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The new paradigm of pig industry led by industry leaders has been initiated, and the logic of sector investment will also switch accordingly.

We believe that at the industry level, the pig cycle is evolving towards increased volatility and shorter duration.

The growth driver of the industry is shifting from capital-driven expansion to cost-driven efficiency, with leading companies likely to benefit first; at the valuation level, leading companies with robust balance sheets, higher fulfillment of long-term delivery targets, and improved cash returns after capital expenditure convergence, bring growth potential in market value from P/B, P/E, and DCF perspectives.

Abstract of the new paradigm of pig prices: increased cycle volatility and shortened duration, with robust balance sheet leaders likely to benefit first.

1) In the short term, pig prices may exhibit "high for longer".

The supply side is constrained by debt pressure and cautious expectations leading to a smooth restocking, coupled with limited short-term inventory suppression, we believe that higher pig prices in 2H24 are supported, and efficient leaders are expected to maintain some profit in 2025.

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2) In the long term, the pig cycle may show increased volatility and shortened duration.

The main reason is that the industry has a large amount of fixed assets, with an increased proportion and frequency of short-term speculative behaviors such as rearing, pressure, and fat-to-mother conversion, coupled with futures expectations guidance.

3) Leaders with robust balance sheets are likely to benefit under the new cycle characteristics.

The main reason is that if pig price volatility increases, companies are more likely to face a balance sheet stress test of "pig price decline + increase in debt ratio".

Industry new paradigm: growth driver shifts from "looking outward" to "looking inward", that is, from capital-driven high-speed growth to cost-driven high-quality growth.

1) New phase: during the African swine fever period, the three major bonuses of "capital, epidemic prevention, and pig prices" weakened, and the industry returned from "capital competition" to "cost competition" mainly based on operational potential.

We believe that the period of high growth driven by capital has ended, the cost gap brought by the gap in epidemic prevention is narrowing, and it is difficult to reappear high pig prices brought by disease impact, and the industry's core competition is production, operation, and technological innovation.

2) New pattern: high-quality growth leaders who grasp the three major bonuses have scarcity, and the growth window for small pig companies is gradually closing.

The same is growth, quality is different, and the increase in profits corresponding to the new unit of fixed assets of large pig companies is among the best in the industry.

Large-scale scale has scarcity, we calculate that if there is no new fundraising, large pig companies can complete the long-term set delivery targets, and it is difficult for small pig companies to achieve them by profit accumulation.

Valuation new paradigm: large-scale leaders have excess profitability and internal growth strength, opening up new space for P/B, P/E, and DCF valuation growth.

We believe that 1) investment logic: under the new paradigm, the traditional pig price and delivery elasticity double-click, small pig growth is king, switching to buy large-scale and excess profitability, leading to stronger leaders.

2) Valuation logic: excess profitability and delivery realization are the core, and the scarcity of large-scale leaders is highlighted.

① P/B: The P/B multiple increase space is limited, excess profitability drives balance sheet repair and net asset growth, driving market value rebound; ② Implicit P/E: internal growth strength supports higher long-term delivery realization for leaders, that is, the implicit P/E is cheaper, and there is room for market repair.

③ DCF: As the capital expenditure of leaders converges and depreciation enters the peak, the increase in FCF promotes the growth of discounted value.

Risks include pig prices lower than expected; a significant increase in raw material costs; epidemic and policy risks.

Main text of the new paradigm of pig prices: the pig cycle volatility increases, the duration shortens, and leaders with robust balance sheets are likely to benefit first.

In the short term, pig prices may exhibit "high for longer" with smooth growth on the supply side, and pig prices may remain at a high level in the short term.

Based on the relatively smooth growth of the supply side in the early stage, that is, the speed of capacity replenishment is moderate under the pressure of the balance sheet, and the suppression of short-term inventory is limited, we believe that pig prices may exhibit "high for longer", that is, higher pig prices in 2H24 are supported, and pig prices in 2025 may fall but efficient leaders are expected to maintain some profit.

► The industry's balance sheet pressure is at a high point, and practitioners are more cautious about restocking.

First, the industry's balance sheet pressure is relatively large, and the financial foundation for restocking is relatively weak.

