The latest response from the "Pig Grass" diving company! The pressure on the pig farming industry is increasing

On the 10th, Muyuan Shares, a leading player in the pig farming industry known as the "Pig Grass", caused investors to break out in a cold sweat.

On January 10th, Muyuan Stock experienced a significant drop during trading, dropping over 8% at one point and ultimately closing down 4.97%. The stock price reached 36.73 yuan per share, with a latest market value of 2007.0 billion yuan.

Muyuan Group disclosed on the 9th that there has been a significant increase in new loans, and the market is concerned about the company's cash flow situation. The current downward cycle of the pig farming industry is relatively long, and even industry leaders are under pressure, "a private equity professional in Shanghai who has long been concerned about the breeding industry told a reporter from China Securities.

However, Muyuan Group responded on the Shenzhen Stock Exchange's interactive platform today that the company's new borrowings in the fourth quarter of 2023 were less than 2 billion yuan compared to September 30, 2023, to meet business needs. The company's current cash flow is safe and stable, and all business operations are normal. The company adopts stable fund management measures, combining market factors such as pig prices and raw grain prices from business activities, investment activities, financing activities, etc., to plan fund inflows and outflows and ensure high-quality and stable development.

The stock price of Muyuan Corporation plummeted

On January 8th, after the opening of Muyuan shares, the stock price continued to decline. By 11:30 noon, it had fallen to a low of 35.25 yuan per share, a drop of up to 8.64%.

On the news front, on the evening of the 9th, Muyuan Group announced that the company's net assets as of the end of 2022 were 88.07 billion yuan, and the loan balance was 59.295 billion yuan. As of December 31, 2023 (unaudited), the company's loan balance was 77.998 billion yuan, an increase of 18.703 billion yuan from the end of 2022, accounting for 21.24% of the net assets at the end of 2022.

The company stated that the above-mentioned new loans are used to meet the needs of the company's business development, and the company's operating conditions are stable and all business operations are normal. The above-mentioned new loans have no significant adverse impact on the company's debt paying ability.

The biggest problem in the breeding industry now is cash flow, because the time and magnitude of the pig price decline in this cycle far exceed market expectations. Many investors are concerned that the cash flow of listed companies cannot support the cycle reversal, "said the aforementioned private equity insider.

According to a recent research report by Guohai Securities, in 2022, the net cash flow from financing activities of listed pig breeding enterprises will shift from positive to negative. In the first three quarters of 2023, the net cash outflow generated from financing activities was 2.63 billion yuan. From the perspective of cash changes, from 2021 to the third quarter of 2023, the 11 listed pig farming enterprises on the A-share market experienced a cumulative decrease of RMB 4.03 billion in cash and cash equivalents. Among them, the accumulated cash in the first three quarters of 2023 decreased by 3.16 billion yuan. Pig farming enterprises are generally facing pressure from a decrease in cash. With the rapid increase in the scale of interest bearing liabilities, the debt repayment pressure borne by enterprises is also increasing. From 2017 to 2022, the cash used for interest payments increased from 1.88 billion yuan to 9.57 billion yuan, with a compound annual growth rate of up to 38.4%.

Not only do pig breeding enterprises need to repay debt interest, but they also need to fulfill their obligation to repay principal. From 2017 to 2022, the cash payments made by these 11 pig farming enterprises to repay debts increased from 16.8 billion yuan to 147.32 billion yuan, with a compound annual growth rate of 54.4%.

Muyuan Group may also be aware of market concerns. On the afternoon of the 10th, the company responded on the Shenzhen Stock Exchange interactive platform that compared to September 30, 2023, the company's new borrowings in the fourth quarter of 2023 were less than 2 billion yuan to meet business needs. The company's current cash flow is safe and stable, and all business operations are normal. The company adopts stable fund management measures, combining market factors such as pig prices and raw grain prices from business activities, investment activities, financing activities, etc., to plan fund inflows and outflows and ensure high-quality and stable development.

The stock price of Muyuan Corporation also rebounded after the afternoon opening, closing at 36.73 yuan/share, a decrease of 4.97%.

The pressure on the pig farming industry is increasing

Muyuan shares also experienced a significant drop that left a deep impression on investors last year. In the 10 trading days from late September to mid October last year, the stock price of Muyuan Corporation fell from 40 yuan to just over 30 yuan per share, with a short-term decline of up to 30%. On October 19th, there was a significant drop of over 8%. However, the company's stock price soon recovered its lost ground.

The frequent fluctuations in the stock price of "Zhumao" are due to the fragility of the entire industry and the pessimism of investors. The pig farming industry has obvious cyclicality, and both industry practitioners and investors regard betting on cycles as a magic weapon for making money.

