Analysts bullish on leading pork producer Cofco Meat as consolidation continues across sector
Pork makes up more than 60 per cent of the nation’s total meat consumption
Cofco Meat Holdings, China’s fourth largest pig producer, in the world’s largest pork market, is set to benefit from huge market consolidation as smaller players are forced to withdraw due to stricter trading conditions — driven by the authorities’ willingness to encourage more environmentally friendly pig feeding and processing procedures by producers
According to new research by analysts from Bank of China’s Investment Banking Group analysts Jamie Shen and Candy Huang, Cofco still holds a “Buy’ rating, even thought the consolidation is ultimately likely to mean lower meat prices, adding the company has a strong shareholder base as well as resilience of pork prices in the long run.
“Despite the hog price down-cycle starting from mid-2016, we remain positive on
Cofco Meat’s earnings outlook and expect it to deliver an 8 per cent recurring earnings
during 2016-18”, Shen and Huang wrote in the report.
Pork makes up more than 60 per cent of the nation’s total meat consumption, according to reports from state media the People’s Daily.
With Chinese people’s astounding appetite for pork dating back to the Qin dynasty, the country accounted for more than half of global consumption and is also one of the largest pork importers globally.
Against that backdop, however, Chinese consumers are increasingly worried about food hygiene, ever since the infamous 2008 scandal over melamine-tainted milk in northern city Shijiazhuang, which has claimed the lives of four infants’ and stirred a national outcry for better supervision of the food industry.
The fourth largest pork producer in China, Cofco Meat – a state-owned offshoot of conglomerate owned by China National Cereals, Oils and Foodstuffs Corporation – has had a strong reputation in low-temperature processed meat production and relies heavily on attracting customers based on strong trust in SOEs, Shen and Huang wrote in the note.
In addition to rising demand toward safer food domestically, the authorities’ stricter rules on environment protection has also put many small players in this field out of business as they cannot afford to buy expensive pork processing machines or hire more skilled managers as required by regulators – another boost to the bottom lines of larger firm’s such as Costo Meat, said the Bank of China findings.
“Diminishing rural populations and rising labour costs will marginalise household hog farming, which in turn will play into the hands of the larger scaled players,” the report said.
China’s Ministry of Agriculture has repeatedly vowed to promote “green development” in animal husbandry in recent years, setting the goal to 200 model provinces upgrade the standards of their industries by 2020.
With suitable land and water resources increasingly scarce, the government in Beijing has “clear incentives and firm goals” to modernise the country’s livestock sector in favour of a more efficient and environmentally friendly methods, Shen and Huang said in the report.
But again, as those costs are rising too, meaning many small-scale farmers are finding they cannot afford to install the necessary equipment to raise their operations to government-required standards, which are affordable by the biggest industry players.
“We expect the well-capitalised, larger players to continue to gain share from the household operations that whill gradually die out from the industry due to the higher environmental regulations, poor profitability and increased rural labour migration,” the report wrote.
Shen and Huang expect the major names to generate more than 20 per cent port industry gross margins in the long run.
Foreign investors too have already started to spot the trend, and majors such Mitsubishi Corporation, Japan’s largest trading company, and its associates Itoham Food Inc and Yonekyu Corp, have been investing in the major Chinese livestock industry.
The only things standing in the way of a successful pork season, however, say analysts would be an outbreak of hog disease, and rising corn (feed), according to the report.
Cofco Meat saw its market value slump by as much as 24 per cent on its first day of trading in Hong Kong in November last year, putting it on track for one of the worst first-day performances among the city’s major initial public offerings last year.
Shares the company lost 2.6 per cent to close at HK$1.54 on the Hong Kong bourse on Monday, the lowest since Jan.16.