An Alarming Sign as Swine Price Returns to Normal after Years of Savouring?

The profit warning of C.P. Pokphand Co. Ltd. came to a surprise for investors as the company estimated a loss around $15-20 million for its 9-month period financial statement in 2021.

Poultry and  swine prices gradually declined in the third quarter as the supply side in China began to stabilize after years of rebuilding herds by Chinese farmers from the devastating spread of African Swine Flu (ASF) in 2018 that continued to drag into the current date, though the severity had subsided and pork price that was once skyrocketing stabilized.

The company stated that the loss was mainly due to 1) a decline in poultry and swine prices and 2) a significant negative net change in fair value of biological assets estimated to be in the range of US$125 million to US$130 million.

 

Despite lower income from meat, it is presumably that the loss was mainly due to the net change in fair value of its assets as the unaudited profit for the eight months ended August 31, 2021, was $112 million, representing a decrease of 75% YoY, and the swine price did not fall significantly to the point that would make the company recorded a loss. Excluding this amount, C.P. Pokphand should be able to record a net gain on its 9-month period.

The decline in swine price is concerning and will reflect in a sharp plunge in income when compared to the same period of last year. Nevertheless, the decline could be seen as a return to normality after savouring high swine prices in the past two years.

 

As for the outlook of Charoen Pokphand Foods Public Company Limited (CPF), KGI Securities roughly estimated that the biological asset loss guidance has downside risk from its estimate of at least 500 million baht, while loss from operation should fall in line with the assumption. Therefore, there should be at least 500 million baht downside risk to our previous CPF’s net profit forecast of 776 million baht in 3Q21F. This could have a short/term negative impact on CPF’s stock price but the stock repurchase program should be a cushion.

KGI Securities maintained an Outperform rating on CPF based on its view that CPF’s earnings will recover next year. The securities company also maintained its 2022F normalized profit forecast of 18.2 billion baht and a target price of Bt30.50.

 

KGI Securities added that domestic swine price increased 4.7% to Bt71.5/kg as COVID-19 restrictions eased to nearly normal levels. However, broiler price was stable at Bt29.5/kg as the oversupply situation persisted. It is likely that broiler price will remain low in 4Q21 despite improving overall economic activities. In terms of spreads, broiler spread averaged Bt8.9/kg (-20.5% QoQ) and swine spread averaged Bt37.3/kg (-19.3% QoQ) in 3Q21. The much lower spread QoQ should result in a drop in meat producers’ earnings QoQ and YoY.

Meanwhile, China’s swine price rebounded 19.3% to CNY13.1/kg. However, KGI Securities expected China’s swine price to remain low for the rest of the year and increase next year once excess supply has been absorbed.