Meat production sector – When it rains it pours

• Feed costs have been accelerating following the Russia–Ukraine conflict, weighing on local meat producers.
• In 1Q22, live hog price improved 18.6% qoq but decreased by 30.7% yoy.
• We maintain our Neutral rating on the sector.

Meat producers struggled in 1Q22
Based on our estimate, aggregated revenue of listed meat production companies plunged 39.7% yoy in 1Q22 and net profit also declined 37.4% yoy. Top companies to record strongest drop in 1Q22 gross margin include DBC (-16.3% pts) and MML (-8.3% pts). We believe weak results were due to the spike of feed ingredients price and 30.7% yoy decline of live hog price in 1Q22. In our view, live hog prices cannot increase sharply following input material prices as meat consumption demand has not fully recovered compared to pre-Covid-19 levels. Meanwhile, the pork supply remains stable and is on the way to recovering after the ASF epidemic.
2-way pressure cast shadow on 2022F outlook
According to World Banks, wheat, corn, and soybean meal price are forecasted to rise 42.7%/19.4%/9.7% yoy in 2022F, thus rising input material cost for animal feed production. Meanwhile, we expect domestic live hog price to decline 5.8% yoy in 2022F mainly due to high base in 1H21 and slow recovery of meat consumption demand after the Covid-19. Therefore, we believe 2022 will still be challenge year for meat producers. We expect DBC’s net profit to plunge 29.6% yoy while MML’s net profit is projected to decline significantly by 66.2% yoy. In our view, meat producers’ business plans are quite positive (10.0% yoy NP growth) in the context of raw material prices is uncertain due to conflicts while hog prices are unlikely to rise sharply in 2022F.
Recommend HOLD for MML and DBC
Meat producers (including DBC, MML, VSN) are currently trading at P/E fluctuate between 15-18x. We recommend Hold for both DBC and MML as we believe that NP growth prospects have been price in, and these companies are expected to record negative NP growth in FY22F. In our view, investors should exercise caution in investment decisions regarding meat stocks during this period. Upside catalysts include 1) lower-than-expect global grain price, 2) higher-than-expect live hog price, and 3) stronger-than-expect meat consumption demand. Downside risks include 1) higher-than-expect input material price for animal feed and 2) lower-than-expect live hog price.

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