HSBC-Hog Industry in China

Equity Research Report
Agricultural Products
October 2019
By: Andy Li (S1700519070001) www.research.hsbc.com
SPOTLIGHT
China’s hog industry

Initiate coverage: What African swine fever
means for China’s pork supply chain
African swine fever has hit China hard

but, in a non-consensus call, we see
signs that the RMB1trn hog industry
could be in the early stages of a
recovery
We expect the market leaders in

animal feed and vaccines to benefit
We initiate coverage of four companies

– prefer feed producer Haid Group
(Buy) and vaccine maker Jinyu (Buy)
to hog producers Muyuan (Hold) and
Wens (Hold)
Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in
the Disclosure appendix, and with the Disclaimer, which forms part of it.
Equities ● Agricultural Products
October 2019
Why read this report?

 African swine fever has hit China hard but, in a non-consensus call,
we see signs that the RMB1trn hog industry could be in the early
stages of a recovery
 We expect the market leaders in animal feed and vaccines to benefit
 We initiate coverage of four companies – prefer feed producer Haid
Group (Buy) and vaccine maker Jinyu (Buy) to hog producers
Muyuan (Hold) and Wens (Hold)
Production levels, not pork prices

Andy Li* (S1700519070001)
Head of A-share Agriculture
Research The story so far: African swine fever, which is now a global phenomenon, has hit China’s
HSBC Qianhai Securities Limited
andy.j.li@hsbcqh.com.cn RMB1trn hog industry – the world’s largest – particularly hard. By September, hog inventories
+86 21 6081 3812 had fallen by 41% from a year earlier, pushing pork prices to record highs. In what is a hugely
*Employed by a non-US affiliate of HSBC fragmented industry, most of the pain has been felt by backyard operators without the funds or
Securities (USA) Inc. and not registered/
qualified pursuant to FINRA regulations the know-how to contain the disease – in 2017 there were still 35m farmers producing fewer
than 50 head of hogs – that’s 95% of the hog farmers in the country. Not everyone has suffered.
Given the inevitable supply shortage, share prices of the few big listed companies with the best
bio-safety systems have shot up.
This report explains our non-consensus view about what’s likely to happen next along the hog
supply chain – farmers, big and small, and the companies that make animal feed and vaccines.
 We believe investors should focus on the level of hog production rather than high pork
prices, which in our view are part of the volatile hog price cycle, driven by supply and
demand. For us, the rate at which farmers replenish their stocks is far more important.
 To this end, we analyse the latest data and find evidence the industry could be in the early
stages of a recovery. We expect sow inventories to gradually recover in 2020 and 2021.
 At least two leading research institutes in China have announced that they have made
breakthroughs in developing a vaccine. We assess the prospects of a vaccine becoming
available and how long it would take to mass produce.
 We believe a recovery in hog inventories will also benefit leading upstream companies in
areas such as animal feed and vaccines. They also stand to gain from the high pork prices
that are increasing demand for protein substitutes such as chicken and fish.
 Longer term, we find evidence pointing to rapid industry consolidation, a process that will
benefit the market leaders and increase efficiency, profits and bio-security standards.
 We initiate coverage of four companies. We prefer animal feed producer Haid Group (Buy)
and Jinyu (Buy), a leader in vaccines, to hog producers Muyuan (Hold) and Wens (Hold).
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October 2019
Contents
Why read this report? 1
Facts and figures 3
Investment summary 4
Industry outlook: short term 14
Industry outlook: long term 27
Company section 41
Haid Group (002311 CH) 42
Jinyu Bio-Technology (600201 CH) 52
Muyuan Foods (002714 CH) 62
Wens Foodstuff Group (300498 CH) 70
Disclosure appendix 81
Disclaimer 84
2
October 2019
Facts and figures

RMB1trn 35m
The market size of China’s hog The number of hog farmers with
industry chain annual production volume of less
than 50 hogs in 2017
The combined market share of the top 10

listed hog companies was 7.38% in 2018.
41.1%
We think this will rise to 30% in 10 years The y-o-y fall in hog inventories in
China, as of September 2019
RMB22/kg 20% 5,000

Our forecast for the hog The combined market Feed companies with
weighted average selling share of the top four feed annual capacity below
price in 2020e producers, implying 50,000 tonnes
significant upside
50 months We think the current cycle will be prolonged

as a result of African swine fever
The average length of the last three hog
price cycles in China since 2006
17% 10-15%
The combined market share of top eight How much we think animal vaccine sales
listed animal healthcare companies, will grow annually in the next 3-5 years
implying significant room for growth
3
October 2019
Investment summary
 China’s RMB1 trillion hog industry has been hit hard by African
swine fever – we assess the short and long-term outlook
 The large listed hog companies with strong bio-security systems
have escaped infection and are benefitting from higher prices. But
we think animal feed and vaccine companies are best placed
 We initiate coverage of Haid Group (Buy), Jinyu (Buy), Muyuan
(Hold) and Wens (Hold)
African swine fever and beyond
In September this year HSBC global research published a thematic report which described
Time to reframe the thinking
on supply, demand, pricing African swine fever as a transformational event that will reset the trajectory and development of
and substitute products the global protein industry. In African swine fever: A new reality, analysts Alessia Apostolatos
and Carlos Laboy said it was time to reframe the thinking on supply, demand, pricing and
substitute products.
This report assesses the impact of African swine fever on China, where the disease has hit the
country’s massive RMB1 trillion hog industry particularly hard. According to the government, by
September the number of hogs had fallen by more than a third y-o-y, pushing up pork prices to
record highs. We analyse the effect this is having on the pace of the hog price cycle, assess
how quickly farmers are likely to restock, and what this means for the big listed hog companies
whose pigs stocks are less affected by disease, the millions of small farmers who have suffered
most, and the animal feed and vaccine producers along the industry’s supply chain. We also
discuss the prospects for developing a vaccine in China (see pages 15-16 for details).
The report also goes further by looking at the longer-term prospects of the hugely-fragmented
hog industry. We find compelling evidence that points to rapid industry consolidation, a process
that will benefit the market leaders and increase efficiency, profits and bio-security standards.
So, while the industry as a whole is facing huge challenges as it tries to cope with the ravages
of African swine fever, we believe the long-term outlook is very promising. We start by looking at
how the hog price cycle works in China and why the earnings of hog companies are so volatile.
The hog price cycle – why earnings are volatile
Pig farming in China is an industry with little product differentiation, low entry barriers and a
huge level of fragmentation. This means it follows a predictable cycle. When there is a supply
shortage pig prices go up, farmers’ profits increase and price expectations rise. The farmers are
keen to replenish their stock and this leads to oversupply, resulting in falling prices, which
means farmers incur losses and expectations about pig prices become more pessimistic.
4
October 2019
Farmers then leave the industry, reducing production capacity which leads to a supply shortage.
The cycle is complete and starts again. The result is that the earnings of hog companies are
volatile. A similar cycle is evident for upstream animal feed and vaccine companies which
depend on the hog industry.
Let’s now put the hog cycle in the context of the outbreak of African swine fever. After sinking to
Putting the hog cycle in the
context of the outbreak of a low level in 2018 due to oversupply before the disease took hold, hog prices started to rise in
African swine fever March this year. As of 27 September 2019, the average selling price (ASP) reached
cRMB28/kg, a record high. This resulted in a hog farmers enjoying a recovery in earnings.
Our analysis of the latest government data shows early signs of African swine fever starting to
stabilise as there is evidence that sow inventories are just beginning to recover. From our
cyclical leading indicators, we can already see a strong recovery in sow prices, reflecting the
fact that hog farmers are becoming more enthusiastic about replenishing their inventories.
We believe this recovery will continue, supported by the high hog prices which are boosting the
profits of farmers. This will also benefit leading upstream companies in areas such as animal
feed and vaccine producers. At the same time, the high pork prices will increase demand for
substitutes such as chicken and fish.
Why the pace of industry consolidation will accelerate
The RMB1 trillion industry is hugely fragmented

China is by far the biggest producer and consumer of pork in the world. In 2018, the number of
China is by far the biggest
producer and consumer of hogs supplied and consumed by China both reached c684m, representing c50% of the global
pork in the world total. Based on the average hog price of RMB12.7kg and the average hog weight of 110kg, we
estimate the country’s hog market was worth cRMB1trn last year. And despite the impact of
African swine fever, we think the size of market will remain stable.
Although we expect a decrease in hog production volumes over 2019-20e, this will be
accompanied by an increase in hog prices. Over 2021-22e, we expect production volumes to
gradually recover and hog prices to decline as hog farmers replenish their inventories.
According to the Ministry of Agriculture, in September 2019 the number of live hogs had fallen
by 41.1% from a year earlier, and sow numbers were down 38.9%. On average, hogs were
down 25.6% and sows 26.5%. Based on these numbers and our assumptions about stock
replenishment, our forecasts for 2019-22e are as follows:
 Production volumes will be 547m, 426m, 469m and 610m, respectively
 The weighted average price per kilogram will be RMB19, RMB22, RMB20, and RMB17
 A market size of RMB1.143trn, RMB1.032trn, RMB1.032trn, and RMB1.141trn
 Annual growth of 19%, -10%, 0%, and 10%.
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October 2019
Exhibit 1. Hog production volume ` Exhibit 2. Size of the market expected to

expected to bottom out in 2021 (m) stay around cRMB1trn (RMBbn)
800 40% 1600 50%

700 1400 40%
30%
600 1200 30%
20%
500 1000 20%
10%
400 800 10%
0% 600 0%
300
200 -10% 400 -10%
100 -20% 200 -20%
0 -30% 0 -30%
2008 2011 2014 2017 2020e 2008 2010 2012 2014 2016 2018 2020e
Source: Wind, HSBC Qianhai Securities estimates Source: Wind, HSBC Qianhai Securities estimates
Ripe for consolidation

Fragmented is a term that is widely used to describe many industries in China, particularly those
35m of the country’s 37m pig
farmers in 2017 produced which are likely to consolidate in the next few years. But the level of inefficiency in the country’s
fewer than 50 hogs a year hog industry is quite remarkable, as captured by the following statistic – 35m of the country’s
37m pig farmers in 2017 produced fewer than 50 hogs a year. Only 4,500 farmers produced
more than 10,000 and a mere 400 over 50,000. It is not surprising that the market share of the
top 10 listed hog companies is only 7.38% (it also helps to explain why African swine fever has
been so hard to contain).
The upstream animal feed and vaccine industries are also fragmented in China. For example,
there are about 6,400 feed companies and between them they generated sales of c200m
tonnes in 2018. Only four companies produced more than 10m tonnes and 5,000 have annual
output below 50,000 tonnes. In the animal healthcare industry annual sales total cRMB50bn,
but the market share of the eight listed companies is only 17%. Compared with the US and
other developed countries, it’s clear that China’s hog breeding industry is extremely inefficient.
The forces that will drive change

The entire industry is going through a process of modernisation and industrialisation, driven by
a number of different forces, including:
 The aging population and rising urbanisation will lead to a decrease in the agricultural
labour force;
 Increasingly strict environmental protection regulations will accelerate the withdrawal of
small farmers from the market;
 African swine fever has raised the industry’s entry barriers, putting more pressure on small
operators.
The industry leaders enjoy remarkable scale advantages in terms of hiring the best employees,
R&D spending and financial muscle. And thanks to their cost advantages, large-scale hog
farmers are more profitable than their smaller rivals and they are also much better placed to
deal with the dramatic fluctuations in hog prices.
At the other end of the scale, there are still 35m backyard farmers who produce fewer than 50
hogs a year. There used to be even more, but their number has been in decline in the last
decade. We believe this process will continue.
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October 2019
Over the next 10 years, we expect most of them to exit the market and the proportion of hog-
In 10 years we expect the top
10 listed hog companies to farming companies producing more than 50,000 hogs annually to increase to the point where
have a market share of 30% they produce more than 40% of the country’s hogs, up from around 10% today. In 10 years we
expect the top 10 listed hog companies to have a market share of 30%, up from the current
7.38%. As the same time, we think the number of feed companies will drop from more than
6,000 to around 2,000 as small producers are squeezed out. As a result, we expect the animal
healthcare industry to grow at a CAGR of 10-15% over the next three years.
Exhibit 3. Production volume of top 10 hog Exhibit 4. The number of feed companies
companies is rising (10,000 hogs) continues to fall
25,000 30% 8000

7000
20,000 25%
6000
20% 5000
15,000
15% 4000
10,000 3000
10%
2000
5,000
5% 1000
0 0% 0
2018 2020e 2022e 2024e 2026e 2028e 2018 2020e 2022e 2024e 2026e 2028e
Top ten total YoY
Initiate coverage
Haid Group (002311 CH, Buy, TP: RMB43.00)

A leading feed company in China, producing feed for poultry (49% of feed sales volume), fish
(29%) and pigs (22%). Haid has industry-leading cost advantages and its market share
continues to expand.
African swine fever has hit the company’s pig feed sales but simultaneously boosted demand
for its aquatic and poultry products. Sales of pig feed fell 6% y-o-y in the first half of the year.
We think this trend will continue in the second half of 2019 and 2020, before sales recover in
2021 as hog farmers replenish their stock. Sales of aquatic feed rose 16% and poultry feed 30%
y-o-y in 1H19. We forecast that aquatic feed sales will rise 16%, 18% and 17% in 2019e, 2020e
and 2021e, respectively, with poultry feed sales up 30%, 20%, and 13% in the same years.
We think profitability will improve in line with the expected recovery by downstream companies
We think profitability will
improve in line with the and our expectations for accelerated growth in feed sales volume. We forecast 2019e, 2020e
expected recovery by and 2021e net profit attributable to the parent can grow 36%, 39%, and 16%, to RMB1.96bn,
downstream companies RMB2.73bn, and RMB3.16bn, respectively.
The stock price is around historical highs, but the valuation is still at the historical average. We
think the company has significant long-term competitive advantages. The company is facing an
industry trough in the short term but as downstream pig farmers replenish their stock and fish
prices rise, the growth of the feed sales and profits are expected to accelerate.
Potential catalysts: A rise in the sow inventory, increases in aquatic product prices, and
significant improvements in q-o-q or y-o-y earnings growth.
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October 2019
Key downside risks: Raw material price fluctuations, African swine fever outbreak worse than
expected, abnormal weather.
Jinyu (600201 CH, Buy, TP: RMB24.00)

A leading animal vaccine company in China. Jinyu has become the market leader in the vaccine
for foot and mouth disease (FMD), which affects hogs and other livestock. We believe demand
for FMD vaccine will continue to increase as the hog industry consolidates and farm standards
improve – the big companies are willing to buy the best vaccine available.
The company’s R&D and production standards should be further enhanced after its new
R&D and production
standards should rise after industrial park starts operations by the end of the year. We think this will make Jinyu the
the new industrial park starts country’s leader in terms of biosafety and help it move beyond the FMD market to become a
operations platform for a complete range of animal vaccines.
African swine fever has hit vaccine sales hard – in the first half of 2019 sales revenue fell
32.85% y-o-y. We expect they will fall for the rest of the year before starting to recover in 2020.
Jinyu has lost many of its smaller customers but we think the bigger clients will start expanding
their production volumes again next year, boosting vaccine sales. As an industry leader, the
company also stands to benefit should a vaccine for African swine fever be approved for
production in China.
Given the short-term challenges, we forecast that net profit attributable to the parent company
will fall 48%, to RMB389m, in 2019e and then rise 53% and 39% to RMB597m and RMB827m
in 2020e and 2021e, respectively.
The stock is now trading at a two-year low. We expect rising replenishment rates by downstream
breeding farmers to lead to a recovery. In addition, with the acceleration of the trend for large-
scale breeding, demand for the company’s products should grow over the long term, pushing up
earnings.
Potential catalysts: A rise in the sow inventory, the new industrial park, significant
improvements in q-o-q or y-o-y earnings growth, and becoming a producer of African swine
fever vaccine once it comes on the market.
Key downside risks: African swine fever outbreak worse than expected, and the industry
moving towards large-scale enterprises at a slower pace than expected.
Muyuan (002714 CH, Hold, TP: RMB89.00)

Muyuan Foods Co Ltd, which went public in 2014, is the largest and most cost competitive
integrated pig farmer in China. It produced the 11m hogs in 2018, representing about 1.6% of
the domestic market.
The last two years have been volatile. Net profit fell sharply in 2018 due to low hog prices. Then,
The last two years have been
volatile as African swine fever reduced the number of pigs, prices have risen sharply in 2019, boosting
profits in the second quarter. We expect this trend to continue until 2021.
Based on the sow inventory announced by the company, we believe there is significant room for
production to maintain rapid growth over the next few years after a dip in 2019. We expect
production to fall 5% in 2019 and then rise 90%, 25%, 20% and 17% each year over 2020-23e.
We forecast net profit attributable to the parent company will rise 788% and 314% in 2019e and
2020e, to RMB4.6bn and RMB19.1bn, respectively, before falling 5%, to RMB18.3bn, in 2021e.
The stock is now trading at close to its historical high. In our view, pig prices will remain high in
2020e, and we think the company’s earnings can improve substantially. The risk is that the
industry will enter a down cycle due to continued replenishment, especially if there is progress in
the area of vaccine development.
8
October 2019
Key upside risks: Rise in hog prices; substantial earnings growth.
Key downside risks: Higher sow inventory; a vaccine for African swine fever becoming available.
Wens (300498 CH, Hold, TP: RMB42.00)

Wens Foodstuff Group Co Ltd is one of the country’s leading producer of hogs and yellow-
feather broilers, a popular breed of chicken. In 2018, the company produced c22m pigs and
c750m yellow-feather broilers, with market shares of 3.2% and 20% respectively.
Wens has developed a “company + farmers” business model. This involves working closely with
Wens has developed a
“company + farmers” farmers to offer a full range of services such as piglets, technological training and feed. The
business model farmers are only responsible for breeding. In this way, the company develops strong
relationships with farms, reduces capital expenditure and generates more stable cash flow. We
believe the company will continue to steadily expand its production volume.
Similar to Muyuan, the last two years have been volatile. Low hog prices in 2018 led to a sharp
fall in net profits. African swine fever has pushed up prices this year, increasing net profit
dramatically. We expect hog prices to stay high in 2020 and 2021.
We forecast that net profit attributable to parent will rise 186% and 96% in 2019e and 2020e to
RMB11.3bn and RMB22.2bn respectively, and then drop 15%, to RMB18.9bn, in 2021e.
The stock price is close to its historical high. Due to African swine fever, we believe pig prices
will remain high in 2020, supporting earnings growth. However, with the ongoing replenishment
and possible introduction of an effective vaccine, we think the industry will enter a downcycle,
hurting the company’s earnings.
Key upside risks: Rise in hog prices; substantial earnings growth.
Key downside risks: Higher sow inventory and other leading indicators; availability of African
swine fever vaccine on the market.
Where we are different from the market

 The market believes that the hog industry is cyclical and so focuses on the hog price cycle.
We take a more-term view. We believe that, driven by industry consolidation, the leading
companies across the supply chain will keep expanding over the next decade.
 The market thinks hog inventories are unlikely to recover in the current cycle due to the
outbreak of African swine fever. We disagree. In our view, there are a number of reasons to
believe that inventories will gradually recover, including the following: (1) hog farmers
should start to make a profit again, which will drive restocking; (2) African swine fever is
showing signs of stabilising; and (3) two research institutes in China (including the Harbin
Veterinary Research) have made progress towards developing a vaccine against African
swine fever. These factors should drive a recovery in large hog farmers and leading feed
and animal healthcare companies.
 The market believes that higher hog prices should drive the performance of hog farming
stocks. We believe that the current prices of hog farming stocks are reasonable as they
have fully priced in the expectations of higher hog prices. A further rise in hog prices could
bring speculative opportunities in the short term, but as hog farmers start to earn a profit
again and restock, the cyclical downturn should pose downside risks to the prices of hog
farming stocks.
Where we are different from consensus estimates

Haid Group: Our 2019e, 2020e and 2021e earnings forecasts are 7%, 9% and 1% above
consensus, as we are relatively bullish on the profitability of the company’s feed business.
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October 2019
Jinyu Bio-Technology: Our 2019e, 2020e and 2021e earnings forecasts are 26%, 13%, 7%
below consensus. We believe consensus estimates have not yet factored in the extent of the fall
in hog production.
Muyuan: Our 2019e, 2020e and 2021e earnings forecasts are 5%, 9% and 20% below
consensus, as we are relatively bearish on 2020-21e hog prices.
Wens: Our 2019e, 2020e, and 2021e earnings forecasts are 3%, 11% and 11% below consensus,
as we are relatively bearish on 2020-21e hog prices.
Exhibit 5. HSBC Qianhai Securities estimates vs consensus

