CICC: Leading Head Opens a New Paradigm in the Swine Industry, Evolving the Swine Cycle Towards Increased Fluctuations and Shortened Lengths.

CICC released a research report stating that the new paradigm in the pig industry led by industry leaders has been initiated, and the sector's investment logic will also switch accordingly. CICC believes that on the industry level, the pig cycle is evolving towards increased volatility and shorter length, with industry growth drivers shifting from "looking outward" capital-driven to "seeking inward" cost-driven. Leading companies are expected to benefit first; in terms of valuation, leading companies' balance sheets are prioritized for repair, with higher realization rates for future slaughter targets and increased cash returns after capital expenditure convergence, bringing market value growth space from P/B, P/E, and DCF dimensions. Pig price new paradigm: Increased cyclical volatility and shorter length, with stable balance sheets, leading companies expected to benefit first. 1) In the short term, pig prices may remain "high for longer." Supply is constrained by debt pressures, cautious expectations leading to slow replenishment, coupled with limited short-term inventory pressure, CICC believes that the high pig prices in 2H24 have support, and efficient leading companies in 2025 are expected to maintain a certain profit. 2) In the long term, pig cycles may see increased volatility and shorter length. The main reason is that a large amount of fixed assets in the industry are accumulating, with short-term speculative behaviors such as waiting for feeding and converting feed to sows accounting for a higher proportion and frequency increasing, coupled with futures expectations guidance. 3) Leading companies with stable balance sheets are expected to benefit under the new cycle characteristics. The main reason is that if pig price volatility increases, companies are more likely to face the balance sheet stress test of "declining pig prices + increasing debt ratio." Industry new paradigm: Growth drivers shifting from "looking outward" to "seeking inward," transitioning from a capital-driven high-growth period to a cost-driven high-quality growth period. 1) New stage: during the non-plague period, the three major bonuses of capital, epidemic prevention, and pig prices are weakening, with the industry transitioning from "capital competition" back to "cost competition" focusing on operational potential. CICC believes that the high-growth period driven by capital has ended, the cost gap brought by epidemic prevention differences is narrowing, the high pig prices brought by epidemic outbreaks are hard to repeat, and the industry's core competition is production operation and technological innovation. 2) New pattern: dominant companies with high-quality growth that grasp the three major bonuses have scarcity, while the growth window for small pig enterprises is gradually closing. Although both sides have different growth and quality, large pig enterprises rank the highest in profit increase per unit of fixed assets in the industry. Large-scale assets have scarcity, CICC's calculation assumes no additional fundraising, large pig enterprises can achieve the established future slaughter targets, while small pig enterprises are unlikely to achieve them relying on profit accumulation. Valuation new paradigm: Large-scale leading companies have excess profitability and internal growth strength, opening up new valuation growth spaces in terms of P/B, P/E, and DCF. CICC believes that 1) Investment logic: under the new paradigm, switching from traditional buying pig price and slaughter elasticity double-hit, to buying large-scale and excess profitability, where the stronger leader will prevail. 2) Valuation logic: excess profitability and slaughter realization are core, with scarcity of large-scale leading companies. P/B: limited multiples expansion space, excess profitability drives balance sheet repair and net asset growth, driving market value rebound; Implied P/E: internal growth strength supports higher future slaughter realization for leading companies, making the implied P/E cheaper, allowing for market value repair space. DCF: as capital expenditure converges for leading companies, and depreciation peaks, FCF improvement drives discounted value growth. Risks Pig prices lower than expected; significant increase in raw material costs; epidemic and policy risks.