In the peak season, if the demand is not high, is pork "not in high demand"?

Recently, major pig companies have successively released performance forecasts for the full year of 2024, but the signal of "completely reversing losses" has not sparked a surge in the pork sector. On January 8, Muyuan Foods (002714.SZ) released its 2024 annual performance forecast, expecting to achieve a net profit attributable to shareholders of 17 to 18 billion yuan, turning losses into profits compared to the previous year. In addition, Wens Foodstuff Group (300498.SZ) expects its operating income to exceed 100 billion yuan in 2024, with a net profit attributable to shareholders of 9 to 9.5 billion yuan, a significant improvement from the 6.39 billion yuan loss in the previous year. Meanwhile, Tech-bank Food (002124.SZ) expects a net profit attributable to shareholders of 1.36 to 1.56 billion yuan in 2024, a significant turnaround from the 2.883 billion yuan loss in the previous year. However, the signals of frequent turnaround in the industry have not led to a significant increase in pork concept stocks. From January 9 to January 13, the pork sector in the Hong Kong stock market continued to decline, with drops of 1.63% and 1.67% on January 9 and 13, respectively. Looking back over a longer period, since December 13, 2024, the sector has fallen by more than 10%, with WH GROUP (00288) falling by more than 12% and COFCO JOYCOME (01610) falling by more than 13%. Generally speaking, the performance of pork stocks often starts before pork prices rise. The current low performance of pork stocks to some extent reflects the market's "negative sentiment" towards the sector. So, why is the pork sector not performing well, and are there still investment opportunities in the future? Diminished dividends, peak demand, industry entering a "micro-profit era" Looking back at the trend of pork prices in 2024, it shows an overall "inverted V" trend. At the beginning of the year, pork prices were relatively low, gradually rising, reaching a peak in August before falling again. Specifically, the price of live pigs reached a low point in January 2024 at around 13.7 yuan per kilogram, then rebounded due to factors such as reduced market supply, farmers reducing inventory, and secondary fattening, reaching a high point of 20.9 yuan per kilogram in mid-August. However, as supply returned in September, pork prices began to fall, continuing until the end of the year, dropping to around 15 yuan per kilogram by the end of December. With the fluctuation of pork prices, the industry seems to have reached a consensus on peak demand and entering a micro-profit era. From the demand side, the low pork prices and losses in pig farming in 2014 and 2023 indicate oversupply. The pork production in 2014 and 2023 was similar, suggesting that domestic demand of around 58 million tons has reached saturation point, and pork consumption in China may have peaked around 2014. In addition, according to OECD forecasts, per capita pork consumption in China is expected to have reached its peak in 2014, and the total population in China is expected to start declining from 2022. The total consumption of pork equals the total population multiplied by per capita consumption, and with the declining population, per capita pork consumption may have peaked, indicating a decline in total consumption. In the long term, the declining population will lead to a weakening total demand for pork in China, bringing long-term constraints. This also means that for a long time in the future, without new disease disruptions, with scale enhancement and difficulties in reducing capacity, supply and demand will become increasingly relaxed, incremental competition will turn into stock competition, and the competition among large companies will intensify. Unless there are irresistible factors, significant profits for companies will be difficult, and the industry will gradually transition from high-speed development and high profits to low profits, or even a micro-profit era. This trend can be seen in the latest performance of relevant pig enterprises. Among the three companies that have turned losses into profits, Muyuan Foods, Wens Foodstuff Group, and Tech-bank Food, "cost reduction and efficiency improvement" played a crucial role. Muyuan Foods stated that the reasons for the turnaround in 2024 were due to the increase in the number of slaughtered pigs, the average selling price of live pigs, and the decrease in breeding costs compared to the previous year. Tech-bank Food's improvement in performance cannot be separated from "selling assets for cash," with the company stating that the main reason for the improvement in performance was the sale of a 32.91% stake in Shiji Biology, generating investment income of 995 million yuan in the first quarter. According to related data disclosures, in 2024, the cost reduction of listed pig companies, including Muyuan Foods, Yunnan Shennong Agricultural Industry Group, Wens Foodstuff Group, and Tecon Biology Co. Ltd, has dropped to below 14 yuan