At the end of 2Q24, the average debt-to-asset ratio of sample companies was 62.8%, and the corporate debt-to-asset ratio is still at a historically high level.

Second, although the national breeding sow capacity has increased, the growth rhythm is slow.

According to the National Bureau of Statistics, the breeding sow inventory increased by 460,000 heads in 2Q24, which is relatively small.

► Pork inventory pressure is controllable, and the suppression of pig prices may be limited.

Looking at the frozen product inventory rate, the frozen product inventory rate has been declining since May 2023, and according to Yongyi Consulting, it has decreased by 6ppt to 13.0% as of September 19, 2024.

Looking at the average weight of commercial pigs, according to Yongyi Consulting, the weight on September 19, 2024, was 125.5 kilograms, lower than the peak period of average weight in 2021-22.

The futures market is cautious, and market reflexivity may lead to pig prices exceeding expectations.

First, this year's futures market has a low expectation for the future market.

According to iFinD, the futures market expects pig prices to fall quarter by quarter in 2025.

Second, the actual pig price performance this year is better than the futures market's expectation.

According to Yongyi Consulting, iFinD, we calculate that the basis of LH2407 and LH2409 (spot price - futures price) is positive and gradually narrowing.

Finally, we review the futures market in 2022 and find that there is reflexivity in the market, and the performance of the current and futures is largely divergent.

In summary, we believe that pig prices in 2H24-2025 may exceed expectations due to market reflexivity.

In the long term, the pig cycle may show new characteristics of increased volatility and shortened duration, the volatility of the pig cycle increases, and the duration shortens.

Before 2022, the length of the pig cycle was about 4 years, with strong regularity and small fluctuations.

According to the data of Xinmoo Network, we review the fluctuations of previous cycles: 1) From April 2014 to May 2018: Pig prices showed a trend of rising and falling, and the frequency of pig price fluctuations was small.

Specifically, the pig price bottomed out at 10.4 yuan/kg in April 2014 and bottomed out again after 47 months in March 2018; 2) From May 2018 to April 2022: The fluctuation range of pig prices increased, but the frequency of fluctuations was small.

Specifically, the pig price bottomed out at 10.9 yuan/kg in January 2019 and bottomed out again after 33 months in October 2021.

After 2022, the pig cycle showed a "new paradigm", with increased volatility and shortened duration of the pig cycle.

According to the data of Xinmoo Network, first, the frequency of pig price fluctuations has increased since April 2022, and the frequency of fluctuations is obviously higher than in previous cycles.

Second, we believe that the fragmentation of production has increased the frequency of pig price fluctuations, that is, short-term production behaviors such as rearing and pressure affect the rhythm of pork supply.

Looking forward, based on the sufficient idle fixed asset capacity and the proportion of fragmented production such as rearing and pressure in 2024 being lower than that in 2021-2023, we judge that the pig cycle in the future may maintain a larger fluctuation frequency, but the fluctuation frequency is lower than the intensity between 2021-2023.

The new characteristics of the cycle come from the large accumulation of capital, the increase in short-term production game behaviors, and futures guidance 1.

The industry has redundant fixed assets, and the foundation for resumption of production is sufficient.

First, during the African swine fever period, the industry increased its production capacity construction efforts due to the convenience of financing, and a large amount of fixed assets were accumulated in the industry.

According to iFinD, we calculate that the average CAGR of fixed assets of sample companies from 2018 to 2021 is 44%.

Second, we believe that the large-scale construction has not been effectively utilized, and the utilization efficiency of industry fixed assets is relatively low.

2.

The production behavior of farmers is fragmented, introducing uncertainty to the supply side of live pigs.

First, as the high pig price bonus gradually fades, some farmers tend to engage in fragmented short-term games in order to quickly obtain profits after the pig price rises.

For example, farmers engage in short-term production game behaviors such as rearing, pressure, and using fat pigs as sows (fat-to-mother).

Second, the above fragmented production actions mainly affect the supply side, and there is a possibility of delay in the release of the supply side, increasing the uncertainty of pig price prediction.

