Outrageous pig cycle, from despair to new hope

Poetry and starry sky

2024-07-09 08:00Posted in Beijing Finance and Economics Creators

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News girl to help you draw the key points

01 New Hope is expected to lose 1.2 billion yuan in the 2024 semi-annual performance forecast, a decrease of 59.77% from the same period last year, thanks to the recovery of the pig market and the decline in breeding costs.

02 The company's internal cost reduction and efficiency increase are obvious, the fattening survival rate increased to 92-93% in June, and the feed-to-meat ratio dropped to 2.64.

03However, New Hope's interest expense is still high, with interest expense of nearly $2 billion and capitalized interest of $160 million in 2023.

04In order to cope with cyclical fluctuations, New Hope promoted private placement and introduced strategic investors to reduce leverage by using external funds.

05At the same time, the company improved operational efficiency through digital transformation, and the overall inventory turnover of the cold chain of fresh life decreased by 20%.

The above content is generated by Tencent's hybrid model and is for reference only

When Xingkong Jun does enterprise analysis, he often uses a data to compare with the same period in 2019. What makes people feel a lot of emotion is that from 2020 to 2022, it is like disappearing from human history.

And the so-called cyclical theory, in the face of various uncertain changes in human history, is a spherical chicken in a vacuum, which has become a joke.

A friend who believed in a well-known cyclical theory and bought a house in 2019 now has the heart to jump off the building.

What theory is correct about cycles and forecasts?

When you study Western Economics, you must not forget another tool: "Political Economy".

The final simplification is this cliché:

A person's destiny is, of course, dependent on self-struggle, but it is also necessary to take into account the course of history.

Taking the pig cycle as an example, what is the "process of history"?

In 2021, the "Implementation Plan for the Regulation and Control of Pig Production Capacity" was issued, and it was revised in 2024. The plan sets up green zones, yellow zones and red zones to accurately regulate and intervene in the number of pigs.

The core elements are:

Guide farms (households) to scientifically arrange the rhythm of production. When pig prices are low and pig breeding is seriously loss-making, guide farms (households) to reduce the weight of pigs slaughtered, avoid weight gain, and encourage slaughtering enterprises to purchase more standard weight pigs. When the price of live pigs rises rapidly, guide the farms (households) to slaughter in a timely manner, avoid short-term supply reduction caused by pressure and secondary fattening, and prevent the price from rising sharply and falling sharply due to the slaughter in the market.

In the face of powerful big data and regulatory capabilities, all cycles are pseudo-cycles. It is still called the pig cycle, but a cycle with unpredictable start times can hardly be called a real cycle.

Enterprises that comply with regulation and control can jump out of the cycle and quickly enter the profit channel, thus ushering in new hope.

1. New Hope, New Hope

On July 5, New Hope released its 2024 half-year performance forecast, with an estimated loss of 1.2 billion yuan, a decrease of 59.77% compared with the same period last year. The company said in the performance forecast: the second quarter of the pig market warmed up, pig prices rose over the same period, combined with the company's production management improvement, the cost of breeding steadily declined, the second quarter of a single quarter profit is expected to be about 750 million, so that the overall performance in the first half of the year reduced by more than 50% year-on-year.

If the third and fourth quarters can continue to be profitable, the company is likely to turn losses into profits throughout the year.

Source: Straight Flush iFind, Graphics: Poetry and the Starry Sky

Once the hope comes true, New Hope is expected to get rid of the performance decline since 2020 and achieve a leap forward in the so-called pig cycle.

2. Self-struggle

In addition to the role of macroeconomic regulation and control, New Hope's internal cost reduction and efficiency increase are also relatively effective.

The latest data shows that the company's fattening survival rate in June has increased significantly, reaching 92-93%, a significant increase of 7-8 percentage points year-on-year. At the same time, the feed-to-meat ratio also decreased, to 2.64, a year-on-year decrease of about 0.1.    

