- MuyuanFoods adopts the means of low-cost expansion to maintain strong competitiveness in the pig industry.
- MuyuanFoods has strained its capital chain due to large-scale expansion of production capacity.
- Act carefully and keep the company developing steadily.
MuyuanFoods was once again pushed to the cusp of public opinion.
According to the Shanghai Commercial Paper Exchange, as of November 30, the commercial bills accepted by the 31 companies directly or indirectly controlled by MuyuanFoods continued to be overdue. The accumulated overdue balance was 21.2573 million yuan and the overdue balance was 16.6688 million yuan.
In this regard, MuyuanFoods believed that the company was unable to redeem the commercial acceptance bills on time because the company did not receive valid payment applications from some holders in time, or the clearing method selected by the holders did not meet the bank’s requirements. To this end, the company has introduced special management systems and measures in response to relevant situations, and will strengthen bill management in the future to avoid similar incidents.
The overdue of the MuyuanFoods commercial bill caused an uproar among investors. The market is also not welcome. It plunged by more than 6% today, again pouring cold water on the market that has continued to weaken recently.
1、Debt repayment pressure
Commercial bills are unsecured short-term bills issued by enterprises, used by issuers to raise funds, and are a type of credit bill. This time, MuyuanFoods’s overdue amount is not large, which may have a certain impact on subsequent financing. And it will make the capital market and financial institutions reflect: Is there a problem with MuyuanFoods’s cash flow? If the capital chain is broken, will it cause a wide range of bad debts?
On October 19, MuyuanFoods raised capital from the controlling shareholder not to exceed 6 billion yuan, and the issue price was 40.21 yuan per share. After deducting the issuance costs, all will be used to supplement working capital.
In February this year, MuyuanFoods issued 9.55 billion yuan of convertible bonds, of which 5.1 billion yuan was used for the pig reproductive construction project, 1.9 billion yuan was used for the pig slaughter project, and the remaining 2.55 billion yuan was used to supplement working capital and repay bank loans. It can be seen from the above incidents that MuyuanFoods’s capital chain is quite tense.
In 2017–2020 and 2021Q3, the company’s current ratio (current assets/current liabilities) was 1.05, 0.72, 1.08, 0.89, and 0.71, respectively. It is generally believed that a reasonable current ratio is 1.5–2.
In the same period, the quick ratios ((current assets-inventory and advance receipts)/current liabilities) were 0.55, 0.29, 0.68, 0.41, 0.2. Generally speaking, a ratio of 1 is normal. The cash ratio ((monetary funds + marketable securities)/current liabilities) is 0.5, 0.2, 0.6, 0.34, 0.15, respectively. Generally, this indicator is generally considered to be more than 20%. Judging from the above three sets of data, MuyuanFoods’s current debt solvency is relatively weak, and it is more tense than in the past few years.
Specifically, as of the end of the third quarter, MuyuanFoods’s short-term loans amounted to 18.79 billion yuan, a year-on-year increase of 23.2%. It reached 16.53 billion yuan at the end of last year, a substantial increase of 95.5% year-on-year. Long-term loans were 14.5 billion yuan, a year-on-year increase of 74.2%.
According to brokerage forecasts, as of the end of Q3 this year, the company’s working capital gap is 19.09 billion yuan. Based on the company’s expected 50–60 million slaughter target in 2022, if the pig price downturn cycle prolongs, the company’s financing gap in 2022 will increase by more than 50% year-on-year. . To
Muyuan Foods’ funding chain is tight, and the main logic is that Muyuan Foods has expanded its production capacity on a large scale in the past three years. In 2020, the scale of construction in progress will be 14.835 billion yuan, an increase of 72.5% year-on-year, and it will reach 14.693 billion yuan in the first three quarters of this year. Extending the time, we found that Muyuan Foods has maintained a very radical expansion in the past 3 years starting in 2018. The entry of African swine fever into China in 2018 has had an irreversible impact on the pig industry.
Muyuan Foods adopts a self-reproduction and self-raising model, and the construction of pig farms requires a lot of investment. Relying on the cash inflows generated by the company’s own operations cannot meet the capital needs for the expansion of pig production capacity, and a large amount of bank borrowings have been increased. Even in 2020, when pig prices are high, Muyuan Foods still has a large funding gap. In the first three quarters of that year, the average monthly funding gap was 13.192 billion yuan.
Muyuan Foods must rely heavily on borrowing and financing to maintain its current expansion rate. Regarding the market’s concerns about cash flow, Muyuan Foods announced yesterday that the company and its holding subsidiaries intend to apply to banks and other financial institutions for a total credit line of no more than RMB 70 billion.
