Impact of African Swine Fever: Industrial reconstruction, transformation and upgrading. Golden Pig, as the world's largest pig-raising country for ten years, has a high proportion of traditional pig farmers in China's pig breeding process, high frequency of pig transportation and high breeding density (7 times of the world). However, the scale, modernization, closeness and biosafety awareness are all low, making African Swine Fever spread rapidly after the outbreak in China and difficult to control.
In addition, after the outbreak of non-epidemic diseases, various folk remedies and vaccines have been tried in the industry, and the phenomenon of selling fake medicines to generate national wealth has emerged one after another, further exposing the inefficiency and disorder of the entire industry. In addition, due to the loss of the core group and the reduction of the three-way backcross efficiency, the pig production efficiency in our country will face a considerable decline in the future for a long time, which will lead to the high cost of the industry.
In the long run, the industrial form that has the lowest cost, is conducive to the improvement of the efficiency of the whole industry, and can ensure consumers to eat heart-rending meat has been very clear, that is, it must move towards "industrial enclosure, self-breeding, self-slaughter, centralized feeding, on-site slaughter and cold chain transportation". Industrialized enclosure guarantees the stability of prevention and control. Self-reproduction, self-support and self-slaughter ensure the stability of the system. Centralized feeding solves the pain points of efficiency and management. Slaughtering on the spot enables the epidemic risk to be controlled on the spot, and cold chain transportation ensures food safety even more.
At present, the closed self-propagation and self-support mode of industrialization has gradually shown its advantages in the breeding process and is forming an industrial direction. However, due to the shortage of capital, sows, land and other resources and the lack of enterprises capable of rapidly expanding production in the short term, the speed of industrial upgrading is relatively limited and the bonus period of excellent enterprises will last for a long time. Among them, the advantageous enterprises have entered the fast expanding high-speed channel and will lead the large-scale reconstruction of the whole industrial chain. The typical representative is Mu Yuan Stock and New Hope.
How can we prevent and control the threshold of entering the 100 million yuan industry?
Judging from foreign experience and short-term domestic attempts, biosafety is the most effective prevention and control method with the lowest long-term cost and the lowest potential safety hazard. At present, there are more and more cases in which domestic advantageous enterprises rely on bio-safety to defeat non-pestilence, which has strengthened our confidence in taking the bio-safety route.
How difficult is it to do a good job in biosafety? We think it is a comprehensive upgrading process from hardware to software, from pig farm to personnel. Sufficient capital investment must be required. Moreover, the head effect is obvious. The advantageous production capacity of pig industry has entered the investment threshold of 100 million yuan. Judging from international prevention and control experience and in combination with national conditions, doing a good job in bio-safety and epidemic prevention requires five conditions at the same time: hardware investment, feed guarantee system, timely detection system, resource mobilization capability and personnel management. Through this detailed exposition and typical negative examples, the difficulty of prevention and control will be better understood.
What kind of company can stand out in this crisis?
Under the impact of the first round of epidemic, almost all companies have been affected to varying degrees, but the extent of the impact and the speed of establishing prevention and control capabilities are obviously different. We believe that relatively large production capacity and relatively wide distribution area, financial strength, learning ability and management level, and the ability to mobilize resources will affect the psychological and practical actions of enterprises at very specific levels, thus affecting subsequent epidemic prevention and expansion achievements.
The technology-driven chairman and senior management team play a role as the soul, efficient management and execution, and fair and in-place results motivate these three points, which determine whether an enterprise can effectively prevent African swine fever and enter the fast lane of expansion. On this basis, the support of capital can be put in place and the reserve of resources can be advanced enough to ensure both the speed and quality of the expansion of the enterprise. After all, only a small number of the strong are finally selected through layers of harsh challenges. At present, they are trying their best to seize the market share. All latecomers and outsiders will have to go through the corresponding process to make progress. In this huge and ancient market reshuffled on the pure supply side, the strong can always turn bad luck into opportunities in great changes, and then firmly grasp the opportunities and precipitate them into strength. This has been the case in every pig cycle in the past 30 years, and it has been repeated over and over again.
What kind of company is expected to lead the industry in ROE for a long time
The ong-term pig price depends on the average cost of the industry and the average rate of return of the society. In the past, the leading enterprise ROE was 25%-30%, while the average farmer was only about 10%. Although the main suppliers are gradually changing, the average production cost has not decreased significantly, and the industry's rate of return will not change significantly. In terms of breeding, sow, procurement, capital, resource acquisition and other aspects, the advantages of large enterprises over farmers will not necessarily shrink, but are currently expanding significantly. We believe that, based on the long-term existence of African swine fever in the next ten years, the rise of epidemic prevention costs and death costs, the visibility of enterprise costs and the rise of labor costs are all challenges that the traditional model must face. During this transformation period, the average cost of the industry is to a certain extent elevated. For enterprises that have mastered core capabilities (sufficient sows+fixed assets+reasonable capacity layout+prevention and control level+management level), the cost will drop faster and the rate of return is expected to rise instead of fall on the fast-moving track of industrialization, digitization and intelligence.
