"2019年猪年丰收：中国农业行业展望"

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The report from Macquarie on the Chinese agriculture industry in the Year of the Pig highlights the potential for a bountiful harvest in the coming year. The analysis indicates that hog prices are expected to rally in the second half of 2019, driven by the intensification of the African Swine Fever outbreak. This increase in prices is further supported by a supply shortage in the broiler market, keeping prices high. In terms of feed outlook, the report suggests a mild growth in corn prices and uncertainty surrounding soymeal prices. This information is crucial for stakeholders in the industry to make informed decisions about their operations and investments. The report also includes appendices that provide a terminology guide for those who may be unfamiliar with the specifics of the hog industry. One of the key recommendations in the report is a preference for WH Group/Shuanghui over other companies in the market. This suggests that analysts view WH Group as a strong contender in the sector and are optimistic about its performance in the near future. Overall, the report paints a positive picture for the Chinese agriculture industry in the upcoming year, with potential for growth and profitability. However, stakeholders should remain vigilant and closely monitor market developments to capitalize on opportunities and mitigate risks. For more detailed information and disclosures, readers are encouraged to refer to page 57 for important disclosures and analyst certification on Macquarie's website.

Macquarie Research China agriculture industry

12 February 2019 10

Sow inventory declined by mid-single digits in 2017 as the hog price decreased by ~20% in 2017.

Post 2018 CNY, hog prices further declined by 34% and 32% in March and April. As such, per

head profit had turned into negative territory, with maximum loss at ~Rmb192 per head, resulting

in accelerating decline in sow inventory at a high single digit rate. If there were no ASF in 2H18,

the decrease of sow inventory in 1H18 might have led to a short supply of hogs in 2Q19 given the

ten-month production period from reproductive sow to finishing hog.

Fig 18 Sow inventory and YoY growth

Source: PRC MOA, Wind, Macquarie Research, February 2019

Fig 19 Sow inventory further decreased post 2018 CNY

Fig 20 Per head hog profit turned into red post 2018 CNY

Source: Wind, PRC MOA, Macquarie Research, February 2019

Source: Bloomberg, Macquarie Research, February 2019

 ASF will intensify and prolong the hog cycle coming in 2019

In August, 2018, the first African swine fever (ASF) case was examined in a farm with 383 heads

hog in Liaoning Province, China. As of Feb 8

, 2019, 105 farms were infected across China,

according to an MOA announcement, spreading faster than in any other country. On Jan 2

, 2019,

the largest outbreak occurred on a farm with 73,000 pigs in Suihua city n Heilongjiang province

owned by Heilongjiang Asia-Europe Animal Husbandry Co Ltd, showing the spread of virus to

modern industrial farms that expected to have the best levels of disease prevention. On Jan 12

2019, the first scaled hog breeding farm was affected in Jiangsu Province, with 69k head culled,

including 18k head of reproductive sows. According to experience in other infected countries, we

believe ASF will last for a long time in China and accelerate the small backyard farms’ quitting.

 Leading to further decline of sow inventory. Heading into 2H18, the downward trend

of sow inventory has dipped further to double digits due to the break out of ASF, resulting

in reported 8.3% YoY decrease of sow inventory at the end of 2018. The inventory of

sows fell below 30mn head for the first time. The reported decline from MOA came from

400 monitored farms, which we believe tended to reflect the change at scaled farms.

-20.0%

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(mn heads)

Sow inventory Sow inventory yoy growth

-80%

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Sow inventory yoy growth Hog price yoy growth - (RHS)

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(Rmb/head)

China hog per head profit

Macquarie Research China agriculture industry

12 February 2019 11

However, our channel checks with feed industry showed a more severe decline, which

could be more representative of small farmers. New Hope, the largest feed producer in

China, whose sow feed sales dropped by ~10% YoY at the end of 2018, saw a 20-30%

decline in Northeast China and low-teens decrease in other main production regions,

such as Henan, Shandong and Jiangsu. Haid, another nationwide feed producer,

estimates that the decrease of sow stock could be higher than 10%.

The reason is that sows are not only culled in the infected farms but also in advance

by farmers due to long-term sluggish hog prices and concerns over ASF in the future.

As discussed earlier, the hog price tends to trend up when CNY approaches. Therefore

small backyard producers will cull reproductive sows as well as immature market hogs to

catch up the upward trend of hog prices in case there is any ASF breakout nearby that

restricts transportation.