► Rearing: An emerging "professional group", intercepting the supply of live pigs in the current period.

In recent years, the industry has emerged a group of people who are specifically engaged in rearing, and the proportion is relatively large.

► Pressure: One of the means for farmers to avoid pig price fluctuations and short-term arbitrage.

First, pressure will cause the supply of pork in the current market to be lacking, and when the pressure pigs are released, the number of pork in the market will increase, and pig prices may fall.

Second, the behavior of pressure has become a norm in the industry after the post-African swine fever period, and the main breeding subjects tend to pressure according to market expectations.

► Fat-to-mother: Sacrificing breeding efficiency for capacity, gambling on short-term pig prices.

First, the speed of fat-to-mother restocking is fast, and when there is an upward expectation of pig prices and a gap in breeding sows, fat-to-mother can quickly make up for the sow capacity, reducing the time cost required for breeding sows.

Second, the cost of fat-to-mother sows is lower than that of seed sows, which has led to some farmers' speculative psychology.

3.

Futures have become a new type of price signal, guiding future pig price expectations.

First, we believe that some farmers regard the changes in futures prices as a guide for pig prices and map them into the current breeding plan.

Second, we judge that farmers can lock in current profits through futures hedging, providing a new type of profit model for the pig breeding industry.

In summary, we believe that futures have increased the degree of game between the industry's delivery rhythm and price expectations, increasing the uncertainty of short-term pig price fluctuations.

Leaders with robust balance sheets are likely to benefit under the new cycle characteristics as pig price volatility increases, and the risk of the balance sheet may increase.

We believe that if pig price volatility increases and the duration shortens, the short-term price rise is not enough to drive the repair of the balance sheet, and companies face a higher frequency of "pig price decline + increase in asset-liability ratio" double hits, increasing the frequency of balance sheet stress tests.

Therefore, we judge that under the new cycle characteristics, leaders with a solid balance sheet may gain a greater advantage.Here is the English translation of the provided text: ► Corporate Level: In this pig cycle, several pig enterprises have been labeled as ST.

The balance sheet pressure of pig enterprises in this cycle has reached a historically high level, with three listed pig enterprises being labeled as ST within one year for the first time in history.

► Industry Level: The financial indicators of the industry have been under extreme pressure multiple times during this pig cycle.

We have calculated the interest coverage ratio, which reflects the multiple of net operating cash flow that can cover the interest expenses of the enterprise.

Considering the significant increase in bank loans for enterprises during this cycle, we believe this indicator can observe the actual cash flow pressure of the current enterprises.

The interest coverage ratio has bottomed out three times during this pig cycle, at 1Q22, 1Q23, and 2Q23, corresponding to -2.1, -3.6, and -0.8, respectively.

Compared to historical cycles, it only bottomed out once in 1Q18.

New Paradigm of the Industry: The growth driver has shifted from "looking outward" to "looking inward," transitioning into a high-quality growth period driven by cost.

We believe that the growth driver of China's pig farming industry has shifted from "looking outward" to "looking inward," that is, from a high-speed growth period driven by "capital" to a high-quality growth period driven by "cost."

On the one hand, the three major bonuses of "capital, epidemic prevention, and pig prices" during the African swine fever period are unlikely to reappear, and the high-growth period driven by capital in the past may have ended.

The cost gap brought by the gap in epidemic prevention is narrowing, and the high pig prices brought by the impact of black swan epidemic events are difficult to reappear.

On the other hand, we believe that the industry may return to "cost competition" centered on operational potential, with the core competition being production and operation management and technological innovation.

Finally, we believe that although pig enterprises are growing, the quality is different.

In summary, we believe that large-scale leading enterprises have scarcity.

New Phase: The three major bonuses of "capital, epidemic prevention, and pig prices" have weakened, and "capital competition" has returned to "cost competition."

Looking outward: The three major bonuses of "capital, epidemic prevention, and pig prices" have weakened marginally.

"Capital bonus" weakening: During the African swine fever period, a large amount of capital flowed in, and the current market financing has significantly decreased.

First, the high pig prices during the African swine fever epidemic attracted capital inflow, and the industry temporarily enjoyed a capital bonus, with enterprises laying the foundation for development through financing.