per kilogram. Based on the above, with intensified industry competition and entering a micro-profit era, pig enterprises have relied on cost reduction and efficiency improvement as the main means to turn losses into profits. This might also be the key reason for the pork sector as a whole to turn losses entirely but not see a surge in prices, and for the pork prices to not be as profitable in the peak season. "Up" or "down," how should the latest pig cycle be interpreted? As long as pigs have a growth cycle, they cannot escape price cycles. In December 2024, which should have been a peak season for cured meats, pork prices remained low, with daily average farming profits decreasing by over a hundred yuan. For listed pig companies, how to hedge against the risks of pork price fluctuations and achieve stable farming profits is an unavoidable issue. Generally speaking, the pig cycle mainly follows the following rules: insufficient pork supply - pork price rise - excessive increase in live pig inventory - pork supply surplus - pork price fall - losses by farmers leading to excessive reduction in live pig inventory - insufficient pork supply... This cycle repeats, and the industry's supply and pork prices form cyclical changes. In the 2018-2022 cycle, a long trough and strong disease outbreaks led to a super high period, but subsequently resulted in deep losses in 2023. Currently, we are at the starting point of a new pig cycle, with the sow inventory experiencing steady reduction, with a depth of reduction of around 11% by May 2024.This supported the rapid rebound of pork prices since the second quarter of this year.However, in fact, this new wave of the pig cycle has not followed the usual rules. The fourth quarter of 2024 is the peak season for pork consumption and demand for cured meats. However, in the past two months, due to the high temperature weather, the demand for cured pork in most areas has not been effectively released, while the supply of slaughtered pigs has increased as scheduled. The imbalance between supply and demand has led to a decline in pig prices in mid to late November. Even though the weather subsequently cooled down, the demand for cured meats was released, driving up pig prices, but this is just a seasonal performance and not a significant upward cycle. Regarding this trend, the industry generally believes that the pig industry will be in a long-term state of slight fluctuations in pig prices and "not betting on cycles" has become the industry consensus. Eastsea Futures pointed out that "under the development trend of stable overall production capacity and seasonal adjustments, the possibility of large cyclic fluctuations in pig prices in the future is decreasing, and the seasonal price fluctuations throughout the year may also become more and more smoothed out." In this context, reducing costs, increasing efficiency, improving quality, and seeking new growth have become a "must-pass course" on the agenda for listed pig companies. For example, the overseas market is currently seen by many pig companies as a new growth curve. New Hope Liuhe, which has entered 15 countries and regions since 1999, has started setting up pig farms in Vietnam in recent years. In September 2024, Muyuan Foods signed a strategic cooperation agreement with BAF Vietnam Agricultural Joint Stock Company, also beginning to explore overseas development. So, what are the investment opportunities in this industry for investors? Haitong Securities believes that with the approach of the Spring Festival and the peak supply-demand situation, the decrease in weight indicates that the pressure of dual reproduction is also being somewhat released. However, considering the overall improvement in production efficiency in 2024, the current basic supply is still sufficient, and pig prices may remain weak in the short term. At the same time, in the long term, after several years of industry expansion, the industry has entered a new stage of development, and companies with cost advantages in breeding are expected to enjoy more dividends. It is recommended to pay attention to Muyuan Foods, Wens Foodstuff Group, Zhejiang Huatong Meat Products, Leshan Giantstar Farming & Husbandry Corporation, Yunnan Shennong Agricultural Industry Group, and Tecon Biology Co. Ltd. Furthermore, Huaxin Securities pointed out that the current breeding capacity is still on the rise, and the industry is still profitable due to low breeding costs. It is expected that there will be a small increase in breeding capacity in the future, and pork supply in 2025 will be relatively surplus. The organization predicts that in 2025, only cost-leading pig companies will have profitable opportunities, while other industry capacities will enter a cycle of losses. Overall, for this new cycle that does not follow the usual rules, strong companies have already come up with their own strategies to deal with it. Similarly, investors should follow this change and focus on top companies with cost advantages and clear measures to improve quality and efficiency.