Investment Suggestions: In such an inefficient industry with a market space of 3 trillion yuan per year, we think there is a very good chance to create an agricultural food enterprise with a market value of 500 billion yuan and 1-2 agricultural food enterprises with a market value of 300 billion yuan. We suggest long-term attention and holding. Outstanding aquaculture enterprises with strong long-term growth logic are about to increase in volume in the second quarter. They will usher in a multi-quarter honeymoon period of volume and price in Shuang Sheng. The sustainability, certainty and cost advantage of volume increase that will always lead the industry will be the main line of investment. First-line leaders are expected to double their independent market trend in 2017. It is strongly recommended to lay out Mu Yuan shares, new hopes and pay attention to Wenshi shares as soon as possible.
Thinking about valuation: three aspects reflect the certainty of golden pig, the trend of independent industry superimposes valuation discount, and underestimation opportunity is precious.
1. Overall Liquidity: Uncertainty in the world economic environment has increased significantly. Countries have adopted interest rate cuts and other measures to ensure sufficient liquidity. Under such a market environment, the potential yield of high-quality assets is 1.3-1.5 times that before this round of decline, which we believe is sufficient to cover the risks of uncertainty. Moreover, the demand for pork is very rigid, and people have to find ways to buy it even if they don't go out. The relationship with the economic environment is not obvious. The recovery of pork supply is also very slow, the essence of which depends on the speed of transformation and upgrading of the industry. At present, there is still a big gap in all aspects, and only 10% of the production capacity can be relatively excellent. With such relatively independent industrial trends and abundant liquidity environment, Hong Kong capital has increased its holdings of Mu Yuan and hopes against the trend. We believe that the opportunities are far greater than the risks.
2. Corporate Profitability: Just Need+Industry Prosperity Upward, High Profitability and High Persistence Belong to Alpha operated by a Few Companies. From 18 years of African swine fever to the present, the whole industry has been able to produce 60% of its production capacity. The pig price has exceeded 30 yuan/kg for more than half a year, but the speed of rehabilitation is very slow. Sows in 2019Q4 increased by 8-9 percentage points in the whole industry, but this was accompanied by disorderly vaccination in the industry, repeated outbreaks of African swine fever in the northern region, and a reduction in the efficiency of triple backcross, with a discount for the recovery of actual production capacity. Adding to the influence of novel coronavirus, the whole industry had a big hesitation in feed transportation, sow transportation and sales, and fencing. The resumption of work at the construction site has a certain impact on the resumption of production in the industry. The rate of resumption of work is getting slower and slower. We estimate that the absolute value of resumption of work in the whole quarter may be a step lower than that in the fourth quarter of last year. The rate of resumption of work in January and February will be a step lower than that in January and February, less than 2%. As a result, it is optimistically estimated that the supply of live pigs may not be able to increase in a positive month-on-month manner until August this year. The high price for the whole year is a foregone conclusion. It is pessimistically estimated that the supply will remain very tight until February 2021.
On the other hand, the resources for expanding production in the industry are distributed structurally. Retail investors do not have the funds, suitable venues, scientific plans and confidence to complete the rehabilitation at this stage. Many rounds of pig cycles in history have proved that it will take three years for the industry to recover even without the interference of non-pestilence, not to mention today. However, individual companies have achieved rapid growth in output, and their profits will continue to rise in the next three years. The essence is that their epidemic prevention and cost are far better than that of the industry as a whole, and cannot be replicated in the short term.
3. Valuation: connotation of super growth stocks and valuation of cycle stocks. From the perspective of long-term ROE-PB, it is obviously underestimated. In the past ten years, the average ROE value in Mu Yuan is 28%, and the bottom range of stock price operation is about 4-6 times of PB. Under the background of repeated and long-term existence of African swine fever in the next ten years, we believe that long-term ROE has a large uplift space. The bottom range of PB is conservatively estimated to be 6-8 times, and the net assets at the end of this year are over 60 billion. According to the current capital expenditure intensity, it is not excluded that it will reach over 80 billion, which corresponds to a very considerable market value space.
From the perspective of head-to-head profitability, Mu Yuan's head-to-head profitability in the past ten years is 350 yuan/head. In the future, due to slow industrial upgrading and very limited learning speed, its own progress speed is on the fast track: first, the increase in the proportion of closed new markets will bring the driving cost closer to below 10 yuan /kg, and then the intelligent building pig-raising (settlement type meat complex) will drive the opening of the efficiency ceiling and march towards lower cost and higher overall industrial chain efficiency. Conservative estimation can bring stable profits to 200 yuan/head. For example, in this round of cycle, the lowest price of white stripes is 18 yuan /kg, while the production cost is the total cost of live pigs plus 1 yuan /kg. More links can produce efficiency differences and increase long-term average profitability.
Based on the average profit of 600-700 yuan/head, it is estimated that the corresponding long-term profit level will climb along the level of 15-30-50-70 billion as the enterprise expands production. In the growth stage, it is conservative to estimate PE at 20-30 times, and it is estimated that 300 billion will be the bottom range this year. In the mature stage, along with the decline of the long-term capital expenditure investment proportion, the self-owned cash flow spurts out, the dividend proportion rises sharply, the balanced PE valuation is conservative by 12 times, and the market value space is also very considerable.
Risk hints: sudden large-scale uncontrollable epidemics, major food safety incidents, macro-economic systemic risks, large-scale crop production reduction caused by extreme weather disasters, which have pushed up food prices, listed companies infected with African swine fever, the market output is not up to expectations, and the state regulates pig prices.