Company __ HSBC Qianhai Securities__ _____ Wind consensus ____ _______ Difference _______
name RMBm 2019e 2020e 2021e 2019e 2020e 2021e 2019e 2020e 2021e
Haid Group Revenue 49,953 58,610 67,760 50,800 61,070 73,094 -1.67% -4.03% -7.30%
Net profit 1,959 2,732 3,169 1,829 2,494 3,148 7.08% 9.54% 0.65%
Jinyu Bio-Technology Revenue 1,246 1,625 2,263 1,454 1,760 2,204 -14.28% -7.69% 2.66%
Net profit 389 597 827 527 690 890 -26.15% -13.42% -7.07%
Muyuan Revenue 20,213 50,400 57,000 20,747 46,540 56,106 -2.57% 8.29% 1.59%
Net profit 4,621 19,127 18,263 4,854 21,043 22,808 -4.79% -9.10% -19.93%
Wens Revenue 64,648 78,367 80,708 69,436 88,437 89,314 -6.90% -11.39% -9.64%
Net profit 11,332 22,227 18,894 11,705 25,000 21,365 -3.18% -11.09% -11.57%
*Data as of 11 October 2019
Source: Wind, HSBC Qianhai Securities estimates
Key industry downside risks
African swine fever mutates

African swine fever is believed to infect pigs but not humans. However, should there be a
mutation causing cross-species transmission to humans, pork demand would be affected and
the hog industry chain would be disrupted. This would lead to a sharp fall in pork demand, a
slump in hog prices and lower demand for feed and animal healthcare products. The four
companies covered in this report would also be hit hard. However, based on the evidence going
back nearly a century, we believe the chance of such a “black swan” event happening is low.
ASF vaccine’s launch later than expected, or if no vaccine is available

If it takes longer than expected to launch a vaccine, or if no vaccine is available, the recovery in
hog inventories will be slower. For upstream companies such as Haid Group and Jinyu Bio-
Technology, demand for their hog-related products will be less than expected and hence their
earnings would be impacted.
Growth in hog volumes and shift to large-scale operations slower than expected
Our earnings estimates for Muyuan and Wens are based on the assumption that their hog
production volumes continue to increase. In case of lower-than-expected hog production
volumes due to African swine fever, a lack of funding and other factors, the companies’
earnings would be affected. Our sensitivity analysis shows that a 1% change in the hog
production volume would cause a 1% change in earnings at Muyuan and Wens.
Meanwhile, if the hog industry’s shift to large-scale operations proceeds more slowly than
expected, demand for upstream animal healthcare products would be hurt, which should affect
earnings estimates for Jinyu Bio-Technology. Our sensitivity analysis shows that a 5% change
in revenue would cause a 3% change in earnings at Jinyu Bio-Technology.
Abnormal weather
Wens, Muyuan and Haid Group have biological assets on their premises. In case of abnormal
weather such as typhoon and floods, these biological assets could be lost, which would directly
10
October 2019
affect the companies’ hog production volumes and earnings and even cause asset impairment.
For Haid Group, which sells aquatic products, typhoon and floods could affect the company’s
feed sales as they would lead to a direct reduction of aquatic feed. For instance, the company’s
net profit rose only c9% in 2016 as its sales volume growth missed expectations due to the bad
weather in South China that year.
Sharp fluctuations in raw material prices

At Muyuan, Wens and Haid Group, corn, soybean meal and other commodities are major raw
materials and account for over 50% of their operating costs. Prices of commodities tend to
fluctuate widely. Rising raw material prices would increase the companies’ costs and thus affect
earnings estimates for them.
Environment, social responsibility and corporate governance
Environmental protection
The four leading companies in the hog supply chain we cover all have stringent environmental
protection standards. We see them as role models for the industry in China. Based on their
2018 annual reports, they met all local emission requirements, including those for greenhouse
gases. They all regularly publish their emission data. In 2015, the Ministry of Environmental
Protection (MEP), now the Ministry of Ecology and Environment, commended the manure
collection technique used on Muyuan’s farms. The MEP and the Ministry of Agriculture, now the
Ministry of Agriculture and Rural Affairs, have conducted regular onsite inspections of the
company’s environmental protection practices.
Social responsibility
The companies try hard to protect the rights and interests of their customers, suppliers,
shareholders, creditors and employees, and are actively engaged in social and public welfare
programmes. For instance, Haid Group won the award for the top 10 listed companies in China
in terms of fulfilling social responsibility (a special award for poverty relief) in 2017 and the
award for fulfilling corporate social responsibility (targeted poverty alleviation award) given to
companies in the Guangdong-Hong Kong-Macao Greater Bay Area in 2017. Muyuan and Wens
have also won several awards for poverty alleviation.
Corporate governance
The companies all strictly abide by the Company Law, Securities Law and other laws and
regulations as well as the relevant requirements of various regulators and have set examples
for agricultural companies in corporate governance. In particular, Haid Group is listed among
the top 100 Chinese listed companies by brand value, while in 2018 Jinyu Bio-Technology won
the award for the top 100 listed companies with the highest investment value and an A rating
from the Shanghai Stock Exchange for annual information disclosure.
11
October 2019
Exhibit 6. Peer valuations

Company Bloomberg Price Target Current Mkt cap ADTV ________ PE (x) _________ ________ PB (x) _________
Feed and breeding code currency Rating price price USDbn USDm 2019e 2020e 2021e 2019e 2020e 2021e
Haid Group 002311 CH RMB Buy 43.00 32.10 6.89 21.67 25.9 18.6 16.0 5.5 4.6 3.8
Muyuan 002714 CH RMB Hold 89.00 82.30 22.43 89.88 38.5 9.3 9.7 11.1 5.7 3.9
Wens 300498 CH RMB Hold 42.00 38.30 31.73 126.86 18.0 9.2 10.8 4.7 3.7 3.1
New Hope 000876 CH RMB NR 18.62 11.72 103.48 25.35 15.38 11.38 3.34 2.83 2.34
Da Bei Nong 002385 CH RMB NR 4.66 3.02 43.39 21.74 9.53 7.99 2.06 1.74 1.61
ZhengbangTech 002157 CH RMB NR 16.26 7.03 119.00 24.23 7.41 7.26 5.77 3.44 2.46
Tech-bank Food 002124 CH RMB NR 12.18 2.31 65.66 19.78 5.37 4.97 4.90 2.82 1.93
Overseas listed
Tyson Foods TSN US USD NR 83.6 31 185.79 14.3 12.35 10.99 2.11 1.9 -
Archer Daniels Midland ADM US USD NR 40.46 20.84 159.88 12.83 10.42 9.82 1.02 1 0.92
Hormel Foods HRL US USD NR 41.16 21.63 120.58 23.35 22.82 21.37 3.57 3.37 3.21
ConAgra Foods CAG US USD NR 28.41 13.44 190.16 13.17 12.01 10.87 1.68 1.56 1.59
Bunge Limited BG US USD NR 56.21 7.94 87.31 18.26 14.65 12.4 1.19 1.11 1.06
C.P. Pokphand 43 HK HKD NR 0.66 2.00 0.51 8.29 8.29 - 1.38 1.18 -
COFCO Meat 1610 HK HKD NR 2.63 1.38 5.89 13.53 5.9 5.05 1.8 1.34 1.01
Animal healthcare
Jinyu Bio-Technology 600201 CH RMB Buy 24.00 18.85 2.44 34.53 54.5 35.6 25.7 3.8 3.6 3.3
CAHIC 600195 CH RMB NR 14.42 1.52 11.89 29.74 25.85 21.71 2.41 2.22 2.02
Pulike 603566 CH RMB NR 19.23 0.59 3.25 40.97 34.68 27.69 2.36 2.18 1.94
Ringpu 300119 CH RMB NR 13.09 0.78 18.58 25.61 20.2 16.7 2.50 2.29 2.05
Overseas listed
Zoetis ZTS US USD NR 128.47 58 210.45 34.23 30.95 27.53 21.87 16.23 12.56
Elanco Animal Health ELAN US USD NR 26.89 12.25 146.54 30.01 25.68 22.59 2.27 2.19 2.08
Bayer Group BAYRY US USD NR 16.77 58.7 18.274 8.255 7.19 6.45 1.16 1.12 1.06
*Data as of 11 October 2019
NR = not rated by HSBC Qianhai Securities
Source: Bloomberg, Wind consensus, HSBC Qianhai Securities estimates for Haid Group, Jinyu Bio-Technology, Muyuan and Wens
12
October 2019
Valuation and risks

Valuation methodology Risks to our view
Price: Given the stable demand in the retail market and good earnings visibility, Key downside risks:
Haid Group
RMB32.10 we use PE to value the stock. We forecast an earnings CAGR of c30% for  African swine fever is more severe than expected
002311 CH the next three years, up from 22% over the past five years. As the short-
Target price:  Abnormal weather
RMB43.00 term rise in hog prices may not be sustainable we apply a 25x 2020e PE,
 A sharp rise in raw material prices
in line with the stock’s past-five-year average forward PE (c25x), to derive
Buy Upside: our target price of RMB43. Our target price implies c.34% upside from
34% current levels. We initiate with a Buy rating.
Andy Li | andy.j.li@hsbcqh.com.cn | +86 21 6081 3812
Jinyu Bio- Price: Given the stable demand in the retail market and good earnings visibility, Key downside risks:
Technology RMB18.85 we use PE to value the stock. We forecast an earnings CAGR of 46%  African swine fever is more severe than expected
600201 CH Target price: over 2020-21e, up from 17% for 2013-18. Given the positive industry  Slower-than-expected shift to large-scale hog
outlook we apply a 45x 2020e PE, higher than the stock’s historical farming
RMB24.00
average forward PE (28x) over the past five years, to arrive at a target
Buy Upside: price of RMB24, implying upside of c.27% from current levels. We initiate
27% with a Buy rating.
Price: Given the earnings volatility, we value the company using a PB-ROE Key upside risks:
Muyuan
RMB82.30 methodology, which is commonly used to value cyclical stocks. Muyuan  Rising hog prices
002714 CH traded at 1x PB at the peak of the last cycle, implying a c6% ROE. In line
Target price:  Higher-than-expected hog production volume
RMB89.00 with the valuation of other cyclical stocks, 1x PB often corresponds to 10-
15% ROE. Key downside risks:
Hold Upside:  African swine fever is more severe than expected
Based on 2020e shareholders’ equity of cRMB31.3bn and 2020e ROE of
8%  Abnormal or severe weather
c61%, we apply a 6.1x target PB to derive our target price of RMB89,
which implies c.8% upside from current levels. We initiate at a Hold rating  A sharp rise in raw material prices
because, while we expect hog prices to stay high until 2020, driving a  Lower-than-expected hog production volume
sharp improvement in earnings and the share price, a sector-wide rise in  A vaccine for African swine fever becomes
earnings could lead to a strong recovery in capacity, posing downside available
risks to hog prices and earnings. Also, there are uncertainties around
production volume and disease.
Price: Given the earnings volatility, we value the company using the PB-ROE Key upside risks:
Wens
RMB38.30 method, which is commonly adopted to value cyclical stocks. Wens  Rising hog prices
300498 CH traded at 1x PB at the peak of the last cycle, implying c6% ROE. In line
Target price:  Rising yellow feather broiler prices
RMB42.00 with the valuation of other cyclical stocks, 1x PB ratio often corresponds
to 10-15% ROE. Key downside risks:
Hold Upside:  African swine fever is more severe than expected
We use 1x PB and 10% ROE. Based on 2020e shareholders’ equity of
10%  A sharp rise in raw material prices
cRMB52.5bn and 2020e ROE of c42%, we apply a 4.2x target PB to
derive our target price of RMB42, which implies 10% upside. We initiate  Lower-than-expected hog production volume
on the stock with a Hold rating because, although hog prices are likely to  A vaccine for African swine fever becomes
stay high until 2020, driving a sharp improvement in earnings and the available
share price, a sector-wide rise in earnings could lead to a strong recovery
in capacity, posing downside risks to hog prices and earnings. Also, there
are uncertainties around production volume and disease.
Note: Prices as of 11 October 2019

Source: Bloomberg, HSBC Qianhai Securities estimates
13
October 2019
Industry outlook: short term
 The onset of African swine fever triggered the start of a new hog
price cycle in 1Q19
 We forecast hog production volumes and prices for 2020 and 2021
 … and how this will affect corporate revenues and profits
African swine fever the key variable
In August 2018, China’s first case of African swine fever was identified in Shenyang. As the
disease spread, hog prices started to rise sharply. As of 27 September 2019, the average price
had increased 100% y-o-y, to about RMB28 per kg – a rise of 180% from the trough in 2018.
Huge numbers of pigs have died from the disease or were culled by farmers, and this has caused
Huge numbers of pigs have
died from the disease a ripple effect throughout the supply chain. According to the Ministry of Agriculture and Rural
Affairs:
 By September 2019 the number of hogs had fallen 41.1% from a year earlier, and the
number of sows 38.9%.
 On average, hog numbers were down 25.6% by September, and sows by 26.5%.
 From January to June 2019, sow feed sales fell 24% y-o-y and piglet feed sales 25% y-o-y.
Given the devastating impact on supply, we think it is inevitable that hog prices will stay high for
the rest of 2019 and throughout 2020. Based on the above numbers, we estimate the volume of
hog production will decline 20% to 547m in 2019e and 22% in 2020e to 426m, which is equal to
reductions of 8m to 10m tonnes of pork in each year.
Exhibit 7. A new hog price cycle began in 1Q19 (RMB/kg)
30.00
25.00
20.00
15.00
10.00
5.00
0.00
Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19
Source: Wind, HSBC Qianhai Securities
14
October 2019
Exhibit 8. The number of sows (10k) has Exhibit 9. ... and so has the number of
fallen rapidly…. hogs (10k)
4,000 0% 40,000 0%
3,500 35,000
-10% -10%
3,000 30,000
2,500 -20% 25,000 -20%
2,000 20,000
1,500 -30% 15,000 -30%
1,000 10,000
-40% -40%
500 5,000
0 -50% 0 -50%
2018-01 2018-07 2019-01 2019-07 2018-01 2018-07 2019-01 2019-07
sow inventory YoY hog inventory YoY
Source: Wind, HSBC Qianhai Securities Source: Wind, HSBC Qianhai Securities
African swine fever update: when will a vaccine become available?
African swine fever is a global problem that has now affected more than 60 countries. In China,
In China, the disease has
spread to most provinces the disease has spread to most provinces, leading to the launch of a series of prevention and
control policies. One of the major problems is the lack of bio-security on the small farms that
dominate the industry. The big farms tend to have much higher standards but the market is so
fragmented that the top-10 listed companies have a combined market share of only 7.38%.
Globally, neither a vaccine nor a cure is available yet. The complexity of the African swine fever
virus makes finding a vaccine difficult. For example, its double-stranded DNA genome is far
more complex than many other viruses, including some strains of Ebola (The Scientist, 24 June
2019).
In China, Yu Kangzhen, the Vice Minister of Agriculture and Rural Affairs, warned in July that
the development of a vaccine was only at an early stage and faced a number of challenges and
technical bottlenecks (Reuters, 4 July 2019). Last month Mr Yu confirmed that there were no
plans to launch a vaccine in the short term (Sina, 25 September 2019).
However, help may be at hand. Two leading research institutions in China are reported to be
Two leading research
institutions are reported to be making significant progress. The first is the Harbin Veterinary Research Institute, which reports
making significant progress to the Chinese Academy of Agricultural Sciences (CAAS), which in turn is subordinate to the
on producing a vaccine Ministry of Agriculture and Rural Affairs.
Bu Zhigao, the institute’s director, was quoted by CCTV on 10 September this year as saying:
“A double-gene deletion attenuated live vaccine has completed laboratory research and we
have made breakthroughs on the major technical bottlenecks for achieving large-scale
production. Bio-safety evaluation applications have been filed. Through laboratory research, it
has been proved that this African swine fever vaccine is safe and effective.” He said that a
patent for the vaccine was published by the National Intellectual Property Administration on 6
August 2019.
Once a bio-safety evaluation has been completed by the Ministry of Agriculture and Rural
Affairs the vaccine will go through a series of clinical trials. If these are successful the ministry
will give its approval for commercial production to start. At present, only one company, Pulike
Biological Engineering (603566 CH, not rated), based in Luoyang City in Henan Province, has
announced publically that it is participating in the development of the vaccine.
15
October 2019
There is still no firm timeline for the launch of the vaccine. Based on the example of the vaccine
for Porcilis PRRSV, another virus that affected the global hog population in 2006-07, we think
the earliest possible launch date would be some time next year.
The second institute in China working on an African swine fever vaccine is the Tsinghua
University School of Medicine, one of the country’s leading research universities. A report
published by the academic journal Cell Research on 20 September 2019 stated that the
university’s team of researchers was the first to analyse the high-resolution structure of the virus
capsid protein p72, revealing the possible assembly mechanism and laying the foundation for
the development of a vaccine. Again, no launch date was mentioned.
Exhibit 10. Events related to African swine fever in China

Main content
3/8/2018 First case of African swine fever found in Shenyang
22/11/2018 20 provinces, 73 domestic pig cases, 600,000 pigs killed in total
1/3/2019 28 provinces and cities, 111 cases
22/04/2019 129 cases of African swine fever, 1.02m pigs killed in total
4/7/2019 143 cases of African swine fever, 1.16m pigs killed in total
Policy
10/8/2018 “Notice on the strengthened movement supervision of hogs for prevention and control of African swine fever”
31/8/2018 “Notice on effectively strengthening the transportation supervision of hogs and hog products”
11/9/2018 “Notice on further strengthening the interprovincial transportation supervision of hogs and hog products”
28/12/2018 “Notice on regulating the transportation of hogs and hog products”
22/6/2019 “Opinions of the General Office of the State Council on strengthening the prevention and control of African swine
fever”
Vaccine
1/5/2019 Harbin Veterinary Research Institute isolated the first strain of African swine fever virus and created a candidate
vaccine. Process research of pre-clinical pilot products has been initially completed.
4/7/2019 Self-constructed gene deletion vaccine candidate strain laboratory stage completed
10/9/2019 Complete laboratory safety assessment and effective testing, and propose biosafety evaluation
Source: Ministry of Agriculture, HSBC Qianhai Securities
Exhibit 11. Policies related to hog supply

Time Content
3/9/2019 Notice on further standardising the regulation and management of livestock and poultry breeding bans and
promoting the development of pig production
5/9/2019 Notice on Supporting the Work of Stable Pig Production Support Market Supply
6/9/2019 Notice on issues related to the protection of pig breeding land
9/9/2019 Notice on Doing a Good Job in the Central Budget Investment Arrangement for Stable Pig Production
10/9/2019 Opinions on Stabilising Pig Production to Promote Transformation and Upgrading
11/9/2019 State Council executive meeting: pay close attention to the implementation of pork price guarantee policy
Source: Ministry of Agriculture, HSBC Qianhai Securities
What’s happening now – early signs of recovery
Even without a vaccine, there are signs that the situation is starting to stabilise. The government
Even without a vaccine, there
are signs that the situation is has already introduced a series of measures to support the farmers, including subsidies on
starting to stabilise loans, insurance and operational costs. We believe this will help persuade farmers to start
replenishing the supply of hogs and increase production. This, in turn, will benefit companies in
the supply chain – for example producers of feed and animal vaccine – and start to ease the
upward pressure on pig prices.
According to Yang Zhenhai, Director of Animal Husbandry and Veterinary Bureau of the Ministry
of Agriculture and Rural Affairs, farmers are starting to become more enthusiastic about
replenishing their stock. He highlighted recent official data in August that point to a recovery of
hog production capacity by the end of the year (Sohu, 26 September 2019). These include:
16
October 2019
 The number of provinces where hog inventory was flat or had increased rose to 10 in
August, up from eight in July; in eight provinces, the rate of decline had fallen.
 There are clear signs of improvement on large farms over the same period. For more than
9,550 pig farms with an annual output of more than 5,000, hog and sow numbers were
down only 0.3% and 1.8% respectively, significantly better than for the industry as a whole.
 The output of piglet feed in August was 1.46m tonnes, up 2.2% from the previous month
and the first increase in five months.
 Based on data from 100 key breeding companies, in August sales of gilts – young female
pigs which have not given birth – increased more than 80% and the market was in short
supply.
 According to on-the-ground investigations by industry experts, the proportion of farmers
who are willing to expand capacity is increasing, following the stabilisation of the sow
inventory in August 2019.
So, based on current market conditions and the brighter industry outlook, we expect the sow
inventory to increase gradually and see two scenarios for 2020 – one with a vaccine and one
without.
Without: We expect the sow inventory to increase 5-10% in 2020 and 20-30% in 2021.
With: We expect the sow inventory to 10-15% in 2020 and 30-50% in 2021.
Based on these assumptions, we forecast that overall hog production volumes will rise 10% in
We forecast that overall hog
production volumes will rise 2021 and 30% 2022. By our estimates, this means that hog production will fall 20% to 547m in
10% in 2021 and 30% 2022 2019, drop 22% to 426m in 2020, and then recover by 10% and 30% in 2020e and 2021e, to
469m and 610m, respectively. In turn, we estimate that hog prices will average RMB19, RMB22,
RMB20 and RMB17 per kilogram in each year from 2019e to 2022e.
The impact of African swine fever on industry consolidation