According to our calculations, the peak of corporate financing in 2020/2021 corresponds to 80.6/81.7 billion yuan.

Second, since 2022, financing activities have significantly decreased, and the financing amount has shown a downward trend.

According to our calculations, the financing amount of sample enterprises in 2022/2023/1H24 has significantly decreased to -6.1/4.8/4.1 billion yuan compared to the period of African swine fever.

Finally, we believe that as the funds obtained from previous financing gradually run out, the capital bonus that enterprises once enjoyed has been exhausted, and the industry's production capacity has accelerated the decline in 4Q23 and showed weak growth in 1H24.

According to our calculations, the per capita monetary funds in 2Q24 are 611 yuan per head, which may indicate that the capital bonus has been exhausted.

"Epidemic prevention bonus" weakening: After the African swine fever period, the epidemic prevention level has generally improved, and the narrowing cost variance may confirm that the advantage of the epidemic prevention gap has narrowed.

We believe that cost is a direct manifestation of the gap in epidemic prevention levels, and the current cost gap between various breeding groups has narrowed.

First, the cost gap between large-scale breeders and scattered breeders has narrowed.

Second, the cost gap between large enterprises has narrowed, and the cost advantage position has been broken.

According to our calculations, the cost variance of listed pig enterprises reached a peak of 20.2 in 1Q21 and gradually narrowed to 1.4 in 2Q24.

"Pig price bonus" weakening: African swine fever has impacted China's pig farming industry, resulting in an unprecedented "super pig cycle," and the future accumulation speed of corporate profits will slow down.

African swine fever has created a capacity gap in the pig farming industry, driving pig prices to rise sharply.

According to the National Bureau of Statistics, we have calculated that the breeding sows' capacity has decreased by 28% from 2019 to 2020, reaching the largest reduction in history; according to Yongyi Consulting, the average price of pigs reached a high of 38.7 yuan per kilogram in October 2019, far higher than the average pig price of 17.38 yuan per kilogram from 2010 to now.

Looking forward, we believe that the African swine fever in 2018 was a "black swan event," and the industry has accumulated experience in preventing and controlling African swine fever.

Unless there is a significant impact on the supply side, the high pig prices of that year are difficult to replicate, and the accumulation speed of corporate profits will slow down.

Looking inward: "Cost competition" centered on operational potential, with core competition in production and operation management and technological innovation.

The common goal of the industry is to promote cost potential through internal production management efficiency and achieve excess profits per head.

On the one hand, we believe that the core factor of pig enterprise production is breeding efficiency.

On the other hand, we believe that management runs through the entire process of pig farming, and good management can optimize the production process, improve production efficiency, and also control costs through refined means to achieve excess profits per head.

► In terms of employee management: Value personnel motivation and training, and mobilize employees' enthusiasm for production.

► In terms of organizational structure: Optimize the organizational structure, and improve the professional and refined level of operation and management.

► In terms of breeding system: Focus on the starting point and break through the foundation to create value through internal potential.

New Pattern: Grasping the strategic opportunities of the three major bonuses, high-quality growth leading enterprises have scarcity, and the growth window of small pig enterprises is gradually closing.

Grasping the strategic opportunities of the "three major bonuses" and high-quality growth, large-scale leading enterprises with scarcity are the same as growth, and the quality is different.

We believe that the purpose of corporate investment in capital expenditure to expand production capacity is to increase profit scale and improve production quality, but some enterprises have not effectively exchanged for profit growth.

First, according to iFinD, we have calculated that among the 16 sample enterprises from 2018 to 2023, all 16 companies have increased their production capacity during the corresponding period, but only 7 sample enterprises have recorded a positive cumulative net profit attributable to the mother company.

Second, we have calculated the net profit amount brought by the increase in fixed assets per unit for the sample enterprises from 2018 to 2023, and more than half of the sample enterprises have a negative value for this figure, that is, more than half of the sample enterprises have not achieved profit growth through capital expenditure.

Currently, we believe that the industry's strategic opportunity period has passed, and leading pig enterprises have fully utilized the "three major bonuses" to stand firm in scarcity, and the growth window for small enterprises is gradually closing.

