According to the Intelligence Finance app, Huaan Securities released a research report stating that the enthusiasm for supplementary pens has been weak since the beginning of this year. From official data, the inventory of sows increased slightly by 1.2% compared to the end of the first quarter in Q2, July and August saw a 0.07% increase and a 0.1% decline in sow inventory compared to the previous month, even though there was a temporary high point in pork prices in August. The recovery of production capacity is expected to be very slow in Q3 and Q4. The slow recovery of production capacity may result in only a slight decrease in pork prices in 2025 compared to 2024, and the hog farming sector may interpret the logic of quantity supplementing price. Most first and second-tier leading hog companies are currently valued at historical lows or even below historical lows, and the share buyback plan of Wens Foodstuff Group (300498.SZ) demonstrates confidence.

The slow recovery of production capacity, with leading hog companies being the main force in new production capacity.

From official data, at the end of the second quarter of 2024, the inventory of sows was 40.38 million, increasing slightly by 1.2% compared to the end of the first quarter. In July and August, the national inventory of sows was 40.41 million and 40.36 million respectively, with an increase of 0.07% and a decrease of 0.1% compared to the previous month. The slow recovery of production capacity remains evident. From industry data, the recovery of hog production capacity by Yongyi Consultancy and Shanghai Ganglian E-Commerce Holdings is significantly weaker than in 2022. Leading hog companies are the main force in new production capacity; in the second quarter of 2024, the cumulative increase in sow inventory of Muyuan Foods and Wens Foodstuff Group was approximately 0.267 million heads, accounting for 0.66% of the national sow inventory of 40.38 million heads at the end of June.

Guoan Securities has previously discussed in the series of reports on hog farming industry that the speed of recovery of hog production capacity in 2024 is relatively slow, which is related to various factors such as long periods of losses, maintaining a high asset-liability ratio for several years, and preferences for low stocking and second parity. The recovery speed needs to be continuously monitored. The super high pork prices brought by the non-epidemic situation stimulated the entire industry to actively expand production, with the average asset-liability ratio of 20 listed hog companies reaching 60% by the end of 2021, the highest level since 2009. By the end of June 2024, the average asset-liability ratio of 20 listed hog companies still remained at a high level of 63%. At the same time, the scale of equity financing completed by listed hog companies has been continuously decreasing, from a peak of 44.8 billion yuan in 2021 to 4.7 billion yuan in 2023, and further reduced to 1.9 billion yuan from January to September 2024, placing the industry's financial pressure at historically high levels.

It is expected that pork prices in the fourth quarter will remain high, and the decrease in pork prices in 2025 will be limited.

In this cycle from December 2022 to April 2024, there has been a cumulative clearance of 9.2%. Pork prices in 2024 are in an upward cycle. The Ministry of Agriculture and Rural Affairs disclosed that the sow inventory in mid-July decreased by 7.2% year-on-year, and the number of newborn piglets from February to July decreased by 6.8% year-on-year. Due to the relatively stable survival rates of fattening and piglets, pork prices are expected to remain high in the fourth quarter; the number of newborn piglets increased by 3.5%, 1.8%, and 0.7% in June, July, and August, respectively. With the corresponding slaughter of pigs before and after the Spring Festival, considering the significant increase in pork consumption before the Spring Festival compared to the current period, pork prices are expected to remain relatively high before and after the Spring Festival.

Based on the data from the Ministry of Agriculture, the inventory of sows capable of farrowing began to increase month-on-month in May 2024. According to the statistics bureau data, the inventory of sows capable of farrowing at the end of the second quarter of 2024 increased by 1.2% compared to the end of the first quarter. It is estimated that after October-December, corresponding to March-May 2025, the price of hogs will enter a downward trend. Taking into account the seasonal factors, the period after the Spring Festival is traditionally a lean season for pork consumption. It is not ruled out that the pig prices may enter a downward cycle as early as February 2025. Due to the significantly slower restocking speed in this cycle compared to previous years, even when pig prices broke through 21 yuan/kg in August this year, the inventory of sows capable of farrowing showed a decrease compared to the previous month. Guoan Securities predicts that the later restocking will continue to be weak, and the downward trend of pig prices in 2025 may be significantly slower, with the average price of hogs in 2025 only slightly lower than in 2024.

Hogs with high weight and poor second-litter results are hindering the short-term pig prices, waiting for prices to stabilize and rise back up.

Data from Pig Easy shows that on August 11, the national pig prices reached a peak of 21.17 yuan/kg since the beginning of this year. Subsequently, the pig prices quickly fell back, and by September 24, the price had dropped to 17.94 yuan/kg, a 15.3% decline from the peak. Guoan Securities believes that the significant short-term pullback in pig prices is mainly due to the high weight of hogs being sold, poor second-litter results in the short term, and subdued demand for pork. ① Hogs with high weight being sold. Starting from late July, the proportion of pigs weighing over 150 kg and the average weight of pigs being sold steadily increased, reaching peaks of 7.37% and 126.73 kg, respectively, by the end of August; ② From September 1 to September 10, 2024, the actual sales proportion of second-litter pigs dropped to 1.89%, the lowest level since March this year, a decrease of 2.31 percentage points from the same period in 2023, indicating low enthusiasm for second-litter pigs; ③ Currently, the pork-to-meat pig price ratio is 1.58, at a low level since 2008, and pork consumption remains subdued due to the overall environment.

As of now, the utilization rate of pig pens has dropped to a low level since May, and Guoan Securities predicts that with the arrival of the peak consumption season, hogs with high weight will gradually be cleared out, second-litter pigs will gradually enter the market, and pig prices are expected to stabilize and rise.

Listed pig enterprises overall saw a slight increase in sales volume, with breeding costs in a downward trend.

From January to August 2024, a total of 100.186 million pigs were offloaded by 18 listed pig enterprises, a year-on-year increase of 2.1%. In August, the total offload of the 18 listed pig enterprises reached 12.94 million pigs, a 1.5% year-on-year increase. The main listed pig enterprises' breeding costs have been in a downward trend. Since January 2024, Shennong Group, Muyuan Foods, and Wens Foodstuff Group have always been in the top tier of complete costs. In July, Shennong Group's complete cost for fattening pigs was 13.7 yuan/kg, Muyuan Foods' complete breeding cost was 13.8 yuan/kg, and Wens Foodstuff Group's comprehensive cost of pig breeding was less than 14 yuan/kg.

Valuation and Investment Suggestions

Guoan Securities continues to recommend the pig breeding sector, with a focus on Wens Foodstuff Group (300498.SZ), Muyuan Foods (002714.SZ), Shennong Group (605296.SH), and Leshan Giantstar Farming&Husbandry Corporation (603477.SH).

Risk warning

The epidemic; pork prices have remained high for a shorter time than expected.