J.P. 摩根-中國農(nóng)業(yè)行業(yè)：專注于頂級玩家的長線游戲-2021.5.20-61正式版

AsiaPacificEquityResearch

20May2021

ChinaAgriculture

Longgamefocusedontop-tierplayers;MuyuanandHaidareourtoppicks

China’stendriestprovincesproduce70%and53%ofthecountry’swheatandhogs,respectively.Foodsecurityviaself-relianceisarecurringtopicinrecentpolicypronouncements,emphasizingagriculturestrategiestomanagelimitedwater,soilandlandresources.Againstthisbackdrop,leadingmarketparticipantsneedtobehighlyefficienttosurviveandgrowinthefragmentedhogandfeedindustry,whereweexpectconsolidationtocontinue.WithAfricanSwineFever(ASF)beingthenewnormal,weforecast2025hogsupplyof675mnhogheads,below2018levelsof694mnheads.Sizeandcostefficiencyareimportantcriteriaforstockselection,inourview,complementingvolumegrowthprospectsandmargins.WeseeMuyuan(initiateatOW)emergingasamega-scalehogproducer;itisourtoppickalongwithHaid(topfeedproducer;initiateatOW).WealsoinitiateonCOFCOatOWforitsunderappreciatedbusinessimprovement.WeinitiatecoverageofWensatNeutral(de-ratinglargelydone)andNewHopeatUW(businessuncertainty).

Hogpricesstillinasweetspotondisruptedsupply.China’shogsupply(hogsforslaughter)declined3.2%YoYlastyear,off2019’slowbasewhensupplyfell21.6%duetotheASFoutbreak.NewASFstrains–lessdeadly,butmoredifficulttodetect–reducedthecountry'sbreedingsowherdsatend-Feb-21byc.10%fromend-2020,constrainingasupplyrecovery.WeexpectASFtoremainafactorforyearstocome,basedonhistoricalexperienceofporcineblue-eardisease.Wemodelhogsupplytorecovergradually,with2025supplyforecastat675mnheads,stillbelowthe2018normof694mnheads.Tightporksupplyhasforcedadeclineinporkconsumptionamidrecord-highhogprices,althoughconsumptionstillexceededsupplyin2020withimportsfillingthegap.Weexpectamildsupplyrecoverytoseehogpricesstayatresilientlevelsin2021-22,albeitoffrecordhighsin2020.

Proteinrequirementsunderpingrowingmeatandfeeddemand.Porkaccountsfor51%ofChina'sproteinconsumption.Higherdisposableincomepercapitaandindividualpreferencesunderpinthemeatdemandoutlook:weforecastadditionaldemandof25mt/68mtformeatifChina'smeatconsumptionpercapitaby2025reachesthe2018levelsofOECD/US.China'sfeedoutputCAGRwas4.5%over2010-20to253mt,exceedingthe13thFYPtargetof220mt,supportedbylivestockproductiongrowth.

Marketconsolidationdrivenbytopplayers.Hogfarmingisafragmentedindustrywiththetoptenenterprisesaccountingfora12.2%marketsharein2020vs5.3%in2016.Weexpectthetopten’ssharetoincreaseto21.8%by2025.Feedproductionisalsofragmented,buttoalowerextent,withthetoptenenterprisesholdinga35%marketshare.WeexpectMuyuanandHaidtomorethandoubletheirsalesvolumesby2025basedonsustainablystrongvolumemomentumdrivenbyorganicgrowth.

Recommendations:OurtoppicksareMuyuanandHaid.Muyuanhasaself-cultivationandself-supportbusinessmodel,withstrongcostadvantagesandanedgeinbreedingsystems.Haidhasastrongtrackrecordwithcounter-cyclicalfeedvolumegrowthandstableoperatingmargins.WealsolikeCofcoondistressedvaluation.WerateWensasNeutral(deemhogbusinessde-ratinglargelydone)andareUnderweightonNewHope(businessuncertaintiesuponseniormanagementexitsandpoorbalancesheet).