The onset of African swine fever has highlighted the huge difference in bio-safety standards
between large and small hog farmers in China. As the bigger farms generally have been less
affected, they have been able to increase production this year and are trying to increase their
capacity. We see two scenarios for industry consolidation:
 If a vaccine is available in 2020, small-scale farmers will replenish their inventory. This
means it will take longer for the industry to consolidate.
 If a vaccine isn’t available in 2020 or 2021, consolidation will accelerate as the small
operators are forced out of the industry.
Regardless of whether a vaccine becomes available, we believe the large-scale farmers with
good bio-safety system will increase their capacity in the next few years, and this will also
benefit feed and vaccines companies along the supply chain.
17
October 2019
Exhibit 12. Proportion of farmers willing to expand capacity is increasing

Regions Provinces Capacity expansion proportion, Capacity recovery proportion,
farmers not affected by ASF farmers affected by ASF
Northeast China Inner Mongolia 80% 20%
Heilongjiang 29% 2%
Jilin 23% 4%
Liaoning 30% 7%
North China Shanxi 23% 9%
Hebei 12% 4%
Shandong 21% 6%
Huazhong China Henan 24% 5%
Hunan 0% 0%
Hubei 1% 0%
Anhui 3% 2%
Jiangxi 3% 0%
East China Jiangsu 0% 0%
Zhejiang 0% 0%
South China Fujian 5% 0%
Guangdong 0% 0%
Guangxi 0% 0%
Southwest China Sichuan 5% 0%
Guizhou 1% 0%
Yunnan 0% 0%
Source: Yongyi consulting, HSBC Qianhai Securities
Exhibit 13. Sow inventory(10k) based on investigations by industry experts
4,000
3,800
3,600
3,400
3,200
3,000
2,800
2,600
2,400
2,200
2,000
Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19
Source: Qingsong Consulting, HSBC Qianhai Securities
Exhibit 14. A-share listed hog company’s production volume (10k head)
Company Production volume, January–August Y-o-y
Wens 1,464 4%
Muyuan 721 5%
Zhengbang Tech (002157 CH) 397 18%
New Hope (000876 CH) 201 40%
Tech-bank Food (002124 CH) 185 45%
Tangrenshen (002567 CH) 66 57%
Tecon Biology (002100 CH) 57 35%
Aonong (603363 CH) 49 71%
Jinxinnong Technology (002548 CH) 29 58%
Note: All companies above are not rated by HSBC Qianhai Securities, except for Muyuan and Wens
18
October 2019
The cycle is turning – why we are bullish on upstream leaders
African swine fever is clearly affecting the whole supply chain. The rising hog prices are driving
African swine fever is
affecting the whole supply the demand for pork substitutes, especially fish and poultry, which in turn boosts production
chain levels and benefits the aquatic and poultry feed companies. At the same time, as larger-scale
hog farmers have better bio-security they are less affected by ASF, they are increasing their
capacity, which will benefit the animal healthcare supply chain.
Here we show the four industry phases driven by the hog cycle:
1. In the initial period, when pig prices start to fall y-o-y, farmers are still making a profit: the
number of hogs produced grows y-o-y, driving the pig feed and vaccine industries.
2. When pig prices fall substantially y-o-y, farmers make losses: the pig inventory increases,
but the willingness to purchase feed and vaccine declines. Upstream industries suffer.
3. In the initial period of rising pig prices, growers profit: pig inventory decreases, the feed and
vaccine industries go into decline.
4. Pig prices continue to rise, growers make a profit and replenish stock: inventory increases,
growers are more willing to buy feed and vaccine. Feed and vaccine companies benefit.
The upstream industry is now at phase 3 – the trough. We think phase 4 will begin soon, providing
that hog farmers continue to make profits and start to replenish their stock. In our view, the
upstream leaders have the potential to expand their market share and benefit from the improving
operating environment. That’s why we are bullish on the market leaders in feed and vaccines.
Exhibit 15. Changes of pig prices leads to changes in the growth rate of pig feed sales
30.00%
20.00%
10.00%
0.00%
Dec-12 Jul-13 Feb-14 Sep-14 Apr-15 Nov-15 Jun-16 Jan-17 Aug-17 Mar-18 Oct-18
-10.00%
-20.00%
-30.00%
Pig feed YoY Pig price YoY

Source: China Feed Industry Association, Wind, HSBC Qianhai Securities
Exhibit 16. High correlation between pork Exhibit 17. High correlation between prices
and aquatic product prices and sales of aquatic products
200 14% 112
12% 110
150 10% 108
8% 106
100 6% 104
4% 102
2% 100
50
0% 98
2009 2011 2013 2015 2017
-2% “2007 96
0
Jan-05 Sep-08 May-12 Jan-16 Aquatic feed YoY CPI: Aquatic products: YoY
CPI: Pork: YoY CPI: Aquatic products: YoY
19
October 2019
Case study: African swine fever in Russia
Given its scale, putting the outbreak of African swine fever in China in context is not easy but
we believe a comparison with other countries does help. We use Russia, China’s neighbour, as
a case study. The disease first surfaced there in 2007 and has yet to be completely eliminated.
Our analysis shows that:
1. Despite African swine fever, hog production has risen: After the short-term fall in the number
of sows, pork production has risen from 1.93m tonnes in 2007 to 3.71m tonnes in 2018.
2. The hog cycle is longer: The cycle used to last about 4-5 years in Russia. After African
swine fever, this was extended to 5-6 years, and the upcycle has lasted longer.
3. Large-scale farming accelerated: After African swine fever, the proportion of large farms
increased quickly. The proportion with a production of more than 200 head rose from 50% to
about 90%.
Exhibit 18. Number of sows in Russia Exhibit 19. Pig prices in Russia
(‘000) (Ruble/tonne)
3,500 160,000
3,000 140,000
120,000
2,500
100,000
2,000
80,000
1,500 60,000
1,000 40,000
500 20,000
0
0
Jan-00 Nov-02 Sep-05 Jul-08 May-11 Mar-14
2003 2005 2007 2009 2011 2013 2015 2017 2019
Exhibit 20. Hog production in Russia
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2005 2008 2018
Familyhouseholds (<200) Scale farmers (>200)
Source: Poultry Industry Association , HSBC Qianhai Securities
20
October 2019
The typical hog price cycle
Pig farming is an industry with little product differentiation, low entry barriers and a high level of
fragmentation. This means it follows a predictable cycle. When there is a supply shortage pig
prices go up, farmers’ profits increase and pig price expectations rise. The farmers are keen to
replenish their stock and this leads to oversupply, resulting in falling prices, which means
farmers incur losses and expectations about pig prices become more pessimistic. Farmers then
leave the industry, reducing production capacity which leads to a supply shortage. The cycle is
complete and starts again.
Exhibit 21. The hog price cycle
Rising pig
prices
Farmers’ profit
Supply grows,
shortage replenish on
optimism
Farmers’ profit
falls, reduce
Oversupply
production on
pessimism
Fall in pig
prices
Source: HSBC Qianhai Securities
Since 2005, there have been three complete cycles – 2006-09, 2010-14 and 2015-18. They
averaged 50 months, with an upcycle of about 1-2 years. The average upside of pig prices was
approximately 100%; the downtrend last about 2-3 years, with a downside of about 45%.
Exhibit 22. A hog cycle lasts 50 months on average, with an upcycle of 18 months
Period time Cycle duration Upcycle Downtrend Upcycle Downtrend Pig price Pig price
period period duration duration upside downside
2006-09 45 months 07/2006- 04/2008- 21 months 24 months 157% 45%
03/2008 03/2010
2010-14 60 months 04/2010- 09/2011 18 months 42 months 107% 42%
08/2011 -2/2015
2015-18 46 months 03/2015- 06/2015- 15 months 31 months 80% 47%
05/2016 01/2019
When pig prices start to rise the farmers generally stay on the sidelines and let their cash flow
recover. The upcycle is confirmed after pig prices increase for half a year, when farmers are
keen to replenish their stock. The pig-breeding process – from a young female pig which has
not given birth, a gilt, to a finishing hog which is ready for market – takes about a year. As a
result, hog supply generally recovers after pig prices rise for 1.5-2 years, pushing prices into a
downtrend.
21
October 2019
Exhibit 23. The pig-breeding process
3-4 months 5-6 months

Finishing
Gilts Sows 3-4 months Piglets pigs
The current upcycle began earlier this year

According to our research framework, hog price trends are highly correlated to the price of sows
and piglets, the level of sow inventory, the rate of sow slaughter, as well as sow feed sales.
From the perspective of the historical cycle, the sow inventory leads pig prices by about 10-12
months, but with a negative correlation.
For example, from 2009 to 2010 the sow inventory continued to fall and pig prices rose from
2010 to 2011. That led farmers to replenish their stock, so the sow inventory kept rising from
2011 to 2014. As a result, pig prices fell from 2012 to 2014 and, between 2014 and 2015, sow
inventory declined again, and pig prices experienced another upcycle from 2015 to 2016. The
sow inventory has been falling since 2018 – as of September 2019, it had dropped about 39%
from a year earlier.
However, when pig prices rise farmers replenish their stock of sows and reduce the rate of sow
elimination, driving up sow prices. In turn, the rise in sow prices means that farmers become
more willing to replenish their stock. However, later in the hog cycle, as production increases
and sow prices start to fall, farmers become less enthusiastic about stock replenishment.
Based on past experience, the sow price tends to lead the hog price trend by 1-1.5 years. There
is an obvious negative correlation. As at 18 September 2019, binary sow prices surged 50% y-
o-y, highlighting the willingness of farmers to replenish their stock. But at the same time, the
latest industry data shows a decline in the rate of sow elimination by farmers.
Meanwhile, when replenishment levels exceed elimination rates the sow inventory rises and
sow feed sales increase. Changes of sow feed sales are now leading to changes in overall hog
prices. There is a significant negative correlation. For example, from January to June 2019, sow
feed sales dropped about 24% y-o-y, while piglet feed sales fell about 25% y-o-y.
Exhibit 24. Negative correlation between sow inventory and pig prices
25 6,000
20 5,000
4,000
15
3,000
10
2,000
5 1,000
0 0
Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jan-19
sow inventory (10,000 heads) Average price of live pigs (yuan/kg)
22
October 2019
Exhibit 25. Changes in sow prices lead Exhibit 26. Changes in sow elimination
changes in hog prices lead changes in hog prices
25 2,000 60% 250000
20
1,500 40% 200000
15
1,000 20% 150000
10
500 0% 100000
5
0 0 -20% 50000
May-08 May-11 May-14 May-17
Average price of pigs after one and a half years -40% 0
(yuan/kg) Jun-17 Jan-18 Aug-18 Mar-19
Sow price (right axis, yuan/head)
Sow elimination Pig price after 10 months
Exhibit 27. Changes of sow feed sales lead Exhibit 28. Changes of piglet feed sales
changes of hog prices lead changes of pig prices
40% 60% 30.00% 60%

30% 20.00%
20% 40% 40%
10.00%
10%
20% 0.00% 20%
0%
Jan-17 Jun-17 Nov-17 Apr-18 Sep-18 Feb-19
-10% -10.00%
0% 0%
-20%
-20.00%
-30% -20% -20%
-40% -30.00%
-50% -40% -40.00% -40%

Sow feed YoY Jan-17 Sep-17 May-18 Jan-19
Pig price after 10 months Piglet feed YoY Pig price after 6 months
Hog prices: the impact on share prices
From the investment perspective, the market regards hog players as cyclical stocks:
1. When the market expects hog prices to rise, hog stocks will rise and the share prices lead
hog prices;
2. When there is a clear turning point in prices, share prices often follow pig prices up;
3. When pig prices increase quickly and companies begin to make a profit, the performance
and expectations of share prices and pig prices are often aligned. Share prices rise further
when pig prices beat market expectations. Share prices decline when pig prices miss
expectations.
4. Stock prices fall when pig prices enter a down cycle.
5. This pattern is clear when we look at how share prices have performed in the last year:
Phase 1: Around Q3 2018, the market expected pig prices to enter an upcycle earlier than
expected due to African swine fever; share prices began to rise.
23
October 2019
Phase 2: After the Chinese New Year holiday in February 2019, it became clear that pig prices
had reached a turning point; share prices surged.
Phase 3: From April 2019 until now pig prices have soared, but within market expectations;
share prices steadied.
So, where does the market go from here?
We know that leading listed companies are much better at preventing the spread of African
Leading companies are much
better at preventing the swine fever than the millions of backyard farmers, who have had to slaughter huge numbers of
spread of African swine fever pigs and have been reluctant to replenish their stock because of the disease. So, given the
sharp rise in hog prices, the listed companies with large numbers of healthy pigs stand to profit,
at least in the short term.
At the same time, if Africa swine fever is not effectively controlled, hog prices should remain
high. This means that investors expect the profits of the listed companies to grow, which has
pushed up the stock prices of Muyuan and Wens.
Although corporate earnings have started to rise rapidly and there are signs that farmers are
more willing to replenish their stock, we expect growth in sow inventories to be slow, resulting in
a longer hog cycle. However, as pig prices eventually enter a down cycle as the pace
replenishment starts to increase, the downside risks to share prices will increase.
Exhibit 29. Muyuan stock price is leading changes in pig prices
25 70
60
20
50
15 40
10 30
20
5
10
0 0
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19
Pig price Muyuan stock price
24
October 2019
Exhibit 30. Changes of sow prices (red, left axis, RMB/kg) are leading changes in Muyuan
stock price (RMB)
45 70
40 60
35
50
30
25 40
20 30
15
20
10
5 10
0 0
Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19
The impact on international markets
China, the world’s leading producer and consumer of pork, usually does not need to import
China is the world’s leading
producer and consumer of much. In 2018 it imported 1.56m tonnes, mainly from Germany, Spain, Canada, and Brazil. This
pork represented only 3% of the country’s total pork consumption. Usually, global trade volumes in
pork are not substantial as most countries are self-sufficient. In 2018, the main four exporters –
the EU, the US, Canada, Brazil – sold 7.66m tonnes of pork overseas.
But African swine fever has changed the outlook for the global pork trade. For example, in
China we estimate the volume of hog production will decline 20% to 547m in 2019e and 22% in
2020e to 426m, which is equal to 8m to 10m tonnes of pork in each year.
As a result, we think it is inevitable that imports to China will increase. The problem is that the
main exporting nations will not be able to fill the pork supply gap in China. There are several
reasons for this. First, global supply is tight because of African swine fever. Second, Chinese
consumers prefer fresh pork and the bulk of imports are frozen meat. Third, trade frictions with
the US complicate the situation further as US pork imports to China now come with tariffs.
This will push up hog prices around the world, particularly in China. But it is not just pork that will
be affected. Chinese consumers also face higher prices for chicken, fish and other substitutes.
According to HSBC Research’s recent report “Global Food: African swine fever, A new reality”,
China’s pork shortage will stimulate demand for substitute beef and chicken globally and benefit
companies in Brazil and other countries.
Corn and soybean

The ripple effect doesn’t end there. For example, the fall in hog numbers will lower demand for
pig feed, which will in turn affect corn and soybean. In 2018, China’s pig feed sales amounted to
97m tonnes, representing 45% of China’s total. We estimate that pig feed sales in China will
drop 20% in 2019e and 22% in 2020e. Demand for corn and soybeans will also decrease by the
same proportion.
Demand for corn is satisfied by domestic supply in China (imports are minuscule 1%). This
means the declining demand for corn will weigh on domestic corn prices. It’s a completely
different story for soybean, with 80% of demand is met by imports, mainly from Brazil and the
US. China’s soybean imports account for about 55% of global exports, so there will be a
significant impact on supply and demand around the world, particularly in the US and Brazil.
25
October 2019
According to chinagrain.cn, soybean used in feed represents over 80% of total soybean
consumption. Therefore, China’s lower soybean demand will weigh on global soybean prices. In
addition, at a time of Sino-US trade frictions declining demand for US imports and increased
tariffs will put added pressure weigh on US soybean prices. And the growing demand for
soybean in Brazil, Argentina and other areas will be positive for soybean prices in other areas
outside the US.
In the next chapter we turn our attention to the long-term outlook for China’s huge hog industry.
Exhibit 31. 2018 chilled and frozen pork Exhibit 32. 2018 exportable quantity of
importers to China pork by country (‘000 tonnes)
3,500
3,000
Germany 2,500
Spain 19% 2,000
30%
Canada 1,500
Brazil 18%
1,000
7%
United States 500
13% 13%
other 0
EU United Canada Brazil Russia Vietnam
States
Exhibit 33. China’s pork imports (tonnes)
250,000
200,000
150,000
100,000
50,000
0
Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 Jan-18 May-18 Sep-18 Jan-19 May-19
26
October 2019
Industry outlook: long term
 We expect to see a shift to large-scale operations in the next decade

 The industry is very fragmented – consolidation will be driven by
economics, demographics and tighter environmental standards
 We assess what this means for the market leaders
Exhibit 34. 2018 China corn supply Exhibit 35. 2018 China soybean supply
Chinese 1% 16%
production Chinese
production
Import Import
volume volume
84%
99%
Exhibit 36. 2018 China soybean imports (m Exhibit 37. 2018 Global soybean exports
tonnes) (m tonnes)
70 70
60 60
50 50
40 40
30 30
20 20
10 10
0 0
United States Brazil other United States Brazil other
27
October 2019
The RMB1trn market that is facing major changes
China is by far the biggest producer and consumer of pork in the world. In 2018, the number of
hogs supplied and consumed by China both reached c684m, representing c50% of the global
total. Based on the average hog price of RMB12.7kg and the average hog weight of 110kg, we
estimate the country’s hog market was worth cRMB1trn last year. And despite the impact of
African swine fever, we think the size of market will remain stable.
Although we expect a decrease in hog production volumes over 2019-20e, this will be
accompanied by an increase in hog prices. Over 2021-22e, we expect production volumes to
gradually recover and hog prices to decline as hog farmers replenish their inventories.
According to the Ministry of Agriculture, in September 2019 the number of live hogs had fallen
In September 2019, the number
of live hogs had fallen 41%
by 41.1% from a year earlier, and sow numbers were down 38.9%; on average hogs were down
from a year earlier, and sow 25.6% and sows 26.5%. Based on these numbers and our assumptions about stock
numbers were down 39% replenishment, our forecasts for 2019-22e are as follows:
 Production volumes will be 547m, 426m, 469m and 610m, respectively
 The weighted average price per kilogram will be RMB19, RMB22, RMB20 and RMB17
 A market size of RMB1.143trn, RMB1.032trn, RMB1.032trn and RMB1.141trn
 Annual growth of 19%, -10%, 0%, and 10%
Pork – an essential part of the diet

Pork is part of daily life in China. Meat consumption is dominated by pork and supplemented by
poultry, beef and lamb. In 2018, China consumed c55mt of pork, which accounted for c63% of
its livestock and poultry meat consumption and c50% of the world’s pork consumption.
As income rise, we expect to see greater consumption of beef and lamb as well as high-end fish
products. However, cooking and eating habits are hard to change, so we believe pork
consumption will remain stable for at least the next 3-5 years, even if prices remain high.
Exhibit 38. China accounts for c50% of the Exhibit 39. China’s per-capita pork
world’s pork consumption consumption is much higher than the
world average (kg)
70.00
60.00
50.00
China
23%
40.00
EU
49% 30.00
9%
United
States 20.00
19%
other
10.00
0.00
Global China EU United other
States
28
October 2019
Exhibit 40. China’s pork consumption Exhibit 41. China’s pork consumption has
accounts for c63% of its livestock and been stable (mt)
poultry consumption
70.00
60.00
50.00
pork 6%
8% 40.00
poultry
23%
30.00
beef
63% 20.00
Lamb
10.00
0.00
2008 2010 2012 2014 2016 2018
But China’s hog market is very, very fragmented

