Pigs fly: Why China's pork stocks are tempting to investors

Yujing Liu, South China Morning Post

Posted at Mar 02 2020 03:59 PM

Pigs fly: Why China's pork stocks are tempting to investors 1
Customers wearing face masks shop at the pork counter of a supermarket following the outbreak of the novel coronavirus in Wuhan, Hubei province, China Feb. 12, 2020. China Daily via Reuters

Pigs do fly in China -- or at least stocks tied to them. While China's $143 billion pig-farming industry has been hit by African swine fever and now the coronavirus, analysts say a number of pig stocks can still gain more altitude.

Without a doubt, the coronavirus epidemic has led to costly shutdowns of wet markets and slaughterhouses across China. And travel restrictions intended to contain the illness have disrupted rail and truck transport of feed to farmers and animals to market.

But some positive signs are emerging on the coronavirus front: businesses and roads are reopening in China, which has taken unprecedented steps" including the lockdown of more than 50 million people in Hubei province, where the virus was first detected to try to reduced the human and economic costs.

Meanwhile, on the swine flu front, the US Department of Agriculture and academic investigators reported in late January that they had developed a vaccine that was "100 percent" effective in preventing infection in a test group of pigs.

No commercially viable vaccine is available to treat the disease, which has roiled the world's largest pork market, leading to mass culling, including of all-important mother pigs. So this could be a very important development.

Despite challenges, investors and analysts are betting a number of the high-flying stocks in the sector will continue to produce mouth-watering gains. The sector has seen a strong run-up over the past 12 months with one stock, Muyuan Foodstuff, racing up more than 150 percent.

In these stocks' favor are surging pork prices, better management and technology that will translate into bigger pig supply, and consolidation will boost the share prices of listed companies, analysts predict.

Shenzhen-listed Muyuan Foodstuff, which surpassed long-time rival Wens Foodstuffs Group in October to become the country's largest pork producer by market capitalization, is one stock that saw its share price plunge on a panic sell-off triggered by the COVID-19 outbreak. While it plunged 23 percent in just 5 days on virus fears, it is still up 58 percent over the past 4 weeks.

Muyuan, based in central China's Henan province, has 15 "buy" recommendations and just one "hold" from analysts, according to Bloomberg data. The company is popular with northbound traders, who own a 2.8 percent stake in it.

Apart from Muyuan, Wens also has a wide fan base, with 21 "buy" ratings. New Hope Liuhe, which has ventured into pig farming in recent years from its traditional business of animal feed production, is also heavily rated "buy" by analysts. Jiangxi Zhengbang Technology, a smaller player based in southeast China, has received 8 "buy" recommendations.

All of these stocks are traded on the Stock Connect.

"Looking at the long term, I'm supporting Muyuan without a doubt," said Zhu Tiantang, a 53-year-old investor who lives in eastern China's Jiangsu province. "The fundamentals supporting its growth did not change because of the virus outbreak."

The bank manager who trades in his free time has earned a paper profit of more than 9 million yuan ($1.3 million) based on his 1 million yuan investment in Muyuan shares in 2017. He so trusted his investment decision that he bought some of the shares on margin " meaning he used leverage and borrowed funds from a broker " to amplify his gains.

Zhu said he "feels calm" about the eye-popping returns and is in no rush to cash out his shares. He predicts the company will continue to lower its unit cost for raising a pig by tapping its corn and wheat farming businesses. That, he expects, will lead to Muyuan occupying a larger share of the extremely fragmented market over the next 5 to 8 years.

Huaxi Securities analyst Zhou Sha says she expects the coronavirus' impact on the sector will be "limited". The public health crisis has infected more than 85,000 people and killed more than 3,000, most of them in China.

Even though logistics disruptions created a challenge for farmers' feed supply, large pork producing firms had stockpiled feed before the Lunar New Year holiday, Zhou said. Meanwhile, consumption of pork remains robust, as a surge in demand from home cooking compensated for the decline in restaurant demand.

African swine fever began in the summer of 2018 in China and led to a 21 percent decline in pork production last year from the previous year. Supply will remain tight, pushing the prices higher, she said.

"The fundamental logic supporting the upwards trend, which is that companies will fulfill high market expectations this year with strong earnings, is unchanged," Zhou said.

She recommended large farming groups that are better capable of defending against the onslaught of African swine fever, including Wends Foodstuffs, New Hope Liuhe, Jiangxi Zhengbang Technology, and Tech-Bank Food.

A number of pork producers have posted upbeat results in the current earnings season, after a year of fast expansion and soaring prices.

Muyuan reported a 1,075 percent jump in net profit for 2019 to 6.1 billion yuan from 2018, while Wens saw net profit surged by 251 per cent to 13.9 billion yuan. Jiangxi Zhengbang's net profit soared by 778 per cent to 1.7 billion yuan over the period.

The listed companies are likely to continue outperforming, as their improving management has proved to be an effective antidote to the African swine fever, analysts say.

China has a vast army of individual pig farmers " defined as those who raise fewer than 500 pigs a year " who make up nearly half of the overall farmers, Galaxy Securities analyst Xie Zhiyou wrote in a report last week. They are less equipped to maintain hygiene at the farms and prevent the spread of the African swine fever virus, and are set to quit the market at an accelerating pace as they suffer higher losses from culled pigs.

This would be a boost to listed companies in the sector, because they would be able to expand faster as the market consolidates, Xie said.

Currently, even Muyuan owns just 1.9 percent of China's live hog market. In comparison, the US market's top player Smithfield Foods occupies almost 15 percent of the market, according to statistics by Fortune Securities.

Xie recommended Tech-Bank Food, which has been growing its herd steadily and developing vaccines against to battle African swine fever.

The listed pork producers have been expanding their output at a faster pace than industry average, analysts at Industrial Securities said in a new report. They recommended Muyuan, Wens and New Hope Liuhe.

As the industry recovers from logistics disruptions over the coronavirus outbreak, listed companies will continue to generate massive profits," they wrote.

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