AsiaBasicMaterials

AddisonDaiAC

(86-21)61066320addison.dai@

SACRegistrationNumber:S1730521010001

LindaCong

(86-21)61066356

linda.cong@

SACRegistrationNumber:S1730520030007

J.P.MorganSecurities(China)CompanyLimited

Stockcoveragesummary

Ticker

Company

Rating

PT(LC)

MktCap

ADTV

(USDm)

(USDm)

002714CH

Muyuan

OW

144.50

58,693

472.3

002311CH

Haid

OW

100.00

21,734

109.7

1610HK

Cofco

OW

7.30

1,844

50.8

000876CH

NewHope

UW

14.20

10,934

145.5

300498CH

Wens

N

14.60

13,686

67.1

Source:BloombergFinanceL.P.,J.P.Morganestimates.

PricesasofMay19,2021

Seepage55foranalystcertificationandimportantdisclosures,includingnon-USanalystdisclosures.

J.P.Morgandoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.

AddisonDai

(86-21)61066320addison.dai@

AsiaPacificEquityResearch

20May2021

TableofContents

Initiatingcoverageofhogandfeedsector;Muyuanand

Haidareourtoppicks

3

KeySectorInvestmentThemes

4

Sector&StockViews

7

Growingdemand,constrainedsupply=Priceresilience

12

Hogsupplyslowresponse

13

Hogmarketsupply

15

Porkandmeatdemand

21

Hogfarmingcostandproductivity

22

Hogpriceoutlook

27

Industrylandscape

29

Industryregulationsandpolicies

34

Feedindustryataglance

39

AgricultureindustryESG

41

Equitiesinvestmentsummary

48

2

AddisonDai

AsiaPacificEquityResearch

(86-21)61066320

20May2021

addison.dai@

Initiatingcoverageofhogandfeedsector;MuyuanandHaidareourtoppicks

WebelievethecurrentvaluationofChina’shogfarmingsectorat10x2021Econsensusearningsisoverlypessimisticonthehogpriceoutlook.Themultiplesrepresenta24%discounttothehistoricalfive-yearaverageof13.2xPER.China’shogfarmingsectoristradingata23%discounttoitsAsianpeers’averageof13.1x2021EBloombergconsensus.Inthefeedsector,Haid,asararepurefeedplayer,currentlytradesat41x2021Econsensusearnings;wedeemthevaluationpremiumtobejustifiedduetoitsdefensivefeedbusinesswithstablesellingpricesandGPmarginoutlook.Plus,webelievefeedhassolidvolumegrowthprospectsdrivenbygrowingproteindemand.

Weinitiatecoverageonthesectorwithaconstructiveview,andOWratingsonMuyuan,HaidandCofco.WehaveaNeutralratingonWensaswebelievethede-ratingislargelydone.WeinitiatecoverageofNewHopeatUnderweighttoreflectbusinessuncertaintyuponseniormanagementexitsandstretchedbalancesheet.

Table1:Chinahogsectorcoverage

Company

Ticker

Share

Target

JPM

Upside/downside

Valuation

1H20salesrevenueexposure(%)

priceas

price

rating

potential(%)

methodology

of19-

(LC)

May(LC)

MuyuanFoodstuff

002714CH

100.48

144.50

OW

44%

PER

99%hog

GuangdongHaidGroup

002311CH

84.20

100.00

OW

19%

PER

78%feed,5%hog

CofcoJoycome

1610HK

3.67

7.30

OW

99%

PER

EBT123%hog,-17%meatimports

NewHopeLiuhe

000876CH

15.62

14.20

UW

-9%

PER

51%feed,16%hog

WensFoodstuff

300498CH

13.82

14.60

N

6%

PER

65%hog,29%poultry

Source:BloombergFinance,L.P.,J.P.Morgan.Note:18-MaypricewasusedforCofcoas19-MaywasHKpublicholiday.2020EBTdatawasusedforCofco’ssalesrevenueexposure.

WeargueASFcouldremainanissueformanyyearswithouttheintroductionofeffectivetreatmentorvaccine.Further,weseerisktoour2021hogsupplyforecasts(600mnheads)skewedtothedownside,basedonunpredictableASFdevelopment.Meanwhile,wedonotexpectfulldeliveryofaggressivecapacityexpansionplansofleadingproducersthisandnextyear,givenmanyofthemfellshortof2020volumetargetssetin2015-16.Instead,weprojectonlyMuyuanhasthepotentialtobecomeamega-producer(outputcapacityexceeding30mnheadsp.a.)by2025.

Figure1:Hogcycle

Source:J.P.Morgan.

