1、China Hog and Packaged Meat SectorUBS Research THESIS MAP a guide to our thinking and whats where in this report HYPERLINK l _bookmark1 OUR THESIS IN PICTURESMOST FAVOUREDLEAST FAVOUREDWH Group, WensN/APIVOTAL QUESTIONSQ: Will hog prices in China stay at elevated levels in 2020-21E?Very likely, as C

2、OVID-19 could delay sow restocking amid traffic restrictions and construction project suspensions, leading to continued tight supply in late 2020/early 2021. A still-low reproductive sow inventory combined with lowered PSY (piglets per sow per year), in addition to the absence of an effective vaccin

3、e for ASF, could also support elevated hog prices in China, in our view. In the medium to long term, we believe improved price discipline from increased industry concentration could support hog prices. HYPERLINK l _bookmark2 moreQ: Will the premiumisation trend gain momentum in the next one to two y

4、ears?Unlikely. Similar to the April 2019 UBS Evidence Lab survey, the December 2019 survey revealed a lack of progress in the premiumisation of packaged meat in China, as indicated by the persistent weakness in purchase frequency and monthly spending on higher-ASP WLTM and CLTM. In addition, demand

5、for packaged meat appears to show high elasticity to price fluctuations, which could be another headwind to premiumisation, in our view. HYPERLINK l _bookmark3 moreUBS VIEWWe lift our 2020/2021 hog price forecasts from Rmb26/Rmb20 to Rmb30/Rmb21.5 per kg in view of the continued tightness in hog sup

6、ply, which is likely caused by delayed sow restocking amid the COVID-19 outbreak. We reiterate our Buy rating for Wens given the robust hog ASP outlook despite our lower hog sales volume assumption. We lift our price targets for WH and SH to primarily factor in the potential earnings contributions f

7、rom more attractive China-US synergy, underpinned by the prospects for a higher-than-expected China/US hog price spread, lower import tariffs and clearer guidance on import volume. However, we prefer WH over SH given WHs low valuation.EVIDENCE1) Reproductive sow inventory in China remains close to t

8、he record-low despite a modest sequential recovery since October 2019, which was likely driven by the retention of commercial (market-ready) sows for reproductive purposes; 2) we estimate a 10% increase in commercial sows mix within total reproductive sows could lead to a 2% decline in PSY; 3) the C

9、OVID-19 outbreak could lead to a 5-6 month delay in sow restocking, according to our recent conversations with industry participants; 4) the development of an ASF vaccine is still in the laboratory stages, with commercial production likely a very long time away, in our view.WHATS PRICED IN?WH is tra

10、ding at 7.3x minority interests-adjusted 2021E EV/EBITDA, below China/Hong Kong peers average of 11.2x and global peers average of 12.7x. SHs 12-month forward PE is at 22.1x; its five- year historical high. We believe this implies SHs resilient earnings growth, on the back of arbitrage profits amid

11、Chinas hog price upcycle, is largely priced in. Wens is trading at 2.3x 2021E P/BV while generating 35% 2021E ROE, compared with agriculture peers averages of 2.7x/28%. We think this indicates its potential return is likely undervalued by the market. HYPERLINK l _bookmark4 moreChina Hog and Packaged

12、 Meat SectorUBS ResearchOUR THESIS IN PICTURES HYPERLINK l _bookmark0 return 10k headChina reproductive sow inventory and YoY change5,5005,0004,5004,0003,5003,0002,5002,0001,5001,000500Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan

13、-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20010%5%0%-5%-10%-15%-20%-25%-30%-35%-40%-45%We remain positive on the hog price outlook in China, given still-low reproductive sow inventories (down 28% YoY in January 2020). This is despite the modest sequential recovery since October 2019, which was like

14、ly driven primarily by breeders retention of commercial sows for reproductive purposes.Reproductive sow inventoryYoY % change (rhs)Commercial sows as% of total reproductive sowsOverall PSY (piglets per sow per year)Rmb/kg45403530252015105Jan-09050%40%30%20%10%0%-10%-20%-30%-40%Q117-50%0%24.010%23.52

15、0%23.030%22.640%22.150%21.660%21.170%20.690%100%19.719.2New UBSe 2020 avg: 30 Old UBSe 2020 avg: 26New UBSe 2021 avg: 21.5Old UBSe 2021 avg: 2080%20.2Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18Jan-19Jan-20Jan-21China hog sales volume YoY % changeWe estimate a 10% increase in commercial so

