… Hog breeders in China had already expedited expansion in 2020. Wens Foodstuff Group Co., Ltd. (BBB+/Negative) spent around 40% of its full-year revenue to refurbish and expand breeding capacity, increase processing facilities and replenish breeding stock. Local peers, such as Muyuan Foods Co., Ltd., Jiangxi Zhengbang Technology Co Ltd and New Hope Liuhe Co, Ltd also spent 24%-81% of their 9M20 revenue on capex. Meat processors and packers, such as WH Group Limited (BBB+/Stable), are also preparing to expand their value chains. WH Group’s onshore operation, Shuanghui Development, issued CNY7 billion in shares in late 2020, with the proceeds used to expand its hog breeding and processing facilities…
China’s Hog-Transfer Restrictions Heighten Diversification Risk
Source: Fitch Ratings
28 Apr, 2021
Fitch Ratings-Shanghai/Hong Kong-28 April 2021: Government restrictions on China’s live-hog transportation, starting from May 2021, are likely to alter regional pricing dynamics and prompt market participants to widen their geographical coverage and diversify their product lines, says Fitch Ratings. We expect companies to maintain high capex in 2021 to broaden their businesses, but the amount may be constrained should hog price continue to fall as herd numbers recover from the impact of African Swine Fever (ASF).
The Ministry of Agriculture and Rural Affairs announced on 16 April that China will be split into five zones to contain ASF, with restrictions on live-hog transportation across the zones, with exceptions for breeding stock and piglets as well as for some non-contaminated regions. We believe the restriction may temporarily imbalance local supply and demand, and create price discrepancies between regions. Producing regions in northeast and central China may face oversupply, while consumption-centric regions, such as east and south China, may seek additional pork externally. Regional pricing discrepancies had incurred during the ASF outbreak in 2018-2019 and amid the coronavirus pandemic outbreak in 1Q20 when transportation was restricted.
The restrictions are also likely to encourage market participants to geographically diversify to increase market share. Breeders with concentrated farms, particularly in hog producing regions, may seek to spread their production base to avoid pricing pressure. The new rule will allow breeders to transport pork, but this would require new processing facilities near their farms or at least within their zone.
However, hog prices trended down by 25% in 1Q20 amid a herd recovery from the impact of ASF and a sell-off due to the mutated ASF virus, putting pressure on cash flow generation from hog producers. Fitch expects participants to adjust their capex in line with operating cash flow to maintain an adequate capital structure.
Hog breeders in China had already expedited expansion in 2020. Wens Foodstuff Group Co., Ltd. (BBB+/Negative) spent around 40% of its full-year revenue to refurbish and expand breeding capacity, increase processing facilities and replenish breeding stock. Local peers, such as Muyuan Foods Co., Ltd., Jiangxi Zhengbang Technology Co Ltd and New Hope Liuhe Co, Ltd also spent 24%-81% of their 9M20 revenue on capex. Meat processors and packers, such as WH Group Limited (BBB+/Stable), are also preparing to expand their value chains. WH Group’s onshore operation, Shuanghui Development, issued CNY7 billion in shares in late 2020, with the proceeds used to expand its hog breeding and processing facilities.
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