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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
(86-21)61066320
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
(86-21)61066320
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
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