Has the longest pig cycle in history fallen to the end?
Yes, possible!
Because hog prices are going up again. According to data released by the National Bureau of Statistics on May 14, compared with late April in early May 2024, the current price of live pigs (foreign three yuan) was 15.0 yuan/kg, up 0.7% month-on-month.
Of course, some people will question that the price of live pigs has also risen in 2022, and at that time the whole market thought that the pig cycle had reversed, and what was the result?
Within a few months, it fell back on, a fake reversal like a fake.
It was not only the pig companies that were cheated that time, but also many investors.
So, this time, everyone became very cautious.
What is the truth? If it really reverses, what should you buy?
01
What is the probability of a reversal?
We have discussed in detail the causes of this ultra-long pig cycle in many previous articles, and have also tracked and analyzed the situation at each stage and the cycle in which it is located.
To briefly summarize the core factors, it is because in 2020 and 2021, at the peak of the supply shortage caused by African swine fever, it was very easy for pig enterprises to raise funds, and all kinds of capital were competing to enter the game, including many large real estate developers such as Vanke and Wanda.
Statistics show that the financing of listed pig enterprises in the past two years is close to 100 billion yuan, which is more than the sum of the past 10 years. At that time, it should be regarded as the most wealthy pig enterprise in the history of the company, and the two years when the money was soft.
As the saying goes, if you have more money, your waist will be harder. Although the capital expenditure of pig enterprises is also large, and the debt ratio has risen sharply, it is still more able to withstand the downward trend of the pig cycle than in the past.
Why is there a "false reversal" in 2022?
It is because on the whole, pig enterprises still have "surplus grain", or they can still carry it, as soon as they see the rise in pig prices, they think that the cycle is coming, so they desperately expand production, hoping to seize the opportunity to earn back what they have lost.
Helplessly, the expansion of production is too much, the supply is too fast, and the price falls quickly, resulting in a flash in the pan.
However, Jinshan also has a day when it is exhausted, after several years of losses, many pig companies are really out of money.
In the past year, the overall industry has lost money, and companies with relatively poor financial conditions have successively broken out the dilemma of selling assets and on the verge of bankruptcy. The practice of improving operating cash flow by increasing accounts payable is also unsustainable, so some pig companies have chosen to transfer assets.
From an industry perspective, it's really cold, but from a cyclical perspective, it may be a good thing, because capacity clearance is accelerating.
In addition, since July 2021, the pig industry has begun to reduce capacity, and the number of sows that can reproduce has begun to decline, but with the increase in the price of pigs in May 22, the industry has re-entered the expansion of production capacity, and the number of sows has risen. At the same time, this process also continued to occur the inefficient ternary conversion of binary conversion, and the production efficiency of sows was improved, resulting in a significant increase in the industry's production capacity and a re-depressed pig price.
But now, things have changed.
According to data from the Ministry of Agriculture and Rural Affairs, by the end of the first quarter of 2024, the national breeding sow herd fell to 39.92 million, a decrease of about 9% from the end of 2022.
In addition, the degree of substitution of the two elements to the three elements is very high, which means that the production efficiency margin of sows is difficult to improve, and the decline in the number of can be multiplied is more easily transmitted to the price of pigs.
This time the hog price has risen, and the logic of the reversal is much harder than the one in 2022.
This illustrates a very simple logic, although the time is much longer than the previous cycle, pork is always inseparable from its own cycle law, it will be late, but it will not be less.
02
How to invest?
Waiting for the reversal of the pig cycle, many investors have been gearing up, but how should they invest?
From the perspective of stock price elasticity, let's talk about two major strategies:
First, breeding-based enterprises are more resilient when the pig cycle arrives.
Second, feed-based enterprises, although the revenue side may not contribute much, but because of the low profit margin of the feed business, the profit side will also have a very considerable elasticity when the pig cycle arrives.
As for other industries cut into pig breeding, such as real estate developers, manufacturing, service industry, basically on a whim, will not have much sustainability, in fact, most of them, have withdrawn from the pig industry, can be ignored. And those that have been "ST", adhering to the principle of prudent investment, can be directly circumvented.
The following chart lists the basic situation of listed pig enterprises.
Specifically:
In terms of growth, because of the low base, the growth of small pig enterprises is better, Shennong Group, Superstar Agriculture, and New Wufeng have maintained a rapid growth rate in slaughter; In the large pig enterprises, Muyuan's slaughter volume is the largest, after experiencing high growth, the growth rate is relatively stable, Wen's in 2020 ate the disadvantage of the breeding model under African swine fever, a sharp decline, after the control of swine fever, the growth rate is also relatively fast. New Hope's slaughter in 24 years has declined, while the growth rate of Haid Group and Tang Renshen's slaughter volume has remained good.
In terms of breeding costs, from the perspective of gross profit margin, the most costly advantages are Muyuan, Shennong, Superstar, Dongrui and Wen's; Haid is mainly in the feed business, and did not disclose the detailed gross profit margin of pigs, but it was able to do it in the second half of last year, indicating that it also has a breeding cost advantage.
