Company Reports

No-moat Muyuan Foods’ 2023 and first-quarter 2024 results were dragged by subdued hog prices. Net loss in 2023 was worse than our estimate, with operating loss persisting entering 2024. Management guided that the higher production cost during the first quarter was temporary due to disease control expense, but expects the cost to be lower in second half 2024. The company also expects improving hog prices in the second half, consistent with our view. We cut the 2024 earnings projection by 11% on lower hog production volume and hog price assumption, but our 2025-26 earnings forecasts are essentially unchanged as we retain hog production segment assumptions. Hence, we maintain our fair value estimate at CNY 46 per share, which implies 25 times 2024 P/E and 11 times enterprise value/EBITDA. The company’s share prices have gained decent momentum over the past six months, likely due to expectations of improving earnings in the second half. We think this has been largely priced in and the stock is fairly valued currently.

Muyuan Foods operates an integrated model in hog breeding and production, profiting from selling hogs at scale. The company has invested heavily between 2020 and 2022 to increase its hog production capacity. Although it is the largest hog producer in China, its volume only makes up a high-single-digit market share given the fragmented industry. China hog supply is made up of a large number of small producers. The company believes that the industry will evolve in the interest of resource efficiency and better food safety practices, and large producers with scale should see opportunities. In the meantime, the fragmented industry leads to more volatile hog price cycles, which Muyuan strives to manage by lowering production costs in order to buffer profit during a downcycle.

No-moat Muyuan Foods announced a preliminary 2023 net loss of between CNY 3.7 billion and CNY 4.5 billion, versus our projected net income of CNY 1.2 billion. The disappointment was mainly driven by suppressed hog prices during the fourth quarter of 2023 and an impairment of biological assets. Hog production volume of 63.8 million in 2023 was also below our estimate of 65.5 million. After incorporating the latest data, we cut our 2024 hog production volume growth forecast to 7%, from 11%. We also lowered our first-quarter 2024 selling price assumption as hog prices in January 2024 were below our expectations. We maintain our view that hog prices would only rebound from the second half of 2024 onward, but we now forecast a more moderate pace of price recovery in the third quarter of 2024. Overall, we anticipate hog prices to grow 9% year on year in 2024, versus our previous forecast of 12%. As a result, our 2024 net income estimate falls 33% to CNY 11.1 billion.

Muyuan Foods operates an integrated model in hog breeding and production, profiting from selling hogs at scale. The company has invested heavily between 2020 and 2022 to increase its hog production capacity. Although it is the largest hog producer in China, its volume only makes up a high-single-digit market share given the fragmented industry. China hog supply is made up of a large number of small producers. The company believes that the industry will evolve in the interest of resource efficiency and better food safety practices, and large producers with scale should see opportunities. In the meantime, the fragmented industry leads to more volatile hog price cycles, which Muyuan strives to manage by lowering production costs in order to buffer profit during a downcycle.

No-moat Muyuan Foods’ third-quarter earnings fell short on softer hog prices and lower sales volumes. We trim our sales and net income estimates for 2023 to reflect continued margin pressure but still expect the company to slightly exceed its production target of 65 million heads. We think the soft 2023 earnings have been priced in by investors with the current share price trading at a discount to 10-year average price/earnings of 16 times and below our base-case fair valuation.

Muyuan Foods operates an integrated model in hog breeding and production, profiting from selling hogs at scale. The company has invested heavily between 2020 and 2022 to increase its hog production capacity. Although it is the largest hog producer in China, its volume only makes up a high-single-digit market share given the fragmented industry. China hog supply is made up of a large number of small producers. The company believes that the industry will evolve in the interest of resource efficiency and better food safety practices, and large producers with scale should see opportunities. In the meantime, the fragmented industry leads to more volatile hog price cycles, which Muyuan strives to manage by lowering production costs in order to buffer profit during a downcycle.

We initiate Muyuan Foods 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.

Muyuan Foods operates an integrated model in hog breeding and production, profiting from selling hogs at scale. The company has invested heavily between 2020 and 2022 to increase its hog production capacity. Although it is the largest hog producer in China, its volume only makes up a high-single-digit market share given the fragmented industry. China hog supply is made up of a large number of small producers. The company believes that the industry will evolve in the interest of resource efficiency and better food safety practices, and large producers with scale should see opportunities. In the meantime, the fragmented industry leads to more volatile hog price cycles, which Muyuan strives to manage by lowering production costs in order to buffer profit during a downcycle.