3

AddisonDai

(86-21)61066320addison.dai@

Figure3:Chinalivehogprice

Rmb/kg

Source:Wind,J.P.Morgan

AsiaPacificEquityResearch

20May2021

KeySectorInvestmentThemes

Theme1:Hogpricesstillinasweetspot

Weexpecthogpricestoremainresilientonmildsupplyrecovery,supportiveporkdemandandthecostinflationoutlook.Weprojectlivehogpricesin2021and2022topullbacktoRmb28.2/kgandRmb26.2/kg,respectively,relativetotherecordhighofRmb34.4/kgin2020,butstillremainhighrelativetothehistoricalaverageofRmb16.2/kgin2014-19.

Figure2:Chinalivehogpriceandforecasts

Rmb/kg

Source:Wind,J.P.Morganestimates

Figure4:Chinapigletprice

Rmb/head

Source:Wind,J.P.Morgan

Theme2:Growthopportunityfortophogproducers

Leveragingthestrongreboundinhogpricesin2019-20,leadingproducersareproactivelyexpandingcapacity.However,weseefewcandidatescapableofachievingmega-scale(hogcapacityof30-50mnheads.p.a)asscale-updemandsescalationinbusinessexecution,operationalefficiencyandbiosecuritysystems(favouringintegratedproducers).WeexpectonlyMuyuantoestablishitselfasamega-scaleproducerby2025.Weprojectthetopten'smarketsharein2025couldincreaseto21.8%,from12.2%in2020.

4

AddisonDai

AsiaPacificEquityResearch

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20May2021

addison.dai@

Figure5:Chinatop10hogproducersmarketshare

mnheads,%

Company

2019

%ofChina

2020

%ofChina

total

total

MuyuanFoodstuff

10.3

1.9%

18.1

3.4%

Zhengbang

5.8

1.1%

9.6

1.8%

WensFoodstuffs

18.5

3.4%

9.6

1.8%

NewHope

3.6

0.7%

8.3

1.6%

TwinsGroup

2.0

0.4%

5.2

1.0%

CharoenPokphandGroup

3.5

0.6%

4.5

0.9%

Tianbang

2.4

0.4%

3.1

0.6%

YangxiangGroup

1.5

0.3%

2.2

0.4%

COFCOJoycomeFoods

2.0

0.4%

2.1

0.4%

DabeinongTechnology

1.6

0.3%

1.9

0.4%

Total

51.2

9.4%

64.5

12.2%

Source:Companydata,J.P.Morgan.

Figure6:Chinatop10hogproducers(2025Ehogsalesvolume)

mnheads

Source:J.P.Morganestimates

Theme3:UnderappreciatedL-Tfeeddemandpotential

Underpinnedbygrowingproteindemand,China'sfeedproductionin2020rose10.4%YoYto253mt,followinganoutputCAGRof3.0%over2014-19.Thisexceededthe13thFYPtargetof220mt.Breakingitdown,outputofhog,poultryandaquaticfeedincreasedatCAGRsof4.1%,4.9%and3.5%,respectively,over2010-

Lowindustrycentralization(toptenaccountfora35%marketshare)pavesthewayforfurtherindustryconsolidation,inourview,whichwebelievewouldbenefitkeyfeedproducerssuchasHaid.

Figure7:Chinafeedproduction

mntons,%

Source:ChinaFeedIndustryAssociation,J.P.Morgan

Theme4:PositiveTop-downpolicythrust

China'scentralgovernmenthashadaconsistenttop-downpolicyemphasisonagricultureself-relianceinrecentyearsandthe14thFYPcontinuesthis,urgingaccelerationofmodernization,promotionofbreedingandseedsectorandefficiencygains.Thisisagainstthebackdropofgrowingresourceconstraintsasurbanizationanddisposableincomescontinuetorise.

5

AddisonDai

AsiaPacificEquityResearch

(86-21)61066320

20May2021

addison.dai@

Agricultureconsumesaround61%ofthecountry’swaterresourceseveryyear.WecalculateChina'sdriesttenprovincesproduce70%ofthecountry’swheatand53%ofitshogs.Fourofthecountry'stopsevengrainproducingprovincesareinthedryten,representing29%ofnationalgrainoutput.Thehogindustryshakeoutin2015-16wasdrivenbyenvironmentalcurbs(waterandsoilsafety)andcapacityreshufflesuptoNortheastChina(majorfeedrawmaterialproducingarea),reducingtheindustry’shogsupplyscaleto690-700mnheadsperannumfrom735mnpreviously.Elsewhere,China’simport-relianceonsoybean(keyinputforfeed)consumptionincreasedto84%in2020(vs62%in2005),whichcouldbeseenasimportsof‘virtual’water.Assuch,webelieveChina’slong-termhogsupplycouldbecappedat690-700mnheadsperannum,withfeedproductionbecomingmoredependentuponrawmaterialimports.

