African Swine Fever Prompts China's Pork Industry to Consolidate and Diversify
Source: Fitch Ratings
07 Sep, 2020
Fitch Ratings-Hong Kong/Shanghai-07 September 2020: Industry consolidation in China's pork industry has accelerated throughout the ongoing African Swine Fever (ASF) outbreaks, says Fitch Ratings. As a result, large hog breeders have ramped up capital spending to expand their market share. Pork companies, breeders, processors and packers are also seeking to diversify their product offerings and expand across the value chain.
Leading breeders, with strong operational efficiency and financial capability, have taken the opportunity to build additional capacity, while small and inadequate breeders exit the market. For instance, Wens Foodstuff Group Co., Ltd. (BBB+/Stable) recorded a capital intensity rate of 30% in 1H20, compared with 17% in 2019, while the top-five breeders, including Wens and Muyuan Foods Co., Ltd, reported combined capex of CNY49 billion (2019: CNY42 billion). However, the hog breeding market remains fragmented, with the top-10 listed breeder production volume roughly accounting for 8.7% of national production. We expect aggressive expansion to enable top breeders to further increase their market share.
Pork industry participants across the value chain are also looking for diversification to mitigate industry volatility. Hog breeders seek protein diversification beyond pork, mainly poultry, as well as downstream processing capacity. Pork processors and packers are also expanding into hog breeding and other protein types. For example, WH Group Limited's (BBB+/Stable) Chinese-listed subsidiary plans to issue common shares to support its breeding and poultry business. Fitch expects the increased diversification, including across geographies, to increase protein companies' resilience to market cyclicities.
Fitch also believes recovering hog production and rising demand for animal feed should benefit feed producers, including feed additive companies, such as Fufeng Group Limited (BB+/Stable). However, the benefit to feed producers may be limited, as a rise in corn prices may inflate raw material costs and experienced breeders may develop their own animal-feed formulae and adjust portions during periods of turbulent feed-market prices.
The special report, "Spotlight: China's Pork Industry", is available at www.fitchratings.com or by clicking the link above.
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