With the continued downturn in hog prices and high feed costs, more and more pig enterprises in China “cut their arms to survive.” According to public information, companies such as Zhengbang Group, Tech-Bank, Kingsino, Jinluo Animal Husbandry, etc., have sold their assets to cope with the current predicament.
In contrast to the weakening fundamentals, the market’s expectations for “pork stocks” are heating up. Since March, many pig enterprises such as Wens, Tangrenshen, Muyuan, and Dabeinong were frequently investigated by institutions. Shares of related companies also rebounded. Some market participants believe that under the market of low pork prices, the overcapacity of the pig farming industry is facing a new round of reshuffling. Industry enterprises are also tightening investment, reducing costs and increasing efficiency, and companies with integration capabilities may stand out in the latest round of development.
Chinese pig enterprises cut their arms to survive under the sluggish market
Recently, Jinluo Group’s wholly-owned subsidiary Jinluo Animal Husbandry released a tender announcement that it plans to sell or lease five self-owned companies to the public: Shandong Linyi Jinluo, Shandong Lingang Jinluo, Inner Mongolia Tongliao Jinluo, Heilongjiang Qiqihar Jinluo, and Yunnan Honghezhou Jinluo. Those five companies have a total stock capacity of 108,400 sows, producing 2.6 million commercial pigs annually. The business scope includes livestock farming and feed production.
The sale of assets in a packaged form is not the precedent in the industry. Previously, on March 1, Zhengbang Group disclosed it intends to sell all or part of its eight feed enterprises to Dabeinong, with a total asset transaction of about CNY 2 billion ($314.40 million) to CNY 2.5 billion ($393.00 million). If the transaction is completed, the company expects to receive investment income of CNY 1.1 billion ($172.92 million) to CNY 1.9 billion ($298.68 million), accounting for 19.15% to 33.08% of the audited net profit for the most recent fiscal year.
Tech-Bank announced in January this year it intends to sell part of the equity of its pig feed subsidiary to Tongwei and engage in long-term strategic cooperation in feed supply, with a total transaction amount of CNY 191 million ($30.02 million). Kingsino also previously disclosed it intends to transfer 100% equity of its subsidiary Shenzhen Yinghua Xunfang Communication Technology Co.
Pig enterprises’ intensive sale of assets streamlined business for improving competitiveness
Since 2021, the pig farming industry has entered a “cold winter” as hog prices continue to fall. Although the short-term storage policy and other upbeat news have boosted hog prices, the industry is still under tremendous operating pressure.
According to the latest monitoring data from the Ministry of Agriculture and Rural Affairs of China, the impacts of increased supply and seasonal consumption reduction have continued the downward trend of live hog prices, at a low level since 2020, with pig farming enterprises falling into losses. In February, the national average price of live hogs was CNY 14.06 ($2.21) per kg, which has fallen below the average pig farming cost line, and the loss was about CNY 150 ($23.58) per pig.
From the latest hog sales data, the capacity of major pig enterprises are being released at an accelerated pace. According to the statistics, 15 listed pig enterprises sold 17,794,700 hogs in the first two months of this year, more than half of them increased YOY, and Huatong increased 482.85% YOY.
Chen Guanghua, deputy director of the Animal Husbandry and Veterinary Bureau of the Ministry of Agriculture and Rural Affairs of China, said the current pig production and supply is sufficient. Still, demand is shrinking, so the periodic surplus is apparent. At the same time, the pig cycle is bottoming out for the third time. It is expected that in March and April, pig prices may fall to the bottom of about CNY 12 ($1.89) per kg, the degree of pig farming losses will increase.
Listed pig enterprises were frequently investigated and expectations on hog price rebound spring up
In contrast to the weakening fundamentals, the market’s expectations for “pork stocks” are heating up. Since March, many pig enterprises such as Wens, Tangrenshen, Muyuan, and Dabeinong have been frequently investigated by institutions.
The latest institutional survey information of Wens shows that 107 institutions participated in the survey on March 11, including many well-known institutions such as Hillhouse Capital, Springs Capital, GF Fund Management, Harvest Fund, and China Asset Management. Dabeinong disclosed on March 11 that 34 institutions, including CITIC Securities, Hillhouse Capital, Springs Capital, and Harvest Fund, researched the company.
Wens said in the survey that from the perspective of supply, the reduction of pig production capacity would continue, and the future market trend mainly depends on the time and degree of production capacity reduction. From the demand side, after the Spring Festival is generally the traditional off-season for pork consumption. At the same time, with the spread of the Covid-19 epidemic, residents’ consumption has been suppressed. It is estimated that the hog prices will remain low in the first half of 2022, and the industry’s capacity reduction will accelerate. The company also revealed that it initially plans to increase the number of breeding sows to 1.4 million by 2022 to meet future development needs.
“The feed industry is entering a period of integration, and large companies with 20% share will emerge,” Dabeinong said during the research that the company’s goal for feed production in 2022 is to break through 8 million tons and exceed 10 million tons.
As for the pig industry, the company has more than 100 nursery pig farms, with a capacity of 400,000 sows, which can provide 10 million piglets per year. Regarding the acquisition of 8 feed companies of Zhengbang Group, Dabeinong said that after the acquisition, the company has established absolute advantages in Southwest China and Hunan and will integrate the acquired targets to increase profits.
Tangrenshen recently emphasized in an investigation that its long-term development goal is to produce 10 million live hogs annually. It has also made adequate preparations in terms of funds in the past two years, such as issuing convertible bonds and raising funds from fixed increments of about CNY 2.8 billion ($440.16 million), raising CNY 1 billion ($157.20 million) through industrial funds, obtaining CNY 10 billion ($1.57 billion) of bank credit lines, etc., and expanding pig production capacity at the bottom of the pig cycle through medium and long-term project loans. At the same time, the company’s feed industry has better cash flow, bringing more net cash inflow to the company.