We assume that enterprises do not raise funds, support the growth of the number of pigs out of the pen with internal profits, and calculate the funds required for pig enterprises to go out of the pen.

We believe: First, the demand for financing for large-scale leading pig enterprises is small.

Second, small enterprises have a smaller profit scale, and the demand for capital expansion is large, making it difficult to support growth through internal profits.

In summary, we believe that high-efficiency leading enterprises with advanced management and technical means may form a squeeze effect on low-efficiency small enterprises.

If the balance of book funds is small or fundraising is limited, it is difficult to obtain growth opportunities and face greater survival and development pressure.

New pattern: High-quality leading enterprises squeeze inefficient pig enterprises, seize development opportunities and space.

Looking back at the past, large-scale breeding farms have formed a market space squeeze effect on scattered households through capital, epidemic prevention, and pig price bonuses.

In terms of capital, individual households mainly rely on indirect financing from banks, lacking direct financing channels; in terms of epidemic prevention, individual households have weak hardware and software reserves for disease prevention and control.

Therefore, under the increasingly fierce competition in the pig farming industry, the exit of individual households has created development space for leading enterprises.

According to the National Animal Husbandry Station and others, the scale rate of pig farming in China has rapidly increased from 35% in 2010 to 65% in 2022; the domestic pig farming enterprise CR10 has also increased from 7.8% in 2018 to 22.2% in 2023.

Looking forward to the future, the competition pattern of pig farming is expected to be reshaped - the focus of competition is concentrated among leading enterprises, and high-efficiency large-scale leading enterprises squeeze inefficient small-scale enterprises.

First, as mentioned above, we believe that the three major bonuses of capital, epidemic prevention, and pig prices are no longer available, and it may be difficult for enterprises to expand in the future by increasing debt or external financing, and may rely more on the accumulation of internal profits.

Second, based on this cycle, we believe that enterprises rely more on advanced management and technology to achieve high-quality development and seize a low-cost position.

In summary, we believe that low cost amplifies the profit gap per head, and large volume amplifies the profit scale gap, thereby differentiating the level among leading enterprises, and the exit of inefficient small-scale enterprises provides market share increments for efficient large-scale leading enterprises.

Valuation New Paradigm: The excess profit and internal growth strength of large-scale leading enterprises open up new space for P/B, P/E, and DCF valuation growth.

New investment logic: From buying pig prices and out-of-pen elasticity double hits, small pig growth as king, to buying large volume and excess profit, leading enterprises become stronger.

We believe that as pig prices and the industry enter a new paradigm, the investment paradigm also needs to be switched: from buying pig prices and out-of-pen elasticity double hits that bring small pig growth opportunities, to buying cost advantages and large volume that bring excess growth of leading enterprises.

On the one hand, under the past pig cycle investment framework, high expected out-of-pen volume elasticity is the alpha of the enterprise, corresponding to the largest increase in pig enterprises.

On the other hand, we believe that the high expected out-of-pen volume elasticity in the past pig cycle comes from the rapid occupation of the market share of small and medium-sized households by listed pig enterprises; in the future, small enterprises have a limited profit scale, and the demand for capital expansion is large, making it difficult to support growth through internal profits, so the difficulty of cashing out out-of-pen elasticity is strengthened, thereby weakening the support for valuation.

New valuation logic: Excess profit, out-of-pen cashing degree as the core driving force, the scarcity of large-scale leading enterprises is highlighted.

In the context of the switch in investment logic, we believe that excess profit and out-of-pen cashing degree are the underlying support, and the growth of the leading enterprise's market value still has a large space.

The traditional per capita market value valuation method takes the number of pigs out of the pen as the core variable, that is, high growth in the number of pigs out of the pen can digest high per capita market value, to a certain extent, ignoring the impact of per capita profit and volume scarcity.

Under the new paradigm, we propose P/B, implied P/E, and DCF valuation methods, among which excess profit and the growth of the number of pigs out of the pen are the underlying support for the increase in market value:Here is the translation of the provided content into English: ► P/B Valuation Method: Excess profits support the repair of the balance sheet and the realization of delivery as the core factors for increasing market value, and the P/B valuation level is already at a reasonable position.

