Rabobank: China’s stock market bull run benefitting China’s aquafeed players

One of the best-performing shares in China’s stock market bull run is also the country’s leading supplier of aquafeed.

The share price of Guangdong Haid stood at CNY 68.75 (USD 10.31, EUR 8.93) on 13 January, nearly double the price of CNY 37.10 (USD 5.56, EUR 4.82), where it was on the same date last year.

Haid is one of China’s top three suppliers of animal feed, and its stock price has grown after China’s pig herd replenished after a nationwide swine flu crisis and the country’s demand for premium aquafeed continuing to grow.

With China’s stock market bull run set to continue into 2021 – U.S. bank Morgan Stanley has projected a 12 percent increase in the country’s main stock index in 2021, lifted by foreign investors seeking to cash in on China’s post-COVID recovery – Haid and the Tongwei Group, which dominate the Chinese feed industry, are in a position to consolidate their position of market leadership.

The two companies’ high share prices and valuations have made fundraising easier, and that access to equity financing has facilitated major expansion. This has created overcapacity, though all is not as it first appears, according to Lief Chiang, a Shanghai-based analyst at Rabobank. Average capacity utilization ratio is 35 to 45 percent in China, Chiang said, but that number is artificially low due to seasonality, with peak demand coming between April and October.

“Even for leading companies like Haid and Tongwei, the utilization ratio is somewhat 50 to 60 percent,” Chiang said.

Overcapacity is definitely a factor in China, but its impact on individual companies is difficult to ascertain, according to Chiang’s colleague, Gorjan Nikolik.

“There is always overcapacity, especially in China, as some sectors such as shrimp farming have declined in the last 10 years,” said Nikolik, who is Rabobank’s senior analyst for seafood. “[Regarding overcapacity], we cannot speak about the entire [country], but need to look at the situation locally. With changing technology, species, [and] intensity of farming, one really has to look at the local situation on each feed mill to know how the competitive situation is evolving.”

However, China's feed market is often characterized by fierce competition based on price, leading some leading players to diversify into different ends of the value chain. In addition to selling feed the Tongwei Group also farms tilapia itself. That strategy comes with risks, according to Nikolik.

“Vertical integration could be a way to increase margin and some will opt for this, but farming is also capital-intensive and risky,” he said. “So usually, if aquafeed companies do this, it remains a small part of the business.”

Diversification into inputs like health products may be a more conservative option, Nikolik suggested.

“We do see that the aquafeed company business model is expanding to include commentary products, such as genetics or juveniles production, software, data, and sensors to better expand on the after-sales knowledge services to the farms and optimize farm performance. And lastly health products, a complement of functional feeds, even up to vaccines, water treatment products, [and] alternatives to antibiotics,” he said.

In recent months, China’s government has sought to overcome the economic blow of COVID-19 by attracting more foreign capital into its domestic stock markets. Foreign investors have eagerly jumped at increased opportunities to invest, and that has kept the bull run going. Additionally, the Chinese government has pledged to pull the country’s per capita output levels up to that of “moderately developed countries” by 2035, replacing an earlier goal to reach that indicator by 2050. That would entail China recording per capita gross domestic product of about USD 30,000 (EUR 24,800) a year, compared to USD 10,262 (EUR 8,483) in 2019, according to the World Bank. This would put China at the current levels of South Korea and Spain. Such targets are designed to entice foreign investors into investing deeper into shares of domestic firms like Haid, which stand to benefit from such macroeconomic trends.

The other big theme being pursued by the Chinese government – net zero carbon emissions by 2060 – stands to benefit one firm in particular. Aside from diversifying into fish-farming, the Tongwei Group has also led the way into renewable energy. Chiang said the firm is unique because of its role as a leading manufacturer of polysilicon and solar cells, which the company moved into through acquisition and which now contributes the largest share of its revenue and profit.

“Tongwei plans to install more solar panels above fish and shrimp ponds,” Chiang said. “Securities firms now regard it more as a solar panel and material manufacturer rather than a feed company.”

One of those securities firms, Guoxin, released an assessment on Haid recently that praised the company’s management style, which is focused on identifying and satisfying customer needs while rewarding staff. The company is a major player in a market with “vast potential,” wrote Guoxin analyst Lu Jiarui. Haid’s ability to build production capacity at home has also led it to install feed production and distribution facilities in Southeast Asia and Ecuador.

China’s feed industry faces several key trends, according to a Rabobank report titled “Swimming in a Crowded Market,” published late last year. Authored by Chiang, the bank’s Shanghai based grains and oilseeds analyst, the report notes slowing growth of regional aqua-farming production as a result of stricter environmental regulations and limited natural resources for fish farming.

“This provides opportunities for industrialization and innovation along the value chain, in which aquafeed players can play a crucial role and achieve value growth,” Chiang wrote.

Meanwhile, a high occurrence of disease and rising labor costs in Asia mean that production of high-value aquaculture products like shrimp will increasingly shift to Latin America, Chiang noted.

“Asian aquaculture needs to offer more value-added options,” he said. “Quality, food safety, and traceability will be increasingly emphasized, thus requiring the development of functional feed and the utilization of advanced digital technology.”

Rabobank also projects a jump in the use of plant protein meals and other protein sources to replace fishmeal in aquafeed formulas. To achieve more sustainable, yet cost-effective aqua farming, more R&D efforts are needed on feed formulation, genetic improvement, and animal health, it said. The Rabobank report also points to a shift away from a traditional dependence on exports among Asian aquaculture producers to greater emphasis on domestic markets. Intraregional trade within Asia has been increasing to feed a growing Chinese demand for high-quality aquaculture products with assured food safety and traceability, according to the Rabobank report, which singles out Vietnam and Indonesia as beneficiaries from the trend.

With conditions on the ground shifting quickly, China’s biggest aquafeed suppliers appear to be taking successful proactive steps to shift their own business models to adapt.

Photo courtesy of Guangdong Haid


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