Muyuan Foods: Keeping Costs Low Is Key for One of China’s Largest Hog and Pork Producers

We initiate Muyuan Foods 002714 with a no-moat rating and a fair value estimate of CNY 48 per share, which implies 15 times 2024 price/earnings, 9 times EV/EBITDA, and 3.7% free cash flow yield. The company is one of China’s largest hog and pork producers. Muyuan’s share price has fallen 15.5% year to date, which we believe reflects weak hog prices on excess supply. However, we think hog prices have bottomed in the first half of 2023 and should stabilize for the rest of the year. We think the market is too pessimistic on Muyuan and see the shares as undervalued, but investors will need to sit through a tough 2023 full-year profit performance.

We expect hog prices to stabilize in the second half of 2023 as the oversupply situation moderates. But with sow inventories still elevated, we expect to only see a more meaningful rebound in hog prices toward mid-2024. We forecast 2023 net profit to fall 58% before rebounding 200% in 2024 as hog prices recover and Muyuan benefits from capacity expansion. We believe cost containment will be key and better-than-expected second-half scale benefits to buffer operating margin—which we project to fall to 7.4% in 2023 from 14.2% in 2022—should boost investor confidence.

Muyuan’s first-half 2023 net loss reflects the weak market dynamics. Volume sales fell 3% year on year and while Muyuan achieved an 11% rise in the average selling price to CNY 14.36 per kg, it was not adequate to cover higher production costs, which the company has contained to CNY 14.60 as of June 2023 from CNY 15.70 in 2022. Looking ahead, the company plans to lower costs through feed formula management, breeding efficiency, digitalization, and automation. Muyuan completed its capacity expansion recently and we expect added scale to help in its average unit cost. We forecast a jump in second-half 2023 volume sales and stable prices to lead to positive earnings for the full year.