Fragmented is a term that is widely used to describe many industries in China, particularly those
which are likely to consolidate in the next few years. But the level of fragmentation in the
country’s hog industry is quite remarkable, as captured by the following stat – 35m of the
country’s 37m pig farmers in 2017 produced fewer than 50 hogs a year (see Exhibit 44). Only
4,500 farmers produced more than 10,000 and a mere 400 over 50,000. It is not surprising that
the market share of the top 10 listed hog companies is only 7.38% (it also helps to explain why
African swine fever has been so hard to contain).
The upshot is that the farmers have little pricing power as there is virtually no product
Farmers have little pricing
power as there is virtually no differentiation and entry barriers are so low. As such, pork prices hinge completely on hog
product differentiation supply and demand. So, what does the future hold for the industry?
First, given the fluctuations of hog prices and the financial impact of African swine fever, we
think it is inevitable that many small farmers will be forced out of the industry. But such is the
scale of fragmentation we don’t think this will give the market leaders much pricing power as the
industry consolidate over the next decade.
Instead, we think they will benefit from increasing their bargaining power over the upstream feed
companies. As a result, we expect their feed costs to fall modestly. Competition in the feed
industry is already robust, a net margin of no more than 10%. Lower feed costs, coupled with a
gradual advancement in hog farming technology, lead us to believe that the overall hog costs
should remain stable and even fall.
Second, although changes in the competitive landscape are unlikely to increase hog
companies’ pricing power, the shift to large-scale operations will see earnings per hog drop,
driving down the industry’s overall ROE.
Overall, we believe that in the short term pork prices will remain the decisive factor for gross
margin and ROE. Longer term, as the industry shifts to large-scale operations, the average
return on invested capital (ROIC) and the height of entry barriers will dictate the level of ROE.
We expect the industry’s average ROE, was has been 25-30% in the last 10 years, to stay
above 20% in the next 3-5 years, before falling to c15% in the following 5-10 years.
If a vaccine is produced and is successful, then the ROE of Muyuan and Wens may be a bit
lower in the next 5-10 years compared with the past decade. But if there are no vaccine, or it
provides only partially protection, then their ROE should remain stable or even rise because of
29
October 2019
their good bio-security systems. We expect Jinyu and Haid’s ROE to remain relatively stable in
the long term.
Exhibit 42. China supplies c48% of the Exhibit 43. China’s hog production volume
world’s pork started to stabilise after 2012 (m head)
800 40%
China 700 30%
600 20%
EU
14% 500
10%
400
United 11% 0%
States 54%
300
other 200 -10%
21%
100 -20%
0 -30%
2008 2011 2014 2017 2020e
Source: Wind, HSBC Qianhai Securities Source: Wind, HSBC Qianhai Securities estimates
Exhibit 44. In 2017 there were still 35m farmers producing fewer than 50 head of hogs –
that’s 95% of the total number of farmers
Hog production volume (head) Number of farmers Share
1-49 35,718,766 94.63%
50-99 1,209,265 3.20%
100-499 603,091 1.60%
500-999 133,486 0.35%
1000-2999 58,487 0.15%
3000-4999 12,095 0.03%
5000-9999 6,893 0.02%
10000-49999 4,134 0.01%
50000 407 0.00%
Total 37,746,624 100.00%
Exhibit 45. Top 10 listed hog companies have a market share of only 7.38%
Company Ticker 2018 (10k head) Share
Wens 300498 CH 2,230 3.21%
Muyuan 002714 CH 1,101 1.59%
Zhengbang Tech 002157 CH 554 0.80%
COFCO Meat 1610 HK 255 0.37%
New Hope 000876 CH 250 0.36%
Tech-bank Food 002124 CH 217 0.31%
Chuying 002477 CH 197 0.28%
Da Bei Nong 002385 CH 168 0.24%
New Wellful 600975 CH 75 0.11%
Haid Group 002311 CH 70 0.10%
Total 5,117 7.38%
The upstream feed and animal healthcare markets

In 2018, China’s feed industry posted sales volumes of c228mt and a sales value of
cRMB870bn. Inevitably, both are being hit hard by African swine fever. We estimate that
volumes will fall 10% in 2019e, to 205mt, then drop 4% in 2020e, to 196mt, before rising 7%, to
210mt, in 2021e.
30
October 2019
This industry is also very fragmented. In China, there are around 6,500 feed producers but only
There are around 6,500 feed
producers but only four have four have an annual output of over 10mt (see Exhibit 49). As in the hog industry, feed producers
annual output of over 10mt have little pricing power as products are so similar. As a result, feed is priced using the cost-plus
method.
As mentioned earlier, hog companies should be able to increase their bargaining power over
the upstream feed producers as they shift to large-scale operations. This could weigh on feed
prices in the long term, but as competition in the feed industry is already quite intense, limiting
margins to a maximum of 10%, we do not expect prices to fall sharply. We believe the industry
is likely to maintain its current level of profitability as more and more of the smaller companies
are forced out.
By comparison, China’s animal healthcare market is more concentrated, with the top 10
companies accounting for c20% of the market in terms of sales in 2018. According to Wind,
sales totalled RMB51.2bn last year. We expect them to remain flat in 2019e and then rise 6%,
to RMB54.6bn, in 2020e and 11%, to RMB60.8bn, in 2021e.
We think the leading companies are well positioned with regard to the hog industry. Animal
healthcare products account for less than 10% of hog costs and are key to animal safety and
health. This means hog companies are generally insensitive to the prices of these products,
such as animal vaccines, and attach great importance to product quality. The animal healthcare
industry also has high entry barriers, limiting competition. As a result we believe animal vaccine
producers should maintain strong earnings as the hog companies increase their focus on
vaccines as they shift to large-scale operations.
31
October 2019
Exhibit 46. Hog industry supply chain
Feed:
Haid Group,
Da Bei Nong,
Zhengbang Tech,
Tangrenshen,
Wellhope,
Shuangbaotai
(Twins Group)
Overseas:
Cargill, Land
O'Lakes, Tysan
Foods, Alltech, CP
International
Animal healthcare; Hog

Hog farming Foods
feed; piglets slaughtering
Jinyu Bio- Wens; Shuanghui, Shuanghui,

Technology, Muyuan, Huatong
CAHIC, Pulike, Zhengbang Overseas:
Ringpu, Hile Tech, Tech- WH Group,
bank, Cargill,
Overseas: COFCO Meat, Seaboard,
Zoetis, Elanco, New Wellful, Triumph,
Bayer, Merck, Da Bei Nong, Maschoffs
Boehringer- Haid Group
Ingelheim
Note: All companies above are not rated by HSBC Qianhai Securities, except for Haid Group, Muyuan, Wens, Jinyu
Exhibit 47. Feed sales started to stabilise Exhibit 48. Size of the animal healthcare
after 2012 (mt) market has been steadily rising (RMBbn)
250 70
60
200
50
150 40
100 30
20
50
10
0 0
2008 2010 2012 2014 2016 2018 2020e 2008 2010 2012 2014 2016 2018 2020e
Biological Products
Animal medicine
32
October 2019
Exhibit 49. There are still c5,000 feed companies, or c80% of all feed companies, with an
annual output of less than 50,000t
Annual output (kt) Number of companies Total output (10kt) Output share
>30 33 1,733 8%
10-30 515 7,917 38%
5-10 760 5,327 26%
1-5 2,016 4,860 23%
<1 3,145 969 5%
Total 6,469 20,806 100%
Source: China’s Feed Industry Association, Wind, HSBC Qianhai Securities
Exhibit 50. Listed healthcare companies have a combined market share of c17%
Company Ticker Animal healthcare revenue (RMBbn) Revenue share
CAHIC 600195 CH 2.00 4.00%
Jinyu Bio-Technology 600201 CH 1.90 3.79%
Jinhe 002688 CH 1.63 3.26%
Ringpu 300119 CH 1.19 2.38%
Vland Biotech 603739 CH 0.81 1.63%
Pulike 603566 CH 0.61 1.22%
Lifecome Biochemistry 002868 CH 0.34 0.69%
Hile 603718 CH 0.25 0.51%
Total 8.74 17.47%
Note: All companies above are not rated by HSBC Qianhai Securities, except for Jinyu
An ageing population and stricter environmental standards to accelerate consolidation

Demographics will also play an important role in helping to consolidate the hog-farming industry.
According to the National Bureau of Statistics, about 14% of the population is aged 50-60,
accounting for 23% of 20-60 age group. In the next 10 years, a large number of people now in
the 50-60 age group will exit the labour force. At the same time, much fewer people will start
work as people aged 10-19 now account for 10.47% of the population.
In an ageing society, the large numbers of elderly farmers who retire are unlikely to be replaced.
More young rural residents are moving to work in cities where wages are higher as the labour
force shrinks. While the number of pig farmers is bound to fall, demand for pork is likely to
remain stable, given its enormous popularity.
Exhibit 51. Working people aged 50-59 Exhibit 52. Average monthly salaries for
(14% of population) will exit the labour rural migrant workers are rising (RMB)
force in the next 10 years
50.00%
4,500.00
45.00%
4,000.00
40.00%
3,500.00
35.00%
3,000.00
30.00%
2,500.00
25.00%
2,000.00
20.00%
15.00% 1,500.00
10.00% 1,000.00
5.00% 500.00
0.00% 0.00
<10 10-19 20-49 50-59 >59 Mar-12 Aug-13 Jan-15 Jun-16 Nov-17
33
October 2019
Another important factor in the consolidation process is environmental protection. Standards

have risen significantly in many industries in China, and agriculture is no exception. Since 2012
the government has passed a series of measures that have tightened regulations for raising
hogs, poultry and other livestock. The higher standards have increased costs, putting pressure
on small farmers. See Exhibit 53 for details.
Exhibit 53. Enhanced environmental protection regulations since 2014

Laws and regulations Department Time Key contents
Regulation on the Prevention and State Council January 2012 Enhancing the administration of feed enterprises
Control of Pollution from Large-scale
Breeding of Livestock and Poultry
Regulation on the Prevention and State Council January 2014 Preventing and controlling the pollution from
Control of Pollution from Large-scale livestock and poultry breeding; promoting the
Breeding of Livestock and Poultry comprehensive utilisation and harmless treatment
of livestock and poultry wastes
New Environmental Protection Law NPC January 2015 Units and individuals engaged in livestock and
poultry breeding shall take measures for scientific
treatment of excrement and bodies of livestock and
poultry, as well as sewage and other waste, to
prevent them from polluting the environment.
Action Plan for Prevention and Control State Council April 2015 Boosting prevention and control of agricultural and
of Water Pollution rural pollution; preventing and controlling livestock
and poultry farming pollution. Existing large-scale
livestock and poultry farms should be equipped
with fecal sewage storing, treating and utilising
facilities according to pollution prevention and
control needs. Dense free-range areas should
adopt collection, by households, and centralised
treatment and utilisation of livestock excrements
and sewage. Since 2016, rainfall and sewage
shunting and resourceful utilisation of fecal sewage
should be implemented in newly built, rebuilt and
expanded large-scale livestock and poultry farms.
Guiding Opinions on Promoting the Ministry of December 2015 Objective: By 2020, pig farmers with annual
Adjustment and Optimisation of the Agriculture production volume shall exceed 70% as a
Distribution of Hog Breeding in the percentage of the total in the southern water
Southern Water Network Area network area; more than 85% large-scale pig
farms shall be equipped with fecal treatment
facilities, and the rate of comprehensive utilisation
of hog excrements shall exceed 75%.
National Hog Production Development Ministry of April 2016 Objective: The proportion of pig farmers with an
Plan (2016-2020 Agriculture annual production volume of 500 hogs shall
increase from 42% in 2016 to 52%
Guiding Opinions on Promoting the Ministry of April 2016 Objective: By 2020, medium-size veterinary drug
Sound Development of Veterinary Agriculture manufacturers shall account for more than 70%;
Drug Industry the capacity utilisation shall improve by more than
10ppt; the industry concentration to increase
further.
Opinions on Further Promoting the CPC Central December 2016 Developing large-scale efficient breeding;
Supply-side Structural Reform of the Committee, State optimising the regional distribution of hog farming
Agricultural Industry and Fostering Council in the southern water network area
New Development for the Agricultural
Industry and Rural Areas
Opinions on Accelerating the State Council June 2017 Objective: By 2020, the rate of comprehensive
Resource Utilisation of Livestock and utilisation of hog excrements shall exceed 75% in
Poultry Breeding Wastes China; more than 95% of domestic large-scale
farms shall be equipped with fecal treatment and
sewage facilities, and 100% of the large-scale
farms shall be equipped with fecal treatment one
year ahead of schedule.
Source: Internet, Wind, HSBC Qianhai Securities
34
October 2019
The strong will get stronger

The industry leaders enjoy remarkable scale advantages in terms of hiring the best employees,
The industry leaders enjoy
remarkable scale advantages R&D spending and financial muscle. And thanks to their cost advantages, large-scale hog
farmers are more profitable than their smaller rivals and they are also much better placed to
deal with the dramatic fluctuations in hog prices.
At the other end of the scale, there are still 35m backyard farmers who produce fewer than 50
hogs a year. There used to be even more, but their number has been in decline in the last
decade. We believe this process will continue. Over the next 10 years, we expect most of them
to exit the market and the proportion of hog-farming companies producing more than 50,000
hogs annually to increase to the point where they produce more than 40% of the country’s hogs,
up from around 10% today. In 10 years we expect the top 10 listed hog companies to have a
market share of 30%, up from the current 7.38%.
Exhibit 54. Large-scale players have Exhibit 55. Proportion of feed players with
higher profitability (RMB/hog) annual output above 1m tonnes is rising
70%
500
400 60%
300 50%
200 40%
100
30%
0
-100 20%
-200 10%
-300
0%
2004 2006 2008 2010 2012 2014 2016
2010 2015 2017
Free-range household
Large-scale household
Exhibit 56. More than 90% of farmers (c35m) have an annual production volume lower
than 50 hogs, with their contribution to total production volume dropping over time
100%
98%
96%
94%
92%
90%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
1-49 50-99 100-499 500-999 1000-2999
3000-4999 5000-9999 10000-49999 50000
35
October 2019
Exhibit 57. In 2017, farmers with an annual Exhibit 58. We estimate farmers with
production volume below 500 hogs annual production of more than 50,000
accounted for more than 50% hogs will exceed 40% by 2028
1-49
1-49
50-99
50-99
100-499
100-499 0%
1%
1%
9% 16%
6% 500-999
500-999 5%
40% 44%
5% 1000-2999 14%
1000-2999
8% 3000-4999
3000-4999 9%
9%
5000-9999 10% 5%
5000-9999 9% 9%
10000-49999
10000-49999
50000
50000
Source: Wind, HSBC Qianhai Securities Source: HSBC Qianhai Securities estimates
The feed and vaccine industries should also benefit

Similar to hog farming, the feed and animal healthcare industries are also consolidating as a
The feed and animal
healthcare industries are also result of the ageing population and enhanced environmental protection standards. Not
consolidating surprisingly, the big hog farmers prefer to do business with companies that can offer them the
best services and products, particularly when it comes to animal vaccines. We expect this to
lead to these upstream companies offering a much wider range of services, including feed,
testing and seeding. This, in turn, will lead to further consolidation.
Large farming enterprises spend much more on animal healthcare than family farmers. Let’s
take the foot and mouth vaccine (FMD) vaccine as an example. This product was originally
distributed free by the government. This changed thanks to technological breakthroughs
achieved by Jinyu. FMD vaccine started to be sold at market prices as demand increased from
large farming enterprises which wanted the most advanced product available. The ex-factory
price is usually more than five times higher than FMD vaccines procured by the government.
The penetration rate of market-priced FMD vaccines rose to 20% in 2018, up from 0% in 2011.
Exhibit 59. Large animal farming enterprises spend much more on animal healthcare
than family farmers (RMB/hog)
120
100
80
60
40
20
0
Muyuan Wens Household
36
October 2019
Calculated at a feed conversion ratio (feed weight/meat weight) of three, the commercialisation
rate of pig feed was less than 50% in 2018. Some family farmers still use homemade feed or
even food scraps. As the industry consolidates, the demand for higher-quality feed products will
expand. This will improve nutrition standards, lower feed prices and enhance efficiency.
Exhibit 60. Low commercialisation rate of feed

Hog production Average weight (kg) Feed conversion Feed needed (m ton Output of feed ente Commercialisation
volume (100m) ratio nes) rprises (m tonnes) rate
6.84 110 3 225.72 97 42.97%
A comparison with the US farming industry
A study in market consolidation

The US is the second largest hog producer and consumer in the world. The industry is much
more concentrated than in China. Between 1996 and 2012 the number of hog farming
enterprises fell from about 1.5m to around 700,000. By 2013, 68% of hogs were supplied by
farms with an annual output of more than 5,000; the combined market share of the top five
players was c30%.
The upstream feed and animal healthcare industries are also more concentrated than their
counterparts in China. The top five animal healthcare players have a market share of c55%; for
the five leading feed companies it’s over 30%.
Exhibit 61. Changes in the number of US animal farming enterprises (10,000)
180
160
140
120
100
80
60
40
20
0
1996 1998 2000 2002 2004 2006 2008 2010 2012
37
October 2019
Exhibit 62. US hog companies, 2013 Exhibit 63. Hog production in the US, 2013
<100
WH GROUP 1%
1%
2%5%
100-499
Cargill 14%
500-999 23%
Seaboard 8%
4% 1000-1999
Triumph 3% 68%
3%
68% 2000-4999
Maschoffs
5000
Others
Exhibit 64. Competitive landscape of the Exhibit 65. Competitive landscape of the
global animal healthcare industry, 2018 US feed industry, 2018
Zoetis
Boehringer- Cargill
ingelheim 11%
17% Land O'Lakes
ELANCO 8%
Tysan Foods
50% 13% 6%
Alltech 4%
Bayer 2%
9% 69%
ADM Alliance
5% 6%
Merck Others
Others
The leading US companies are strengthening their grip on the market. For example, Smithfield
Foods, a leading hog player that was acquired by China’s Shuanghui in 2013, recorded a c15x
revenue increase from cUSD0.9bn to cUSD13.2bn over 1988-2012, a c12% CAGR. During the
same period, its market capitalisation soared by c33x from USD0.1bn to USD3.3bn, a CAGR of
c15%. The short-term fluctuations in Smithfield’s market cap is highly correlated with its short-
term earnings, which are driven by hog prices, but its long-term growth is driven by the
expanding hog production volumes and market share.
38
October 2019
Exhibit 66. Smithfield’s revenue grew Exhibit 67. Smithfield’s market cap
rapidly continued to increase amid fluctuations in
net profit (USDm)
14000 80% 600 5000

500
12000 60% 400 4000
10000 300
40% 3000
8000 200
20% 100
6000 2000
0
0%
4000 -100 1000
2000 -20% -200
-300 0
0 -40% 1988 1992 1996 2000 2004 2008 2012
1988 1991 1994 1997 2000 2003 2006 2009 Net profit Market Cap(right axis)
Revenue(millions) YoY growth
Source: Bloomberg, HSBC Qianhai Securities Source: Bloomberg, HSBC Qianhai Securities
The demand for animal healthcare has also surged in the US. Zoetis (not rated), a leading
player, has achieved growth by virtue of its strong R&D capacity. In 2011, Zoetis registered total
revenue of USD4.23bn – USD2.78bn from its livestock business and USD1.46bn from its
companion animal healthcare business. Zoetis went public in 2012 on a standalone basis. By
2018, the revenue and market cap had risen to USD5.83bn and cUSD60bn, respectively.
Exhibit 68. Zoetis revenue (USDm) Exhibit 69. Zoetis net profit (USDm)
7,000 1,600
6,000 1,400
1,200
5,000
1,000
4,000
800
3,000
600
2,000
400
1,000 200
0 0
2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018
In the feed industry, companies actively expanded to the downstream animal farming industry.
Some of them, such as Cargill (not rated), Tyson Foods (not rated) and CP Group (not rated),
have grown into vertically integrated enterprises engaged in feed and animal farming.
In terms of hog production and sales volumes, China’s market is around five times larger than
the US industry. Based on the development of the US industry supply chain, we believe that
China is now at the early stage of increasing market concentration, and we expect the pace of
consolidation to accelerate over the next decade.
We expect the leading companies to benefit from their competitive advantages and generate
higher rates of return on capital, given the low level of operational efficiency of many smaller
rivals. In our view, the biggest operators will continue to gain market share across China’s hog
industry chain.
39
October 2019
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40
October 2019
Company section
41
October 2019
Haid Group (002311 CH)
 A leader in the feed industry, market share set to keep rising

