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16 Apr, 2020

COFCO Meat (1610 HK)

Robust earnings growth with relatively attractive valuations among peers: Buy

China hog supply remains tight in 2020. Despite sow stock in China was rising in end-2019, continuous spreading of African swine with latest cases found in Gansu coupled with Covid-19 would delay Spring replenishment. And even we expect China will continue importing pork (+75% YoY to 2,108K tons 2019, accounts for only 5% of national domestic pork production), it’s still unable to compensate the supply gap, not to mention import will slow by massive disruption from overseas’ supply chain, hog supply is unlikely to recover to previous level this year.

Demand stays robust despite cities lockdown in 1Q20 and expect hog price to rise 20%+ in 2H20. Recent average hog price was slightly lowered to around RMB34/kg to the level last seen in Dec19 according to the CSRC data. The fact is hog price able to hover at the highest level shows Chinese’s demand for pork is strong and no other proteins, like chicken, is able to substitute. We expect following the economy reopening and lifting of lockdown policies, demand from restaurants will rebound from 2Q20, together with supply/demand gap further widen in 2H20 as peak season kicks in, hog price will rise 20%+ from current level to record highs in 2H20.

Supply/demand gap remains unresolved, supporting high hog price

While China has been continuously releasing more central pork reserves to meet market demand and vigorously importing pork from overseas, average pork price is merely lowered. We expect supply chain disruption of poultry industry by Covid-19 in the first quarter will continue to drive pork price reaching the highest level of the year in summer. COFCO Meat will continue to benefit from high pork price pushing FY20E EPS +860% to RMB0.919, with P/E FY20E sharply drop to single digit number (vs 23x FY19).

Noteworthy that the company recommended to issue their first dividend to shareholders for FY19, and plan for a regular dividend policy. Though dividend yield is less than 2%, the move shows the company is positive with future results.

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Anli Research 16 Apr, 2020

Source: Company data, Anli Research

Fig 2. Increased pork imports cannot compensate the huge supply shortage


Fig 3. China hog and sows inventory plummeted >30% YoY in end-2019

COFSO Meat’s 1Q20 hog production volume was disrupted by Covid-19 to 308K heads (+15% QoQ only), yet, the company expects total hog production for 2020 stays flat at 2,000K heads, indicating higher production volume will result later this year. As we expect hog price will point higher in 2H20, and feed ingredients, specifically corn and soybean meal are likely to stay in current level, profit per hog will remain strong, contributing “Hog production” GP up >700% YoY to RMB4,644mn and GPM 56.6% in 2020E.

Hog production GPM to rise robustly supported by high pork price and low feed cost

Source: Zhue.com, Anli Research estimates

Fig 1. China hog prices remain >RMB30/kg since Oct-2019

Fig 4. We expect feed ingredients prices to stay at current level

Source: Bloomberg, Anli Research



Capacity gradually releases and pave ways for production recovery

Fig 5. Company's hog production volume improving QoQ since 4Q19



Increasing share of branded fresh pork uplift earnings ability. Through several years of brand promotion and channel development, company has built stable sales network and reached 134 “Freshhema” shops in top tier cities as of end-2019. The % of Branded Fresh Pork revenue as of total fresh pork rose 14pts YoY to 44.5% in 1Q20 (vs 32% FY19). As we expect the company will continue to expand the sales of small-packed products, and convert high-quality hogs into high-premium pork products, fresh pork GMP will further improve to 4.4%.

As catering for China government’s encouragement of “transporting hogs” to “transporting pork”, the company has accelerated the slaughtering capacity layout. New plant in Hubei with annual slaughtering capacity of 1mn heads has been completed in end-2019 and a new plant in Northeast China is also expected to be completed this year, they are proximity to the company’s main production sites and can help secure the development of fast-growing branded operation. Besides, company’s breeding capacity reach 5mn heads as of Dec 2019 with 16.7K breeding and replacement hogs and expected to grow to 23.2K in end-2020 according to management’s guidance, paving the way for hog production recovery from 2021 onwards.

Fig 6. COFCO Meat's average selling price of finishing hogs keep rising


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Fig 7. New plants in Hubei and North China are proximal to production sites and can greatly upgrade slaughtering capacity


Fig 8. Hog production capacity increased to 5mn heads in 2019




1. Larger-than-expected cost

2. Lower-than-expected hog price and production

3. Government intervention on hog price ceiling

Key Risks:

Source: Bloomberg, Company Data, Anli Research estimates

PT $3.1 as of 31 Dec 2020 with 34% upside

Given the China hog supply/demand gap is likely to last throughout 2020, hog price will remains elevated and may hit higher to RMB40/kg in 2H20. We expect COFCO Meat EPS to grow to RMB 0.919/1.028 in 2020/21E, up 860%/12% respectively. We initiate "Buy" ratings on COFCO Meat with PT $3.1, representing 3x 2020 P/E with 34% upside.

Fig 9. Valuation comps



COFCO Meat (1610 HK): Financial summary

Note: RMB in thousands, except otherwise specified, earnings are stated before fair value adjustment Source: Company Data, Anli Research estimates


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