Orient Securities has released a research report expressing optimism towards the pig farming sector, suggesting that pessimistic expectations are likely to reverse following the confirmation of a bottom price during the off-season. The firm is positive about hog price performance in 2026, noting that companies with leading cost advantages are expected to continue achieving improved financial results. For the post-cycle sector, ongoing structural growth trends are anticipated, with profits from the breeding industry chain expected to gradually transfer downstream once hog prices recover, thereby driving growth in the animal health sector. Within the planting chain, against a backdrop of geopolitical disruptions, commodity price increases have already spread to agriculture. From a fundamental perspective on crop varieties, the upward trend in grain prices is now established, with fundamentals for planting and seed industries improving, highlighting significant investment opportunities in large-scale planting. The pet food industry is currently in a phase where incremental volume and price increase logics are being realized, with continuous growth in overseas markets and rising recognition of domestic brands, leading to sustained growth fulfillment for leading enterprises. Key viewpoints from Orient Securities are as follows: Hog prices are accelerating their bottom exploration, with leading companies demonstrating resilience under stress tests. In 2025, the pig farming sector achieved revenues of RMB 410.029 billion, a year-on-year increase of 5.69%, but net profit attributable to shareholders was RMB 16.645 billion, down 45.75% year-on-year. For Q1 2026, revenue was RMB 94.703 billion, down 1.52% year-on-year, and net profit attributable to shareholders was a loss of RMB 6.282 billion, turning negative year-on-year. Since Q1 2024, the sector has again reported quarterly losses; however, thanks to corporate cost optimization, the loss magnitude in Q1 2026 was relatively smaller historically, even as hog prices broke through previous record lows. A turning point in hog prices has now emerged, with ongoing policy efforts to stabilize prices and reduce capacity, suggesting a gradual improvement in pig farming companies' performance. Financially, the industry is switching between profit and loss, focusing on corporate operational resilience. (1) Operating cash flow has declined significantly both year-on-year and quarter-on-quarter. Starting from H2 2025, downward pressure on hog prices became apparent. In Q4 2025, industry operating cash flow was RMB 58.6 billion, up 21.5% year-on-year, but turned negative in Q1 2026 for the first time since Q1 2023, indicating the industry has fully entered a phase of negative cash flow amid record-low hog prices. (2) The industry's asset-liability ratio has rebounded. From Q4 2025 to Q1 2026, most pig farming companies saw an increase in their asset-liability ratios. The sector's overall arithmetic mean rose from 57.86% in Q3 2025 to 62.27% in Q1 2026, approaching the absolute level of Q3 2024. Specifically, in Q1 2026, only Muyuan Foods Co., Ltd. saw a decrease in its liability ratio by 3.42 percentage points quarter-on-quarter due to its Hong Kong IPO fundraising, while other companies experienced increases to varying degrees. Capacity-wise, long-term capacity clearance continues, but near-term supply pressure remains. (1) Inventory levels at pig farming companies remain high. Looking at short to medium-term supply indicators, inventories of listed pig farming companies continued to rise from Q3 2025 to Q1 2026. By the end of Q1 2026, inventories for 15 listed pig farming companies totaled approximately RMB 96.55 billion, down 1.19% year-on-year. Considering that industry costs have decreased more significantly year-on-year and most listed companies had provisioned for inventory depreciation of live hogs in Q1, the flat apparent inventory value implies a substantial increase in the number of hogs on hand, indicating persistent supply-side pressure in the medium term. (2) Productive biological assets are declining at an accelerated pace. From Q4 2025 to Q1 2026, productive biological assets of pig farming companies decreased further. By the end of Q1 2026, the total productive biological assets for 15 companies were RMB 19.843 billion, down 8.7% year-on-year. Leading companies Muyuan Foods Co., Ltd. and Wens Foodstuff Group Co., Ltd. saw changes of -9.66% and +4.03% year-on-year, respectively. Companies like New Hope Liuhe Co., Ltd., Tianbang Food Co., Ltd., Dongrui Co., Ltd., Kingsino Technology Co., Ltd., and Jingji Zhinong saw larger declines of -35.2%, -26.7%, -18.1%, -14.9%, and -13.3% year-on-year, respectively. Influenced by policy guidance and market pressures, most listed companies have reduced their sow inventories, with capacity reductions concentrated in Q4 according to financial statements. (3) Construction in progress saw a slight rebound, while fixed assets declined at an accelerated rate. By the end of Q1 2026, fixed assets for 15 pig farming companies totaled RMB 240.251 billion, down 1.57% year-on-year, and construction in progress was RMB 14.514 billion, down 29.51% year-on-year. Current new projects by pig farming companies mainly involve investments in upstream and downstream segments like feed and slaughtering, as well as overseas expansion. For the full year of 2026, most companies prioritize ensuring financial security and navigating the cycle, with relatively restrained capital expenditure plans. Risk warnings include livestock and poultry prices falling short of expectations, large-scale outbreaks of animal epidemics, and significant fluctuations in raw material prices.