The total market value of pig enterprises = P/B x net assets per head x number of deliveries, where P/B is anchored by ROE (there is a clear positive correlation between P/B and ROE).

On the one hand, we estimate that the industry's self-breeding and self-raising mode central P/B may be around 2.5x, and the company + farmer mode central P/B may be around 3.1x, the P/B valuation level of pig enterprises is already at a reasonable position, and there is limited room for further improvement.

On the other hand, we believe that the repair of the balance sheet may drive the rebound of net assets per head, and also empower the growth of delivery volume, which may provide the core drive for the market value to rise.

At present, listed pig enterprises generally have a large space for balance sheet repair.

► Implied P/E Valuation Method: Excess profits and the realization of delivery are the core factors for increasing market value, and leading pig enterprises with excess profits and high delivery realization have cheaper implied P/E valuations.

The total market value of pig enterprises = P/E x profit per head x number of deliveries.

First, due to the high pig price bonus period of the pig breeding industry has passed, the profit per head may be centrally shifted downward, and there may be a certain deviation from the historical central market value per head.

Second, we anchor the new paradigm cycle profit per head based on the downward shift of profit per head, and calculate the implied P/E based on the pig enterprise's super profit per head compared to the industry.

► DCF Valuation Method: A new valuation system for the self-breeding and self-raising leader after the convergence of capital expenditure and the improvement of free cash flow return.

First, under the DCF valuation system, the total market value of the company is positively correlated with free cash flow.

Second, free cash flow is negatively correlated with capital expenditure and positively correlated with depreciation.

Specifically, the main capital expenditure of pig enterprise leaders occurred between 2019-2021, and currently, the capital expenditure of pig enterprise leaders shows a trend of tightening; in the future, as capital expenditure tightens, we judge that depreciation will present a "bell curve", or gradually reach a peak and decline.

In summary, the cost of pig enterprise leaders continues to dig potential, capital expenditure converges, and there may be a large room for improvement in free cash flow, which is expected to further contribute to the increase in market value.

P/B Valuation: The P/B level is not obviously undervalued, and the speed of balance sheet repair and the degree of delivery realization are the core drivers.

The total market value of pig enterprises = P/B x net assets per head x number of deliveries.

We believe that due to the profits of the pig breeding industry being greatly affected by pig price fluctuations, the traditional P/E valuation method has limited reference value, and the historical data of pig enterprises decomposed from the P/B and net asset dimensions has stronger reference value.

We decompose the pig breeding market value into P/B (reflecting the valuation level) x net assets per head (reflecting the breeding mode and leverage) x number of deliveries (reflecting growth), and quantitatively decompose the driving factors of pig enterprise market value.

We find that the speed of balance sheet repair and the degree of delivery realization are the core drivers, the P/B level is not obviously undervalued, and there is room for market value to rise and certainty for large-volume leaders: ► P/B Multiple: High P/B, high ROE for the company + farmer model, low P/B, low ROE for the self-breeding and self-raising model.

Referring to the industry P/B-ROE fitting line and comprehensively considering the volatility of pig enterprise ROE, the P/B center is calculated as 3.1/2.5 times.

► Net Assets per Head: The repair of the balance sheet drives the rebound of net assets per head or is the core driver of pig enterprise market value, and the leader will be the first to repair.

We believe that net assets per head can be decomposed into total assets per head x the ratio of net assets, and the indicator can comprehensively reflect the breeding mode, capacity utilization rate, and leverage situation.

Implied P/E Valuation: Excess profits, and the degree of delivery realization are the core drivers, and there is room for improvement in the implied P/E of leading pig enterprises.

Based on the commonly used market value per head valuation method, we further decompose the profit per head and implied P/E, implied P/E = market value per head / profit per head center.

We believe that the traditional simple method of the market to compare the historical market value per head center may have a certain precision optimization space.

We calculate the profit per head center of each pig enterprise to calculate the implied P/E level, and find that the implied P/E of leading pig enterprises generally has room for improvement: ► Implied P/E: Excess profit differences lead to differentiation in implied P/E levels, and some pig enterprises that appear to be cheap in market value per head actually have expensive implied P/E.