 Rising hog prices to stimulate stock replenishment as well as
demand for aquatic and poultry products as substitutes for pork
 Initiate coverage with a Buy rating and a TP of RMB43.00
Leading feed producer in China
Haid Group, founded in Guangdong province in1998, is one of China’s largest feed
The company now has a c5%
share in the feed market
manufacturers. The company listed in 2009 and is led by Xue Hua, the founder, chairman and
CEO, who is also the actual controller. Haid Group started as an aquatic feed producer and has
since expanded into poultry feed, hog feed, aquatic seedlings, animal healthcare products and
hog farming. It aims to become a leading domestic high-tech agriculture and animal husbandry
company. The company now has a c5% share in the feed market in terms of sales volume.
Its revenue has grown steadily in the past few years, with relatively stable gross margin and
profit margin. As a result of African swine fever, in 1H19 sales of pig feed decreased 6% but
sales of aquatic feed rose 16% and poultry feed 30%. Gross profit margin, net profit margin and
ROE remain stable as substitute products have offset the fall in pig feed sales.
In 2018, the company posted revenue of RMB42.157bn, up 29.49% versus 2017; net profit
attributable to shareholders was RMB1.437bn, up 19%. Feed revenue increased 31.7%, to
RMB34.965bn, as sales volume rose 26%, to 10.7mt. In 1H19, revenue was RMB21.06bn, up
19.1% y-o-y; net profit attributable to shareholders was RMB674m, an increase of 12.2% y-o-y;
feed sales volume rose 18% y-o-y, to 5.39mt.
Exhibit 70. Revenue rising steadily, with Exhibit 71. Feed sales volume breakdown,
feed the major contributor (RMBm) 2018
50,000
40,000 Aquatic
product
sales
30,000 Pig 29%
material
49%
20,000 sales
Poultry
sales 22%
10,000
0
2013 2014 2015 2016 2017 2018
Other business Microecological preparation
Agricultural product sales Raw material trade
Feed
42
October 2019
Exhibit 72. Gross margin, net margin and Exhibit 73. Operating cash flow (RMBm)
ROE (%)
25 1,600
1,400
20 1,200
1,000
15
800
10 600
400
5 200
0
0 2013 2014 2015 2016 2017 2018
2013 2014 2015 2016 2017 2018
ROE (Weighted) Net Profit Margin
Gross Profit Margin
Exhibit 74. Shareholding structure
Xuehua
39.75%
Guangzhou Haishu Investment

Co., Ltd.
57.6%
Guangdong Haida Group Co., Ltd.
43
October 2019
Investment highlights
Feed market share expected to increase; feed sales volume to grow steadily
The company has been expanding market share since it launched. In aquatic products, Haid
The company has been
expanding market share has maintained its market leading position on the back of cost-effective products and industry-
since it launched leading technical services. Its aquatic product mix has been improving, driven by consumption
upgrades. In poultry feed, lower-than-industry costs have made the company highly competitive
and given it pricing power, helping Haid increase profitability while expanding scale. In pig feed,
sales volumes far exceed those of peers.
What is driving market share gains?

“Four-in-one” mechanism. This mechanism co-ordinates R&D, technical services and sales,
procurement and production teams. The front-line sales team provides feedback on demand to
the R&D team, which then designs the best product by working with the procurement and
production teams. This mechanism ensures products have the highest value for money and
meet customer demand in a timely manner.
Advantages in scale and product lines. The company is strong in three areas – aquatic,
livestock and poultry feed. This diverse product mix helps it withstand risks in each segment,
improve production efficiency and use a flexible pricing strategy to secure share in each market
segment.
Management team. The company has a clear strategy and a stable, experienced management
team led by the chairman.
Incentive scheme. The company has an incentive scheme, with all the senior executives’
holding company shares. It has implemented several employee stock ownership plans (ESOPs)
to incentivise staff.
As the industry consolidates, we believe the company’s competitive strengths will allow it to
increase its sales volume and market share. Based on our assumptions for aquatic, poultry and
hog feed sales volumes, we forecast total feed sales volume to be 12.20mt, 14.39mt, 16.76mt,
19.27mt and 21.45mt in 2019-23e, up 14%, 18%, 16%, 15% and 11% in each of these years.
Exhibit 75. Market share by product Exhibit 76. Sales volume by product (kt)
16.00% 25000
14.00%
20000
12.00%
10.00%
15000
8.00%
6.00% 10000
4.00%
5000
2.00%
0.00% 0
2007 2009 2011 2013 2015 2017 2015 2017 2019e 2021e 2023e
Total feed Aquatic product
Aquatic product Hog product Poultry product
Hog product Poultry product
Source: Wind, HSBC Qianhai Securities Source: Wind, HSBC Qianhai Securities estimates
Higher hog prices to drive restocking and consumption of alternatives to pork

As mentioned in the industry section, the short-term growth in feed sales is highly correlated
with hog companies’ earnings and the level of restocking. As higher hog prices drive restocking
44
October 2019
and in turn stimulate fish prices and the use of aquatic feed, hog feed and aquatic feed
segments should enter an upcycle. As a result, the company could accelerate its sales volume
growth and improve its profitability on the back of a better product mix. In addition, aquatic feed
has a higher margin than hog feed, boosting profitability.
Based on the assumption that the price of aquatic feed will recover and the company will continue
to increase its market share in this segment, we forecast aquatic feed sales at 3.6mt, 4.25mt,
4.97mt, 5.62mt and 6.11mt in 2019-23e, up 16%, 18%, 17%, 13% and 9%, respectively, in
these years.
Given the impact of African swine fever this year, we forecast that hog feed sales will fall 25% in
2019e, to 1.73mt, and then rise 10%, 30%, 30% and 20% in each year over 2020-23e, to 1.90mt,
2.47mt, 3.21mt and 3.85mt, respectively.
Exhibit 77. We expect aquatic feed sales to Exhibit 78. We expect hog feed sales to
continue to rise (kt) resume growth in 2020 (10kt)
7000 30% 450 60%

400
6000 25% 40%
350
5000 20% 300
250
20%
4000 15%
200
3000 10% 0%
150
2000 5% 100 -20%
50
1000 0% 0 -40%
0 -5% 2015 2017 2019e 2021e 2023e
2015 2017 2019e 2021e 2023e
Hog farming segment to become a new growth driver

The company has been accumulating experience in hog farming. As its feed business
expanded, it has increased investment in this business. We expect its hog production volume to
be 0.9m/1m/1.2m/2.0m/3m head in 2019-23e. With hog prices staying high, we think the hog
farming business will make a greater contribution to both revenue and profits.
Exhibit 79. Hog production volume (10,000 head)
250
200
150
100
50
0
2015 2016 2017 2018 2019e 2020e 2021e 2022e
45
October 2019
Exhibit 80. SWOT analysis

Category Analysis
Strengths 1. Scale advantage: In 2018, the company’s feed sales amounted to c10m tonnes, among the top three in the
industry. The scale advantage can secure a cost advantage, so that it has sufficient resources for R&D and hiring
outstanding talent. In 2018 R&D expenses amounted to cRMB300m, at the forefront of the industry.
2. Product line advantage: the company is strong in three areas - aquatic, poultry and pig feeds. Among the listed
companies, its aquatic feed sales rank No. 1, and poultry feed is among the top three. The product mix reduces
the reliance on a single industry. Meanwhile, flexible production can enhance efficiency. The company’s ROE is
the highest among listed peers.
3. Experienced management: the average age of its management team is about 50, with 20 years’ experience in
the industry on average.
4. Incentive scheme: The company has employee stock ownership plan and the core management have a stake
in the company.
Weaknesses It was a late starter in the hog feed segment and production growth is rather low; there is still a 5-10% difference
in terms of costs compared to Muyuan and Wens.
Opportunities 1. The overall market share of the company’s feed sales is c5%. The market shares of aquatic, poultry and hog
feed could continue to grow;
2. The hog segment is fragmented, so there is room for production growth, especially as the outbreak of African
swine fever changes the industrial landscape;
Threats 1. In the short term, hog feed makers are faced with tough times and they may turn to the aquatic feed business,
which would intensify competition, affecting aquatic feed prices and profitability;
2. Prevention and control of African swine fever are both difficult and could impact the company’s hog production
and hog feed sales.
Earnings estimates and balance sheet
We estimate 2019e, 2020e and 2021e feed sales to be 12.20m, 14.39m and 16.76m tonnes,
with prices per tonne of RMB3,265, RMB3,261 and RMB3,273 and gross profit per tonne
RMB354, RMB417, and RMB487. Based on the above assumptions, we estimate feed revenue
will grow 13%, 18% and 17% in 2019-21e, to RMB40bn, RMB47bn, and RMB55bn, with gross
profit up 16%, 18% and 17% in the same years.
We estimate 2019e, 2020e and 2021e hog production at 0.9m, 1m and 1.2m head, with hog
ASPs at RMB18, RMB22 and RMB20 per kg.
Based on our assumptions for the feed business and hog farming, we estimate 2019e, 2020e
and 2021e net profit attributable to the parent to grow 36%, 39% and 16%, to RMB1.96bn,
RMB2.73bn, and RMB3.16bn, respectively.
46
October 2019
Exhibit 81. Haid’s revenue and earnings estimates (RMBm)

2015 2016 2017 2018 2019e 2020e 2021e 19-21e
CAGR
Revenue 25,567 27,185 32,557 42,157 49,953 58,610 67,760 17%
Feed 20,170 21,674 26,500 35,328 39,846 46,954 54,867 16%
Hog 116 598 734 924 1,782 2,420 2,640 42%
Animal healthcare 176 287 396 515 618 741 890 20%
Seedling 204 241 277 318 350 403 463 13%
Others 4,902 4,385 4,650 5,072 7,358 8,092 8,900 21%
Gross profit 2,408 2,560 3,577 4,541 5,555 7,006 8,059 21%
Feed 2,246 2,100 3,066 3,858 4,484 5,293 6,172 17%
Hog 15 141 127 39 396 935 990 195%
Animal healthcare 88 136 197 259 310 373 447 20%
Seedling 41 48 55 64 70 81 93 13%
Others 18 135 132 322 295 324 357 3%
Gross margin
Feed 11.14% 9.69% 11.57% 10.92% 11.25% 11.27% 11.25%
Hog 13.33% 23.53% 17.24% 4.17% 22.22% 38.64% 37.50%
Animal healthcare 50.00% 47.39% 49.76% 49.76% 49.76% 49.76% 49.76%
Seedling 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00%
Others -0.43% 3.29% 3.80% 4.00% 4.00% 4.00% 4.00%
Net profit attributable to 780 856 1,207 1,437 1,959 2,732 3,169 30%
parent
The company’s business model is based on low net margin and high turnover. Its net profit
attributable to the parent is mainly affected by revenue and gross margin. We conducted a
sensitivity analysis of its net profit attributable to parent:
We found that the net profit attributable to parent is not particularly sensitive to revenue,
growing 5% when revenue grows 5%. However, it is highly sensitive to gross margin – when
gross margin grows 1% its net profit attributable to parent would rise 18%.
Looking ahead into 2019-20e, we expect feed sales to continue to drive revenue growth. Its
gross margin is based on gross profit per tonne of feed and the feed product mix. The company
usually adopts the cost-plus pricing model for its feed products, so gross profit per tonne is
relatively stable. With downstream farms replenishing their stock of hogs and aquatic product
prices rising, the sales growth of aquatic feed and high-end products should accelerate and
improve the feed product mix. We expect the company’s gross margin to edge upward.
Exhibit 82. Sensitivity analysis of 2020e net profit attributable to parent to revenue and
gross margin (RMBm)
__________________________________ Revenue growth ___________________________________
Gross margin 7% 12% 17% 22% 27%
10% 1,629 1,713 1,803 1,881 1,965
11% 2,064 2,168 2,279 2,377 2,482
12% 2,499 2,623 2,732 2,873 2,998
13% 2,934 3,079 3,233 3,369 3,514
14% 3,368 3,534 3,710 3,865 4,030
Exhibit 83. Sensitivity analysis of 2020e net profit attributable to parent to revenue and
gross margin (%)
__________________________________ Revenue growth ___________________________________
Gross margin 7% 12% 17% 22% 27%
10% -40% -37% -34% -31% -28%
11% -24% -21% -17% -13% -9%
12% -9% -4% 0% 5% 10%
13% 7% 13% 18% 23% 29%
14% 23% 29% 36% 41% 48%
47
October 2019
Balance sheet and cash flow analysis

The company has a sound balance sheet. In 2018, the net debt ratio was 16.44%, and the debt
to asset ratio was maintained at c50%.
It has healthy cash flow. Operating cash flow has been positive for several years, totalling
RMB1.03bn in 2018. Given the size of market, capex is high so free cash flow is negative but
we expect it to turn positive in 2020e. We estimate average annual capex of cRMB1.5-2bn over
the next three years, mainly for construction of feed plants and a new piggery.
Exhibit 84. Balance sheet (RMBm)

2015 2016 2017 2018 2019e 2020e 2021e
Cash 1,167 1,544 1,392 1,735 1,246 1,384 1,532
Inventories 1,635 2,057 3,384 4,844 6,256 8,079 9,501
Current assets 3,771 5,314 6,887 9,292 10,941 12,834 15,166
Fixed assets 2,776 3,113 3,761 4,555 5,652 6,855 8,045
Non-current assets 4,413 4,974 6,274 8,073 9,046 10,127 11,195
Total assets 8,185 10,288 13,160 17,366 19,987 22,960 26,360
Current liabilities 2,955 4,337 6,008 6,951 7,501 8,515 9,645
Non-current liabilities 133 143 315 2,191 2,642 2,681 2,720
Total liabilities 3,087 4,480 6,324 9,142 10,144 11,195 12,365
Shareholders’ equity 5,001 5,650 6,475 7,746 9,302 11,134 13,259
attributable to parent
Interest-bearing debt 959 1,609 2,304 4,590 5,220 5,654 6,277
Net interest-bearing debt -208 65 912 2,855 3,974 4,270 4,745
Net debt ratio -2.54% 0.63% 6.93% 16.44% 19.88% 18.60% 18.00%
Debt to asset ratio 37.72% 43.54% 48.05% 52.64% 50.75% 48.76% 46.91%
Cash flow statement 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Operating cash flow 0 1,142 494 1,036 1,003 2,615 2,759
Investing cash flow 0 -996 -1,071 -2,006 -1,500 -1,800 -2,000
Free cash flow 0 60 -493 -1,237 -571 742 689
Valuation and risks
Given the stable demand in the retail market and strong earnings visibility, we use PE to value
the stock. We expect an earnings CAGR of c30% for the next three years, up from 22% for the
past five years. As we think the current high hog prices are likely to be unsustainable, and given
the consistent level of past earnings growth, we apply a 25x 2020e PE, in line with the five-year
average (c25x). This gives us a target price of RMB43.00, implying 34% upside. We initiate
coverage with a Buy rating.
48
October 2019
Exhibit 85. Haid’s historical forward PE
70
60
50
40
30
20
10
0
Nov-09 Nov-10 Nov-11 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Nov-18
PE Average PE
The share price trend in the last two years

August 2017 to May 2018: The stock price rose steadily from below RMB20 to RMB25. There
were two main reasons for the increase. First, investors collectively invested in all industry
leaders in 2017, so Haid was a beneficiary. Second, the company grew its market share in
aquatic feed, a category where prices were rose in 2017. Sales volume and net profit both rose
during this period.
May 2018 to October 2018: The price fell from RMB25 to cRMB20. A-share market sentiment
in 2018 was relatively poor and, at the industry level, investors were worried about feed sales as
falling pig prices dragged down the price of aquatic products. Net profit growth fell.
October 2018 until now: The share price rallied from RMB20 to cRMB30, close to its historical
high. First, Q4 2018 results were strong, bringing annual profit growth to c19%. This confirmed
that the decline in the previous three quarters of 2018 was due to the hog price decline and
investor confidence in the company’s long-term competitive advantages strengthened. At the
same time, A-share market sentiment has improved substantially since 2019.
The stock and market cap are around historical highs, but the valuation is still at the historical
average. We think the company has significant long-term competitive advantages and its market
cap will increase as profit grows. In the short term, the company is facing an industry trough.
However, with as downstream pig farmers replenish their stock and fish prices rise, the growth
of the feed sales and profits are expected to accelerate. Meanwhile, we estimate that 2019-20e
profit growth will increase on rising pig prices.
Potential catalysts: Upside share price catalysts in the next 6-12 months include: R&D and the
possible launch of an African swine fever vaccine, recovery of sow inventory, rising fish prices,
faster profit growth in Q3-4 2019e.
49
October 2019
Exhibit 86. Share price over the last two years
35
30
25
20
15
10
5
0
Jul-17 Sep-17 Nov-17 Jan-18 Mar-18 May-18 Jul-18 Sep-18 Nov-18 Jan-19 Mar-19 May-19 Jul-19
Key downside risks

 African swine fever continues to spread: Sales growth of pig feed depends on the scale of
the epidemic stabilising. If it continues to spread, sales growth of pig feed will be impacted.
 Abnormal weather conditions: Sales growth of aquatic feed depends on the stable
operation of downstream growers. If abnormal weather occurs, growers could reduce their
feed purchases, affecting feed sales.
 Competition: Our earnings estimates are based on stable gross profit of feed per tonne. If
competition increases between feed players due to African swine fever, gross profit of feed
per tonne could be impacted in the short term.
 Raw materials prices: Our earnings estimates are based on stable gross profit of feed per
tonne. If raw material prices fluctuate and the company fails to adjust feed prices in time or
adopts the wrong purchasing strategy, the gross profit of feed per tonne could be impacted
in the short term.
 African swine fever: If it spreads to the company’s pig farms the number of hogs produced
and costs will be affected, impacting the company’s profit.
 Aquatic products may not meet expectations in terms of being a replacement for pork.
Other substitutes, like beef and poultry, may beat expectations.
50
October 2019
Financials & valuation: Haid Group Buy
Financial statements Valuation data