16、ws mix within total reproductive sows could lead to a 2% decline in PSY.We expect the full-year average hog price in China to reach Rmb30/Rmb21.50 per kg in 2020/2021E, up from our previous forecasts of Rmb26/Rmb20 per kg. This is in view of the continued tightness in hog supply, which we believe is

17、 likely caused by delayed sow restocking amid the COVID-19 outbreak.Large-scale breeders in China consistently outperformed the industry average (and small-scale breeders) in hogs sales volume growth since the ASF outbreak, except in Q419 when they extensively retained commercial sows for reproducti

18、ve purposes. We believe improved price discipline from increased industry concentration in the future could support hog prices.Q217Q317Q417Q118Q218Q318Q418Q119Q219Q319Q419IndustryLarge-scale breeders*70%70%73%70% of regular packaged meat buyers (all respondents)56%47%53%57%55%48%54%53%56%45%51%58%In

19、 the December 2019 UBS Evidence Lab survey, 57% of respondents indicated they purchased packaged meat at least once every six months (defined as regular buyers), up from 53% in April 2019 and 47% in May 2018. This trend is driven by an increase in tier 4-5 cities.ChinaTier 1Tier 2-3Tier 4-5 Oct-17 M

20、ay-18 Apr-19 Dec-19Likelihood to purchase packaged meat in the next six months (non-regular buyers)1%3%2%10%22%27%46%48%55%34%21%13%8%6%2%In the December 2019 UBS Evidence Lab survey, 29% of non-regular buyers indicated they are likely (2%/27% very likely/quite likely) to buy packaged meat in the ne

21、xt six months, improving from 25% in the April 2019 survey. We expect further upside potential in the penetration of packaged meat, which we think could be considered a substitute for pork amid the ASF-driven price upcycle.Very likelyQuite likelyMaybeQuite unlikely Very unlikely Oct-17Apr-19Dec-19Av

22、erage monthly amount spent compared to 6 months ago (regular buyers), December 201913% 24% 10% 13% 19% 22% 14% 21% 24% 22% 15% 27%79% 60% 81% 80% 70% 62% 66%73% 69% 60%77%67%8%16%9% 7%10% 16% 20%7% 7%18%8% 6%China Tier 1 Tier 2- Tier 4- China Tier 1 Tier 2- Tier 4- China Tier 1 Tier 2- Tier 4-353535

23、Heat-treated processed Chinese low temp meat Western low temp meat meat productsproductsproducts24%/19% of regular buyers appeared to be spending less than six months ago on higher-ASP WLTM/CLTM per month while 7%/10% were spending more, according to the December 2019 UBS Evidence Lab survey. In our

24、 view, this indicates a challenging premiumisation outlook for packaged meat.Spending more per month nowNo changeExpected purchase frequency change to packaged meat price hike (regular buyers), December 201921%40%40%28%33%39%38%39%23%53%36%11%The December 2019 UBS Evidence Lab survey results indicat

25、ed consumer demand for packaged meat is fairly sensitive to price changes, with 5%/10%/20%/30% price hikes likely to result in 11%/23%/39%/40% of regular buyers cutting back on their purchase frequencies. This could have a negative impact on premiumisation, in our view.5% price increase 10% price in

26、crease 20% price increase 30% price increaseLikely to buy as oftenMay or may not buy as often Unlikely to buy as oftenSource: Company data, China Animal Agriculture Association, National Bureau of Statistics, Wind, UBS Evidence Lab, UBS estimatesChina Hog and Packaged Meat SectorUBS ResearchPIVOTAL

27、QUESTIONS HYPERLINK l _bookmark0 return Q: Will China hog prices remain at elevated levels in 2020-21?UBS-S VIEWVery likely, as COVID-19 could delay sow restocking amid traffic restrictions and construction project suspensions, leading to continued tight supply in late- 2020/early-2021. Continued lo

28、w reproductive sow inventory combined with lowered PSY (piglets per sow per year), in addition to the absence of an effective vaccine for ASF, could also support elevated hog prices in China, in our view. In the mid- to long-term, improved price discipline from increased industry concentration could

29、 also support hog prices.EVIDENCEReproductive sow inventory in China remains close to record-low levels (down 28% YoY in January 2020), even with a modest sequential recovery since October 2019 driven by the retention of commercial sows for reproductive purposes.A 10% increase in the mix of commerci

