China's pig market is recovering at the beginning of the first quarter, the industry turning point is approaching?

The annual report of China's listed pig enterprises in 2023 and the quarterly report of 2024 all disclose how the longest and difficult pig cycle in history affects the balance sheet of pig breeding enterprises, and what changes are presented in the first quarter of this year, which provides important information for investors to layout the investment of this round of pig cycle.

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2023 Pork Sector (pig breeding as the main business) profit pressure, 23 listed companies of the Parent company net income loss of 36.9 billion yuan, the first quarter of this year continued to lose 6.803 billion yuan. The market has long expected the performance loss of Pork Sector in the first quarter of this year, exceeding expectations is the performance of pig prices this year, "the market in the off-season consumption is not cold", the market is stronger than the same period last year, which has been reflected in the year-on-year growth of the net profit of listed pig enterprises in the first quarter.

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This pig cycle is at the bottom for more than 25 months, which challenges the cash flow of listed pig companies and affects the balance sheet. The asset-liability ratio of Pork Sector continued to rise from 2022 to 2023, and by the first quarter of this year, the rising trend of debt had eased, but the debt and solvency of various pig enterprises were significantly differentiated.

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Many listed pig companies have mentioned in the institutional research after the Spring Festival that production stability and cost control are the focus of work this year. "Stable production means breeding efficiency, fattening rate and survival rate, which corresponds to the capacity of pig breeding enterprises and determines the scale of revenue." "Cost is a frequently discussed issue in the industry in recent years, and reducing the cost of farming is not only related to the average profit, but also related to cash flow efficiency."

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Industry-wide earnings were depressed last year and recovered in the early first quarter of this year

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According to the annual report, the Parent company net income of the three leading enterprises Wens, Muyuan and New Hope last year was 6.452 billion yuan, 4.026 billion yuan and 4.608 billion yuan, respectively. Coupled with bankruptcy reorganization and reorganization of the STZhengbang and STAonong losses of 4.893 billion yuan, 3.633 billion yuan, loss scale of the top five enterprises a total loss of 23.61 billion yuan. Among them, Muyuan suffered its first annual loss since going public, while Wens and New Hope suffered the second largest loss since going public.

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Before the current pork production cycle turned into a recession, all listed companies used the profits and bank loans obtained in 2019-2020 to invest in the expansion of fixed assets (i.e. the increase of production capacity). This strategy of relying on financing for expansion has resulted in the ratio of liabilities to assets in the industry as a whole rising significantly in the early stages of the cycle turning downward. As the market trough continued to extend, the financial situation of some listed companies began to face challenges, which eventually led to the bankruptcy of STZhengbang, STAonong and STTechbank, three pig farming companies successively suffered or were forced to restructure.

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Since the beginning of this year, pig prices are significantly stronger than market expectations, although the Pork Sector is still in a state of loss in the first quarter, it has decreased year-on-year, showing a positive signal that the cycle turning point is approaching.

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The main reason for the "consumption off-season market is not cold" of pork prices in the year is that the outbreak of pigs in the north in the fourth quarter of last year caused the early release of pigs, the concentration of large-weight pigs before the Spring Festival caused the relative shortage of large-weight pigs after the festival, the price difference between standard fat pigs and lean pigs, farmers delayed the release of livestock and the increase of secondary fattening activities, which jointly provided stable support for pork prices. At the same time, China's breeding sow stock continues to decrease, since the beginning of 2023, China's breeding sow stock has declined for five consecutive quarters, if such a trend can be maintained, the supply of pigs in the future will further decline.

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According to the data, the average and median annual growth rates of Parent company net income of the 24 listed pig breeding enterprises in the first quarter were 11.43% and 35.13%, respectively. After adjusting for non-recurring profit and loss, the mean and median growth rate of Parent company net income is 28.42% and 32.72%, indicating that the performance growth rate of all enterprises has turned positive. However, the average adjusted Parent company net income fell to -$283 million and the median decreased to -$91 million, an improvement from -$356 million and -$115 million in the same period last year, indicating a reduction in the amount of losses.

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While the profit side is recovering slightly, the revenue performance of listed pig companies in the first quarter is seriously differentiated, which is caused by the differentiation of the growth rate, breeding costs and production efficiency of each pig company. Only six pig companies posted revenue growth, while the rest fell. Revenue growth was recorded in Shennong, New Wellful, Wens, Muyuan, GIASTAR and Hua Tong, up 20%, 17%, 9%, 9%, 6% and 1%, respectively.

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The volume of listed pig enterprises is the key to determining operating income, Shennong, Wens, Hua Tong, TRS volume of the year-on-year growth rate of more than 20%. Among them, Shennong volume growth rate of more than 40%, the first quarter revenue growth of 20.82%, ranked first, and Shennong's asset liability ratio is the lowest listed pig enterprises, as of the end of the first quarter of 29.53%, mainly because Shennong had no debt expansion, capacity layout rhythm is not radical, The historical burden of the balance sheet is smaller.

