By Bloomberg News
The worst impact of African swine fever may be over, but that doesn’t mean investors have stopped betting on the Chinese farm stocks that have benefited from the deadly virus.
Although pork prices have eased from record highs in recent weeks, festivities around the Lunar New Year in January should lift demand for China’s favorite meat, even as supply remains fragile. Pig numbers have begun to recover after collapsing more than 40%, but new cases of the disease are still popping up and there’s still no vaccine.
Moreover, the government is relying on the largest farms to repopulate the herd, squeezing out smallholders. It leaves stocks like hog-breeder Muyuan Foodstuff Co. -- which has already tripled over the past year -- open to even more gains.
“Given that the surge in domestic pork prices may continue, and peak in the first quarter of next year, pig stocks are expected to continue their strong performance over the next three months,” said Dai Ming, a fund manager with Hengsheng Asset Management Co. in Shanghai.
Other firms to watch include New Hope Liuhe Co., which counts meat processing among its activities and has risen about 180% this year, and China’s top pig producer Wens Foodstuffs Group Co., which is up around a third.
China’s farm ministry said last week that the hog herd has started to expand after declining for months. Pig numbers probably began picking up in November after 12 provinces reported an increase in inventories, according to a senior official.
Pork prices have also dropped as China has boosted meat imports, while the government’s plan is to raise domestic pork supply to 80% of normal levels by the end of 2020 by restocking the larger farms.
Thanks to heady expectations of earnings growth over the next 12 months, Muyuan saw its price-to-earnings ratio sink to a record low of 7.22 times at the end of November, way below its two-year average of 20.2. The consensus target price for the firm is 108.87 yuan, according to six analysts surveyed. That’s more than 20% higher than current levels.
Still, not everyone is as optimistic. Xiong Qi, a portfolio manager with Windsor Capital Management Co. in Beijing, said he’s cut Muyuan from his watchlist as hog stocks are already overpriced. “Anticipation of a surplus of hogs will turn the breeding industry to a downward cycle,” he said, adding that interest in the sector is waning among investors.
But time could well be on Muyuan’s side. Boosting pig numbers doesn’t immediately translate into more pork supplies, which may take over a year to recover, said Lin Guofa, a senior analyst with Beijing-based consultant Bric Agriculture Group. And, the government’s policy to allow bigger producers to expand is putting them on “a fast track to take more market share,” he said.
Muyuan said in September it expects the number of its sows to exceed 1.3 million by the end of this year, up from around 900,000.
Others see an even longer time-frame. The industry could be generating strong profits for the next three years as it waits for a full recovery in hog numbers, TF Securities Co. said in a note earlier this month.