Buoyant hog prices underpinned by China’s high-protein diet shift
Large agricultural companies poised to benefit from boom in pork consumption
China’s rising appetite for pork, especially high-quality pork, is likely to fuel consolidation among the country’s hog producers and meat processing sector, potentially benefiting big players with overseas industrial chains.
China ranks as the world’s largest producer and consumer of pork, home to about half of the world’s domestic bovine population. Much of China’s domestic production comes from small-scale pig famers, who are unable to scale up to meet the surge in demand, leaving them potentially vulnerable to the sweeping changes that lie ahead, according to analysts.
Each year China imports a significant amount of pork to satiate the nation’s growing consumption, driven in part by the shifting dining habits of more affluent consumers.
The impact can be seen in hog prices, which have remained relatively upbeat in spite of the global rout in agricultural and industrial commodities. Since last March, China’s hog prices have increased sharply to hover near a historical high level of 18.72 yuan per kilogram at the end of January, according to data from the Ministry of Agriculture.
Shortages could be on the horizon, as the number of sows ready for production fell for a 27th consecutive month in December, according to government data.
“In view of increasing demand and shrinking supply of pigs, we expect pig price to rise in 2016 and exceed the previous high,” Industrial Securities said in a recent research report.
The uptrending price cycle has attracted many companies to expand into the hog and meat industry. Among them, New Hope Liuhe Group, China’s largest animal feed maker, announced last week that it plans to invest 8.8 billion yuan in building new pig-farming bases, with a production capacity target of 10 million hogs in the next three to five years.
The company also said it will transform its business model to rely more on hog sales rather than on animal feed sales. Its goal is to become a fresh and processed pork producer in the medium to long term.
Gongdong Wen’s Foodstuff Group, one of the country’s largest hog producers, have also launched two new pig-farming projects since November.
As the industry expands, stiff competition may force small pig farmers out of business, with bigger players to benefit, analysts said.
About 5 million pig producers went out of business in 2015, most of which were small-to-medium sized farmers, according to statistics from the Ministry of Agriculture. As these smaller players are eliminated, there is more room for industry consolidation, analysts noted.
In particular, leading pork producer WH Group, which acquired the world’s largest hog farmer and pork processor Smithfield Foods in 2013, is a favoured pick among many analysts.
WH Group, which is listed in Hong Kong, is rated a “conviction buy” at China International Capital Corp (CICC). They says the share is likely to produce an absolute return of 30 per cent or more over the next six to 12 months.
CICC also has a buy rating on Shenzhen-listed Shuanghui Development, the mainland subsidiary of WH Group, believing that the share will provide an absolute return of 20 per cent or more.
“Pork is a major source of protein for China’s consumers, and the sector is highly fragmented with room for upstream integration and downstream upgrades,” CICC analysts said, adding that Shuanghui is a leading player in the industry and its position is guaranteed by high industry barriers.
In addition, there is a sharp price gap between Chinese and US hog prices, which should fuel more hog imports from the US.
While China’s hog prices were already above 16 yuan per kilogram, the US hog prices remained at a relatively low level of 5.85 yuan per kilogram, CICC said.
According to data from the US Department of Agriculture, hog exports to China jumped 40.7 per cent year-on-year in November.
“Given that there is still a still large gap between hog prices in China and the US (185.4 per cent), we expect hog exports from the US to China to rise in the future,” analysts from CICC said.
“The widening price gap between hog prices in China and US could promote synergies,” they noted.
In the meantime, other analysts suggest investors select stocks in the hog-raising subsector. Industrial Securities favors Guangdong Wen’s Foodstuffs Group, Muyuan Foodstuff, and Jiangxi Zhengbang Technology. Meanwhile, Dongxing Securities recommends Chuying Agro-Pastoral Group, Guangdong Wen’s Foodstuffs, Muyuan Foodstuff, as well as New Hope Liuhe Group.