30、al sows within total reproductive sows could lead to a 2% decline in PSY, by our estimates.The COVID-19 outbreak could lead to a 5-6 month delay in sow restocking, per our recent conversations with industry participants.Leading breeders have set promising mid- to long-term targets for hog sales volu

31、me, which implies an expected rise in industry concentration and improved price discipline.ASF vaccine development is still in the laboratory stage, with commercial production likely a long time away.WHATS PRICED IN?We believe investors have only partially priced in a lengthening in the expected dur

32、ation of elevated hog prices due to COVID-19.Despite modest sequential recovery, still-low sow inventory levels could underpin a solid hog price outlook in ChinaAfter reaching a record-high of Rmb40+/kg in late-October/early-November 2019, hog prices in China slid to the low- to mid-Rmb30s for the r

33、emainder of 2019 and have been hovering around Rmb35 since the beginning of 2020. Amid the ASF outbreak, full-year 2019 average hog price in China was Rmb22/kg, up 73% YoY. In 2020 YTD, monthly hog price increases in China have been largely above 200% YoY, with current price standing at around Rmb33

34、/kg.Looking ahead, we remain positive on the hog price outlook in China, given reproductive sow inventories (down 28% YoY in January 2020) remain low even after a modest sequential recovery since October 2019 mainly on the back of breeders extensive practice of retaining commercial sows for reproduc

35、tive purposes. We estimate a 10% increase in the mix of commercial sows within total reproductive sows could lead to a 2% decline in PSY (piglets per sow per year) due to the formers lower reproductive efficiency compared to dedicated reproductivesows, therefore leading to potential downside to hog

36、sales volume in China this year and providing support to hog prices.Figure 1: China hog inventory and YoY changeFigure 2: China reproductive sow inventory and YoYchange10k head 55,00050,00045,00040,00035,00030,00025,00020,00015,00010,0005,000Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Ja

37、n-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19010%5%0%-5%-10%-15%-20%-25%-30%-35%-40%-45%10k head 5,5005,0004,5004,0003,5003,0002,5002,0001,5001,000500Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Ja

38、n-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19 Jan-20010%5%0%-5%-10%-15%-20%-25%-30%-35%-40%-45%Hog inventoryYoY % change (rhs)Reproductive sow inventoryYoY % change (rhs)Source: China Animal Agriculture Association, WindSource: China Animal Agriculture Association, WindFigure 3: Wens PSY sen

39、sitivity analysisCommercial sows as % of total reproductive sowsOverall PSY (piglets per sow per year) 0% 24.010%23.520%23.030%22.640%22.150%21.660%21.170%20.680%20.290%19.7100%19.2Source: Company data, UBS-S estimatesFigure 4: China hog price and YoY changeRmb/kg 45403530252015105Jan-09Jul-09 Jan-1

40、0 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 Jul-19Jan-200300%250%200%150%100%50%0%-50%-100%-150%Hog priceYoY % change (rhs)Source: China Animal Agriculture Association, Windwith COVID-19 likely to delay sow restockin

41、g and cause continued supply tightness in late 2020/early 2021The short-term impact of the COVID-19-triggered traffic lockdown has already manifested itself in the hog sales volume weakness at leading breeders in February 2020, including Wens and New Hope, as cited by both companies in their monthly

42、 hog sales announcements. Our recent conversations with industry participants lead us to believe sow restocking could be delayed by 5-6 months, therefore negatively impacting supply in late-2020/early-2021, given the 10-month hog breeding cycle.We now expect full-year average hog price in China to r

43、each Rmb30/21.5 per kg in 2020/21E, up from our previous forecasts of Rmb26/20 per kg.Figure 5: February vs January 2020 hog sales volume sequential changeWensNew Hope-27%-39%February vs. January 2020 hog sales volume sequential changeSource: Company dataSow4 months pregnancyPigletBreeding:1-2 month

44、s with milk 4-5 months with feedHogFigure 6: Hog breeding calendar: a 10-month processSource: UBS-S estimatesFigure 7: 2020-21 China average hog price forecastsRmb/kgNew UBS-S-e 2020 avg: Rmb30/kg Old UBS-S-e 2020 avg: Rmb26/kgNew UBS-S-e 2021 avg: Rmb21.5/kg Old UBS-S-e 2021 avg: Rmb20/kg4540353025

45、2015105Jan-09Jan-10Jan-11Jan-12Jan-13Jan-14Jan-15Jan-16Jan-17Jan-18Jan-19Jan-20Jan-210Source: China Animal Agriculture Association, Wind, UBS-S estimatesRecord-high sow and piglet prices could cap restocking at small-scale breedersAbsent an effective vaccine for ASF, small-scale hog breeders progres