The application of 70 billion does not mean that such a large amount can be approved. The overdue commercial invoice may have an impact on the subsequent borrowings of Muyuan Foods, and it can be tracked continuously.
On the whole, Muyuan Foods’ capital chain is indeed tight, which makes some investors quite worried.
2、Facing the question of financial fraud
The impact of overdue commercial invoices can be large or small. However, MuyuanFoods’s outstanding financial performance over its peers has attracted continuous “questioning about fraud.” On November 26, Mr. Yang from China Merchants Securities “reminded” group friends who hold MuyuanFoods shares to pay attention to the risks in the WeChat group, saying that “the risk of financial fraud is involved and there should be a thunderstorm soon.”
Looking back, in March 2021, the Internet celebrity “Xia Di Xia Ying” published “Will MuyuanFoods be a thunder?” “The article questioned a number of financial data of MuyuanFoods shares, which triggered extensive discussions in the investment circle.
Among the doubts, the most intense one is that MuyuanFoods’s gross profit margin is much higher than that of its peers. Later, on March 16, MuyuanFoods issued an announcement in response to the inquiries of the Shenzhen Stock Exchange, explaining this in great detail.
MuyuanFoods’s high gross profit margin is mainly due to the fact that the cost of raising pigs is much lower than that of its peers. In the first June of 2020, MuyuanFoods farmed commercial pigs cost 1123.9 yuan per head, far lower than Wen’s 2949.8 yuan and Zhengbang Technology’s 2526.7 yuan.
The huge difference in breeding costs stems from three major differences: the source of breeding pigs and piglets, the structure of pig products, and the pig breeding model.
(1) Sources of breeding pigs and piglets
In 2020, New Hope will purchase approximately 50% of piglets from outside, and Zhengbang Technology will account for 54%. Both wens and Tech-Bank will also need to purchase a large amount of piglets from outside. The main supplier of outsourcing is MuyuanFoods. In the first September of 2020, MuyuanFoods sold a total of 2,261,900 heads to the above four peers, a significant year-on-year increase of 472%. In the same period, the average price of piglets sold by MuyuanFoods to its peers was 1985.5 yuan/head, a substantial increase of 92.5% year-on-year (the price in 2019 increased by 209.7% compared to 2018).
The biggest customers of the breeding pigs that MuyuanFoods provides to the market are peers. As the saying goes, my profit is your cost. It is understandable that although you are in the same industry, there is a big gap in operating efficiency.
(2) Product structure of live pigs
The gross profit margin of commercial pigs is much lower than that of breeding pigs and piglets. For example, in the first September of 2020, the gross profit margin of MuyuanFoods commercial pigs was 58.73%, which was much lower than 81% for breeding pigs and 81.6% for piglets. During the same period, the sales of MuyuanFoods commercial pigs were 6.669 million, accounting for 56.13% of the total sales, 4.678 million pigs were sold, accounting for 39.37%, and the breeding pigs were 534,000, accounting for 4.49%. The latter two are much higher than previous years.
With the exception of Tech-Bank, the sales ratio of breeding pigs and piglets of comparable companies in the same industry is low, and the peers also need to purchase breeding pigs and piglets from companies including MuyuanFoods.
(3) The breeding model of pigs
MuyuanFoods adopts the self-supporting and asset-heavy model, while most of wens, Zhengbang and New Hope adopt the light asset model of “company + peasant household”. TechBank has changed, adopting “company + farmers” before 2019, and then shifted to the model of “family farm + rental fattening farm + self-built fattening farm” because of African swine fever.
The MuyuanFoods model does not need to pay the commission breeding fee, thus reducing the production cost per unit product. But the peer is different, the entrustment fee increases year by year.
The above factors determine that the gross profit margin of MuyuanFoods is higher than that of its peers. MuyuanFoodsFoodsFoods used detailed data to explain to the market what an excellent business model is and responded to investor questions.
3、What development opportunities are there in the future?
In the past, WENS was a giant pig farming company.The number of pigs released to the market exceeded 10 million in 2013, and 20 million to 22.3 million in 2018. However, the number of pigs released to the market in 2020 was only 9.54 million, a 48.5 percent drop year-on-year. The inflection point of wens production was in 2018, when African Swine Fever was introduced into China, profoundly changing the pig industry. “Company + peasant household” fighting alone, epidemic prevention and control is very difficult, and the cost is very high, the advantages of self-breeding and self-rearing model highlights.
