The story so far: African swine fever, which is now a global phenomenon, has hit China’s RMB1trn hog industry – the world’s largest – particularly hard. By September, hog inventories had fallen by 41% from a year earlier, pushing pork prices to record highs. In what is a hugely fragmented industry, most of the pain has been felt by backyard operators without the funds or the know-how to contain the disease – in 2017 there were still 35m farmers producing fewer than 50 head of hogs – that’s 95% of the hog farmers in the country. Not everyone has suffered. Given the inevitable supply shortage, share prices of the few big listed companies with the best bio-safety systems have shot up.
This report explains our non-consensus view about what’s likely to happen next along the hog supply chain – farmers, big and small, and the companies that make animal feed and vaccines.
We believe investors should focus on the level of hog production rather than high pork prices, which in our view are part of the volatile hog price cycle, driven by supply and demand. For us, the rate at which farmers replenish their stocks is far more important.
To this end, we analyse the latest data and find evidence the industry could be in the early stages of a recovery. We expect sow inventories to gradually recover in 2020 and 2021.
At least two leading research institutes in China have announced that they have made breakthroughs in developing a vaccine. We assess the prospects of a vaccine becoming available and how long it would take to mass produce.
We believe a recovery in hog inventories will also benefit leading upstream companies in areas such as animal feed and vaccines. They also stand to gain from the high pork prices that are increasing demand for protein substitutes such as chicken and fish.
Longer term, we find evidence pointing to rapid industry consolidation, a process that will benefit the market leaders and increase efficiency, profits and bio-security standards.
We initiate coverage of four companies. We prefer animal feed producer Haid Group (Buy) and Jinyu (Buy), a leader in vaccines, to hog producers Muyuan (Hold) and Wens (Hold).