Talking Point

Bringing home the bacon

Investors hope that the Year of the Pig will see pork industry sizzle

Pigs-w

Swill times: as Peppa Pig looks to dominate the holiday box office, pork giants hope for a rerun of 2007 boom

Pig farming has proved a surprising sideline for some of China’s tech tycoons.

Ding Lei’s NetEase was one of the first internet giants to start hog-rearing. The video streaming and online gaming firm started a pig production division almost a decade ago and it now rears more than 150,000 free-range hogs each year.

Last year Alibaba and JD.com started to show interest too. The former has signed major supply contracts with Brazilian and Danish pork producers for its retail arm and it believes new technologies will be key to transforming an industry almost as old as Chinese civilisation (the character meaning ‘home’ or ‘family’ – 家 – tellingly features a pig sheltering under a roof; see WiC2).

One of Alibaba’s units announced last month that its facial-recognition cameras can now diagnose pregnancy in sows (with the help of a proprietary algorithm), while JD.com has been promoting a stockbreeding platform which deploys AI and intelligent sensors to monitor the growth rate of the pigs, their meat quality and the amount of feed that they need.

Innovations like these could be important: with more than 700 million hogs produced every year, China is also the world’s biggest consumer of pork. All of which makes it timely to ask what the upcoming Year of the Pig might bring for the pig industry itself?

A good year in general?

The Pig is the last of the 12 zodiac animals that rotate through the Chinese lunar calendar. As we have discussed in greater depth before, the calendar is based on a complicated lunar-solar system (see WiC353) with the cycle set to start anew with the Rat next year. This year’s lichun, or the ‘Beginning of Spring’ according to the 24 solar terms, will fall during Chinese New Year Eve (on February 4). In the feng shui context that means it will be a new year without lichun – which is known as a ‘blind year’ in southern China or a ‘widow year’ in the north. This has connotations of bad luck, especially for those who planned to get married.

Perhaps that’s why some fortune tellers are forecasting that the Year of Pig will be an eventful one. But you don’t need a crystal ball to tell that the economy is facing testing times and on Monday the Chinese government announced that economic growth slowed to 6.6% in 2018 from 6.9% a year earlier.

Yes, the official full-year figure matched most expectations and was in line with government targets, given that the State Council had aimed for GDP growth of “around 6.5%” in March last year.

Yet the figure also represents the slowest pace of growth since 1990, a statistic widely quoted in international press reports. It has also boosted Donald Trump’s belief that his team of negotiators should have the upper hand during their ongoing trade talks with Beijing officials. “China posts slowest economic numbers since 1990 due to US trade tensions and new policies. Makes so much sense for China to finally do a Real Deal, and stop playing around!” he wrote on Twitter this week.

What about WH Group’s fortunes?

The clock is ticking for Beijing and Washington to reach a trade deal before the 90-day truce expires on March 1. Investors who own shares in WH Group, the world’s biggest pork processor, will be hoping for a resolution of the row. Its merger with Smithfield Foods in 2013, a year ahead of its major Hong Kong IPO, was initially celebrated as a case of the two markets joining together (see WiC235). WH now derives almost 60% of its revenues from the United States but it has been one of the casualties of the trade tiff with the Trump administration. With its business hit by higher tariffs, its share price has fallen nearly 30% in the past year. WH has also had to wrestle with last year’s African swine flu outbreak (more on which later).

Revenues at Henan Shuanghui, WH’s Shenzhen-listed unit, have declined for four consecutive quarters and its share price has dropped almost 20% over the past 12 months too.

In the face of these challenges WH has revamped both its China and US units. Trading in Henan Shuanghui was suspended on Tuesday, pending the announcement of a merger of assets with its parent firm. A slew of executive changes were announced at Smithfield Foods too, with its CEO Ken Sullivan telling Bloomberg in an interview that the shake-up will help the company focus on higher-margin packaged foods and move away from the commodity-end of the hog market, which is more volatile.

Sina Finance noted that Chinese brokerages have already priced in more bullish price targets for WH and Henan Shuanghui, hoping that the Year of the Pig may turn out to be a better year for the world’s biggest pork producer.

Let’s not forget Yurun

Another company looking for a reversal in fortunes is Yurun, which was previously China’s leading pork packaging firm.

The Nanjing-based company was competing with Henan Shuanghui to be “China’s no.1 butcher”: but things unravelled in 2015 when its founder Zhu Yicai was detained on bribery allegations.

Yurun has since been mired in debt trouble as well (see WiC320). Zhu stepped down as chairman although he kept a 26% stake. Over the past three years, Yurun’s share price has fallen almost 70% but its shareholders got a surprise just ahead of the Chinese New Year this week with news that Zhu had been released. Boosted by the announcement, shares of Yurun surged more than 30% on Wednesday.

According to Beijing Youth Daily, Zhu spent almost four years under house arrest in Hangzhou but following a trial, a local court set him free. “Many investors believe Zhu’s return would lead to a turnaround in Yurun’s prospects,” the newspaper predicted.

How about WENS Foodstuff?

Trading at a market value of less than $13 billion, or 10 times past earnings, WH isn’t even the biggest pig firm from China. That title goes to WENS Foodstuff, a Guangdong-based hog and chicken supplier.

