Summer bird flu threat resurfaces, vaccine company stock prices rise in response

Last weekend, rumors of a bird flu threat once again circulated in the poultry farming market: according to some media reports, Fogang County in Qingyuan City recently reported an outbreak of highly pathogenic H5N6 avian influenza; all 38,110 birds at 13 poultry farms within the epidemic zone were culled; respiratory medicine experts even believe that this outbreak must be taken seriously.

From the current perspective, the outbreak occurred in summer and has not further expanded, so its impact on the meat market and farming enterprises is mainly short-term. Comparing historical stock price changes, more than ten avian influenza vaccine companies can relatively easily gain significant upward momentum in their stock prices from sudden events, while listed companies with a large proportion of chicken farming business, such as Yisheng Shares and Sunner Development, may see their future performance and stock prices affected to a certain extent.

⟦NL> Impact one: Limiting the upward trend of chicken prices

Regarding this H5N6 avian influenza outbreak, a Guangzhou Daily reporter interviewed many professionals, who believe it will suppress and limit the current upward trend of national chicken prices, or cause it to peak temporarily, but it increases the substitutability of pork, making pork prices likely to rebound again.

Compared with avian influenza outbreaks in previous years, the culling of more than 38,000 birds in this outbreak as described by related enterprises is not yet a very large scale. From past historical outbreaks, whenever the culling scale exceeded 100,000 birds, it would cause a 10%-30% downward impact on chicken prices; if the culling scale was only below 10,000 birds, the hit to chicken prices was generally within 5%, with little change; and the culling scale of this outbreak happens to fall between the two.

Chicken prices rebounded sharply starting in July. According to statistics from institutions such as Xinmu Network, the average national chicken (wholesale) price rebounded by 31% over one and a half months, at a relatively fast pace. In the past 3 trading days, the pace of increase has slowed, and technically there was already a need for a pullback after the surge. Coupled with the threat of avian influenza, in the next 2 weeks, chicken prices are quite likely to see a certain degree of pullback.

In contrast, since entering August, pork prices have shown an obvious trend of surging and then pulling back. The national average pork ex-farm price has fallen from a high of above 9.2 yuan/jin to below 9 yuan/jin. Because the shrinkage in pork market slaughter volume and tight supply conditions have not changed, meat prices are still in a “bull market.” The avian influenza threat easily makes pork a substitute, allowing pork prices to bottom out and rebound again.

Impact two: Vaccine company stock prices rising on heavy volume

Since the current avian influenza threat has not expanded, for the A-share market, the positive impact on vaccine company stock prices should be far greater than the negative impact on farming company stock prices. From historical experience, once an outbreak occurs, farming enterprises large and small will buy large quantities of vaccines to “insure” their poultry, driving the performance of listed vaccine companies.

Guangzhou Daily learned that the Ministry of Agriculture has approved a total of 9 avian influenza vaccine manufacturers, involving production by more than ten A-share listed companies. Among them, six companies have avian influenza vaccines as their main business with a relatively large proportion, namely Lianhuan Pharmaceutical, Hualan Biological, Tiantan Biological, Zhejiang Medicine, Shanghai Pharmaceuticals and Shenghua Baike. Except for Shenghua Baike, which is suspended from trading, the other five companies have recently performed stronger than the broader market, in a rising trend on heavy volume.

By comparison, Hualan Biological has the best investment prospects, with half-year earnings per share as high as 0.53 yuan, steady net profit growth, and hot concepts such as “Central Huijin holdings.” During the 2013-2014 avian influenza outbreaks (or rumors), this stock's price surged significantly, and it deserves special attention later. In addition, pharmaceutical companies such as Lukang Pharmaceutical, North China Pharmaceutical and Harbin Pharmaceutical Group have also participated in the research and development of avian influenza vaccines and will also benefit.

Impact three: Farming enterprises prone to adverse effects

Compared with vaccine companies, the stock prices of listed farming enterprises have recently been sluggish. The avian influenza threat easily has an adverse stock price impact on enterprises with large-scale chicken farming operations or located in southern regions. For example, Yisheng Shares, whose chicken farming business accounts for about 160% of its pig farming business, is relatively vulnerable to impact; also, for example, Chuying Agro-Pastoral and Sunner Development, whose chicken business scale is relatively large, are also among the companies that may be affected, especially when their stock prices are already weak overall, making them prone to being “hit while down.”

In contrast, Muyuan Foods' business is basically only related to “pigs,” and Luoniushan's business is spread across various industries, so their future performance is less likely to be threatened by avian influenza.

In addition, because avian influenza is a sudden event and has not yet caused “human infection,” the annual performance of listed companies is limited in how much it can be affected by similar events. Hot events such as mergers and restructuring, equity participation in finance, and state-owned enterprise reform currently still have a greater impact on the performance and stock prices of similar listed companies than avian influenza.