Huachuang Securities' Agricultural Investment Strategy for 2025: Low valuation as shield, efficiency and growth as spear.

Huachuang Securities released a research report stating that for the traditional agriculture sector, based on the judgment of the supply and demand balance sheet, the volatility on the industrial side in the next 25 years will show a certain convergence state. Efficiency improvement is still the core pursuit of industry practitioners in the next 25 years, ensuring the lower limit of the enterprise, allowing oneself to stay on the playing field for as long as possible, and being able to earn substantial excess profits. This will provide sufficient cash flow and capital for the future growth of the enterprise, expand the growth boundaries of the enterprise, whether it's high-quality pig enterprises, poultry enterprises, or leaders in the later cycle. As for the new consumer sector, continued optimism is placed on the growth narrative of the pet industry, especially in pet food. The stability of overseas business profits is increasing, while domestic brand-side business is entering a phase of profit release, both of which are expected to bring greater valuation upside for leading companies. Huachuang Securities' main views are as follows: Pork: There is no need to be overly pessimistic about the breeding profits in the next 25 years. High-quality pig enterprises are expected to exceed expectations Although current pork prices have entered a downward channel, with the limited rebound in sow inventory, the marginal contributions to supply increment from production efficiency, average weight at slaughter, and frozen inventory are decreasing, and with a significant decrease in breeding costs, there is no need to be overly pessimistic about profits in the next 25 years. Profits in the breeding end are expected to be significantly better than in 2023 (the worst year in profits in recent years), and profits of excellent enterprises are expected to exceed expectations. In the long run, overcapacity and excess capital are problems faced by many industries, but in a non-completely homogeneous industry, high-quality capacity is unlikely to be excessive. As long as the efficiency gap can be maintained, as long as the efficiency gap of high-quality capacity can be maintained, buying in at reasonable valuations during industry downturns and looking at the longer term, there is potential for good returns. The essence of the pig industry's ability to maintain competitive advantage over many other industries lies in enterprise culture and organizational management. Cultivating excellent talents on a large scale can reduce costs, which requires sticking to a high-quality corporate culture for decades under proper guidance and continuously accumulating based on a scientific system. Prices have already factored in extreme pessimistic cyclic expectations, and the major bearish factors causing sector decline have been fully released: short selling sentiment in futures market approaching completion, concerns about slowing capacity increases, easing of chip crowding worries, general market decline and other bearish factors have been released, with limited bearish trends at current levels. In the short term, the sector is expected to follow the overall market in valuation recovery. Medium-term catalytic factors include pig price trends, sow inventory trends, disease conditions, realization of profits by high-quality pig enterprises, etc. Stock recommendations focus on Muyuan Foods, Wens Foodstuff Group, New Hope Liuhe, Yunnan Shennong Agricultural Industry Group, Leshan Giantstar Farming & Husbandry Corporation, Dongrui Food Group, etc. Poultry: Focus on improvement in poultry meat demand under expectations of consumption recovery Looking forward to the next 25 years, in terms of supply, for white chickens, the upstream breeding sources are sufficient, with a focus on the continued impact of overseas avian influenza outbreaks on the introduction phase, as well as domestic chicken and duck diseases affecting the rearing and egg production performance of commercial parent stock. Expectations are for yellow chicken parent stock inventory to continue to maintain a low and stable operation. On the demand side, subdued terminal consumption has always been a key factor suppressing demand and prices for chicken products, thereby affecting the industry chain profits. Against the backdrop of expanding domestic demand in the next 25 years, poultry consumption is expected to receive a boost. With rearing costs still running at low levels, meat chicken enterprises are expected to see improved profitability and valuation recovery. Target recommendations focus on Jiangsu Lihua Animal Husbandry, Fujian Sunner Development, Shandong Yisheng Livestock & Poultry Breeding, Wellhope Foods, etc. Furthermore, with continuous research and development and upgrades of domestic white-feathered meat chicken breeds in the future, there is potential to narrow the efficiency gap with overseas breeds in the commercial rearing phase. From a longer-term perspective, the market share of domestic breeds is expected to continue to increase. In terms of yellow chickens, by 23, the CR2 market share has reached 45.6%, a significant increase of 19pct compared to 2019. With the continuous increase in the share of leading companies, there is potential to fully leverage their scale advantages, enhance regional pricing power, and gradually extend downstream to slaughter and deep processing stages, thereby realizing value addition in the industry chain. Feed: Focus on the increase in market share of leading feed companies and opportunities in going abroad With a significant decline in the prices of upstream bulk raw materials, feed companies have seen a noticeable decline in costs, and the downstream breeding industry continues to recover with herd sizes increasing gradually, leading to a rebound in feed industry sales. As the intensification rate of pig farming increases rapidly, free-range households exit more quickly, feed raw material prices fluctuate severely, credit policy adjustments, low breeding profitability, upward trend in downstream customer leverage, intensified competition in the feed industry, and other factors come together, small and medium-sized feed enterprises struggle to survive and continue to exit the market. However, top companies with multiple advantages in research and development, production, sales, funding, branding, talent, management, and efficiency are entering a golden window period. They continuously expand market share through internal and external means, enhancing competitiveness. For example, Guangdong Haid Group has seen a doubling of feed sales in the past 5 years, with growth rates significantly higher than the industry average. Leveraging an integrated competitive system consisting of "feeds, seeds, animal protection, and service systems," the company is strategically located in regions with abundant breeding resources like Southeast Asia, South America, Africa, and so on, continuously exploring markets in neighboring countries. The proportion of overseas business revenue reached 14.2% in the first half of 2024, the highest since 2015, with a steady increase in gross profit margin, driving the overall profitability of the company. As the domestic feed industry gradually enters a stage of stock competition, the strategic expansion of overseas business is expected to help companies open up incremental space. The recommendation is to focus on Guangdong Haid Group with continuous increases in market share and accelerated overseas strategies. Animal Protection: Internal roll-in and roll-out, emphasizing science and technology innovation and talent incentives The animal protection industry is a sunrise industry full of potential, with the rapid development of the national economy and people's living standards, the concern for animal protection has been organically integrated into people's daily lives. With the rise of pet owners' awareness of pet health and environmental protection, the industry is facing opportunities for development, demonstrating broad prospects and tremendous potential. The continuous improvement of the animal protection industry's competitiveness requires enterprises to pay attention to scientific and technological innovation, talent incentives, and management optimization, enhance core competitiveness, and meet market demand. In the future, while carrying out their core businesses, they should actively adapt to the market, comply with environmental protection regulations, and actively implement their corporate social responsibilities. With the globalization of the animal protection industry, enterprises should strengthen comprehensive strength in various fields, build a strong corporate brand, and establish a good corporate reputation, demonstrating sustainable development. Overall, the agriculture sector is expected to see improvements in efficiency, profitability, and valuation as companies focus on enhancing productivity, pursuing efficiency gains, and expanding their market reach. In particular, the pig and poultry industries are expected to benefit from rising consumer demand and continuous innovation. The feed industry is also poised for growth as leading companies expand their market share and explore opportunities abroad. Animal protection companies will need to emphasize innovation and talent incentives to remain competitive and meet the evolving needs of consumers.The way to break the deadlock in drama - efficiency and innovationFrom the perspective of historical experience, the improvement of the aquaculture industry will drive the demand for upstream animal protection products. In terms of quantity and price, the demand for animal protection products is gradually recovering, but the product prices are under significant pressure, leading to a slow pace of business recovery. It is expected that the aquaculture sector will remain profitable in 2025, with a guarantee of sustained demand for animal protection products. Structurally, competition in the pig animal protection sector is becoming increasingly fierce, with industry profitability significantly declining; the poultry animal protection sector overall remains stable; the ruminant and pet animal protection sectors benefit from relatively early stages of development with limited supply and new product pipelines, and are expected to become core sources of incremental growth in the animal protection sector in the coming years. In addition, attention should be paid to the potential opportunities brought by the future chain operation of pet hospitals. In terms of industry landscape, the overall profitability center of the animal protection industry is shifting downward, but there is differentiation in profitability among different enterprises, with large enterprises having significantly higher asset returns than small and medium-sized enterprises, and the gap widening. Consolidation in the animal protection industry is expected to accelerate. From the development trajectory of leading animal protection companies overseas, continuous mergers and reorganizations are also the necessary path for companies to achieve growth. After fierce competition in the domestic animal protection industry in a mature market, the companies that will remain at the table must have a combination of financial strength, strong cash flow operations, strategic vision, comprehensive product matrix, management efficiency, and execution capabilities. The industry's downturn is also a great opportunity to nurture great companies. With efficiency assured at the lower limit, innovation wins the future, and the emergence of large market value companies in the future will certainly be those companies that stand out in cutting-edge technology sectors because solving future economic animal challenges and domestic substitutes in the pet sector all rely on this, which is also the only driver for creating incremental markets. Targets: Recommend focusing on Tianjin Ringpu Bio-Technology, Wuhan Keqian Biology Co., Ltd, Jinyu Bio-Technology, China Animal Husbandry Industry, Pulike Biological Engineering, Inc., etc., and pay attention to WuHan Hvsen Biotechnology, Guobang Pharma Ltd. Pet sector: A broad blue ocean with increasing market share and profitability According to the "2023 China Pet Industry White Paper," the number of urban pet owners in China has been increasing for five consecutive years since 2018, reaching 75.1 million people in 2023, and the urban pet consumption market size has reached 279.3 billion yuan, approaching the 300 billion yuan mark, with a far higher average annual growth rate than that of the social retail industry. From the industry trend perspective, domestic substitutes have been basically completed, and baked food has become the core trend of new main pet food with a considerable growth rate in the past 24 years, which is expected to deeply promote the industry's upgrading. From an investment perspective, it is recommended to focus on leading companies such as Gambol Pet Group, which have made remarkable progress in high-endization and have achieved massive growth rates with independent brands, as well as recommend Yantai China Pet Foods, Hangzhou Tianyuan Pet Products; pay attention to companies such as Petpal Pet Nutrition Technology, Wenzhou Yuanfei Pet Toy Products. Risk warning: Price fluctuations, unforeseeable large-scale epidemics, major food safety incidents, systemic risks in the macroeconomic system, extreme weather disasters leading to large-scale crop reductions and pushing up grain prices, escalating trade frictions, product quality issues, and unmet expectations in new product development, etc.