Year to 12/2018a 12/2019e 12/2020e 12/2021e Year to 12/2018a 12/2019e 12/2020e 12/2021e
Profit & loss summary (RMBm) EV/sales 1.3 1.1 0.9 0.8
Revenue 42,157 49,953 58,610 67,760 EV/EBITDA 21.0 17.6 12.9 11.1
EBITDA 2,557 3,115 4,251 4,981 EV/IC 4.1 3.4 2.9 2.5
Depreciation & amortisation -493 -488 -681 -895 PE* 35.3 25.9 18.6 16.0
Operating profit/EBIT 2,064 2,626 3,570 4,086 PB 6.6 5.5 4.6 3.8
Net interest -219 -219 -212 -192 FCF yield (%) -2.0 -1.0 1.6 1.5
PBT 1,844 2,407 3,358 3,894 Dividend yield (%) 0.9 1.3 1.8 2.1
HSBC Qianhai PBT 1,844 2,407 3,358 3,894 *Based on HSBC Qianhai EPS (diluted)
Taxation -282 -385 -537 -622 Source: Company data, HSBC Qianhai Securities estimates
Net profit 1,437 1,959 2,732 3,169
HSBC Qianhai net profit 1,437 1,959 2,732 3,169
Cash flow summary (RMBm) ESG metrics
Cash flow from operations 1,036 1,003 2,615 2,759 Environmental indicators 12/2018a Governance indicators 12/2018a
Capex -2,029 -1,500 -1,800 -2,000
GHG emission intensity* n/a Number of board members 7
Cash flow from investment -1,500 -1,800 -2,000 -2,000
Energy intensity* n/a Average board tenure (years) 3.4
Dividends 474 646 902 1,046
Change in net debt 1,943 1,119 297 475 CO2 reduction policy Yes Female board members (%) 14.3
FCF equity -993 -497 815 759 Social indicators 12/2018a Board members’ independence (%) 42.9
Balance sheet summary (RMBm) Employee costs as % of revenue n/a
Intangible fixed assets 1,309 1,225 1,140 1,056 Employee turnover (%) n/a
Tangible fixed assets 4,555 5,652 6,855 8,045 Diversity policy No
Current assets 9,292 10,941 12,834 15,166 *GHG intensity and energy intensity are measured in kg and kWh, respectively, against revenue in USD’000
Cash & others 1,785 1,296 1,434 1,582 Note: n/a = not available
Total assets 17,366 19,987 22,960 26,360 Source: Company data, HSBC Qianhai Securities
Operating liabilities 348 348 348 348
Gross debt 4,590 5,220 5,654 6,277
Net debt 2,855 3,974 4,270 4,745 Issuer information
Shareholders’ funds 7,746 9,302 11,134 13,259 Share price (RMB) 32.10 Free float 98%
Invested capital 13,024 16,174 19,047 22,337
Target price (RMB) 43.00 Sector Food Products
RIC (Equity) 002311.SZ Country China
Ratio, growth and per share analysis Bloomberg (Equity) 002311 CH Analyst Andy Li
Market cap (USDm) 7,155 Contact +8621 6081 3812
Year to 12/2018a 12/2019e 12/2020e 12/2021e
Y-o-y % change
Revenue 29.5 18.5 17.3 15.6 Price relative
EBITDA 28.3 21.8 36.5 17.2
Operating profit 29.0 27.3 35.9 14.5
PBT 21.4 30.5 39.5 16.0 34.00 34.00
HSBC Qianhai EPS 19.1 36.3 39.5 16.0 29.00 29.00
Ratios (%)
Revenue/IC (x) 3.7 3.4 3.3 3.3 24.00 24.00
ROIC 15.1 15.1 17.0 16.6 19.00 19.00
ROE 18.6 21.1 24.5 23.9
ROA 10.9 11.8 14.0 13.9 14.00 14.00
EBITDA margin 6.1 6.2 7.3 7.4 9.00 9.00
Operating profit margin 4.9 5.3 6.1 6.0 2016 2017 2018 2019
EBITDA/net interest (x) 11.7 14.2 20.1 25.9 Haid Group Rel to CSI 300 Index
Net debt/equity 34.7 40.4 36.3 33.9
Note: Priced at close of 11 October 2019
Net debt/EBITDA (x) 1.1 1.3 1.0 1.0
CF from operations/net debt 36.3 25.2 61.2 58.1 Source: HSBC Qianhai Securities
Per share data (RMB)

EPS Rep (diluted) 0.91 1.24 1.73 2.00
HSBC Qianhai EPS (diluted) 0.91 1.24 1.73 2.00
DPS 0.30 0.41 0.57 0.66
Book value 4.90 5.88 7.04 8.39
Source: Company data, HSBC Qianhai Securities estimates
51
October 2019
Jinyu Bio-Technology
(600201 CH)
 A leader in animal vaccines that should benefit from the move to

large-scale breeding
 Replenishment by farmers is fuelling demand, creating an upward
cycle
 Initial with a Buy rating and a target price of RMB24.00
China’s leading animal vaccine company
Jinyu Bio-Technology was founded in 1993 and is headquartered in Hohhot, the capital city of
The company has a market
share of over 50% in foot- Inner Mongolia. As China’s leading animal vaccine company, it develops, manufactures and
and-mouth vaccine sells vaccines for foot-and-mouth disease (FMD), a contagious disease that affects cattle and
hogs, and veterinary biological products for Chinese and international markets. The company,
which used to have a textile processing business, started to focus exclusively on vaccines in
2012 and the launch of FMD products has boosted revenue and profits. It has had a market
share of over 50% in FMD vaccine for several years.
Growth slowed in 2018 as small customers started to be affected by African swine fever. The
company posted revenue of RMB1.897bn, down 0.23% versus 2017; net profit was RMB754m,
a fall of 13.29%. We estimate that the FMD vaccine business contributed cRMB1.5bn to sales.
As swine fever spread, vaccine sales fell sharply in the first half of 2019 and revenue decreased
32.85% y-o-y. We expect the downturn to continue throughout 2019. As the company’s main
customers are large-scale farming enterprises, which are less affected by the disease and are
more likely to replenish their stock, we forecast that revenue will recover in 2020e.
52
October 2019
Exhibit 87. The focus has been on the Exhibit 88. Robust growth of net profit
animal vaccine business since 2012 attributable to the parent (RMBm)
(RMBm)
2,000 1,000
900
1,500 800
700
1,000 600
500
500 400
300
0 200
2009 2011 2013 2015 2017
100
Biopharmaceutical Textile processing Others
0
2010 2012 2014 2016 2018
Exhibit 89. Profitability indicators (%) Exhibit 90. Operating cash flow (RMBm)
90 1,000
80 800
70
60 600
50 400
40
30 200
20 0
10
0 (200)
2010-12-31 2013-12-31 2016-12-31 2010 2011 2012 2013 2014 2015 2016 2017 2018
Gross Profit Margin
Exhibit 91. Equity structure
Hong Kong Central Clearing Inner Mongolia Jinyu other

Company Limited Biological Holdings Co., Ltd.
11.57% 10.55% 77.88%
Jinyu Biotechnology Co., Ltd.
Source: :Wind, HSBC Qianhai Securities
53
October 2019
Investment thesis
Core competitive strengths

The company’s use of advanced technology to produce high-quality vaccines is its core
competitive strength. For example, back in 2008 Jinyu Bio-Technology became the first
company in China to solve the key technical problem of cell suspension culture. The following
year it launched the country’s first production line of suspension culture for FMD vaccine.
In 2010, the company took the lead in applying suspension culture technology and in 2012 it
developed three standards for the FMD vaccine: antigen content, impure protein content,
antigen and impure protein detection. Investment in R&D and high-quality production capacity
has paved the way for robust sales growth of FMD vaccines since 2012.
The company is building an RMB2bn industrial park which will house a new vaccine production
The company is building an
RMB2bn industrial park line and a state of the art bio-safety laboratory. We think this facility will take its R&D capabilities
which will house a new to a new level. According to Jinyu, phase one should start operations by the end of 2019.
vaccine production line
Channel and brand accumulation ensures leading edges
As part of the move to focus on FMD vaccines, in 2012 the company introduced a direct sales
model to sell vaccine directly to its customers. Since then it has broadened its sales channels
and also offers vaccine trials and technology services, which has helped to improve its market
share.
Management team and incentive scheme

The experienced management team has a clear strategy and core management and employees
hold shares in the company through a stock incentive scheme.
Exhibit 92. FMD vaccine market share, Exhibit 93. Animal vaccine business:
2018 robust growth since 2012 (RMBm)
2,000
1,800
1,600
1,400
1,200
Jinyu
1,000
CAVAT 800
Others 600
400
200
0
2012 2013 2014 2015 2016 2017 2018
We expect FMD vaccine sales to grow due to the move to large-scale breeding
As discussed in the industry section, large-scale breeding will become the prevailing trend in the
next decade. In terms of vaccines, the bigger farmers focus on breeding intensity, bio-safety
awareness and quality. As the market consolidates, we expect the emphasis to be on vaccine
quality and premium pricing. As an industry leader, this should benefit Jinyu. The rise in pork
prices is likely to improve the earnings of breeding farmers and encourage them to replenish to
their stock. In turn, the recovery of breeding stock is likely to spur farmers’ demand for animal
vaccine.
54
October 2019
The short-term problem for Jinyu is that its small customers have been hardest hit by African
swine fever, with smaller farms losing a disproportionate number of hogs. Longer term, we
expect the bigger customers to increase capacity and production over the next few years.
As a result, we forecast that revenue from FMD vaccine will fall 35% in 2019e, to RMB1bn, and
then rise 27%, 40%, 17% and 16% each year over 2020-23e, to RMB1.25bn, RMB1.75bn,
RMB2.06bn and RMB2.39bn respectively.
Another possible growth drive is a vaccine for African swine fever, if and when one is identified.
As Jinyu is the industry leader, it would be a strong candidate to start production of the new
vaccine, assuming it is among the 3-5 companies likely to be approved by the Ministry of
Agriculture and Rural Affairs.
Exhibit 94. We expect the FMD market to recover in 2020 (RMBm)
2,500
2,000
1,500
1,000
500
0
2015 2016 2017 2018 2019e 2020e 2021e 2022e 2023e
From FMD vaccine leader to full service platform

Jinyu Bio-Technology wants to move beyond the FMD market in order to become a platform for
Jinyu Bio-Technology wants
to move beyond the FMD a complete range of animal vaccines. The company’s new industrial park should play a major
market role in this process. It will feature a national bio-safety lab, including cell, small animal and a big
animal P3 lab that enables the isolation of dangerous biological materials for research. This will
make Jinyu the country’s leader in terms of biosafety levels. At the same time, the company is
cooperating with domestic and overseas R&D institutions and integrating its resources to build
an international platform.
Besides FMD vaccine, the new industrial park includes brucella and ruminant animal vaccine
production lines. This will create a complete production line: Porcine circovirus (PCV), swine flu
vaccine and other pig vaccine categories developed by subsidiary Yangzhou Uni-bio, poultry
vaccines including H5+H7 and a rabies vaccine by subsidiary Liaoning Yikang.
Also Jinyu just announced it will increase its investment in pet vaccines, which is a very
promising market in China.
55
October 2019
Exhibit 95. Poultry vaccine revenue Exhibit 96. PCV product revenue estimate
estimate (RMBm) (RMBm)
300 300
250 250
200 200
150 150
100 100
50 50
0 0
2018 2019e 2020e 2021e 2022e 2023e 2018 2019e 2020e 2021e 2022e 2023e
Exhibit 97. Jinyu Bio-Technology: SWOT analysis

Category Analysis
Strengths 1. Technology: The company took the lead in applying suspension culture technology and launched China’s first
production line of suspension culture for FMD vaccine
2. Channel and brand: The company has a strong brand and pioneered the point-to-point sales channel. It has
had a market share of over 50% in FMD vaccine for several years.
3. New industrial park: The park is being built to the highest industry standards in terms of production efficiency,
bio-safety and R&D.
Weaknesses 1. Single production line: FMD vaccine sales contribute over 80% of total revenue.
Opportunities 1. The growing trend of large-scale breeding boosts vaccine demand. The FMD vaccine penetration rate is 20%,
so demand for the company’s FMD products should continue to grow.
2. Strong demand for African swine vaccine. If the company succeeds in launching a vaccine for African swine
fever, it will become the company’s new star product.
3. Pet vaccine is at an early stage.
Threats 1. FMD vaccine companies, such as China Agricultural Vet Biology and Technology, China Animal Husbandry
industry, are improving their product quality. The competitive landscape is likely to intensify.
2. African swine fever continues to spread, reducing breeding stock numbers.
Given the short-term challenges caused by African swine fever, we forecast that revenue will fall
34%, to RMB1.246bn, in 2019e and then rise 30% and 39%, to RMB1.625bn and RMB2.263, in
2020e and 2021e, respectively.
56
October 2019
Exhibit 98. Jinyu Bio-Technology revenue and net profit estimates (RMBm)
2015 2016 2017 2018 2019e 2020e 2021e 2020-21e
CAGR
Revenue 1,247 1,517 1,901 1,897 1,246 1,625 2,263 35%
Pig vaccine 1,170 1,480 1,850 1,710 1,097 1,430 2,029 36%
Poultry vaccine - - - 130 150 194 233 25%
Gross profit 960 1,180 1,509 1,375 843 1,170 1,639 39%
Pig vaccine 901 1,151 1,468 1,357 768 1,073 1,522 41%
Poultry vaccine - - - 65 75 97 117 25%
Gross margin 77.03% 77.79% 79.37% 72.50% 67.62% 72.01% 72.42% 0
Pig vaccine 77.03% 77.79% 79.37% 79.37% 70.00% 75.00% 75.00% 0
Poultry vaccine 50.00% 50.00% 50.00% 50.00% 0
Net profit to the parent 480 645 870 754 389 597 827 46%
The company’s business model is based on high gross margin and low turnover. Its earnings
are driven by revenue and gross margin. We apply a sensitivity analysis on the net profit to the
parent. A 2% increase in gross margin corresponds to a 4% rise in earnings and a 5% increase
in revenue leads to 3% increase in net profit.
Looking forward to 4Q19 and 2020, along with the recovery in breeding stock in the
downstream market, we expect demand for the company’s FMD and other pig vaccine to grow,
boosting revenue growth. The company’s gross margin is likely to stay stable.
Exhibit 99. Sensitivity analysis of changes in revenue and GM on 2020e net profit
attributable to parent (RMBm)
__________________________________ Revenue growth ___________________________________
Gross margin 20% 25% 30% 35% 40%
68% 498 517 538 556 575
70% 523 543 565 584 605
72% 548 569 597 613 634
74% 573 596 620 641 664
76% 598 622 647 669 693
Exhibit 100. Sensitivity analysis of changes in revenue and GM on 2020e net profit
attributable to parent (%)
__________________________________ Revenue growth ___________________________________
Gross margin 20% 25% 30% 35% 40%
68% -17% -13% -10% -7% -4%
70% -12% -9% -5% -2% 1%
72% -8% -5% 0% 3% 6%
74% -4% 0% 4% 7% 11%
76% 0% 4% 9% 12% 16%
Balance sheet and cash flow

The company has a solid balance sheet. In 2018, Jinyu Bio-Technology posted a debt to asset
ratio of 17%. Cash flow is healthy, with operating cash flow of RMB422m in 2018. As the
construction of company’s new industrial park is largely complete, capex will decline. As such,
we expect positive FCF position to continue.
57
October 2019

2015 2016 2017 2018 2019e 2020e 2021e
Cash 1,030 2,401 2,452 1,728 2,690 3,013 3,394
Inventory 222 229 231 313 237 267 367
Current asset 1,543 3,220 4,119 3,713 4,127 4,574 5,217
Fixed asset 405 381 399 758 894 821 753
Non-current asset 1,008 1,127 1,565 2,601 2,709 2,607 2,511
Total asset 2,550 4,348 5,684 6,313 6,835 7,181 7,728
Current liability 435 503 1,061 942 849 906 1,071
Non-current liability 47 92 144 149 151 144 114
Total liability 482 595 1,206 1,091 1,000 1,050 1,185
Owner’s equity 2,069 3,749 4,471 5,031 5,647 5,946 6,361
Interest accrual debt 1 1 3 3 3 3 3
Net interest accrual debt -1,030 -2,400 -2,449 -1,726 -2,687 -3,010 -3,391
Net debt ratio -40.37% -55.21% -43.09% -27.34% -39.32% -41.92% -43.88%
Cash flow 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Operating cash flow 0 756 891 422 899 583 754
Investing cash flow 0 -383 -2,099 -125 -200 0 0
Free cash flow 0 339 428 -665 804 698 913
Valuation and risks
Given the stable demand in the retail market and as well as strong earnings visibility, we use the
PE method to value the stock. We forecast earnings growth to accelerate over 2020-21e, with a
CAGR of 46%, up from 17% for 2013-18. Given the current industry outlook, we apply a 45x
2020e PE, higher than most peers – HILE is an outlier, see Exhibit 102 – and the stock’s historical
average forward PE (28x) for the past five years. We arrive at a target price of RMB24.00, implying
upside of 27%. We initiate coverage with a Buy rating.
Exhibit 102. Peer valuations

Comparables Ticker Price __ Consensus earnings ___ ___ Earnings y-o-y (%) ____ ________ PE (x) _________ _________ PEG _________
2019e 2020e 2021e 2019e 2020e 2021e 2019e 2020e 2021e 2019e 2020e 2021e
China Animal Husbandry 600195 14.42 403.41 464.05 552.48 -2.94 15.03 19.06 29.74 25.85 21.71 -10.11 1.72 1.14
Pulike 603566 19.23 144.63 170.84 213.98 6.65 18.12 25.25 40.97 34.68 27.69 6.16 1.91 1.1
Hile 603718 12.49 45.5 61.5 96 113.63 35.16 56.1 165.88 122.73 78.62 1.46 3.49 1.4
Ringpu 300119 13.09 132.78 104.9 118.98 69.52 26.79 20.98 25.61 20.2 16.7 0.37 0.75 0.8
Average 65.55 50.86 36.18 -0.53 1.96 1.11
Source: Wind consensus, HSBC Qianhai Securities
58
October 2019
Exhibit 103. Jinyu Bio-Technology historical forward PE
60
50
40
30
20
10
0
Jul-09 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jul-18 Jul-19
PE Average PE
Company share price movements

July 2017–January 2018. The share price rose from RMB18 to RMB24. We attribute this to two
factors: (1) investors tended to favour industry leaders in 2017 and (2) the rise of breeding stock
in the downstream market in 2017 boosted demand growth in breeding-related sectors,
accelerating profit growth. In 2017, Jinyu Bio-Technology recorded a c35% increase in net profit
attributable to the parent.
January 2018–now. The share price fell from RMB25 to cRMB15 over this period. There were
two reasons for this: (1) downstream breeding farmers began to record losses in 2018; 2) the
outbreak of African swine fever hit hog output hard, leading to a fall in profits. Its 2018 and 1Q19
net profit attributable to the parent dropped 13% and 46%, respectively.
The stock is now trading at a two-year low. We expect rising replenishment rates by downstream
breeding farmers to lead to a recovery. In addition, with the acceleration of the trend for large-
scale breeding, demand for the company’s products should grow over the long term, pushing up
earnings.
Potential catalysts for next 6-12 months: R&D progress in developing a vaccine for African
swine fever, significant improvements in q-o-q or y-o-y earnings growth.
Exhibit 104. Jinyu Bio-Technology stock price performance in the past two years
25
20
15
10
0
59
October 2019
Key downside risks

 African swine fever: Our assumptions for the growth in vaccine sales are based on the
scale of the epidemic stabilising and the recovery of stock replenishment by farmers. If
African swine fever continues to spread, vaccine sales will be negatively affected.
 Intensified competition: Our earnings estimates are based on the assumption of stable
vaccine prices. If African swine fever triggers vicious competition between vaccine makers,
the company’s vaccine profitability may be put under pressure.
 Slower-than-expected growth in large-scale breeding: We base our earnings estimates on
the assumption of an acceleration in the scale of large-scale breeding. The company’s
vaccine sales are likely to be affected if the pace is slower than expected.
 Product launches: Our earnings estimates assume the successful launch of new products.
Any slower-than-expected launch could have a negative impact on vaccine sales.
60
October 2019
Financials & valuation: Jinyu Bio-Technology Buy

EBITDA 1,757 879 1,340 1,883 EV/IC 6.3 8.4 8.3 7.7
Depreciation & amortisation -805 -456 -673 -945 PE* 28.1 54.5 35.6 25.7
Operating profit/EBIT 952 423 667 938 PB 4.2 3.8 3.6 3.3
Net interest 36 36 36 36 FCF yield (%) 1.0 4.2 2.7 3.5
PBT 988 459 703 974 Dividend yield (%) 1.9 0.9 1.4 1.9
HSBC Qianhai PBT 988 459 703 974 *Based on HSBC Qianhai EPS (diluted)
Taxation -140 -72 -110 -153 Source: Company data, HSBC Qianhai Securities estimates
Net profit 754 389 597 827
HSBC Qianhai net profit 754 389 597 827
Cash flow from operations 422 899 583 754 Environmental indicators 12/2018a Governance indicators 12/2018a
Capex -200 0 0 0
Cash flow from investment -200 0 0 0
Dividends 474 646 902 1,046
Change in net debt 723 -962 -323 -381 CO2 reduction policy Yes Female board members (%) 44.4
FCF equity 222 899 583 754 Social indicators 12/2018a Board members’ independence (%) 33.3
Intangible fixed assets 511 484 457 430 Employee turnover (%) n/a
Tangible fixed assets 758 894 821 753 Diversity policy No
Operating liabilities 146 598 636 676
Gross debt 3 3 3 3
Net debt -1,726 -2,687 -3,010 -3,391 Issuer information
Target price (RMB) 24.00 Sector Biotechnology
RIC (Equity) 600201.SS Country China
Year to 12/2018a 12/2019e 12/2020e 12/2021e
Y-o-y % change
Revenue -0.2 -34.3 30.4 39.3 Price relative
EBITDA -6.4 -50.0 52.5 40.6
Operating profit -8.6 -55.6 57.8 40.7 25.00 25.00
PBT -8.2 -53.5 53.2 38.6 23.00 23.00
HSBC Qianhai EPS -13.3 -48.4 53.2 38.6
21.00 21.00
Ratios (%)
19.00 19.00
Revenue/IC (x) 0.7 0.5 0.7 1.0
ROIC 30.8 13.4 25.4 34.9 17.00 17.00
ROE 15.0 6.9 10.0 13.0 15.00 15.00
ROA 12.0 5.4 8.0 10.6 13.00 13.00
EBITDA margin 92.6 70.5 82.5 83.2 11.00 11.00
Net debt/equity -33.0 -46.1 -49.1 -51.8 Jinyu Bio-Technology Rel to CSI 300 Index
Net debt/EBITDA (x) -1.0 -3.1 -2.2 -1.8
EPS Rep (diluted) 0.67 0.35 0.53 0.73
DPS 0.36 0.17 0.26 0.37
Book value 4.47 5.01 5.28 5.65
61
October 2019
Muyuan Foods (002714 CH)
 A leading hog farmer; production expected to keep growing

