The $250 Billion Hog Equity Market, By Jim Huang Futures Market Executive

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Highlights:

  • China’s financial markets reopened Feb 18 after a week-long Spring Festival holiday;
  • DCE Hog Futures rallied 6% with trading volume more than double on Friday;
  • “Hog Concept” is a red-hot investment theme in China’s stock market;
  • l There are 31 publicly listed hog firms with market capitalization of 1.6 trillion;
  • The Crowning of Wen’s Group as China’s No. 1 hog producer, and its falling from grace.

[Greene County IL, Feb 20] – China’s financial markets resumed Thursday February 18 in the Year of the Ox after a week-long close in observation of Lunar Chinese New Year. In China, Spring Festival is an official holiday where all workers are entitled to seven days of annual vacation time.

DCE hog futures traded 18,942 lots Friday, 170% more than the previous day volume. The front month September contract LH2109 jumped 6.1% and closed at 28,330. November and January contracts gained 6.0% and 5.8%, respectively. Hog futures Open Interest grew 1,811, or 6.7% to 27,175 contracts. (Notes: DCE hog futures is based on 16 metric tons of live hogs. Price unit is RMB yuan per metric ton, US$1≈6.5 yuan.)

Chart 01: DCE Hog Futures Daily Closing Prices

(Data Source: DCE, complied by CACDA)

As of yesterday, hog contracts regained all the ground they had lost in initial trading sessions. SEP is now 1,520 points higher than the Jan. 8 close of 26,810 when the contract debuted. NOV and JAN closings of 27,030 and 26,400 are up 8.4% and 9.4%, respectively.

Over the past month, hog futures have been trending up with the resurfacing of African Swine Fever (ASF) cases in China. As cash hog prices dropped in January unexpectedly, ahead of the Chinese New Year peak season, farmers accelerated the sales of hogs and sows. The latter would result in fewer piglet births in the coming months, and reduced market hog production this year. The compound effect gave strong support to futures prices.

Although China’s total hog supply may come under original forecasts, stock market indicates that large producers would grow hog inventory rapidly and gain market shares at the expense of smaller farmers. With more hog sales at a higher expected price, the 31 hog firms listed in China’s stock market rallied 2.2% Friday, and reached a market capitalization of RMB 1.5 trillion, equivalent to US$246 billion.

Seven stocks triggered the 10% market up limit for individual stocks, including producers Zhengbang, Tech Bank, TRS, and Yisheng. New Hope group, China’s biggest feed supplier and animal health companies TECCN and Aonong also jumped 10%.

Table 01: Selected Chinese Hog Firm Stocks

(Data Source: Wind Financial, complied by CACDA)

The so-called “Hog Concept” has been a red-hot investment theme in China’s stock market since 2019 when ASF outbreaks cut hog production by two thirds and cash hog price quadrupled. These publicly listed firms cover four industry sectors: hog production (sow, piglet and market hog), feed processing (livestock, poultry and fishery feeds), food services (meatpacking and food sales), and animal health.

Six hog firms have reached the prestigious status of RMB 100 billion in market capitalization.

Table 02: Top-6 China Hog Firms by Market Cap

(Data Source: Wind Financial, complied by CACDA)

Muyuan (002714.SZ) is the largest hog producer in China. Based in Henan Province, it sold 18.1 million hogs in 2020, up 76.7% from the previous year. At year-end 2020, the Company had sow stock of 2.6 million herds. Analysts estimated its hog production could reach an astonishing 40 million this year. With a market capitalization of US $73.4 billion, Muyuan is now 2.7 times bigger than Tyson Foods (TSN), the largest US meat provider (market cap. $19.9B). Its stock is also more expensive with a Price/Earnings ratio of 18.6, vs. the 12.4 P/E for Tyson.

Chart 02: Stock Price Trend, Muyuan vs. Tyson

(Data Source: Wind Financial)

New Hope Group (000876.SZ) is the largest feed processor in China. In 2020, it sold 24 million metric tons of feeds, of which 7 million tons was to feed its own chickens and hogs. The Company is China’s fourth largest hog producer and sold 8.3 million hogs last year, up 134% from a year ago.

Haid Group (002311.SZ), based in southern Guangdong Province, is China’s third largest feed processor with sales of 14.7 million tons in 2020. It also built a large hog production business and sold nearly 1 million hogs in 2020. Haid branched out into animal health and food services. The stock trades at a whopping 55.4 P/E, making it bigger than New Hope Group (16.4 P/E) by market cap.