Table2:Chinaporksupplyanddemandforecasts

2015

2016

2017

2018

2019

2020

2021E

2022E

2023E

2024E

2025E

Porksupply

mt

57.5

56.3

56.0

55.5

45.0

43.2

50.8

54.8

55.2

55.1

55.2

%yoy

-2.1%

-0.5%

-0.9%

-18.9%

-4.1%

17.7%

7.8%

0.9%

-0.2%

0.1%

Porkproduction

mt

56.5

54.3

54.5

54.0

42.6

41.1

49.3

52.6

52.9

53.2

53.5

%yoy

-4.0%

0.5%

-0.9%

-21.2%

-3.3%

19.9%

6.6%

0.7%

0.5%

0.5%

Hogforslaughter

mnheads

708.3

685.0

688.6

693.8

544.2

527.0

600.0

648.0

668.7

672.1

675.4

%yoy

-3.3%

0.5%

0.8%

-21.6%

-3.2%

13.9%

8.0%

3.2%

0.5%

0.5%

Porkimports

mt

0.8

1.6

1.2

1.2

2.0

4.4

3.5

2.2

2.4

2.0

1.8

%yoy

107.7%

-24.7%

-2.5%

67.2%

120.7%

-20.3%

-37.1%

9.1%

-16.7%

-10.0%

Porkconsumption

mt

57.1

56.1

55.8

55.3

44.9

43.1

50.8

54.8

54.9

55.1

55.2

%yoy

-1.8%

-0.5%

-0.9%

-18.9%

-4.0%

18.0%

8.4%

0.8%

0.8%

0.8%

Source:USDA,NBS,J.P.Morganestimates

6

AddisonDai

AsiaPacificEquityResearch

(86-21)61066320

20May2021

addison.dai@

Sector&StockViews

Muyuan&Haidastoppicks

China’shogfarmingsectoriscurrentlytradingat10.0x2021EconsensusPER,a24%discounttothehistoricalfive-yearaverageof13.2xPER.China’shogfarmingsectoristradingata23%discounttoAsianpeers’averageof13.1x2021EBloombergconsensus.

Webelievethecurrentvaluationisoverlypessimisticonthehogpriceoutlook.First,weargueASFcouldremainanissueformanyyearsunlesseffectivetreatmentorvaccinesareintroduced.Further,risktoour2021hogsupplyforecasts(600mnheads)isskewedtothedownside,basedonunpredictableASFdevelopment.Meanwhile,wedonotexpectfulldeliveryofaggressivecapacityexpansionplansofleadingproducersthisandnextyear,givenmanyofthemfellshortof2020volumetargetssetin2015-16.OnlyMuyuanhasthepotentialtobecomeamega-producer(outputcapacityexceeding30mnheadsp.a.)by2025,inourview.

Figure8:Hogfarmingsectorvaluations

(x)

Asadistinctiveplayerinagrowingmarket,webelieveHaid’svaluationpremiumisjustified

Source:BloombergFinanceL.P.,J.P.Morgan.

Comparedtohogfarming,feedmanufacturingisadefensivebusiness.InAsia,therearefewfeedproducerlistcoandHaidisararepureplayer(feedsalesrevenueaccountsforabout80%ofitstotalsalesrevenue),whichwebelieveexplainsthecompany'svaluationpremiumtoitspeers.Haid’shistoricalfive-yearaveragePERwas22.4x,apremiumtothe16.2xforCPFoodand10.2xforJapfa(JPFAIJ,NotCovered).Feedbusinessaccountedfor37%ofsalesrevenueofCPFoods,andpoultryfeedconstitutedfor39%ofsalesrevenueofJapfain2020.

