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Author: Xiao Li Fei Dao, Editor: Xiao Shi Mei

On the evening of August 2, Muyuan Foodstuff Co., Ltd. announced its performance report for the first half of 2024 as scheduled, and its performance and cash flow improvement exceeded market expectations. Next, with the recovery of pig prices and the continuous improvement of breeding results, the second half of the year will bring more surprises to the capital market.

【Beautiful transcript】

In the first half of 2024, Muyuan shares' revenue was 56.866 billion yuan, a year-on-year increase of 9.6%. Net profit attributable to the parent company was 829 million yuan, a year-on-year increase of 129.8%. In terms of breakdown, the second quarter made a huge profit of 3.2 billion yuan, setting a record for the highest single-quarter profit since the fourth quarter of 2022, an increase of 5.59 billion yuan from the previous quarter and 4.79 billion yuan from the previous year.

Muyuan's pig output has been growing steadily. In the first half of the year, a total of 32.388 million pigs were slaughtered, an increase of 2.123 million pigs and a 7% increase compared with the same period in 2023. This has basically reached 50% of the lower limit of the annual target of 66-72 million pigs, and the annual output task is expected to be successfully completed.

Breeding results also continued to improve. In June this year, the full cost of pig farming at Muyuan dropped to 14 yuan/kg, a sharp drop of 1.8 yuan/kg compared with the first two months of the year, reaching the lowest level since 2023. Among them, the impact of falling feed prices and improved production results on cost reduction accounted for 40% and 60% respectively.

It is worth noting that the gap in cost lines among Muyuan's farms has further narrowed. In June, the farms with breeding costs below 14 yuan/kg accounted for more than 55% of the output, and those below 13 yuan/kg accounted for as high as 18%, while those above 16 yuan/kg have narrowed to about 5%.

It can be seen that Muyuan has shared, replicated and promoted the successful experience of excellent pig farms, and ultimately achieved good results, improved production management efficiency and reduced overall breeding costs.

In addition, along with the substantial improvement in performance in the second quarter, Muyuan's cash flow also improved significantly.This disproved the market's previous liquidity concerns.

Specifically, as of the end of the second quarter, Muyuan had more than 20 billion yuan in cash on its account. Currently, the ratio of cash amount to long-term and short-term loans is 0.38, which is better than 0.31 at the end of 2023 (the industry average is 0.24). In addition, Muyuan has an unused bank credit line of 30 billion yuan and a reserve bond approval quota of 8 billion yuan, and maintains a low financing cost.

More importantly, as pork prices rebounded significantly, Muyuan has outstanding cash flow generation capabilities. Net cash flow from operating activities in the first half of the year was 15.47 billion yuan, of which net inflows in the second quarter exceeded 10 billion yuan.

▲Muyuan's net cash flow from operating activities, source: Wind

It can be seen that Muyuan has delivered a gratifying semi-annual report card.

【Cycle Reversal Bonus】

In the second half of the year, Muyuan’s performance and cash flow improvement are more worth looking forward to, mainly because pig prices and breeding costs are developing in a favorable direction.

The price of pork has been fluctuating upward from 13.65 yuan/kg at the end of February this year, and has recently exceeded the 20 yuan/kg mark, with a cumulative increase of 47%. This clearly shows that the current round of pig cycle has reversed in the first half of the year.According to mainstream market expectations, pork prices will continue to fluctuate upward.

From a big-cycle perspective, the last round of pig cycle lasted for six years, and the low pig prices lasted far longer than market expectations. Breeding entities of different scales were all greatly impacted and threatened, and large pig companies such as Zhengbang, Aonong and Tianbang fell into bankruptcy and restructuring.

After this round of cycle reversal, the pig farming industry urgently needs to repair its greatly deteriorated balance sheet, and will be more cautious in re-leveraging and replenishing production capacity, which also means that this round of pig price rise may last for a long time.