Tongwei (600438.SH) is a Sichuan-based feed processor. It also has a fully owned subsidiary that produces solar photo voltaic products. With Hog and New Energy the hottest chases in the stock market, Tongwei is trading at an even higher P/E ratio of 61.6. You may scratch your head about the possible relationship between hogs and solar panels. There is none. Many US conglomerates owned totally unrelated business lines in the last century. This practice is still very popular in China.

Shuanghui (000895.SZ) is China’s top meat packer. In 2020, it realized revenue of RMB 14.0 billion in meat packing and 11.4 billion in food sales. In 2013, Hong Kong listed WH Group (0288.HK) acquired the top US hog producer Smithfield. WH Group is a sister company to Shuanghui and controlled by Shuanghui founder Mr. Wan Long.

Today, I want to spend time to discuss Wen’s Group (300498.SZ), who fell from the grace as China’s long-run top hog and poultry producer last year. Wen’s was founded in 1983 by Mr. Wen Beicun, a village bookkeeper, and six farmers in rural Xinxing County in Guangdong Province. The startup capital was 8,000 yuan.

From its start, Wen’s Group contracts out poultry production to local farmers. The Company provides chicks, feeds, animal health products and technical support to farmers, who builds their own chicken farms and raise chicken for Wen’s under contract. In this “Company + Farmers” business model, Wen’s pays farmers a specified amount for turning over healthy grown chicken. In addition, it distributes part of the profit to farmers when the market price is profitable. This model is being hailed as a great invention to build wealth in rural farming communities.

By leveraging farmers’ land, labor and capital, Wen’s quickly grew into one of the largest chicken producers in China. Built on its success, Wen’s began raising hogs in 1997. It adopted the same “Company + Farmers” model as with poultry production. By 2018, Wen’s generated 59% of its sales from hog production, outgrew poultry’s 39%. The Company also branched out into duck and dairy production. In comparison, Muyang focuses on hog production since Mr. Qin Yingnian started the company in 1992 and now still derives 99% of its income from hogs.

The founder’s common-wealth philosophy also reflects in Wen’s ownership structure. In 1993, the company started offering employee stock ownership plans to all qualified employees, with the stocks being held by its workers’ union. By December 2012, prior to Wen’s IPO, a total of 6,789 employees owned 49.57% of the Company. In comparison, Mr. Qin owns 39.76% of Muyuan, and his wife Qian Ying, another 1.23%.

Today, the original seven founding families owns 23.53% of Wen’s Group. The largest individual shareholder is Mr. Wen Pengcheng with just 4.08%. He is the founder’s second oldest son and served as the Company’s chairman from 2012 through 2017. Wen’s Group is currently led by Mr. Wen Zhifeng, Chairman of Board since April 2007, and previously its CEO. He is the younger brother of Mr. Wen Pengcheng.

In 2019, Wen’s Group recorded sales revenue of RMB 73.2 billion, with net profit of 13.9 billion for a profit margin of nearly 19%. It sold 18.5 million hogs, comparing to Muyuan’s 10.2 million in 2019 and 18.1 million in 2020.

Photo 01: Visit of Wen’s Group in 2017

(Mr. Wen Zhifen, Chairman of Wen’s Group, is at the center of the photo)

Wen’s business model came under attack when African Swine Fever broke out in China in August 2018 and spread throughout 2019. The Company’s tens of thousands of contract farmers were more vulnerable to the virus, and as a result, a large portion of sow inventory was wiped out. The impact worked its way downstream to market hogs the next year. In 2020, Wen’s hog sales were down 48.4% to 9.55 million and it gave up its top hog producer title to Muyuan. Wen’s stock price was also cut in half, from the historic high of RMB 37.33 to 18.81 at today’s closing.

Chart 03: Wen’s Group Stock Price Trend

(Data Source: Wind Financial)

About the author: Jim W. Huang, CFA is chief executive of China-America Commodity Data Analytics, Inc., an independent agricultural commodity market consultancy. Mr. Huang is a leading voice on China’s livestock and poultry markets, and frequently quoted by Bloomberg, Reuters and the Wall Street Journal. Prior to starting CACDA in 2012, he was an Associate Director of Product Strategy at CME Group, the world’s largest Derivative Exchange holding company. Mr. Huang received an MBA from Chicago Booth and studied under Nobel Laureate Eugene Fama in an empirical research of futures market liquidity. You may contact the author by email at jimwenhuang@gmail.com.

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