Of course, both of these indicators are just regular analytical indicators. In the past two years of the downturn of pig enterprises, there is another indicator that is very important, that is, financial pressure.
In this wave of production capacity, many pig companies can't withstand the thunder because the leverage is too large. Therefore, when choosing a company, it is necessary to take the initiative to avoid those companies with large financial problems, and it is best to choose those with low financial pressure, others can not bear it and are forced to reduce production capacity, it can be carried to prove the soundness of the company's operation, as well as the strategic vision of the management.
As can be seen from the chart below, in terms of financial pressure, Haid Group's interest-bearing borrowings at the end of 2024Q1 were 5.380 billion, book cash at the end of 2024Q1 was 4.597 billion, EBIT in 2023 was 4.032 billion, and net operating cash flow in 2023 was 12.698 billion.
Among the small pig enterprises, Shennong's interest-bearing borrowings at the end of 2024Q1 were 788 million, the book cash at the end of 2024Q1 was 609 million, the EBIT in 2023 was -402 million, and the net operating cash flow in 2023 was 19 million, with the least financial pressure;
Among the large pig enterprises, Wen's interest-bearing borrowings at the end of 2024Q1 were 24.436 billion, the book cash at the end of 2024Q1 was 11.476 billion, the EBIT in 2023 was -5.158 billion, and the net operating cash flow in 2023 was 7.594 billion, and the financial situation was relatively stable, while Muyuan's interest-bearing borrowings at the end of 2024Q1 were 70.516 billion, the book cash at the end of 2024Q1 was 23.024 billion, and the EBIT at 2023 was -1.116 billion. The net operating cash flow in 2023 will be 9.893 billion, and the possibility of financial problems is also low, while New Hope's interest-bearing borrowings at the end of 2024Q1 will be 53.841 billion, the book cash at the end of 2024Q1 will be 10.948 billion, the EBIT in 2023 will be 1.294 billion, and the net operating cash flow in 2023 will be 13.904 billion, and the financial pressure is relatively large.
From the perspective of valuation, Shennong enjoys the highest valuation because of its low financial pressure, the best growth, and the advantage of breeding costs; Huatong and superstars also have higher valuations because of their growth. In the big pig enterprise, New Hope feels that the market is very worried about its financial problems, and the valuation is relatively low, and Wen's Muyuan Haida is about a level valuation.
From the perspective of comprehensive enterprise competitive advantage, financial pressure, growth, valuation, etc., the quality of Haid Group, Wen's shares, and Muyuan shares is relatively good, and the main valuation of Shennong Group is a bit high, and if there is a drawdown, you can also pay attention.
Of course, ETFs are also a great option. Animal Husbandry ETF (159867) has risen by more than 22.4% 159867 since the bottom of February 6.
Animal Husbandry ETF (159867) is a leading high-quality pig enterprise, and the animal husbandry ETF closely tracks the CSI Animal Husbandry Index, and the top ten weighted stocks of the index are Haid Group, Muyuan Shares, Wen's Shares, Meihua Biotechnology, New Hope, Dabeinong, Sunner Development, Biological Shares, Superstar Agriculture and Animal Husbandry and Tiankang Biotechnology.
03
epilogue
Betting on the reversal of the pig cycle is one of the investment themes of A-shares in the past two years, but for various reasons, the problem of this round of pig cycle mismatch is very serious, and the delay in reversal has made many funds mistakenly rushed, and investors have also experienced from full of hope to big disappointment, and there are really a lot of buried funds.
However, as mentioned above, the cycle law of pigs still exists, only late, not less, investors need just a little more patience, and an in-depth understanding of the development of the industry, waiting for opportunities.
Now, judging from the supply side, the industry's production capacity, and the operation of pig enterprises, the probability of the reversal of the pig cycle is indeed not small.
Of course, blindly chasing high is not recommended, especially after the false reversal in 2022, this time it is also not 100% guaranteed that the pig cycle will definitely reverse, in fact, there is still a risk of miscalculation. Objectively speaking, the demand and supply side are a dynamic process, and only when the decline in the supply side is greater than the decline in the demand side, and after enough time to adjust, will a real reversal be ushered in. Now, we see that the supply side is indeed clearing, but on the other hand, overall consumption is not particularly strong, which will undoubtedly affect pork consumption as well.
Therefore, a more prudent approach is to buy low, and it is best to lay out step by step, and call back to a relatively low position to open a position, with the aim of reducing the cost of opening a position and increasing the ability of the position to resist risks. At the same time, combined with the current investment style of A-shares, from the past speculation and speculation to the pursuit of stability and certainty, then the industry leader is more likely to be favored by large funds.
To sum up, the general direction of the reversal is forming, and low absorption and step-by-step position building are the correct posture to bet on this wave of pig cycle reversal. Investors who are optimistic about this round of pig cycle may wish to study the livestock ETF (159867).
Risk Warning: Funds are risky and should be cautious when investing.