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From the perspective of net loss, the net loss of the three companies exceeded 1 billion yuan, and the net loss of Muyuan, New Hope and Wens in the first quarter was 2.379 billion yuan, 1.934 billion yuan and 1.236 billion yuan, respectively.

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Wens and Muyuan maintained positive revenue growth, and GIASTAR's revenue growth was also at the forefront, with growth rates of 6.37%, 8.57% and 6.16%, respectively. In addition, Muyuan's single quarter loss was basically the same as that of the fourth quarter of last year, while Wens and GIASTAR reduced their losses by 620 million yuan and 160 million yuan respectively, which showed the effect of cost control.

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The above three pig enterprises have obvious breeding cost advantages. According to the financial report, the comprehensive cost of pig breeding in Wens2023 is about 16.6-16.8 yuan/kg; Muyuan's cost is lower, and the comprehensive cost of pig breeding in 2023 is about 15 yuan/kg. GIASTAR said in a recent survey that in the first quarter of 2024, the company's breeding cost of 6.91 yuan/jin (13.82 yuan/kg), some of the company's excellent breeding bases have achieved profitability, and the 2024 annual breeding cost is expected to continue to decline on the basis of the first quarter.

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The inflection point is approaching and Pork Sector's balance sheet still needs to improve further

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With long-term performance losses, investors pay great attention to the balance sheet of Pork Sector, which is because the current pig cycle has a much greater impact on the balance sheet of listed pig enterprises than the previous cycles. Wens, which raises both pigs and chickens, has been the least cash-strapped company in the Pork Sector, with its gearing ratio averaging about 30% until 2020, rising to 64.1% by 2021 and 63.37% at the end of the first quarter.

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By the end of 2023, the median asset-liability ratio of the 24 listed pig enterprises was 60.63%, an increase of 3.37 percentage points from the end of 2022, short-term loans rose from 87.663 billion yuan at the end of 2022 to 102.27 billion yuan, and monetary funds decreased from 75.084 billion yuan at the end of 2022 to 72.622 billion yuan at the end of last year.

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By the end of the first quarter of this year, the median asset-liability ratio of the Pork Sector was 60.02%, down 0.41 percentage points from the previous quarter. The differences between companies are striking. Muyuan's short-term borrowings as of the end of the first quarter were 50.8 billion yuan, an increase of 3.9 billion yuan from the previous quarter, making the asset-liability ratio further rise to 63.6%, the highest value in history, and the company's monetary funds were 23.024 billion yuan. Wens' short-term borrowings at the end of the first quarter doubled from the previous quarter to 4.953 billion yuan, and its asset-liability ratio rose to 63.37%.

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Among the three leading companies, New Hope's financial and performance performance was the worst, with not only a decline in revenue and net profit in a single quarter, but also a further rise in debt ratio. In the first quarter, New Hope achieved operating income of 23.908 billion yuan, down 29.5% year on year, and the Parent company net income was a loss of 1.934 billion yuan, down 14.75% year on year. At the end of the first quarter, New Hope's debt-to-asset ratio reached 74.03%, an increase of about 1.75 percentage points from the fourth quarter of last year, and the highest in history.

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By the end of the first quarter of this year, although the asset-liability ratio of the pig breeding industry has not increased significantly, it is still in a state of effective improvement, which means that the industry's refinancing ability is limited, cash flow is tight, financial risk is increased, and the overall anti-risk ability is weak. "The pig cycle appears to be a price cycle, but the price is determined by supply and demand, and its essence is a cycle dominated by the production capacity recovery cycle, profit equilibrium cycle and balance sheet repair cycle, our analysis believes that the current is in a stage of the business cycle, in which the primary goal of listed companies is to improve their balance sheet situation," This has not happened in past cycles. "There are a number of factors that may make the pace of production capacity recovery slower than expected, which will make it difficult for pork prices to climb quickly, and it will be difficult to return to the past situation of huge profits for a single pig." Some analysts told reporters: "The improvement of production efficiency has significantly enhanced the number of pork pigs and the profitability of enterprises, which is a very positive change." However, until balance sheets are fundamentally repaired, listed pig producers may face insufficient cash flow to fully invest in the recovery of sow breeding capacity. As a result, the reversal in the industry cycle is likely to be driven by actions to reduce financial leverage, and profitability is likely to be more limited and over a longer time horizon than in the previous cycle."

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In the current pig cycle continues to hover at the bottom of the case, the pace of capacity expansion of listed pig enterprises has slowed down significantly. At the same time, the value of productive biological assets of some enterprises has declined, and there are two main reasons behind this phenomenon: first, the lower market price of live pigs has directly lowered the market value of each sow; Second, the production capacity of the entire industry has been reduced. As of the end of the first quarter of 2024, the overall productive biological assets of the pig farming industry have decreased by nearly 8 percentage points compared to the same period last year. Against this backdrop, only four companies - Muyuan, Shennong, New Wellful and Hua Tong - achieved year-on-year growth in productive pig assets, while the remaining companies all suffered declines in asset values.

(Source:CBN)