The average stock in this industry has seen steady growth in the past 12 months.
With markets around the world struggling to rebound, there is still one bright spot, and it’s a welcome surprise for investors. Key companies in this little-known industry saw their revenue triple over the past three years, and their profits more than double.
Shares are trading at record low PE ratios. And stocks are moving higher, with 18-month returns reaching as high as the mid-triple digits.[i]
These aren’t the kind of small-cap companies in an up-and-coming industry that you’d expect to see with those kinds of numbers, either. The industry is well established, some of the companies turning in these numbers boast market caps of several hundred billion dollars. Analysts say the growth spurt isn’t over either, calling for bottom line revenue to increase by as much as 2.3 times this year.[ii]
Hengsheng Asset Management says stocks in the industry “are expected to continue their strong performance.”[iii]
TF Securities says “the industry could be generating strong profits for the next three years.”[iv]
It will no doubt surprise you that we’re talking about China’s publicly traded mega-pork producers.
China produces and consumes fully half of the world’s pork.[v] And nearly half of world’s 31 pork mega-producers are in China.[vi]
Now a perfect storm of conditions has put China’s large publicly traded pork producers in a very sweet spot, causing these mega-companies to suddenly act like small growth stocks.
Fueled by the world’s largest middle class
China’s rising middle class is demanding pork. Always the country’s favorite meat, few could afford to eat it except on special occasions until the boom of economic growth over the past few decades.
Today pork accounts for nearly 70% of all meat consumed in China. It is a $128 billion a year industry and its stability is of key concern.
Recent market conditions have shaken that stability, plunging the country’s pork output to a 16-year low and forcing up prices. Low prices from the last market cycle have worked to drive small producers out of business, further constraining supply and pushing prices higher.
The combined result is a greater than 40% decline in supplies in 2019 and pork prices that have shot up 140% in a little more than a year.[vi] Analysts expect supply to fall another 10% to 15% by year-end.[vii] Meanwhile, China’s pork producers are benefitting from skyrocketing prices, though consumers are not.
China offers pork producers financial incentives
On March 16, China announced a range of policy incentives to boost investment in the aftermath of the African swine fever. Ranging from subsidies for purchases of automatic feeding and waste treatment facilities, to easier access to land use to encourage expansion, the incentives are available to the country’s large pork producers. Bric Agriculture Group, a Beijing-based farm-consulting firm, estimates that the total investment will be more than $14.3 billion.
While the largest, most well-known producers, most of which are listed on the Shenzhen Stock Exchange, have seen massive share price increases, there is one less-known company that stand to benefit most going forward.
Be sure to sign up for our newsletter to learn the name of the company on the leading edge of this transformative shift.
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[i] Muyuan Foods (002714.SZ) 9-16-18 through 3-8-20
[ii] Huatai Securities forecast of Wens Foods: https://asia.nikkei.com/Business/Food-Beverage/Chinese-pork-producers-on-a-tear-amid-coronavirus-outbreak2
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