Based on the calculated profit per head center of each pig enterprise, we calculate the implied P/E level of each pig enterprise by the latest market value per head.

We find that due to the differentiation of costs among pig enterprises, there are differences in the level of excess profits per head, and large-volume leading pig enterprises have excess profits per head, and some pig enterprises that appear to be cheap in market value per head actually have expensive implied P/E.

► Leading pig enterprises with excess profits have room for improvement in implied P/E, mainly because large-volume leaders rely on higher efficiency and more certain growth to have a valuation premium.

DCF Valuation: High-efficiency large-volume leaders have increased free cash flow, and the market value increase is expected.

Free cash flow is positively correlated with the market value of enterprises, and a slowdown in expansion speed is expected to increase valuation.

First, under the DCF valuation system, the market value of enterprises is positively correlated with free cash flow and negatively correlated with the discount rate (weighted average cost of capital).

Second, free cash flow is negatively correlated with capital expenditure and positively correlated with depreciation.

We believe that when the expansion speed of enterprises slows down, if accompanied by a slowdown in the pace of capital expenditure and the arrival of the peak period of depreciation, the market value of enterprises is expected to increase.

The difference between capital expenditure and depreciation of high-efficiency large-volume leaders is narrowing, and the cash flow of leading enterprises has room for thickening.

Some self-breeding and self-raising leading enterprises are at the node of high-quality development, and have shown a trend of slowing down capital expenditure and reaching the peak of depreciation and amortization.

We judge that the difference between the two is narrowing or even turning negative, which is expected to thicken the company's free cash flow, and thus increase the market value level under the DCF model.

Investment Recommendation Investment Logic: Historically, the price of buying pigs and the elasticity of delivery double-click, and in the future, buy the cycle convergence under the large volume of excess profits.

As the pig breeding industry enters a new paradigm, the three major bonuses of "capital, epidemic prevention, and pig price" are weakening, and the industry returns from "capital competition" to "cost competition".

We believe that the excess profits under a large volume are the core variable to support the excessive growth of pig enterprises, and large-volume leading pig enterprises with stable excess profit capabilities have the ability to accumulate momentum at the bottom of the cycle and to grow excessively in the upward period of the cycle, supporting faster balance sheet repair and more certain delivery growth, and should be given a valuation premium.

Recommendation order: low cost and large volume > low cost and small volume > high cost.

From the industry perspective, we judge that the pig price in the second half of 2024 has a foundation for rising quarter by quarter, and the current pig cycle has entered the right side.

From the company's perspective, we believe that due to the obvious excess profit per head of low-cost, large-volume pig enterprises, it supports faster balance sheet repair and more certain delivery growth.

After the pig price bonus, epidemic prevention bonus, and capital bonus fade away, it has obvious scarcity, and the market value has room for upward, and is expected to lead the pig breeding plate market under the new paradigm.

Risk Warning Pig Price Lower Than Expected The pig breeding industry has a cyclical characteristic.

Pig price is one of the core assumptions of the company's performance.

We judge that if the increase in pig price is not as expected, it will cause the company's performance to face the risk of not meeting expectations.

Raw Material Cost Soars Feed raw materials are important inputs for the company's feed business and pig breeding business, accounting for a large proportion of the company's operating costs.

Affected by factors such as weather, pests, and trade policies, the prices of feed raw materials such as corn and soybean meal also have volatility.

We judge that if the price increase of raw materials exceeds expectations, it will lift the company's feed production cost and pig breeding cost, bringing pressure to the company's performance growth.

Pig Epidemic Risk African swine fever and other pig epidemics will disturb the production of the breeding industry.

If the winter pig disease epidemic worsens, we judge that the company's breeding production may have the risk of the epidemic, which will increase the uncertainty of performance.

Policy Change Risk The pig breeding industry is greatly affected by policy changes.

Price policies such as storage adjustments will affect the profits of pig breeding enterprises.

Some areas implement strict breeding bans and environmental protection requirements, which will affect the expansion of business and the rhythm of delivery.