Further,China'sfeedbusinessissweetenedbystablevolumegrowthprospectsdrivenbygrowingproteindemandandwebelievethetopplayerswillbekeybeneficiariesofindustryconsolidation.TakingIndonesiaasanexample,thecountryhassimilarpoultrymeatconsumptionper-capitatoChina,butthefeedindustryinChinaismorefragmented.CPFoodandJapfaaccountedfor31%and22%ofpoultryfeedproductioncapacityrespectively,accordingtoJapfa’s2020companypresentation.Incomparison,NewHopeandHaidhadmarketsharesof11.8%and6.5%ofChina'spoultryfeedoutputin1H20.Elsewhere,China'shogandaquaticfeedoutputarealsofragmented.

7

AddisonDai

AsiaPacificEquityResearch

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20May2021

addison.dai@

Figure9:HaidfeedGPmargin Figure10:JapfafeedGPmargin

%

Source:Companydata,J.P.Morganestimates

Source:Companydata

DuringadownturnofChina’shogsupplyin1H20,Haidmanagedtodeliverfeedsalesvolumegrowthof18.6%,as32%and15%growthinpoultryandaquaticfeedsalesmorethanoffseta17%declineinhogfeedsalesvolume.WebelievethisistherationalebeyondHaid'svaluationre-ratingsince2Q20,whilstthecompany’searningsforecastsdidnotundergomarkedupwardrevisions.

Figure11:HaidfeedsalesvolumegrowthvsChinafeedindustry Figure12:HaidhistoricalP/Evaluation

outputgrowth (x)

%

Source:BloombergFinanceL.P.,J.P.Morgan.

Source:ChinafeedIndustryAssociation,J.P.,Morgan.

Figure13:HaidearningsforecastsbasedonBloomberg

Source:BloombergFinanceL.P.estimates.

8

AddisonDai

AsiaPacificEquityResearch

(86-21)61066320

20May2021

addison.dai@

WhywethinkCOFCOismispriced

Cofco–Businessimprovement,distressedvaluations

OnCOFCO,wethinkthestockismispriced.Thecompanyoperatesaverticallyintegratedvaluechain,includingbreeding&rearinghogs,slaughtering,production

salesoffreshporkandalsoengagesinmeatimportbusiness.Cofco’spretaxprofitwashistoricallydrivenmainlybyhogfarmingbusiness,whilstthenon-hogfarmingbusinessregisteredalowsingle-digitEBTmarginhistorically.Thevaluationde-ratingsinceend-December2019wasinconsistentwithforwardconsensusearningsupgrades.WebelieveCOFCO’sunderlyingearningsgrowthwas154%in2020(19%aboveconsensusestimates),butwasdraggedby2H20impairmentlossesformeatimports(over-importsofbeef),whichsurprisedthemarket.Managementhassaidtherewillbenosuchimpairmentforthemeatimportssegmentin2021asthewrite-downwascompletedlastyear.

Figure14:COFCOP/Evaluationband Figure15:COFCOearningsforecastsbasedonconsensus

Source:BloombergFinanceL.P.estimates.

Source:BloombergFinanceL.P.estimates.

Wecalculatethecompany’send-2019sharepriceofHK$2.2wasequivalentto2.1x2020earningsor2.0x2020earningsofthehogfarmingbusiness,whichimpliedshareholdersownedthenon-hogfarming(freshpork,processedmeatandmeatimports)businessforfree.The2.0xvaluationrepresentsan87%discounttotheaverageofMuyuan(5.8x2020earnings),Wens(24.1x)andNewHope(15.9x).SomevaluationdiscounttoMuyuanisjustified,inourview,givensizeandscale,butwebelievetheextentofthedeepdiscountisnotjustifiedgiventhedistinctivehogbusinesslikeMuyuan(self-supportandself-cultivation)modehelpedrevivehogsalesvolumein2H20andthecompanywastheNo.6hogproducerinChinain2020.Wediscusstheadvantagesofthe“self-supportandself-cultivation”businessmodeloverthe“companyplusfarmer”businessmodelinthesectionontheIndustrylandscapeonpage30ofthissectorreport.

WealsocrosscheckthevaluationofAsianlistcosengagedindownstreambusiness.ItsAsianpeerMaruhaNichiro(1333JT,NotCovered)tradesat11.7x2022(fiscalyearended31March2022)PERbasedonBloombergconsensusforecasts.Asafoodcompanymainlyengagedfisheries&aquaculturetradingandprocessingbusiness,itsEBTmarginin2020(fiscalyearended31March2020)was2.3%.TheEBTmarginofCofco’snon-hogfarmingbusinesswas-5.4%vs2.0%in2019and4.3%in2018.Weexpectlossofthenon-hogfarmingsegmentstonarrow,thus,projecttheEBTmargintobe-3.7%,-2.1%and-0.4%in2021,2022and2023,respectively.