46、s in restocking will likely remain limited, in our view, due to the high mortality associated with ASF and the significant financial losses that would need to be borne if their herds were to become infected. Record-high sow and piglet prices (up a respective 128% and 280% YoY currently) could serve

47、as additional obstacles to restockingparticularly for small-scale breeders that are more likely to be financially challenged, thus leading to increased supply discipline and robust price outlook.Figure 8: China reproductive sow price and YoY changeFigure 9: China piglet price and YoY changeRmb/kg 80

48、70605040302010Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19Dec-190140%120%100%80%60%40%20%0%-20%Rmb/kg 12010080604020Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Jun-19Dec-190400%300%200%1

49、00%0%-100%-200%Reproductive sow priceYoY % change (rhs)Piglet priceYoY % change (rhs)Source: NDRC, WindSource: China Animal Agriculture Association, WindExpected acceleration in hog breeding industry consolidation could lead to improved price discipline in the futureWe continue to believe ASF could

50、drive accelerating consolidation in Chinas hog breeding industry, as small-scale breeders are more vulnerable to ASF due to constraints in the resources needed to prevent and combat the disease. Indeed, large-scale breeders in China have continued to outperform the industry average (and thus their s

51、mall-scale counterparts) in hog sales volume growth since the ASF outbreak, with the exception of Q419 when large-scale breeders sacrificed immediate volume for future market share by extensively engaging in the retention of commercial sows for reproductive purposes. Leading breeders including Wens,

52、 Muyuan and Zhengbang have set promising mid- to long-term targets for their hog sales volumes, which implies a likely rise in industry concentration, and we expect Chinas top two breeders Wens and Muyuans combined share of volume to reach 8.4% in 2020E, up from 5.3% in 2019 and 4.8% in 2018. We bel

53、ieve higher industry concentration with reduced presence of small-scale breeders could lead to improved price discipline in the future.Figure 10: China hog sales volume YoY % change50%40%30%20%10%0%-10%-20%-30%-40%-50%Q117 Q217 Q317 Q417 Q118 Q218 Q318 Q418 Q119 Q219 Q319 Q419IndustryLarge-scale bre

54、eders*Note: Large-scale breeders include Wens, Muyuan, Zhengbang, New Hope (from Q119 onwards), and Tech- bank.Source: National Bureau of Statistics, company dataFigure 11: Annual hog sales volumes and targets for leading breeders (heads)20182019Company targetWens22.3m18.5m70m by 2027Muyuan11.0m10.3

55、m17.5-20m in 2020; 70%/47% YoY volume growth target in 2020/21 per share incentive schemeZhengbang5.5m5.8m60%/38% YoY volume growth target in 2020/21 per share incentive schemeSource: Company dataFigure 12: Wens and Muyuans hog sales volume market share in China2.2%2.5%2.8%3.2%3.4%4.1%4.3%94.7%1.9%9

56、5.2%1.6%96.2%1.1%97.0%0.5%97.6%0.3%91.6%Rest Muyuan Wens201520162017201820192020ENote: Assume China hog sales volume will decline 20% YoY in 2020; Muyuans 2020 hog sales volume per guidance midpointSource: National Bureau of Statistics, company data, UBS-S estimatesASF-driven price increase has mean

57、ingfully impacted pork demand; however, this could be outweighed by an even greater supply deficitIn December 2019, UBS Evidence Lab conducted the second round of a survey to gauge Chinese consumers perception of and consumption behaviour towards fresh/frozen pork following the ASF outbreak. Compare

58、d to the first round of the survey conducted in April 2019, 14% more respondents (58% this time vs 44% last time) say they have either cut back on or completely stopped their consumption of fresh/frozen pork due to ASF. Of those whose fresh/frozen pork consumption was negatively impacted by ASF, 76%

59、 noted significant increase in recent pork price in the December 2019 survey vs 23% in the April 2019 survey. Although the survey results indicate a meaningful negative impact on pork demand due to ASF-triggered price increases, we would expect this to be more than offset by an even more significant

60、 supply shortage, leading to a relatively resilient price outlook for pork and hog in China.Figure 13: Influence of ASF news on the consumption of fresh/frozen pork100%9%6%52%35%31%33%25%9%90%80%70%60%50%40%30%20%10%Stopped consuming fresh / frozen pork completelyConsume less fresh / frozen pork now