fell back to 14 yuan. But in any case, the reversal of the upward trend in this round of the pig cycle is certain, it is only a matter of time sooner or later.
Overall, the current main business of Muyuan is still growing. On the one hand, there is still room for the scale of slaughter, and the target is 100 million heads; On the other hand, there is still a lot of room for cost reduction under technological innovation. In addition, the value of the whole industry chain underestimated by the market, as well as the reversal of the pig cycle that will be welcomed sooner or later, may bring some surprises to the later capital performance.
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