The company's fine management has also made great achievements, and the cost of sow consolidation has been reduced to 2380 yuan/head, which not only reduces the cost of weaned piglets, but also further reduces the cost of commercial pigs. In May, the company's operating yard line cost also decreased, to 14.7 yuan/kg, down 1.1 yuan/kg from January. The cost of weaned piglets has also dropped to 288 yuan/head, and it is expected that the cost of commercial pig seedlings slaughtered in July and August will drop by 0.4-0.5 yuan/kg.

The company expects the gearing ratio to fall to 70% and 65% in 2024 and 2025.

Source: Straight Flush iFind, Graphics: Poetry and the Starry Sky

The recent rise in pig prices and the decline in breeding costs have made the company's net profit in the second quarter as high as 750 million yuan. At the same time, the company is promoting private placement, and gradually introducing strategic investors to reduce leverage with external funds. At the same time, the company has no large-scale capital expenditure plan in the next two years, and the annual capital expenditure is controlled at 2 billion to 3 billion yuan, which will help further optimize the balance sheet.

In terms of production capacity, New Hope's sow production remains stable and plans to increase pig production in 2025. According to the production and marketing report, in June, the company's breeding sow herd reached 730,000 heads, a slight increase from the end of the first quarter. From January to May, the number of live pigs slaughtered was 7.402 million heads, which provided a strong guarantee for the annual slaughter target of 14 million to 15 million heads. The company is promoting the renovation of positive pressure ventilation and small unit enclosures, which is expected to be completed in the fourth quarter of 2024 and will reach a new level of growth in 2025.

3. The Cost of Expansion: Interest

New Hope's expansion was financed mainly by bank loans, and the consequence was a staggering interest expense.

Source: Straight Flush iFind, Graphics: Poetry and the Starry Sky

In 2023, the company's interest expense will be close to 2 billion yuan, and the capitalized interest will be 160 million yuan, which is far beyond the company's ability to bear when combined with the company's net profit.

The source of these interests is mainly the company's crazy investment in 2020.

Source: Straight Flush iFind, Graphics: Poetry and the Starry Sky

2020 is the highest price in the history of live pigs and the best year for breeding profitability in the past five years. Driven by interests, major pig enterprises have increased investment and borrowed money to repair pig houses.

After that, the collapse of pig prices in 2021 will lead to a cold winter.

Of course, consumers have achieved the freedom of pork head meat.

Fourth, the industrial upgrading of pig breeding

In the eyes of many people, pig breeding is a traditional industry with a relatively low threshold.

However, after several years of bloody fighting, the pig industry has basically cleared the low-end production capacity, and those who remain are the players who rely on science and technology to continue their lives.

New Hope has set up a "digital lighthouse".

New Hope Group has been implementing the Excellence Digital Ascending Plan since 2021, and a series of lighthouse projects will be progressing in an orderly manner from 2022 to 2023.

The Group has achieved digital operational excellence through three major businesses: supply chain excellence, production excellence, and marketing excellence, as well as three functions of finance, human efficiency, and food safety. In 2022, the Group set up six lighthouse project groups, including digital pig farms, dairy digital factories 2.0, and dairy fresh GO2.0. In 2023, in order to continue to expand the depth and breadth of the "lighthouse" effect, the Group will add 15 industrial lighthouses, including lean energy management in the chemical industry and digital operation of real estate and property.

Taking New Hope Dairy as an example, Li Xuchang introduced that the food safety of New Hope Dairy has realized the full-link traceability from milk collection, production to storage, and the traceability efficiency has been increased from the original 3 hours to 3 to 5 minutes. At the same time, in its own logistics brand "Fresh Life", the cold chain logistics system, through the application of big data and Internet of Things technology, has achieved a decrease in the overall inventory turnover rate and a significant improvement in scheduling timeliness.    

In the process of digital transformation, New Hope even cooperated with Byte's Feishu. On the one hand, it reduces the company's own expenses, and on the other hand, it also effectively improves the digitalization through the technical strength of the partner.

What effect does digital transformation bring to New Hope? The fresh life cold chain has achieved a 20% reduction in overall inventory turnover, a 40% decrease in expiring inventory, a reduction in scheduling time from 4 hours to 10 minutes, and a 10% reduction in logistics costs.    

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