9

AddisonDai

(86-21)61066320addison.dai@

AsiaPacificEquityResearch

20May2021

Our2021/22earningsforecastsforCOFCOare17%and88%aboveconsensusforecasts(Street'searningsforecastshaveawiderange),asouroperatingprofitmarginforecastsarehigherthanconsensus.Weprojectthecompany'scostadvantagesinhogfarmingtobesustainedanditsbusinessoperationsinfreshpork,processingmeatandmeatimportstoimprove.Assuch,weconcludethemarketunderappreciatesCOFCO'sbusinessmodel,itscostadvantagesinhogbusinessandtheimprovementinthebusinessoutlookforthenon-hogfarmingsegments.

Table3:Cofco:Keyoperationalassumption(JPMevsConsensus)

Rmbmn,Rmbpershare,%

JPMe

Consensusforecasts

JPMevsConsensus

2021E

2022E

2021E

2022E

2021E

2022E

Salesrevenue

19,595

21,587

21,814

23,038

-10%

-6%

EBITDA

5,191

5,784

4,298

3,307

21%

75%

Operatingprofit

4,615

5,118

4,175

3,072

11%

67%

Netprofit

4,630

5,158

3,964

2,748

17%

88%

EPS

1.19

1.32

1.04

0.70

14%

88%

Source:J.P.Morganestimates,BloombergFinanceL.P.estimates.

InitiatecoverageofMuyuanatOW

WeinitiatecoverageofMuyuan(002714.CH)atOverweightwithaDec-21PTofRmb144.5.Underpinnedby76.7%YoYsalesvolumegrowth,MuyuanbecameChina’sNo.1hogproducerin2020.Thecompanybreedsandproducescommodityhogsandpigletsthroughself-cultivationandself-support.AmidASF,itssuperiorbusinessmodelismorebiosecuritymanagement-friendlythanthe'companyplusfarmer’modeladoptedbyitspeers.Coupledwithastrongbreedingsystemandadvantages,Muyuanhasarobustcapacityoutlooktoenablecontinuousmarket-sharegains.Weforecastsalesvolumein2025tomorethandoublefrom2020andbelieveitsmarketsharewouldincreaseto7.9%in2025relativeto3.4%in2020.

InitiatecoverageofHaidatOW

WeareOW-ratedonHaid(002311.CH)withaDec-21PTofRmb100.ThecompanyisChina'stopfeedmanufacturer,accountingfor16.7%,6.5%,2.3%ofnationwideoutputofaquatic,poultryandhogfeed,respectively,in1H20.Ontheindustrialsupplychain,italsooperateshogfarms,producesaquaticseedsandengagesinanimalhealthcareproductsasasolutionprovider.Weexpectitsfeedsalesvolumecouldmorethandoubleby2025from2021(drivenbyorganicgrowth)andexpectastableGPmarginoutlooktobeconsistentwithhistoricaltrends.

InitiatecoverageofCofcoatOW

WearealsoOW-ratedonCofco(1610.HK)withaDec-21PTofHK$7.3.LikeMuyuan,Cofcobreedsandproducescommodityhogsandpigletsthroughaself-cultivationandself-supportmodel.Itsemploymentincentiveprogramin2019successfullyretainedcoretalentandsupportedafastrecoveryinhogsalesaftertheASFoutbreak.Weestimateend-2020hogannualcapacityof5.5mnheadswoulddriveasalesvolumeCAGRof56.3%over2020-22.However,webelieveinvestorsshouldnotoverlookthecompany’sstrongcostadvantageinhogfarmingwhichhelpedtodeliverEBTofRmb22.9/kgin2020,onourestimates.Weexpectotherbusinessessuchasfreshpork,processedmeatandmeatimportstoimprovepostthetroughseenin2020.

10

AddisonDai

(86-21)61066320addison.dai@

AsiaPacificEquityResearch

20May2021

InitiatecoverageofNewHopeatUnderweight

WeinitiatecoverageofNewHope(000876.CH)atUnderweightwithaDec-21PTofRmb14.2.ThecompanyisChina'slargestfeedmanufacturerandfourth-largesthogproducerasof2020.Thecompanyoperateshogfarmsprimarilythroughthe'companyplusfarmer’businessmodel.Its4Q20profitfellshortofexpectationsduetoworse-than-expectedsowmortality.Resignationswithinseniormanagementcouldleadtobusinessuncertaintyandreducedefficiency.Thehogfarmingbusinessisgearingupheavilyandweexpectthebalancesheettolookstretched.Wearecautiousonthename.

