China Post Securities: The pig industry cycle reverses at the right time, highlighting the value of configuration.

China Post Securities released a research report stating that pig prices remained strong in the fourth quarter, ensuring profitability, and the third quarter reports of listed companies are worth looking forward to. After previous adjustments, the sector's valuation is low, and its configuration value is highlighted. With the industry cycle reversing at the right time, it is recommended to focus on targets with outstanding cost advantages, while also considering growth potential. 1) Leading enterprises have high certainty and relatively obvious cost advantages. It is recommended to pay attention to: Muyuan Foods (002714.SZ) and others. 2) Small and medium-sized enterprises have faster growth in slaughter output, and larger room for cost reduction. It is recommended to pay attention to: Leshan Giantstar Farming & Husbandry Corporation (603477.SH) and others. The main points of China Post Securities are as follows: Summary of August slaughter situation: prices rose significantly, and the growth of production capacity slowed down. In August, pig prices continued to rise, and listed companies followed suit in slaughtering pigs: the output increased slightly, while the average weight decreased slightly. 1) Output: Continued small increase. A total of 12.925 million pigs were slaughtered by 17 listed pig companies in August, a slight increase of 0.9% from July and an increase of 1.6% year-on-year; a total of 100 million pigs were slaughtered from January to August, with a cumulative year-on-year increase of 2.2%. In August, pig prices continued to rise, so pig farming companies increased their output slightly. Looking at the first eight months, the slaughtering pace remained stable, and the high pig prices did not stimulate the industry to accelerate slaughter or increase production capacity on a large scale. 2) Price: High upward trend. The national average price of live pigs in August was 20.37 yuan/kg, a 7.56% increase from the previous month. The average price of pigs slaughtered by 14 listed companies also increased significantly, with an average price of 20.20 yuan/kg in August, a 6.69% increase from the previous month and a 19.54% increase year-on-year. In August, the early pig prices continued to rise to a high level, reaching their peak in the middle and late stages. The overall supply in August remained tight, combined with a small number of second sow entries, pushing up pig prices. 3) Weight: Slightly decrease. The average weight of pigs slaughtered by 10 listed companies was 116.1 kg/head, a decrease of 0.46% from the previous month. Since May, the average weight of pigs slaughtered by listed companies has shown a slight monthly decrease trend, contrasting with the gradually rising pig prices, reflecting the industry's cautious expectations and adopting a strategy of slaughtering in line with the trend. Limited downside for pig prices, industry profitability cycle may exceed expectations. Pig prices peaked and fell as expected in August, but the subsequent downside is limited. At the same time, there is no need to be too pessimistic about 2025, as the industry's profitability cycle may exceed expectations. After the first quarter of 2024, third-party production capacity data turned from decline to increase, indicating a slow increase in future supply, but the increase is not significant. Even though pig prices rebounded significantly from April, the number of breeding sows at the Ministry of Agriculture and Rural Areas only increased slightly for three months. In August, pig prices exceeded expectations and the industry saw substantial profits, but instead of increasing, production capacity decreased, reflecting the industry's current cautious expectations and tight financial situation. Looking ahead, the fourth quarter is a peak period for disease outbreaks, making it more difficult to increase production capacity, and the growth in supply next year may not be significant. Pig prices are expected to remain relatively high, and the duration of this round of industry profitability cycle may exceed expectations. Risk warning: Risk of animal disease outbreak and fluctuation in raw material prices.