 We expect pig prices to remain high in 2020e due to African swine
fever, driving rapid earnings growth
 Initiate coverage with a Hold rating and a TP of RMB89.00
A leading integrated pig farmer
Muyuan Foods Co Ltd, which went public in 2014, is the largest and most cost competitive
The founder has been in the
business since 1992
integrated pig farmer in China. The founder, Qin Yinglin, who has been in the business since
1992, has developed an integrated pig farming model, which includes design, breeding, feed
formula and fattening. In 2018 the company produced 11m head, representing about 1.6% of
the market in China.
In 2018, revenue totalled RMB13.388bn. Actual net profit attributable to the parent company
was RMB520m.
Exhibit 105. Revenue has grown rapidly Exhibit 106. …but growth in net profit has
(RMBm)… been volatile (RMBm)
16,000 2,500
14,000
2,000
12,000
10,000 1,500
8,000
6,000 1,000
4,000
500
2,000
0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018
62
October 2019
70 2,000
1,800
60
1,600
50 1,400
1,200
40
1,000
30 800
20 600
400
10 200
0 0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018
Gross Profit Margin
Exhibit 109. Muyuan’s shareholding structure
Muyuan Industrial Group Co., Other

Qinyinglin
Ltd.
21.27% 42.35% 36.38%
Muyuan Foods Co., Ltd.
Source: :Wind, HSBC Qianhai Securities
Investment thesis
Production growing rapidly, market share rising

Muyuan Foods, based in Nanyang, Henan Province, has expanded rapidly since listing to
Production has risen from
1.85m head in 2014 to 11m in become a leading integrated pig-farming company with the biggest production in the industry.
2018, a CAGR of 56% Production has risen from 1.85m head in 2014 to 11m in 2018, a CAGR of c56%. Despite this,
its market share is still less than 2%.
Based on the sow inventory announced by the company, we believe there is significant room for
production to maintain rapid growth over the next few years after a dip in 2019. We expect
production to fall 5% in 2019 and then rise 90%, 25%, 20% and 17% each year over 2020-23e.
Given the low hog prices at the time, net profit and ROE fell sharply in 2018. As hog prices
increased sharply in 2019, profits grew dramatically in the second quarter. We expect this trend
to continue in 2020 and 2021.
63
October 2019
Exhibit 110. Muyuan Foods: production expected to grow rapidly (10,000 head)
4000 140%
3500 120%
3000 100%
2500 80%
2000 60%
1500 40%
1000 20%
500 0%
0 -20%
2014 2015 2016 2017 2018 2019e 2020e 2021e 2022e 2023e
Industry-leading cost control

As discussed earlier, the industry is dominated by small farmers. For the handful of big companies
the key to growth is access to financing and cost control. The company has raised more than
RMB44bn since its listing to support its rapid development. In our view, cost control is the ultimate
differentiator, and Muyuan is the industry leader. We consider the company to be the benchmark
for the integrated farm model and has cost advantages in a wide range of areas, such as
standardisation, large-scale operations, automation, breeding and nutritional formula technology.
Exhibit 111. ROE: falling but still above Exhibit 112. Costs: lower than peers
most peers (%) (RMB/kg, 2018)
60 14
50
13.5
40
13
30
20 12.5
10
12
0
2014 2015 2016 2017 2018 11.5
(10)
(20) 11
(30)
10.5
MUYUAN WENS ZHENGBANG TBGF
TECH
MUYUAN WENS
ZHENGBANG TECH TBGF
African swine fever expected to lengthen the hog cycle

As mentioned in the industry section, the replenishment period and the hog cycle have both
been extended during the African swine fever outbreak. This is because of rising costs for
farmers and slower replenishment due to concerns about the spread of the disease.
64
October 2019
Exhibit 113. Muyuan Foods: SWOT analysis

Strengths 1. Low costs: The company is a leading integrated pig-farming company, with the lowest costs among listed
companies. Its costs are 10-20% lower than its peers.
2. Strong financing: the company has raised more than RMB44bn since its listing to support its rapid development;
3. Sustainable model: The company’s rapid expansion model is mature, with production growing at a CAGR of
over 50% since its listing.
Weaknesses 1. The integrated farm model requires higher levels of bio-safety to prevent disease.
2. Asset heavy: strong capital investment requirements.
Opportunities 1. In 2018 the market share in terms of production was less than 2%. There is huge room for growth;
2. Consolidation: Accelerated exit of small players due to African swine fever. Hog prices to remain high, boosting
the company’s profits;
Threats 1. Many listed feed companies are expanding their pig farming operations. Large-scale farming will lower the long-
term ROE of the industry.
2. African swine fever has increased the company’s costs by c10%. If there is an outbreak on its farms, the
company’s profits will be impacted and asset losses might be incurred.

We estimate 2019e, 2020e and 2021e production to be 11m, 20m and 25m head, with hog
ASPs at RMB17.5, RMB21 and RMB19 per kg. Based on the above assumptions, we estimate
that 2019e 2020e and 2021e revenue will grow 51%, 150% and 13%, to RMB20.2bn, RMB50.4bn,
and RMB57.0bn, respectively. We estimate that 2019e, 2020e and 2021e net profit attributable
to the parent can grow by 788%, 314% and -5%, to RMB4.6bn, RMB19.1bn, and RMB18.3bn,
respectively.
Exhibit 114. Revenue and net profit attributable to parent estimates (RMBm)
2015 2016 2017 2018 2019e 2020e 2021e
Revenue 3,003.47 5,605.91 10,042.42 13,388.16 20,212.50 50,400.00 57,000.00
Hogs produced (10k) 191.90 311.40 723.70 1,101.00 1,050.00 2,000.00 2,500.00
Average weight(kg) 103.51 100.46 95.96 104.65 110.00 120.00 120.00
Average price(RMB/kg) 15.12 17.92 14.46 11.62 17.50 21.00 19.00
Unit operating costs 11.40 9.73 10.15 10.48 12.20 12.00 12.00
Operating costs 2,263.91 3,044.44 7,048.99 12,074.04 14,091.00 28,800.00 36,000.00
Gross profit 739.56 2,561.46 2,993.42 1,314.11 6,121.50 21,600.00 21,000.00
Gross margin 24.62% 45.69% 29.81% 9.82% 30.29% 42.86% 36.84%
Net profit attributable to parent 595.85 2,321.90 2,365.53 520.21 4,621.36 19,126.79 18,262.71
We conducted a sensitivity analysis of its net profit attributable to the parent. We found that it
would change c25% when pig prices change RMB2/kg (c10%). Its net profit attributable to
parent is less sensitive to production, changing c10% with every 10% change in production.
Looking ahead, we expect production growth to slow in 2019 due to African swine fever but it
should pick up in 2020e. We expect pig prices in 2019-20e to stay high and they could even
reach new highs in 2020e. As such, we estimate that the 2019-20e net profit attributable to the
parent to improve substantially.
Exhibit 115. Sensitivity analysis of 2020e net profit attributable to parent to production
and pig prices (RMBm)
Pig prices ______________________________ Hogs produced (m head) _______________________________
(RMB/kg) 16 18 20 22 24
17 7,891 8,916 9,940 10,964 11,989
19 11,566 13,050 14,533 16,017 17,501
21 15,241 17,184 19,127 21,070 23,013
23 18,915 21,318 23,720 26,123 28,525
25 22,590 25,452 28,314 31,175 34,037
65
October 2019
Exhibit 116. Sensitivity analysis of 2020e net profit attributable to parent to production
and pig prices (%)
Pig prices ______________________________ Hogs produced (m head) _______________________________
(RMB/kg) 16 18 20 22 24
17 -59% -53% -48% -43% -37%
19 -40% -32% -24% -16% -9%
21 -20% -10% 0% 10% 20%
23 -1% 11% 24% 37% 49%
25 18% 33% 48% 63% 78%
Balance sheet and cash flow analysis

As the company has regularly raised funds in order to expand, the debt to asset ratio remains at
c50%. With rising pig prices in 2019-20e, we think operating cash flow will increase substantially
and the balance sheet will improve. As the company will require significant investment to
construct new capacity, we estimate average annual capex will remain above RMB5bn.

2015 2016 2017 2018 2019e 2020e 2021e
Cash 836 984 4,197 2,778 1,483 4,830 12,787
Inventories 1,156 2,618 4,190 5,813 6,784 13,865 17,331
Current assets 2,514 3,718 8,742 9,781 9,567 20,327 31,515
Fixed assets 2,976 6,500 10,597 13,545 16,375 20,617 26,042
Total assets 7,068 12,931 24,045 29,842 32,402 47,347 63,904
Non-current liabilities 657 2,076 2,985 2,547 4,586 4,041 3,400
Interest-bearing debt 2,534 5,075 8,970 11,713 9,116 10,696 10,696
Net interest-bearing debt 1,697 4,091 4,773 8,935 7,633 5,866 -2,091
Net debt ratio 24.02% 31.63% 19.85% 29.94% 23.56% 12.39% -3.27%
Cash flow statement 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Operating cash flow 0 1,282 1,787 1,358 2,278 11,803 19,797
Investing cash flow 0 -3,866 -6,441 -5,781 -4,000 -6,000 -8,000
Free cash flow 0 -1,153 -1,899 -4,336 237 5,873 11,868
66
October 2019
Valuation and risks
Given the high level of earnings volatility, we value the company using PB-ROE methodology,
which is commonly adopted to value cyclical stocks. The valuation range of cyclical stocks is
often highly correlated with factors such as investor structure, market sentiment, liquidity and
enterprise growth. Muyuan traded at 1x PB ratio at the peak of the last cycle, implying c6%
ROE. In comparison with the valuations of other cyclical stocks, 1x PB ratio often corresponds
to 10-15% ROE.
Using Smithfield as an overseas comparable, the cyclical peak of 1x PB corresponded to c10%

ROE. We use the neutral range of 1x PB corresponding to 10% ROE.
Based on 2020e shareholders’ equity of cRMB31.3bn and a 2020e ROE of c61%, we apply a
target PB of 6.1x to 2020e BVPS of RMB14.47 to derive our target price of RMB89, which implies
c.8% upside from current levels. We initiate at a Hold rating because, while we expect hog prices
to stay high until 2020, driving a sharp improvement in earnings and the share price, a sector-
wide rise in earnings could lead to a strong recovery in capacity, posing downside risks to hog
prices and earnings. Also, there are uncertainties around production volume and disease.
Exhibit 118. Muyuan’s historical forward PB band
16
14
12
10
8
6
4
2
0
Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 May-17 Oct-17 Mar-18 Aug-18 Jan-19 Jun-19
PB Average PB
Share price performance in the last two years

July 2017 to January 2018: The stock price soared from RMB16 to cRMB34. We think this is
attributable to: 1) Investors collectively invested in all industry leaders in 2017; and 2) the
company’s production grew more than 100% in 2017, to c7m head.
January 2018 to October 2018: The stock dropped from RMB34 to cRMB25. First, overall A-
share market sentiment in 2018 was relatively poor. Second, falling pig prices led to a substantial
decline in profit – 2018 net profit attributable to the parent plummeted 78% versus 2017.
October 2018 to present: The stock soared from RMB25 to cRMB70. The A-share market had
improved and African swine fever led to investor expectations of a rally in pig prices, which have
risen sharply.
The stock is now trading close to its historical high. In our view, pig prices will remain high in
2020e and we think the company’s earnings will improve substantially. The risk is that the
industry will enter a down cycle due to continued replenishment, especially if there is progress in
the area of vaccine development.
67
October 2019
Exhibit 119. Muyuan’s share price performance in the last two years
90
80
70
60
50
40
30
20
10
0
Key upside risks

 Higher-than-expected pig prices: our earnings estimates are based on certain pig price
assumptions. If pig prices beat expectations and the company’s earnings are higher than
expected, the share price could rise.
 The company’s production capacity is expanding rapidly. If the sales volume exceeds
expectations, profits may exceed expectations, driving the stock price up.
Key downside risks

 African swine fever: our production and cost estimates are based on the assumption that
the company can effectively control African swine fever. If African swine fever infects its
pigs, production and costs will be impacted and earnings will decline.
 Lower-than-expected hog production: our estimates are based on continued rapid
production growth. Its earnings will be affected if production misses expectations.
 Lower-than-expected pig prices: The net profit attributable to parent is highly sensitive to
pig prices. Earnings will be affected if pig prices miss expectations.
 Bigger-than-expected replenishment by pig farmers: If the replenishment rate exceeds
expectations, the down cycle in pig prices could start earlier, affecting earnings.
 African swine fever vaccine: If a vaccine is launched earlier than expected, farmers may
boost production rapidly, which will lead to a rapid decline of pig prices.
 Abnormal or severe weather.
68
October 2019
Financials & valuation: Muyuan Foods Co Ltd Hold

EBITDA 2,000 6,366 21,134 21,066 EV/IC 11.1 8.4 5.2 4.0
Depreciation & amortisation -1,282 -1,205 -1,794 -2,610 PE* 342.0 38.5 9.3 9.7
Operating profit/EBIT 718 5,161 19,340 18,456 PB 14.5 11.1 5.7 3.9
Net interest -538 -538 -212 -192 FCF yield (%) -2.5 -1.0 3.3 6.6
PBT 180 4,623 19,128 18,264 Dividend yield (%) 0.1 0.5 2.1 2.1
HSBC Qianhai PBT 180 4,623 19,128 18,264 *Based on HSBC Qianhai EPS (diluted)
Taxation 2 0 0 0 Source: Company data, HSBC Qianhai Securities estimates
Net profit 520 4,621 19,127 18,263
HSBC Qianhai net profit 520 4,621 19,127 18,263
Cash flow from operations 1,358 2,278 11,803 19,797 Environmental indicators 12/2018a Governance indicators 12/2018a
Capex -5,836 -4,000 -6,000 -8,000
Dividends 104 924 3,825 3,653
Change in net debt 4,162 -1,302 -1,767 -7,957 CO2 reduction policy Yes Female board members (%) 14.3
FCF equity -4,479 -1,722 5,803 11,797 Social indicators 12/2018a Board members’ independence (%) 42.9
Intangible fixed assets 351 315 280 244 Employee turnover (%) n/a
Tangible fixed assets 13,545 16,375 20,617 26,042 Diversity policy No
Operating liabilities 4,074 2,572 1,237 596
Gross debt 11,713 9,116 10,696 10,696
Net debt 8,935 7,633 5,866 -2,091 Issuer information
Target price (RMB) 89.00 Sector Food Products
Year to 12/2018a 12/2019e 12/2020e 12/2021e
Y-o-y % change
Revenue 33.3 51.0 149.4 13.1 Price relative
EBITDA -41.1 218.4 232.0 -0.3
Operating profit -71.4 619.0 274.7 -4.6
82.50 82.50
PBT -91.8 2474.9 313.8 -4.5
72.50 72.50
HSBC Qianhai EPS -78.0 788.4 313.9 -4.5
62.50 62.50
Ratios (%)
52.50 52.50
Revenue/IC (x) 0.9 1.0 1.8 1.4 42.50 42.50
ROIC 5.1 26.4 67.4 46.4 32.50 32.50
ROE 4.2 28.9 61.1 39.8 22.50 22.50
ROA 4.0 16.6 48.5 33.2 12.50 12.50
EBITDA margin 14.9 31.5 41.9 37.0 2.50 2.50
EBITDA/net interest (x) 3.7 11.8 99.7 109.7 Muyuan Foodstuff Rel to CSI 300 Index
Net debt/equity 65.2 43.9 17.9 -4.4
Net debt/EBITDA (x) 4.5 1.2 0.3 -0.1
CF from operations/net debt 15.2 29.8 201.2 – Source: HSBC Qianhai Securities

EPS Rep (diluted) 0.24 2.14 8.85 8.45
DPS 0.05 0.43 1.77 1.69
Book value 5.68 7.39 14.47 21.23
69
October 2019
Wens Foodstuff Group

(300498 CH)
 A leading hog company which uses a “company + farmers” model;

production volumes are rising steadily
 We expect 2020e hog prices to stay high due to African swine fever,
boosting earnings growth
 Initiate with a Hold rating and a TP of RMB42.00
A leading hog and chicken breeder
Founded in 1983 as Xinxing County Lezhu Chicken Farm, Wens is now one of the country’s
leading producer of hogs and yellow-feather broilers, a popular breed of chicken (Exhibit 118).
The company went public in 2015 by merging with Guangdong Dahuanong, an animal products
business. In 2018, Wens produced c22m pigs and c750m yellow-feather broilers, with market
shares of 3.2% and 20% respectively.
Revenue growth has slipped since 2016. In 2018, revenue grew 2.84% versus 2017, to
RMB57.236bn, but net profit attributable to shareholders declined 41.38%, to RMB3.957bn,
because of the sharp fall in hog prices.
Exhibit 120. Revenue growth (RMBm) Exhibit 121. Revenue breakdown, 2018
70,000
Hog
60,000 farming
50,000
3%
40,000 yellow-
feather 36%
30,000 broilers
farming 61%
20,000
Other
10,000 farming
0
2012 2013 2014 2015 2016 2017 2018
70
October 2019
50 14,000
12,000
40
10,000
30 8,000
6,000
20
4,000
10 2,000
0
0 2012 2013 2014 2015 2016 2017 2018
2012 2013 2014 2015 2016 2017 2018
Net Profit Margin Gross Profit Margin
ROE (Average)
Exhibit 124. Shareholding structure
Wenpengcheng Other
4.08% 95.92%
Guangdong Wens Food

Group Co., Ltd.
Investment thesis
We expect steady growth in hog production and continued expansion of market share
With more than 30 years of industry experience, Wens has developed a distinctive business
model – “company + farmers”. This involves working closely with farmers to offer a full range of
services such as piglets, technological training and feed. The farmers are only responsible for
breeding. In this way, the company develops strong relationships with farms, reduces capital
expenditure and generates more stable cash flow. Typically, these farmers produce 1,000 hogs
a year and Wens is responsible for the biosafety and loss if the animal dies.
We expect hog production volumes will continue to grow steadily over the long term after a dip
in 2019. Based on the sow inventory and the targets announced by the company, we forecast
annual hog production will drop 10% in 2019e and then rise 5%, 19%, 20% and 17% y-o-y over
2020-23e, to 20m, 21m, 25m, 30m and 35m respectively.
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October 2019
Exhibit 125. We expect steady growth in hog production in the long term (m head)
40 25%
35 20%
30 15%
25 10%
20 5%
15 0%
10 -5%
5 -10%
0 -15%
2015 2016 2017 2018 2019e 2020e 2021e 2022e 2023e
Strong cost control and risk management

As the largest hog farmer in China, Wens has prioritised cost control across the farming chain,
including breeding, piggery design, epidemic prevention, nutrition, and formula technologies.
Under the “company + farmers” model, the farmers are required to build a farm and pay a
deposit in advance, reducing the company’s investment and operation risks. Wens is also the
largest yellow-feather broiler player in China. This product mix helps the company mitigate risks
arising from price fluctuations of a single product.
Exhibit 126. ROE has fallen sharply but is Exhibit 127. Costs: second lowest after
higher than peers (%) Muyuan (RMB/kg, 2018)
60 14
50
13.5
40
13
30
20 12.5
10
12
0
2014 2015 2016 2017 2018 11.5
(10)
(20) 11
(30)
10.5
MUYUAN WENS ZHENGBANG TBGF
TECH
MUYUAN WENS
ZHENGBANG TECH TBGF
We expect African swine fever to extend the hog production cycle

As discussed, the African swine fever has led to an increase in farmers’ costs and a slowdown
in inventory replenishment due to concerns about the spread of the disease. This has resulted
in an extended inventory replenishment and hog production cycle. As a result, the company’s
hog business is likely to see an extended earnings cycle. At the same time, an increase in pork
prices will drive up the price of substitutes, keeping broiler earnings high.
72
October 2019
Exhibit 128. Wens: SWOT analysis

