CITIC SEC: Profit margins in livestock and poultry improving, steady demand in pet sector, promising performance expected.

CITIC SEC reports that under the previous capacity digestion, pig prices will be relatively prosperous in 2024. However, with efficiency improvements, pig prices will fluctuate and fall back after a turning point in July. The current sector valuation is low, waiting for signals of a turning point in production capacity. With the rise in feed prices, costs for poultry farming are steadily decreasing, and industry chain profits are slightly improving. The future outlook depends on demand recovery and the impact of avian flu overseas. The report recommends investing in companies leading in pet medical care layout, as demand remains strong overseas and domestic market continues to substitute local products, leading to expected growth in the pet sector performance in 2024. Key points from CITIC SEC: Pig farming: The sector will turn profitable in 2024, with a wait for a turning point in production capacity in 2025. In 2024, pig prices will be relatively prosperous due to previous capacity digestion, but with efficiency improvements, pig prices will fluctuate and fall back after a turning point in July, with the industry achieving profits per head of 150-200 yuan for the whole year. With feed prices decreasing and farming efficiency improving, most listed companies have achieved a cost reduction of 1-2 yuan/kg within the year, with profits exceeding 200 yuan for the top tier companies. Looking ahead to 2025, with the recovery of production capacity and efficiency improvements, the supply is expected to steadily increase, resulting in fluctuating pig prices. The average price for the year is estimated to be between 14-15 yuan/kg, with a focus on factors such as production capacity and breeding impacting the market. The current sector valuation is low, waiting for signals of a turning point in production capacity. Poultry farming: Marginal improvement in profitability in the industry chain in 2024, potential fluctuations in 2025. In 2024, the white feather chicken industry has a relatively high inventory, but with expansion in farming, chick prices are expected to rise by 6-7% year-on-year. With weak demand, the price of raw chicken is expected to drop by 10-15% year-on-year. From the industry chain perspective, feed prices are driving steady cost reductions, leading to marginal improvements in industry chain profits; the yellow chicken industry has seen a slight decrease in production, with a 3.1% year-on-year decline in 2024, but the profitability of top listed companies has improved through continuous cost reduction. Looking ahead to 2025, with the high breeding levels in white feather chicken industry, there may be some offset in breeding efficiency, but overall supply is abundant, with a focus on demand recovery and the impact of avian flu overseas. Post-cycle breeding: Operating pressures, leading companies to cross the cycle. Due to reduced downstream inventory and weak consumption, competition intensifies in the feed and animal protection industries, leading to a general decline in industry profitability. However, with continued prosperity in aquatic farming in the second half of 2024, there has been a slight improvement in industry prosperity, and the competitive advantage of leading feed companies remains solid. Looking ahead, with livestock and poultry inventory recovery and resumption of aquatic fingerling rearing, it is expected that feed prosperity will improve in 2025. Pets: Achieving new performance highs, with accelerated growth in domestic brands. With continued recovery of overseas orders, decline in chicken meat costs, devaluation of the renminbi, accelerated growth of domestic brands, and continuous improvement in profitability of domestic leading brands, the pet sector's performance is expected to reach new highs in 2024. Looking ahead, there is stable overseas demand, continuous substitution of local products in the domestic market, leading to the potential for sustained growth in the pet sector's performance in 2024. The pet economy is a scarce race, with resilient demand, and the domestic market is currently in the stage of "big industry, small head", with a further concentration of leading companies. The report is optimistic about leading companies increasing market share through product innovation, brand, and channel construction. Risk factors: Pig prices do not meet expectations; large-scale outbreak of animal diseases; food safety issues; natural disasters; significant fluctuations in grain prices; geopolitical risks; intensification of market competition, and others.