Founded in 1983 as one of Communist China’s earliest private enterprises, WENS was an investor darling when it went public on Shenzhen’s Growth Enterprise Market in 2015 (see WiC379).

As of this week it enjoyed a market value of Rmb147.5 billion ($20.6 billion). In 2017 it raised more than 19 million pigs and 776 million chickens for Chinese diners. But its farms have been hit by swine fever (100 outbreaks have been confirmed across 23 provinces in China since August last year) and WENS issued a trading warning this month that its net profit for 2018 is likely to drop by about 40% from Rmb6.75 billion in 2017.

Muyuan Foods, another major pig farm listed on the Shenzhen bourse, also cut its profit forecasts for last year by 20% to below Rmb500 million.

WENS is actually in better health than many others in its sector. In part that’s because it is getting a boost from increased demand for its chickens as more shoppers turn to the country’s second most popular meat. Chicken producers have also been benefiting from tighter domestic supply after China banned imports of breeding birds from other countries because of outbreaks of bird flu.

Back in the pork business the slump in prices has also been forcing many smaller farms out of the market and even the bigger ones have scaled back some of their expansion plans.

Tougher food safety standards – imposed more diligently by regulators since the African swine flu outbreak – mean that smaller operators may be dissuaded from giving it another go even should prices improve.

Investor Journal reckons that this situation is helping to suck out surplus capacity and concludes that big players such as WENS will be best placed to reap the benefits should hog prices get higher later this year.

Will prices rebound?

According to data released by industry consultancy Soozhu on Tuesday, pork prices in China have fallen below their production cost. Lean pork meat in northeastern China, for example, is now selling at wholesale prices of Rmb8.5 per kilogramme. This compares with an average production cost of roughly Rmb12.5 per kilo.

Dongbei in the northeast is among the worst hit areas, Sohu Finance notes, and lossmaking local farmers have been sending their entire stock for slaughter in desperation. Many of the pig farms in the northeast had traditionally funelled much of their supply down to southern China, where the demand for pork is greater. However, a transport ban imposed by the authorities last year – designed to prevent swine flu from spreading – has meant that pork could only be sold locally. As a result the local market in Dongbei is saturated. Prices in Jilin have fallen more than 30% over the past 12 months.

The government has been urging the larger pig producers to diversify into slaughtering and invest in processing capacity closer to their farms, so there is less need for transporting live animals.

But Reuters also reported last November that Beijing might resort to buying up pork for the state reserves to give the commodity a boost. That sounded like good news for the hoggeries but others were concerned that intervention like this makes it more likely that pork prices will rebound too strongly later this year, especially if farmers refuse to invest in new animals.

“If the outbreak of African swine flu can’t be effectively controlled or even further spreads after the Chinese New Year, pork will be in short supply as farmers won’t be willing to replenish their herds,” Lu Yanchun, head of the price monitoring centre at the state economic planner the National Development and Reform Commission (NDRC), warned Caixin Weekly.

It’s true that smaller farmers are less likely to restock to full capacity while the threat of the disease persists. If that leads to shortages in supply later this year, it might open the door for American imports, although business is currently constrained by the tariff row.

Another risk is that suddenly steepening prices for pork could feed through into higher readings for inflation.

The government doesn’t disclose the component weightings for its inflation monitor but according to Citic Securities, pork accounts for as much as 3% of the consumer price index. So a surge in pork prices – i.e. a repeat of the major bull cycle in the prior Pig Year in 2007 – would fuel inflationary pressures.

And the award for the ‘pig’ of the year goes to…

Staying on the pig theme, “What’s Peppa?” has been the subject line of the most forwarded video across China over the past week. The video content in question is about five minutes long and promotes Peppa Pig Celebrates Chinese New Year, a made-for-China movie featuring the porcine cartoon character.

No prizes for guessing it will be released at the start of the festive holiday early next month.

China is no stranger to Peppa (see WiC383) but the latest trailer has been viewed more than 1.45 billion times on Sina Weibo.“Besides drawing attention to the movie, what I wanted to do through this trailer was to share the same values that are highlighted in the movie – family, reunion, harmony and love,” Zhang Dapeng, who directed the film, explained to news website Btime.com.

The forthcoming Peppa Pig movie is a co-production between Alibaba Pictures and Entertainment One, the Canadian firm which owns the cartoon franchise. Nonetheless, the British-made cartoon isn’t the only offering trying to tap into the seasonal cheer.

In fact, it will run into competition from a number of other pig-themed productions, with at least four rival flicks debuting in the same window, each inspired by the Chinese literary classic Journey to the West.

This is a familiar genre for lunar new year audiences, but there’s a key difference from previous years: the star isn’t the Monkey King (see WiC397) but his part-hog-part-human sidekick Zhu Bajie, whose name in English is Pigsy.

For Peppa, meanwhile, the new movie also marks a welcome return to official favour after a period in which the cute pig unwittingly became a subversive symbol for China’s online sang counterculture (see WiC407). Last May angry censors instructed leading short-video streaming site Douyin to remove 30,000 offensive clips featuring a doctored Peppa. Now with Alibaba’s backing the bubbly piglet is firmly back in the kiddy mainstream.


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