The quantity of MuyuanFoods sold in 2013 was less than 1.3 million, less than 13% of Wens. However, in 2020, MuyuanFoods sold 18.115 million head, 1.9 times that of Wens.
The MuyuanFoods model is proving to be superior in terms of development over the past few years. If the original pig raising of family farmers is regarded as the 1.0 model, then “company + farmer” can see the 2.0 model, while MuyuanFoods industrial pig raising can see the 3.0 model. MuyuanFoods is still leading the industry towards the direction of informatization and intelligence 4.0.
This is one of MuyuanFoods’s core competencies. In industries where pig farming is highly competitive, low-cost expansion can keep competitors and foreign rivals out.
MuyuanFoods still has a knack for raising pigs. For many years, China has not been able to breed the three original breeds, so it is necessary to regularly import the original breeds from abroad to ensure that the breeding stock does not degenerate in the genetic process. Before ASFF, China imported 15,000 to 18,000 breeding pigs each year, while in 2020, the import directly exceeded 30,000 pigs (breeding pigs in short supply, many pig farms were forced to breed three yuan sows for breeding).
At the Central Economic Work Conference to be held at the end of 2020, key tasks to be addressed in 2021 include making containment on Chinese people. Narrowing the gap between pig breeds and international advanced levels has become one of the concerns.
Liu Yonghao, chairman of New Hope Group, also said in an interview with the media in 2020, “If the original seed is good, the pig will grow well; If the original breed is bad, the pig may not grow well, so breeding is very important. If the pig supply is really cut off, the first reflection in the feed conversion rate will be higher. In the past, more than 2 jin of feed can grow a jin of meat, but in the future, we may need to grow 4 jin or 5 jin of meat, which will increase grain consumption.”
After years of breeding and gene selection, MuyuanFoods developed a “dual cycle breeding system”, which can be used as both commodity and seed. This is a very disruptive thing, allowing the industry to control the pace of production in the downturn, rapid expansion of capacity in the business cycle. Since the outbreak of ASF, MuyuanFoods has quickly recovered its capacity and has been able to quickly supply the industry with a large number of breeding pigs and piglets in addition to commercial pigs.
At present, MuyuanFoods has no strong competitors in the industry. However, for the capital outside the industry, large-scale pig farming can maintain good economic benefits, and can continuously improve the breeding efficiency of the threshold is very high. In the past few years, many companies have announced their entry into the breeding industry, but they all want to make a quick buck and have not formed a climate. Pig raising is an industry that needs continuous accumulation and cannot expand production on a large scale in a short time. It needs continuous investment in land, large-scale construction, introduction, propagation and fattening. In fact, this kind of characteristic can prevent the capital outside the industry to enter pig industry on a large scale.
And pig raising has become one of the few trillion industries that has not yet been integrated. But the logic of concentration has been in progress:
From 2007 to 2017, the number of farmers with less than 50 pigs for slaughter decreased by 55.41%, the number of 50–99 pigs slaughtered decreased by 23.35%, the number of farms slaughtered 5000–9999 pigs increased by 142.71%, and the number of slaughter farms increased by 142.71%. The number of farms with 49,999 animals has increased by 129.28%, and the number of farms with more than 50,000 animals has increased by 714%.
Low-cost expansion can ensure that it survives the industry’s cold winter and has sufficient growth potential in the future. At present, MuyuanFoods’s chances are not small.
Institutions determine the right to speak in the market. As of the end of the third quarter, there were a total of 101 domestic funds holding MuyuanFoods with a total of 146,084,800 shares, an increase of 41,747,400 shares from the end of the second quarter. In addition, domestic funds have continued to increase MuyuanFoods positions in the last four quarters. Northbound funds also increased their positions slightly in the second quarter, but reduced their positions by 0.65% in the third quarter. But on the whole, the institution did not sell MuyuanFoods on a large scale, which embarrassed the question of “financial fraud”.
At present, pig farming is at the bottom of the industry cycle, and MuyuanFoods is also losing a lot. It is not easy to predict when the inflection point of the cycle will rise, but from the perspective of next year’s futures prices, it is not easy for the pig price to get out of the hole quickly.
Next, MuyuanFoods’s stock price slump may continue, but the stock price may start well before the turning point of the industry cycle. For the current position, we can only say that we can’t be too pessimistic, the more you fall, the more attractive. However, we still need to be cautious in order to develop steadily for a long time. , MuyuanFoods’s financial risks deserve continuous follow-up.
Analyst's Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours.
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