Muyuan Earnings: Disappointment Following Weak Hog Prices; Valuation Retained

No-moat Muyuan Foods’ 002714 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.

We retain our fair value estimate at CNY 48 per share, which implies 15 times 2024 price/earnings and 2.9 times price/book. While Muyuan is presently undervalued, we expect weak hog prices to persist through first half 2024, which may limit near-term share price performance.

Third-quarter revenue fell 14.8% year on year, cycling a high base in hog prices from last year. Muyuan sold 16.7 million market hogs during the quarter, at CNY 15.3 per kilogram. Both volume and selling price were below our estimates of 19 million and CNY 16.5, respectively. The hog price rebound was short-lived and is sequentially lower so far this fourth quarter. Muyuan’s third-quarter gross profit trailed our estimates by roughly CNY 2 billion as a result. On the bright side, the recovery to net profit of CNY 1.1 billion from operating losses in the first half reflects continued effective cost control as well as higher selling prices. The firm continued to invest in lowering production costs through swine disease control, feed formula optimization, and standardization in production processes. Cost per kg has dropped to CNY 14.50 during the period, from CNY 15.00 in the second quarter.

We expect the firm’s selling price to sit at CNY 16 per kg this quarter, versus the prior estimate of CNY 17. We continue to expect second-half 2024 earnings to outpace the first half. Sow supply remains elevated, so we project hog prices to linger at around CNY 15 per kg in first half 2024. We see limited lunar new year demand impact.