CASC Securities: How to view the current pig cycle allocation opportunity?

Zhonghang Securities released a research report stating that currently, there is a relatively ample supply of live pigs, and the seasonal weakening of pork consumption demand. The loose supply and demand situation is expected to continue for some time, and live pig prices will still face certain pressure. From a policy perspective, the current industry's "anti-internal circulation" policy goal is to moderately and reasonably reduce production capacity, and does not support large-scale reduction of industry capacity. From the perspective of diseases, currently African swine fever and other animal diseases are generally controllable, with industry prevention and control investment, methods, and capabilities being strong, but continuous monitoring and observation are needed. In the current live pig cycle, it should be a normal cycle based on farming profits - farming behavior regulation under the cobweb model. In terms of trading, the trend of industry production capacity digestion is expected to continue, emphasizing opportunities in the live pig sector. The main viewpoints of Zhonghang Securities are as follows: Factors driving the historical pig cycle The driving factors of the pig cycle result from the combined effect of multiple forces, with different factors varying in strength at different stages. Ultimately, they form a cyclical pattern of live pig prices "rising, falling, bottoming out, and rebounding". The main driving factors include: (1) Supply and demand relationship, farming profit cycle driving production lag under the cobweb model; (2) Disease impacts, such as blue ear disease in 2006 and African swine fever in 2018, having a significant impact on live pig inventory; (3) Policy influences, such as environmental protection policies from 2014-2018, eliminating some non-compliant production capacity. Analysis of current cycle driving factors From the perspective of farming profit driving, currently, there is a relatively ample supply of live pigs, and seasonal weakening of pork consumption demand. The loose supply and demand situation is expected to continue for some time, and live pig prices will still face certain pressure. Weaker pig prices are expected to drive industry production capacity digestion as the industry operates in a loss zone; from the perspective of industry policy driving, for the past 25 years, policy departments have promoted the industry's "anti-internal circulation" focusing on adjusting the breeding sow population, increasing the elimination of weak piglets, and reducing the weight of slaughtered pigs. The policy goal is to moderately and reasonably reduce production capacity; from the perspective of disease impacts, currently, African swine fever and other animal diseases are generally controllable, but continuous observation is needed. Investment recommendations The bank believes that in the current live pig cycle, it should be a normal cycle based on farming profits - farming behavior regulation under the cobweb model. From a policy perspective, the current industry's "anti-internal circulation" policy goal is to moderately and reasonably reduce production capacity, and does not support large-scale reduction of industry capacity. From the disease perspective, African swine fever and other animal diseases are generally controllable, with strong industry prevention and control investment, methods, and capabilities, but continuous monitoring and observation are needed. Therefore, in the current live pig cycle, it should be a normal cycle based on farming profits - farming behavior regulation. In trading, the trend of industry production capacity digestion is expected to continue, and attention should be paid to opportunities in the live pig sector. First, the rotation of the live pig cycle will continue, with expected rational reduction of capacity due to guidance from the "anti-internal circulation" policy, supporting price expectations and trends in the live pig sector. Second, the value attributes of leading companies in the live pig industry are enhanced. In the long term, the overall live pig breeding industry will maintain a certain profit level, and companies with breeding management and cost advantages are expected to maintain good profitability. The improvement in the free cash flow of high-quality industry companies will support their valuations. Third, the dividend attributes of leading companies in the live pig industry are enhanced. High-quality breeding companies focus on and continuously improve shareholder returns, making the long-term dividend attributes and value of the live pig sector more significant. Fourth, leading companies in the live pig industry are advancing their globalization strategies, aiming to seize overseas market opportunities with technological and management advantages. Recommended focus Excellent large-scale breeding groups Muyuan Foods and Wens Foodstuff Group, and Yunnan Shennong Agricultural Industry Group, Leshan Giantstar Farming & Husbandry Corporation, Zhejiang Huatong Meat Products with breeding expansion optimization and growth potential.