Strengths 1. Low costs: Its cost are the second lowest among listed peers after Muyuan Foods.
2. Asset light model and stable asset structure: small capital input due to the partnership with farmers; cash flow is
more stable; debt to asset ratio maintained at c30%, net debt is low.
3. Mature replicable model: The company has a good reputation among farmers with a mature replicable model; it
has been expanding at a CAGR of 10-15% since listing.
Weaknesses 1. With wages rising, the costs of farmers could rise and increase the costs of the company.
2. The company’s co-operation with farmers involves a considerable amount of management resources.
Opportunities 1. Room for growth – its market share was less than 3% of production in 2018.
2. Accelerated exit of small players due to African swine fever. Hog prices to remain high and the company has
room to increase profits;
Threats 1. Many listed feed companies are expanding their pig farming operations. Large-scale farming will lower the long-
term ROE of the industry.
2. Losses will be incurred if African swine fever infects pigs on farms the company works with.
Based on the sow inventory announced by the company, we expect 2019-21e hog production
volume to be 20m/21m/25m at an ASP of RMB18/RMB22/RMB20 per kg, respectively. Based
on these assumptions, we estimate 2019e, 2020e and 2021e revenue will grow 13%, 21%, and
3%, to RMB64.6bn, RMB78.4bn, RMB80.7bn, and net profit attributable to parent will increase
186% and 96% in 2019e and 2020e, and decline 15% in 2021e, to RMB11.3bn, RMB22.2bn,
and RMB18.9bn.
Exhibit 129. Revenue and margin estimates (RMBm)

2015 2016 2017 2018 2019e 2020e 2021e
Revenue 48,237 59,355 55,657 57,244 64,648 78,367 80,708
Operating costs 38,796 42,606 44,491 47,590 47,490 48,510 54,210
Gross profit 9,442 16,749 11,167 9,654 17,158 29,857 26,498
Gross margin 20% 28% 20% 17% 27% 38% 33%
Net profit attributable to parent 6,205 11,790 6,751 3,957 11,332 22,227 18,894
Of which: hog - - - - - - -
Revenue 27,287 37,643 35,049 33,766 43,200 55,440 60,000
Hogs produced 15 17 19 22 20 21 25
Average weight(kg) 120 120 120 120 120 120 120
Average price(RMB/kg) 15 18 15 13 18 22 20
Unit operating costs 12 11 12 11 13 13 12
Operating costs 21,221 23,319 26,357 29,605 30,480 31,500 37,200
Gross profit 6,066 14,324 8,692 4,161 12,720 23,940 22,800
Gross margin 22% 38% 25% 12% 29% 43% 38%
Yellow-feather broiler - - - - - - -
Revenue 18,049 18,593 17,564 19,956 21,448 22,927 20,708
Hogs produced 744 819 776 748 845 845 845
Average weight 2 2 2 2 2 2 2
Average price 14 13 13 15 15 16 14
Unit operating costs 12 12 11 12 12 12 12
Operating costs 15,544 16,546 15,602 15,311 17,010 17,010 17,010
Gross profit 2,505 2,046 1,962 4,646 4,438 5,917 3,698
Gross margin 13.88% 11.01% 11.17% 23.28% 20.69% 25.81% 17.86%
Below we present our sensitivity analysis on the company’s net profit attributable to parent. It is
highly sensitive to hog prices. Every RMB2/kg (c10%) change in hog prices will lead to a c20%
change in the net profit attributable to parent. It is less sensitive to hog production volume.
Every 10% change will lead to a c8% change in the net profit attributable to parent.
In our view, hog production growth will decelerate in 2019 due to the impact of African swine
fever but will pick up in 2020. Hog prices are likely to stay high over 2019-20 and could even hit
73
October 2019
a new high in 2020. Thus, we expect a substantial improvement in the company’s 2019-20e
earnings.
Exhibit 130. Sensitivity analysis on 2020e net profit attributable to parent to hog
production volume and hog prices (RMBm)
_______________________________ Production volume (m) _______________________________
Hog price (RMB/kg) 17 19 21 23 25
18 11,578 12,507 13,435 14,364 15,293
20 15,137 16,484 17,831 19,179 20,526
22 18,696 20,461 22,227 23,993 25,759
24 22,254 24,439 26,623 28,808 30,993
26 25,813 28,416 31,019 33,623 36,226
Exhibit 131. Sensitivity analysis on 2020e net profit attributable to parent to hog
production volume and hog prices (%)
_______________________________ Production volume (m) _______________________________
Hog price (RMB/kg) 17 19 21 23 25
18 -48% -44% -40% -35% -31%
20 -32% -26% -20% -14% -8%
22 -16% -8% 0% 8% 16%
24 0% 10% 20% 30% 39%
26 16% 28% 40% 51% 63%
Balance sheet and cash flow

The “company + farmers” model requires only a small amount of capital expenditure. Its debt to
asset ratio is c30%, with an extremely small amount of net debt. The balance sheet and
operating cash flow are healthy and the capex, mainly for capacity expansion, remains stable.

2015 2016 2017 2018 2019e 2020e 2021e
Cash 1,493 792 1,129 1,798 7,352 14,368 24,302
Inventories 8,895 10,548 11,328 12,889 12,862 13,138 14,682
Current assets 15,908 18,446 19,674 21,802 27,430 34,806 46,231
Fixed assets 9,370 11,371 14,438 18,250 21,700 24,587 26,948
Total assets 32,735 41,438 49,040 53,950 62,803 72,841 86,402
Non-current liabilities 136 224 3,566 5,094 11,511 11,618 11,702
Interest-bearing debt 1,919 0 5,947 7,132 7,132 7,132 7,132
Net interest-bearing debt 426 -792 4,818 5,335 -219 -7,235 -17,169
Net debt ratio 1.30% -1.91% 9.82% 9.89% -0.35% -9.93% -19.87%
Cash flow statement - - - - - - -
Operating cash flow - 14,653 7,994 6,494 15,102 23,340 24,568
Investing cash flow - -8,580 -8,765 -4,768 -5,000 -5,000 -5,000
Free cash flow - 8,210 816 1,185 9,977 18,214 19,443
74
October 2019
Valuation and risks
Given its earnings volatility, we value the company using the PB-ROE method, which is commonly
adopted to value cyclical stocks. The valuation range of cyclical stocks is often highly correlated
with factors such as investor structure, market sentiment, liquidity, and enterprise growth. Wens
traded at 1x PB at the peak of the last cycle, implying a c6% ROE. Compared with the valuations
of other cyclical stocks, 1x PB often corresponds to 10-15% ROE.
Using Smithfield as an overseas comparable, the cyclical peak of 1x PB corresponded to c10%

ROE. We therefore use 1x PB and 10% ROE to value Wens. Based on 2020e shareholders’
equity of cRMB52.5bn and 2020e ROE of c42%, we apply a 4.2x target PB to derive our target
price of RMB42, which implies c.10% upside from current levels. We initiate on the stock with a
Hold rating because, although hog prices are likely to stay high until 2020, driving a sharp
improvement in earnings and the share price, a sector-wide rise in earnings could lead to a
strong recovery in capacity, posing downside risks to hog prices and earnings. Also, there are
uncertainties around production volume and disease.
Exhibit 133. Historical forward PB band
14
12
10
8
6
4
2
0
Nov-15 Mar-16 Jul-16 Nov-16 Mar-17 Jul-17 Nov-17 Mar-18 Jul-18 Nov-18 Mar-19 Jul-19
PB Average PB
Share price performance

The share price was relatively stable at cRMB20 from July 2017 to September 2018 but it has
risen sharply since then and is now hovering around RMB40. We attribute this to the turnaround
in the overall A-share market and the market expectations for a hog price recovery in 2019
following the outbreak of African swine fever.
The stock price is close to its historical high. Due to African swine fever, we believe pig prices
will remain high in 2020, supporting earnings growth. However, with the ongoing replenishment
and possible introduction of an effective vaccine, we think the industry will enter a downcycle,
hurting the company’s earnings.
75
October 2019
Exhibit 134. Share price performance in the last two years
50
45
40
35
30
25
20
15
10
5
0
Key upside risks

 Our earnings estimates are based on certain pig price assumptions. If prices beat
expectations in 2020e and earnings are higher than expected, the share price could rise.
 The company is the market leader in yellow feather broilers. If the price of pigs drives up the
price of yellow feather broilers, earnings could beat expectations.
Key downside risks

 Our production and cost estimates are based on the assumption that the company can
effectively control African swine fever. If its pig farms are infected, production and costs
would be impacted and earnings would decline.
 Lower-than-expected hog production: our estimates are based on continued rapid
production growth. Its earnings will be affected if production misses expectations.
 Lower-than-expected pig prices: The net profit attributable to parent is highly sensitive to
pig prices. Its earnings will be affected if pig prices miss expectations.
 If the replenishment rate exceeds expectations, the down cycle of pig prices could start
earlier, affecting earnings.
 African swine fever vaccine: If a vaccine is launched earlier than expected, farmers may
boost production rapidly, which will lead to a rapid decline of hog prices.
76
October 2019
Financials & valuation: Wens Foodstuff Group Hold

EBITDA 7,444 13,724 25,911 22,894 EV/IC 5.7 6.0 5.3 4.6
Depreciation & amortisation -2,184 -1,651 -2,214 -2,740 PE* 51.4 18.0 9.2 10.8
Operating profit/EBIT 7,277 14,093 25,717 22,175 PB 5.7 4.7 3.7 3.1
Net interest -101 -101 -212 -192 FCF yield (%) 1.6 5.0 9.0 9.6
PBT 4,284 11,973 23,485 19,962 Dividend yield (%) 1.3 2.8 5.5 4.6
HSBC Qianhai PBT 4,284 11,973 23,485 19,962 *Based on HSBC Qianhai EPS (diluted)
Taxation -28 -77 -151 -129
Net profit 3,957 11,332 22,227 18,894
HSBC Qianhai net profit 3,957 11,332 22,227 18,894 ESG metrics
Cash flow summary (RMBm) Environmental indicators 12/2018a Governance indicators 12/2018a
Cash flow from operations 6,494 15,102 23,340 24,568 GHG emission intensity* n/a Number of board members 13
Capex -3,222 -5,000 -5,000 -5,000 Energy intensity* n/a Average board tenure (years) 4.1
CO2 reduction policy Yes Female board members (%) 15.4
Dividends -2,657 -5,666 -11,114 -9,447
Social indicators 12/2018a Board members’ independence (%) 30.8
Change in net debt 517 -5,554 -7,016 -9,934
FCF equity 3,273 10,102 18,340 19,568 Employee costs as % of revenue n/a
Balance sheet summary (RMBm) Employee turnover (%) n/a
Intangible fixed assets 1,356 1,255 1,155 1,054 Diversity policy No
Tangible fixed assets 18,250 21,700 24,587 26,948 *GHG intensity and energy intensity are measured in kg and kWh, respectively, against revenue in USD’000
Current assets 21,802 27,430 34,806 46,231 Note: n/a = not available
Cash & others 1,853 7,407 14,423 24,357 Source: Company data, HSBC Qianhai Securities
Total assets 53,950 62,803 72,841 86,402
Operating liabilities 2,679 9,096 9,203 9,287
Gross debt 2,415 2,415 2,415 2,415 Issuer information
Net debt 5,335 -219 -7,235 -17,169 Share price (RMB) 38.30 Free float 76%
Shareholders’ funds 34,568 41,453 52,568 62,017 Target price (RMB) 42.00 Sector Food Products
Bloomberg (Equity) 300498 CH Analyst Andy Li
Ratio, growth and per share analysis
Year to 12/2018a 12/2019e 12/2020e 12/2021e
Y-o-y % change Price relative
Revenue 2.9 12.9 21.2 3.0
EBITDA -20.0 84.4 88.8 -11.6
45.00 45.00
Operating profit -22.5 93.7 82.5 -13.8
PBT -39.6 179.5 96.1 -15.0 40.00 40.00
HSBC Qianhai EPS -41.4 186.3 96.1 -15.0 35.00 35.00
Ratios (%) 30.00 30.00
Revenue/IC (x) 1.7 1.8 2.2 2.1
25.00 25.00
ROIC 15.3 33.9 66.5 51.7
ROE 11.4 27.3 42.3 30.5 20.00 20.00
ROA 8.5 20.5 34.7 25.1 15.00 15.00
EBITDA margin 13.0 21.2 33.1 28.4 2016 2017 2018 2019
Operating profit margin 12.7 21.8 32.8 27.5 Wens Foodstuff Rel to CSI 300 Index
EBITDA/net interest (x) 73.9 136.2 122.2 119.2
Net debt/equity 15.0 -0.5 -13.1 -26.2
Net debt/EBITDA (x) 0.7 0.0 -0.3 -0.7
CF from operations/net debt 121.7 – – –
EPS Rep (diluted) 0.74 2.13 4.18 3.56
DPS 0.50 1.07 2.09 1.78
Book value 6.70 8.10 10.40 12.36
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October 2019
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October 2019
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October 2019
Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s)
whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering
analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or
issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other
views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect
their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Andy Li
Important disclosures
Equities: Stock ratings and basis for financial analysis
HSBC and its affiliates, including the issuer of this report (“HSBC”) believes an investor’s decision to buy or sell a stock should
depend on individual circumstances such as the investor’s existing holdings, risk tolerance and other considerations and that
investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or
relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in
each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating
because research reports contain more complete information concerning the analysts’ views and the basis for the rating.
From 23rd March 2015 HSBC has assigned ratings on the following basis:
The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12
months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will
be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a
Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between
5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20%
below the current share price, the stock will be classified as a Reduce.
Our ratings are re-calibrated against these bands at the time of any ‘material change’ (initiation or resumption of coverage, change
in target price or estimates).
Upside/Downside is the percentage difference between the target price and the share price.
Prior to this date, HSBC’s rating structure was applied on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate,
regional market established by our strategy team. The target price for a stock represented the value the analyst expected the
stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight,
the potential return, which equals the percentage difference between the current share price and the target price, including the
forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12
months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was
expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage
points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.
*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months
(unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which
we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month’s
average of the daily 365-day moving average volatilities. To avoid misleadingly frequent changes in rating, however, volatility had
to move 2.5 percentage points past the 40% benchmark in either direction for a stock’s status to change.
81
October 2019
Rating distribution for long-term investment opportunities

As of 15 October 2019, the distribution of all independent ratings published by HSBC is as follows:
Buy 52% (31% of these provided with Investment Banking Services)
Hold 39% (31% of these provided with Investment Banking Services)
Sell 9% (21% of these provided with Investment Banking Services)
For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current
rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy
= Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial
analysis” above.
For the distribution of non-independent ratings published by HSBC, please see the disclosure page available at
http://www.hsbcnet.com/gbm/financial-regulation/investment-recommendations-disclosures.
To view a list of all the independent fundamental ratings disseminated by HSBC during the preceding 12-month period, please
use the following links to access the disclosure page:
Clients of Global Research and Global Banking and Markets: www.research.hsbc.com/A/Disclosures
Clients of HSBC Private Banking: www.research.privatebank.hsbc.com/Disclosures
HSBC & Analyst disclosures

Disclosure checklist
Company Ticker Recent price Price date Disclosure

HAID GROUP 002311.SZ 32.30 14 October 2019 6, 7
MUYUAN FOODS 002714.SZ 83.15 14 October 2019 7
WENS FOODSTUFF GROUP 300498.SZ 37.60 14 October 2019 6, 7
Source: HSBC
1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
three months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company.
4 As of 30 September 2019, HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 31 August 2019, this company was a client of HSBC or had during the preceding 12-month period been a client of
and/or paid compensation to HSBC in respect of investment banking services.
and/or paid compensation to HSBC in respect of non-investment banking securities-related services.
and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company
12 As of 9 October 2019, HSBC beneficially held a net long position of more than 0.5% of this company’s total issued share
capital, calculated according to the SSR methodology.
13 As of 9 October 2019, HSBC beneficially held a net short position of more than 0.5% of this company’s total issued share
capital, calculated according to the SSR methodology.
82
October 2019
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HSBC Qianhai Research Team
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Steven Sun +86 755 8898 3158 Analyst, Head of A-share Financials Research Analyst, Head of A-share Technology
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Product, HSBC Qianhai Securities
Healthcare
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Analyst, Head of China Equity Strategy
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Associate
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Agriculture & Fishery
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Auto & Auto Parts Analyst, Head of A-share Transportation &
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Yuqian Ding +86 755 8898 3650 Analyst, A-share Infrastructure & Renewables David Wu +86 755 8898 3436
yuqian.ding@hsbcqh.com.cn Research david.wu@hsbcqh.com.cn
Dun Wang +86 755 8898 3460
Consumer Associate
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darron.xue@hsbcqh.com.cn
Associate
Associate Yi Ru
Joseph Zhou
Associate
Li Quan
Issuer of report:
HSBC Qianhai Securities Limited
Block 27 A&B, Qianhai Enterprise Dream Park
63 Qianwan Yi Road, Shenzhen-Hong Kong Cooperation Zone,
Shenzhen, China
Telephone: +86 755 8898 3288
Main contributors
Andy Li* (S1700519070001) Andy Li joined HSBC Qianhai Securities Limited in 2019 as Head of A-share Agriculture Research.
Head of A-share Agriculture Research Previously, Andy worked as a chief analyst for a domestic investment bank in China. In 2015 and
HSBC Qianhai Securities Limited 2016, his team was ranked #1 in both the New Fortune Best Analyst Awards and the Crystal Ball
andy.j.li@hsbcqh.com.cn Awards for Sell-side Analysts of the agriculture, forestry, animal husbandry and fishery industries.
+86 021 6081 3812 In 2017, he was ranked #2 in the WIND Gold Analyst category for the agriculture industry. He
holds a master’s degree in finance from Shanghai Jiao Tong University.
* Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered / qualified pursuant to FINRA regulations
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HSBC-Hog Industry in China

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Equity Research Report

China’s hog industry

African swine fever has hit China hard

We expect the market leaders in

We initiate coverage of four companies

Why read this report?

Production levels, not pork prices

Why read this report? 1

Facts and figures 3

Industry outlook: short term 14

Industry outlook: long term 27

Facts and figures

The combined market share of the top 10

RMB22/kg 20% 5,000

50 months We think the current cycle will be prolonged

African swine fever and beyond

The hog price cycle – why earnings are volatile

Why the pace of industry consolidation will accelerate

The RMB1 trillion industry is hugely fragmented

Exhibit 1. Hog production volume ` Exhibit 2. Size of the market expected to

800 40% 1600 50%

Ripe for consolidation

The forces that will drive change

25,000 30% 8000

Haid Group (002311 CH, Buy, TP: RMB43.00)

Jinyu (600201 CH, Buy, TP: RMB24.00)

Muyuan (002714 CH, Hold, TP: RMB89.00)

Key upside risks: Rise in hog prices; substantial earnings growth.

Wens (300498 CH, Hold, TP: RMB42.00)

Key upside risks: Rise in hog prices; substantial earnings growth.

Where we are different from the market

Where we are different from consensus estimates

Exhibit 5. HSBC Qianhai Securities estimates vs consensus

Key industry downside risks

African swine fever mutates

ASF vaccine’s launch later than expected, or if no vaccine is available

Sharp fluctuations in raw material prices

Environment, social responsibility and corporate governance

Exhibit 6. Peer valuations

Valuation and risks

Note: Prices as of 11 October 2019

Industry outlook: short term

African swine fever the key variable

Exhibit 7. A new hog price cycle began in 1Q19 (RMB/kg)

Source: Wind, HSBC Qianhai Securities

African swine fever update: when will a vaccine become available?

Exhibit 10. Events related to African swine fever in China

Exhibit 11. Policies related to hog supply

What’s happening now – early signs of recovery

The impact of African swine fever on industry consolidation

Exhibit 12. Proportion of farmers willing to expand capacity is increasing

Exhibit 13. Sow inventory(10k) based on investigations by industry experts

Source: Qingsong Consulting, HSBC Qianhai Securities

The cycle is turning – why we are bullish on upstream leaders

Pig feed YoY Pig price YoY

Case study: African swine fever in Russia

Exhibit 20. Hog production in Russia

Source: Poultry Industry Association , HSBC Qianhai Securities

The typical hog price cycle

Exhibit 21. The hog price cycle