December 16, 2021
The rollercoaster ride of New Hope's market value
An eFeedLink Hot Topic
In 2016, New Hope, which is mainly focused on its feed business, entered into livestock production, specifically, pig production.
Last year, the company set a target: pig slaughter volumes from 2021 to 2023 should have growth rates no lower than 100%, 300% and 700% respectively.
With a very tight live pig supply, domestic live pig prices surged, boosting producers' confidence and sparking competition for farm expansions. It is under the stimulus of this development that New Hope invested resources to build pig farms in recent years.
According to preliminary statistics, from 2016 to 2020, the company constructed at least 59 pig breeding farms across China, with a total investment of nearly ¥30 billion (US$4.7 billion). It was during the second half of 2019 — when pig prices skyrocketed — that New Hope saw substantial capital expenditures, totalling ¥9.346 billion (US$1.5 billion) for the year. By the end of 2020, the company has invested ¥30 billion (US$4.7 billion) in a pig farm building.
However, just when New Hope and other large companies placed their bets heavily on soaring pig prices, the impact of the African swine fever (ASF) epidemic gradually waned while pork imports soared. Domestic pig production capacity quickly recovered, resulting in a significant surplus. Last September, the inventory for reproductive sows reached 45.64 million heads, 11% higher than normal levels pre-ASF.
The overcapacity of live pigs was reflected in domestic pig prices as early as January this year. Investors in the capital market — who were spooked by the news — started to sell stocks as early as China's National Day last year.
While the pig industry continued to invest in the breeding production capacity (as the price of live pigs plummeted relentlessly), New Hope's profitability decreased in tandem.
In the third quarter this year, its gross profit margin was 2.24%, resulting in a net loss margin of 6.41%. Compared with Q3 2020, these figures dropped 10.79 percentage points and 14.41 percentage points respectively. New Hope's stock price suffered a double blow as a result.
As of September 30, the closing price of New Hope Liuhe was ¥14.76 (US$2.31) while the total share capital was 4.505 billion shares. This means the company's market value plunged from ¥190.1 billion (US$29.8 billion) to only ¥66.497 billion (US$10.4 billion) — a 65% reduction in over a year.
- Ngoh Seng Keong and Shi Tao, eFeedLink