From a medium- to short-term perspective, the sales of sows can provide certain forward-looking guidance for future pork prices.

As of the end of June, the domestic breeding sow inventory was 40.38 million, a significant reduction of 3.52 million from the peak in December 2022, a reduction of 8.7%. Among them, from September 2023 to March 2024, the reduction slope was quite high, exceeding 1%. At that time, the pig farming industry was at its most difficult low point in the last cycle, and the industry was forced to accelerate the unloading of production capacity.

Judging from the rule that it takes 10 months from breeding sows to slaughtering commercial pigs, the tight supply of live pigs will not change in the remaining months of this year, and pig prices are expected to maintain an upward trend at a high level.

Of course, in addition to enjoying the benefits of the reversal of the pig price cycle, Muyuan’s breeding costs are also expected to continue to decline in the second half of the year.

Since 2024, soybean meal, corn, and wheat, which account for a relatively high proportion of pig feed, have maintained a downward trend. As of August 2, the spot price of soybean meal was 3,046.9 yuan/ton, a sharp drop of nearly 50% from the high point in 2022. In addition, the current demand side of the downstream breeding end is relatively weak, while the upstream soybean supply in South America and North America is abundant, and the soybean meal inventory remains high, and there may still be room for decline in the future.

▲Soybean meal, corn and wheat spot price trend chart, source: Wind

The spot price of corn is 2,439 yuan/ton, down 500 yuan from the peak in September 2023. According to the outlook for futures prices (corn 2501 is 2,263 yuan/ton), corn spot prices may fall more easily than rise. The spot price of wheat is 2,499 yuan/ton, down 23% from the end of 2022, and has fallen to the lowest level since the beginning of 2021.

In addition to the cost reduction on the feed side, Muyuan's production performance also has some surprises. According to reports, Muyuan's full-process survival rate in June exceeded 84%, and PSY was above 28. In addition, the cost of weaned piglets has been declining month by month, and in June it has dropped to around 270 yuan per head.

The continuous improvement of Muyuan's production performance is due to its continuous investment in research and development in 20 aspects, including breeding, feed, health, breeding, slaughtering, and housing, and its continuous efforts to tap the potential and reduce costs in the three dimensions of pig efficiency, human efficiency, and material efficiency. By the end of the year, the probability of achieving the target of 13 yuan/kg is very high.

Both of the above aspects will help significantly improve Muyuan’s cash flow and enhance its profitability.

According to institutional estimates (latest costs and pig prices), each pig can make a profit of 500 yuan. In the second half of the year, 36.6 million pigs will be slaughtered according to the median of the annual target, so Muyuan's annual profit may exceed 19 billion yuan (refreshing the highest annual profit record in all years except 2020). If pig prices rise and costs fall beyond expectations, Muyuan's profit performance in 2024 is even more worth looking forward to.

【Growth without boundaries】

In the short and medium term, Muyuan's growth is still focused on its main business of breeding. The target of slaughtering 100 million pigs is an increase of more than 36 million pigs compared with the end of 2023, a cumulative increase of 57%. In terms of breeding costs, the ultimate goal is to reach the Danish level. There is still room for cost reduction of 600 yuan per pig, which is expected to further increase the profit level per pig.

But if we extend the time dimension, where is Muyuan’s room for growth?

In fact, Muyuan Chairman Qin Yinglin has already given the answer.

He once made the following statement about the pig farming industry: "The development of China's pig farming industry can be divided into three stages. The first stage is the capital-driven development stage, which is about to end. It is gradually entering the second stage - the cost-leading stage, relying on equipment and technology to improve efficiency and reduce costs. The third stage in the future is value creation, relying on brand value to obtain reasonable and stable profits."

As the undisputed leader in the pig farming industry, Muyuan has fully entered the second stage, and has already begun to take action and accumulate experience in the third stage.