 Restock of both small farms and scaled farms was delayed by ASF. The majority

of small farms usually buy sow or piglets nearby. On Jan 16

, 2019 in the first press

conference of the year, the MOA suggested farmers restock, in view of the sharp decline

of sow stock as mentioned above. However, the average price of reproductive sows and

piglets has not yet seen a turning point, as farmers still worry about ASF and are reluctant

to restock.

As for the scaled farms, they tend to transfer parent sows and piglets from their own

breeding bases, which could involve transportation across provinces. Although MOA

resumed live sow and piglet transportation across provinces on Dec 27

, 2018, actual

implementation has not recovered yet, according to our industry checks with listcos we

visited. The reason behind is that the government of receiving party is unwilling to take

this risk, as the whole city will be blocked for hog transportation once one ASF is

confirmed there.

Fig 21 Piglet prices have not turned around yet

Fig 22 Reproductive sow prices continue to trend down

Source: Wind, Macquarie Research, February 2019

 Enlarged price gaps in producing area and consuming area. Generally speaking,

North China is the main hog producing area, while South China is the main consuming

area. Guangdong, Zhejiang, Shanghai, Beijing and Tianjin are the top five importing

provinces, while Henan, Shandong, Hunan, Hubei and Hebei are the top five exporters.

Before the ASF breakout, hog producers transported live hogs from producing areas to

consuming areas, but afterward initially banned such transport. Following the blocking of

main producing areas, pork prices in consuming areas, such as Sichuan and Guangdong

soared to above Rmb20/kg, while prices in producing area further declined due to

oversupply. The lowest price reached Rmb7.70/kg in Liaoning Province. In view of this

enlarged pork price gap, MOA encouraged pork transportation across unblocked

provinces in Nov 2018 to ease supply tension in consuming areas before CNY.

0.00

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Piglet Hog Pork

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Average at Rmb32.5/kg

Macquarie Research China agriculture industry

12 February 2019 12

Fig 23 Top 5 import(-) and export(+) provinces before ASF

Fig 24 Hog price YoY(%) in consuming and producing area

Source: Qingsong Agriculture Consulting, Macquarie Research, February

2019

Source: Wind, Macquarie Research, February 2019

According to the latest African Swine Fever Emergency Action Plan in 2019 (Chinese announcement),

all livestock in the identified farm, whether infected or not, must be culled. The affected area is

defined as within a three-kilometre radius of the infected farm. Farmers are allowed to continue to

raise healthy hogs in the affected area under quarantine. If no more ASF is confirmed, they will be

released from quarantine after a minimum of 42 days. Post another 45 days of raising sentinel pigs,

farms within the affected area are permitted to restock. We believe this could help to moderate the

hog stock decline. However, farmers will not resume restocking in the near term, in our opinion.

 Imported pork could partially narrow supply shortage, while impact will be limited

The volume of imported pork recorded a historical high at 3% in 2016 (last round of hog price rally)

and accounted for ~2% of China total pork supply in 2018. Historically, imported pork volume is

positively correlated to China’s hog price premium. According to the latest data, China’s hogs are

still trading at 73% premium over US hog prices. As long as the price gap between domestic hog

price and import price remains, companies will be motivated to import pork. We project the import

pork to increase 100% in 2019 to narrow the supply shortage; however, this will have limited

impact on the potential hog price rally in 2H19.

Meanwhile, more than 50% of daily pork consumption in China is dominated by warm fresh pork,

rather than chilled fresh pork or frozen pork. Thus the imported frozen pork is generally for

processed meat production. Specifically, WH Group is well poised to import more pork from US

once the trade war between China and US is resolved, which will help to improve its US business.

Fig 25 China imported pork volume decreased by 25%

in 2017

Fig 26 China imported pork value growth -30% in 2017

Source: General Administration of Customs of PRC, Macquarie Research,

February 2019

Source: General Administration of Customs of PRC, Macquarie Research,

February 2019

-3000.0

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'000 t

-50%

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Guangdong, Huizhou Zhejiang, Hangzhou

Henan, Kaifeng Shandong, Linyi

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(m MT)

Import pork volume YoY % (RHS)

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(US$m)

Import pork value YoY % (RHS)

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