InitiatecoverageofWensatNeutral

WerateNeutralonWens(300498.CH)withaDec-21PTofRmb14.6.ThecompanyisChina'sNo.1chicken(yellow-featherbroiler)producerwitha7.3%marketshareofpoultryoutputin1H20.ItshogrankingslippedtoNo.3in2020fromNo.1in2019,withsalesvolumeshitmarkedlybyASF.Thecompanyhashistoricallydevelopedhogfarmingthroughthe‘companyplusfarmer’businessmodel,andnowseekstobuildnewcapacitythroughself-cultivationandself-support,whichrequirescapitalization.Thiswouldweighonitsbalancesheet.Domesticchickenpricesarerecoveringfrom2020’slowlevels,butthemagnitudeofmarginrecoverydependsonrawmaterialpricedevelopment.

11

AddisonDai

(86-21)61066320addison.dai@

AsiaPacificEquityResearch

20May2021

Growingdemand,constrainedsupply=Priceresilience

Growingporkdemand

TightporksupplyforcedadeclineinChina’sporkconsumptionamidrecord-highporkpriceslastyear.China’sporkconsumption(-4%YoYto43.1mt)in2020stillexceededsupply(-3.3%to41.1mt),withimportsfillingthegap.Porkaccountedforabout61%ofpre-ASFtotalmeatconsumptionand80%ofaggregatepork,beefandlamb,makingup51%ofChina’sproteinconsumption.

Disposableincomeandindividualpreferencesplayakeylong-termroleindrivingthemeatdemandoutlookaroundtheworld.Chinafollowssuit.Inthe14thFYP,Chinatargetstoincreaseitsurbanizationrateto65%by2025,from60.6%by2020,andgrowits2021-25disposableincomepercapitainlinewithGDPgrowth.TheUnitedNationsforecastsaChinapopulationCAGRof0.26%over2020-25,implying1.423bnin2025from1.405bnin2020.Thiscouldtranslatetoadditionalmeatconsumptionof25mtifChina’smeatconsumptionpercapitaby2025catchesuptotheOECD’s2018levelof69.5kgpercapita,orincrementalmeatconsumptionof68mtifChina’smeatconsumptionpercapitaby2025catchesuptotheUS’s2018levelof99.3kgpercapita.

Figure16:Chinameatconsumptionpercapitabytype(2019)

Kgpercapita

Source:OECD,J.P.Morganestimates.

Figure17:China’sdisposableincomepercapita Figure18:Chinaurbanizationrate

Rmbpercapita %

Source:NBS,J.P.Morgan Source:NBS,J.P.Morgan

12

AddisonDai

AsiaPacificEquityResearch

(86-21)61066320

20May2021

addison.dai@

Hogsupplyslowresponse

InJune2019,DirkPfeiffer,aprofessoratCityUniversityofHongKong,commentedthatASFisthe‘biggestanimaldiseaseoutbreakwe'veeverhadontheplanet’

China'shogsforslaughter/hogsalesvolume(aproxyforsupply)wasreportedtobedown3.2%YoYlastyearto527mnheads,despitealowbasein2019whenhogsforslaughterfell21.6%YoY,hitheavilybytheASFoutbreak.Hogsupplybottomedoutin3Q20basedonbreedingsowherd(inventory)hittingatroughinSeptember-October2019,ashogsforslaughterusuallylagbreedingsowsby10-11months.

InJanuary-Februarythisyear,China’sbreedingsowherddeclinedsequentially,hitbyaresurgenceofswinediseaseinNorthernChina,duetoanewASFstrain.NotethereisnoeffectivetreatmentorvaccineforASF.Webelieveswinediseasecouldbeafactorformanyyears,basedontheporcineblue-eardiseaseexperiencein2006-15.Assuch,weexpectthehogsupplyrecoverytobegradual,withsupplyrecoveringgraduallyoverthenextfewyears,butstillbelow2018baselinenormallevel.

Figure19:Chinabreedingsowinventory Figure20:Chinahogsupply(hogforslaughter)

mnh