From the perspective of market value observation, to achieve value creation and to rely on brands to gain profits, the prerequisite is to truly realize the integration of the pig farming industry chain. In addition to feed processing, breeding pigs, and commercial pig farming in the middle and upper reaches, slaughtering is an important link that must be taken.

Since 2019, Muyuan has started the layout of slaughtering business. By 2023, the annual slaughtering volume will reach 13.26 million heads, surpassing Shuanghui to become China's largest pig slaughtering company. By the end of June 2024, Muyuan has established 26 slaughtering subsidiaries across the country, and the production capacity has reached 29 million heads/year. During the same period, 5.415 million pigs were slaughtered, and the operating income was nearly 10 billion yuan.

Muyuan’s slaughtering business has progressed rapidly, realizing the integration of the pig farming industry chain, which is of great significance to the company as a whole.

On the one hand, slaughtering can generate stable profits. Muyuan slaughtering has many advantages over general slaughterhouses, such as reducing losses due to nearby transportation, reducing slaughtering losses due to intelligent equipment, and reducing labor costs due to automated slaughtering process transformation. According to the company's future per capita profit target of 103 yuan, this business may bring more than 10 billion yuan in profits in the long term (slaughtering volume matches the long-term target of 100 million slaughters).

On the other hand, by forming a synergistic effect with the upstream pig farming links, the entire process can be known, controlled and traceable, contributing to reducing the overall breeding costs of the enterprise and enhancing its core competitiveness.

As the downstream, the slaughtering end can accumulate a large amount of data on quarantine and other aspects, which can be traced back to the breeding plant, thus providing support for upstream disease prevention and control. In addition, self-built slaughterhouses can better control the order of market release and market the animals at a more economical weight, which can also reduce breeding costs.

Most importantly, only by opening up the downstream slaughtering link will it be possible to make profits by relying on the brand and have the foundation to continue to extend downstream to engage in meat processing and other businesses.

From the perspective of market value observation, if Muyuan wants to realize pork branding in the future, the necessary conditions include product traceability and quality differentiation. Muyuan has already achieved the former, which is something that many other pig production capacities cannot do.

In terms of quality differentiation, Muyuan has also begun to seek some breakthroughs and progress. In June 2022, Qin Yinglin introduced at the Shenzhen Bay Conference that Muyuan has cultivated marbled pork, a discovery comparable to the discovery of wild rice. At present, marbled pork has been replicated and is very similar to marble. The fat content of these pork is very fragrant (Note: 5 times the fat content of local pork, comparable to A5 Wagyu beef).

With product traceability and quality differentiation as the basis, and supplemented by channel brand building and brand-driven sales, Muyuan may be the first to break the history of no major pork brands in China. If the terminal pork products can be sold at a premium, then the performance growth space brought by this is undoubtedly huge.

In addition, after the integrated industrial chain is realized, Muyuan can also expand to higher value-added meat processing or pre-prepared meals. If so, this will undoubtedly open another door to growth. You know, Shuanghui Development also started as a small slaughterhouse, gradually expanded to meat processing (ham sausage) to achieve its rise, and finally achieved its current market position.

Muyuan’s current growth boundaries are far from being seen. The long-term value space of Muyuan can no longer be defined solely by pig farming, and we should not underestimate Muyuan’s lofty ideals and vision.

In summary, Muyuan is highly certain to make a substantial profit in 2024, and its fundamentals have reversed and emerged from the cyclical trough. In addition, the main pig breeding business still has great growth potential, and in the long term, it has the foundation and strength to rely on its brand to make profits from the industrial chain, so there is no reason for the capital market not to be positive and optimistic.

Disclaimer

The content of this article related to listed companies is the author’s personal analysis and judgment based on the information disclosed by listed companies in accordance with their legal obligations (including but not limited to interim announcements, regular reports and official interactive platforms, etc.); the information or opinions in the article do not constitute any investment or other business advice, and Market Value Observation shall not bear any responsibility for any actions arising from the adoption of this article.