According to statistics from Shanxi Securities, since 2006, China's pig industry has gone through four rounds of pig cycles. The first cycle was from May 2006 to March 2010, with a duration of 46 months; The second cycle is from March 2010 to March 2015, with a duration of 60 months; The third cycle is from March 2015 to February 2019, with a duration of 47 months. The duration of the first three cycles is over 46 months. The fourth cycle started in February 2019 and has lasted for 58 months, currently in the bottoming out stage. The current cycle is likely to exceed the 2010-2015 cycle and become the longest pig cycle since 2006.

In the cycle of 2015, with the tightening of environmental policies and the outbreak of African swine fever, a large number of small and medium-sized farmers were cleared out, and pig prices soared to historical highs. It was during that cycle that Muyuan Group also expanded massively with its cost advantage, establishing its leading position in the industry. The company's stock price also increased dozens of times during this period, becoming a well deserved "pig grass".

However, with the onset of African swine fever, the market became aware of the crazy profitability of the pig farming industry during a historic cycle, and a large amount of capital began to pour into the breeding industry, leading to a crazy expansion of industry production capacity.

Guohai Securities pointed out that from 2017 to 2021, the cash flow generated from financing activities of major listed pig breeding enterprises has maintained a net inflow for five consecutive years, with a cumulative net inflow of up to 187.06 billion yuan. In 2022, the cash generated from fundraising activities of listed pig companies ended the net inflow for five consecutive years. With the support of capital, the industry has accumulated a large amount of fixed assets. From 2017 to 2022, the book value of fixed assets of 11 pig breeding enterprises listed on the A-share market rapidly increased from 46.82 billion yuan to 222.57 billion yuan, with a compound annual growth rate of 36.6%; The book value of construction in progress increased from 9.79 billion yuan to 42.44 billion yuan, with a compound annual growth rate of 34.1%. Along with the expansion of fixed assets, the debt growth of listed aquaculture enterprises is also very significant. The average asset liability ratio of these 11 companies has increased from 40.4% to 70.9%; The interest bearing debt ratio has increased from 20.4% to 47.4%. In 2023, the asset liability ratio and interest bearing liability ratio will further increase to 76.6% and 51.2%, respectively. This round of scale expansion is essentially a rapid process of leveraging, and there has been a mismatch between asset and liability maturity structures, namely short-term debt financing of non current assets.

Undoubtedly, the influx of funds has slowed down the pace of leading companies in reducing production capacity. In 2022, the number of live pigs slaughtered in China reached 700 million, and the year-end pig inventory reached 450 million, with supply restored to pre African swine fever levels. According to official data from the Ministry of Agriculture, from January to October 2023, the cumulative reduction rate of breeding sows was 4.1%. Southwest Securities estimates that by the end of November 2023, the national inventory of breeding sows will be 41.58 million, which is 101.4% of the normal inventory of 41 million. Considering the significant improvement in production efficiency and other factors, the pig production capacity is still slightly higher than the reasonable level.

Correspondingly to the supply, pork prices have been continuously declining against the backdrop of abundant supply. According to the December 2023 pig sales briefing released by Muyuan Group, the company sold 6.631 million pigs in December 2023, including 6.578 million commercial pigs, 36000 piglets, and 17000 breeding pigs, with a sales revenue of 10.319 billion yuan. In December 2023, the price of the company's commercial pigs decreased compared to November 2023, with an average sales price of 13.42 yuan/kg, a decrease of 2.04% from November 2023.

Muyuan Group represents the overall situation of the industry, and the pig prices for the whole year of 2023 have fallen back to pre African swine fever levels, making it difficult for the vast majority of companies to make profits. Some industry insiders believe that this year or the first year since 2014, the industry will experience an overall loss for the whole year.

The pig cycle that cannot be waited for, the investors who cannot endure it, "said the aforementioned private equity investor with emotion.

However, many institutions believe that there are more opportunities hidden behind the sustained downturn. Huatai Securities pointed out that the trend of reducing sow production capacity is expected to deepen, and in addition to the expansion of the decline in sow inventory, the main body of sow reduction may further spread from individual investors to large-scale pig farms with cost disadvantages. Some leading pig companies are actively transferring assets/equity to raise funds, and the continuous decline in feed data, as well as the downward adjustment or side validation of some leading pig companies' 2024 slaughter plans. The turning point of the cycle may appear in 2024. It is expected that the current sector valuation will remain low, the sector safety margin will be high, and the stock price turning point may lead the pig price turning point. It is recommended to actively layout the breeding sector.

The current PB valuation of the pig farming sector is relatively low since 2018, and high-quality targets such as Superstar Agriculture and Animal Husbandry, Huatong Shares, Muyuan Shares, and Wen's Shares continue to drive down costs and enhance competitive advantages. With the strengthening of the logic of decentralization, the value of the sector's allocation is becoming more apparent, presenting a good opportunity for layout, "said Open Source Securities in a research report.