Livestock and poultry industry chain sentiment picks up, breeding stocks rise broadly, presenting a good opportunity for positioning
At the end of July, prices across the livestock and poultry industry chain rose noticeably. Historical statistics show that whenever pig prices rise significantly and sustainedly, breeding stock prices climb another step higher. On the whole, the decline in the inventory of breeding sows is clear, while the domestic macroeconomic shift is turning favorable, with mid-term positive factors strengthening, and improvement in the 2015 hog supply-demand pattern along with a clear recovery in sentiment can be expected. At the same time, in terms of trend, the fact that a “pig price reversal” cannot be falsified before the 2015 Spring Festival also provides a safe time window for investment in the livestock and poultry chain; in terms of market cap space, some leading hog companies currently have room to rise, but the risk-reward ratio of poultry industry stocks and feed and vaccine stocks is higher. Therefore, the livestock and poultry industry chain is worth actively accumulating, and opportunities in the livestock and poultry chain will also spread to feed and veterinary drugs as well as other non-leading breeding stock targets.
Sentiment picks up, breeding stocks rise broadly
As of the end of July and early August, pig prices nationwide continued to rise, with lean-type pigs rising to 14.17 yuan/kg, pork prices rising to 21.32 yuan/kg, and piglet prices falling to 24.85 yuan/kg. At present, pig prices have crossed the break-even point, and in July-August the deviation of marketed heavy pigs from normal levels is the largest, the supply shortage relative to demand is most obvious, and this is also the stage in which pig prices rise fastest. As pig prices entered a substantive upward range, coupled with the boost from the recovering domestic macroeconomy, mid-term positive factors for the industry strengthened noticeably, and breeding stocks in the third quarter also welcomed a broad rise.
In terms of investment rhythm, the current period belongs to the second wave of investment opportunities——that is, the broad-rise stage. In fact, the investment rhythm of this round of livestock and poultry breeding stocks is divided into two parts. The first is that the sharp decline in breeding sow inventory from April to July led to strong reversal expectations, driven mainly by expectations, manifesting as a stage in which leading stocks led the rise; the second is that after July the extent of pig price increases was realized, with performance improvement as the focus, manifesting as the current broad-rise stage.
Among these, in the first stage, because the capital market had considerable disagreement over whether pig prices would reverse, investors mostly invested in leading hog breeding stocks, while other hog breeding stocks showed no obvious performance. Now in the second stage, breeding stocks need to realize pig price rise expectations, and only when pig prices begin to rise and show sustained performance will breeding stocks have a stepwise upward market trend, that is, after stock prices are rapidly pulled up they serve as a platform, waiting for further stimulation from pig prices. During this period, some who previously did not expect a reversal will also engage in phased operations, with the main targets being mostly non-leading stocks that rose less earlier. Therefore, as livestock and poultry breeding stock investment is currently in the second wave of a broad rise brought about by the substantive increase after pig prices crossed the cost line, non-leading stocks may have greater elasticity.
Benefiting from the breeding industry, veterinary drug sentiment recovers quarter by quarter
After the second quarter, the domestic breeding industry welcomed two major positives: growth in inventory and improvement in profitability. Benefiting from the improvement in these two driving indicators, the sentiment of the domestic veterinary drug industry also moved upward quarter by quarter. On the one hand, the recovery in inventory brought a recovery in demand for veterinary drugs; on the other hand, after breeders achieved profitability, demand for some high-end vaccines and veterinary drugs recovered, and the prevention and control cost per pig and per bird will increase quarter on quarter. As a result, overall demand in the veterinary drug industry recovered noticeably, and the performance of related veterinary drug companies showed quarter-on-quarter improvement.
It is expected that by 2020 the scale of the domestic veterinary drug industry will reach 100-150 billion yuan, with its growth drivers mainly coming from the increase in the penetration rate of vaccines and veterinary drug preparations brought by the rising share of large-scale breeders, the value enhancement of the vaccine industry brought by the gradual shift of government-tendered vaccines to market vaccines, the substantial increase in the penetration rate of traditional Chinese veterinary medicine health products, the future market size of domestic pet preparations and vaccines should be 10-15 billion yuan, and the future market size of domestic aquatic medicine and vaccines at 15-20 billion yuan.
In addition, cooperation and mergers and acquisitions among domestic veterinary drug leaders are also in full swing. After listing, Ringpu Biology successively acquired or formed joint ventures with several veterinary drug companies; Hubei Longxiang, Inner Mongolia Dadi, Tianjin Sairui Polypeptide, and Beijing Bolaidelii mainly focused on expanding product lines of raw material drugs, traditional Chinese veterinary medicine, polypeptide products, and pet medicine and vaccine products, while Hunan Zhong'an and Shanxi Ruixiang focused on sales regions and channels; Dahua Nong successively acquired Foshan Zhengdian to enter the parasite vaccine field, and formed a joint venture with the Pearl River Fisheries Research Institute to enter the aquatic medicine and vaccine field; Tiankang Biology took a controlling stake in Jilin Shuguang to enter the avian influenza vaccine field.
Against the backdrop of an overall recovery in the sentiment of the livestock and poultry industry chain, positioning opportunities in industry chain stocks are also quietly emerging. Specifically, in terms of investment targets, the mid-term core position is still recommended to be mainly poultry industry stocks, supplemented by some non-leading hog breeding stocks, and partially going long on the livestock and poultry chain in the third quarter. Because in this pig cycle, poultry industry stocks have greater elasticity than the pig industry chain and greater certainty in performance than the pig industry chain, and are currently in the early stage on the right side of the reversal phase; as each link of the entire industry chain recovers one after another, the industry will show a state of broad gains, with a better overall risk-reward ratio. In addition, given that the sentiment of the hog industry in 2015 is better than in 2014, and poultry breeding has also achieved a reversal, with sentiment set to continue into 2015, demand in the veterinary drug industry is expected to continue improving and is worth close attention.