Industry losses are intensifying, and an accelerated capacity reduction is gradually commencing, with a key recommendation to position on the left side of the hog farming sector. Hog prices saw a significant rebound before New Year's Day, primarily driven by secondary fattening operations re-entering the market at year-end coupled with smallholders' reluctance to sell, which pushed prices higher. From a supply and demand perspective, the price increase at this juncture is difficult to sustain. Looking ahead over the next 1-2 quarters, the trend of hog prices bottoming out and fluctuating is clear, with a key focus on the progress of capacity reduction. Furthermore, after experiencing a relatively full adjustment earlier, the pet sector is suggested for attention regarding its valuation rotation opportunity around the turn of the year. The main views of Shenwan Hongyuan are as follows:
Hog Farming: Increased holding back of hogs and secondary fattening, combined with a recovery in consumption, led to a significant rebound in hog prices before New Year's Day, with a slight retreat after the holiday. According to Yongyi Consulting, the national average selling price for ternary hogs on January 4th was 12.44 yuan/kg, up 0.2% week-on-week. Prices continued their upward trend from the previous week at the start of the week, mainly due to a reduction in the slaughter of medium and large hogs previously, a widening price gap between fat and standard hogs encouraging farms to hold back hogs and be reluctant to sell, strengthened sentiment for secondary fattening, and a significant consumption recovery driven by low year-end prices. After the New Year's Day holiday, supply resumed growth, and prices retreated somewhat.
Industry-wide losses persist: Currently, for farrow-to-finish operations with fewer than 50 sows, the loss per head of fattened hog sold is -10.29 yuan/head; for operations with 5,000-10,000 heads, the profit per head sold is 28.31 yuan/head. Looking forward, consumption demand for curing and other activities before the Spring Festival is relatively strong. However, the current ample supply situation in the industry has not substantially improved. The industry will still face the fundamental reality of oversupply in the next 1-2 quarters, and it is expected that hog prices will continue to bottom out and fluctuate. Combined with the current average industry breeding cost level, breeding losses are expected to persist, and capacity reduction will continue as a trend.
Investment Analysis Opinion: The lackluster hog prices during the peak season remains an indisputable fact for the industry. Continuous losses in piglet and fattened hog breeding may gradually erode industry confidence and accelerate the pace of industry capacity reduction. At the same time, winter is a high-incidence season for breeding diseases, and disease prevention may also face some pressure under loss conditions. Focus on the accelerated capacity reduction, which catalyzes left-side investment opportunities in the sector. Recommendations include: Muyuan Foods Co., Ltd., Wens Foodstuff Group Co., Ltd., Dekon Agriculture and Animal Husbandry Group, and Tecon Biology Co., Ltd.
Cattle: Import country quotas and additional out-of-quota tariffs are implemented, attention on rising domestic beef prices. On December 31st, the Ministry of Commerce announced its ruling on safeguard measures for imported beef. It decided to implement safeguard measures on imported beef in the form of "country-specific quotas and additional tariffs on quantities exceeding the quotas," with a 55% tariff applied to quantities exceeding the quotas, to be implemented for a period of 3 years; for products originating from developing countries (regions), if their import share does not exceed 3%, and the total import share of these countries (regions) does not exceed 9%, the safeguard measures do not apply. It is expected that with the implementation of the new tariffs, the pressure from imported beef on the domestic supply side will decrease. According to MySteel data, as of December 25th, the national average selling price for fattened bulls was 25.47 yuan/kg, down 0.24% week-on-week; the average price for calves was 31.62 yuan/kg, down 1.34% week-on-week; the national average wholesale market price for beef was 65.92 yuan/kg, down 0.11% week-on-week.
Broiler Farming: White-feathered broiler breeding eggs enter a hatching stoppage period, downstream price increases continue. According to MySteel data, as of December 25th, 2024, the average selling price for white-feathered broiler day-old chicks was 3.37 yuan/bird, down 0.6% week-on-week, with some smaller farms gradually entering a chick stoppage period in the latter half of the week; the average selling price for live white-feathered broilers was 3.80 yuan/kg, up 4.7% week-on-week, hitting a new high for the year; the average selling price for chicken parts was 9663.7 yuan/ton, up 3.2% week-on-week.
Investment Analysis Opinion: Ample supply of white-feathered chicken remains the theme for 2024-2025. Focus on the development and long-term value of leading enterprises during the bottom phase, and pay attention to improvements on the demand side. It is recommended to focus on Fujian Sunner Development Co., Ltd.
Risk warnings: Continued low prices for hogs and broilers; sales of self-owned pet food brands falling short of expectations; outbreaks of breeding diseases.