Lower Hog Prices Drove a First-Half Loss, but Cost Leadership and Industry Capacity Reduction Support Margin Recovery in 2027

Overview

The report assesses Muyuan Foods' loss in 1H26 and the subsequent path to margin recovery. Near-term earnings were severely affected by the rapid decline in hog prices, but BofA believes the company's cost leadership continues to strengthen, industry capacity continues to contract, and the slaughtering and overseas businesses have begun contributing profits. It therefore maintains a positive view on the recovery of hog prices and margins in 2027 and reiterates its Buy rating.

Core views

Muyuan Foods recorded a net loss of RMB6.1bn in 1H26, compared with net profit of RMB10.5bn in the same period of 2025, broadly in line with its previous profit warning. This implies a net loss of approximately RMB4.9bn in the second quarter of 2026, widening significantly from the RMB1.2bn loss in the first quarter. The report attributes the deterioration mainly to continued pressure on hog prices: the average selling price in the second quarter is estimated at RMB9.6/kg, down 33% year over year and 15% quarter over quarter. Despite broadly stable operating metrics, this still resulted in a unit loss of approximately RMB1.8/kg. Second-quarter hog sales totaled 20.3mn head, up 1% year over year and 10% quarter over quarter, while average slaughter weight was approximately 126kg, down 4% year over year and up 2% quarter over quarter. First-half cumulative sales reached 38.6mn head, up 1% year over year. This indicates that the wider loss was driven mainly by pricing and unit profitability rather than a sharp contraction in sales volume. Earnings forecasts were therefore revised significantly. BofA cut its 2026 attributable net profit forecast by 95% but left its 2027 forecast unchanged. Current adjusted net profit forecasts are RMB348mn for 2026, RMB17.155bn for 2027, and RMB25.849bn for 2028, corresponding to earnings per share of RMB0.06, RMB3.14, and RMB4.77. Compared with previous forecasts, 2026 EPS was reduced from RMB1.57 to RMB0.06, 2027 EPS was raised from RMB2.96 to RMB3.14, and 2028 EPS was raised from RMB3.74 to RMB4.77. The 2026 EBITDA forecast was cut from RMB24.4357bn to RMB18.4831bn, the 2027 forecast was slightly raised from RMB31.4952bn to RMB31.6526bn, and the 2028 forecast was increased from RMB35.0881bn to RMB39.9066bn. The report's core view is that the hog-price shock in 2026 is extremely severe but has not undermined the earnings recovery thesis for 2027. Costs are the primary basis for the report's positive view. Muyuan Foods achieved its all-in cost target of RMB11.5/kg in July and continues to lead the industry. If feed costs remain stable in 2H26 as management expects, there is room for the all-in cost to decline further. The company is using the current capacity adjustment cycle to optimize underperforming farms and strengthen biosecurity before winter, reducing seasonal mortality risks and the usual increase in winter costs. Further efficiency gains are expected from herd health management, breeding upgrades, organizational optimization, and artificial intelligence-driven digitalization. The company's cost advantage has a structural foundation. According to Frost & Sullivan data cited in the report, Muyuan Foods held shares of 10.2% and 5.6% in the Chinese and global hog farming markets, respectively, in 2024, making it the largest hog producer in both markets. By slaughtering and processing volume, the company ranked first in China and fifth globally. Through its proprietary smart feeding system, the company adjusts raw-material formulations in real time. Soybean meal represented only 7.3% of its feed mix in 2024, below the industry level of 10% to 17%. Given that feed ingredients account for approximately 60% of production costs, this formulation flexibility is particularly important amid tensions in the Middle East and rising feed ingredient prices. In the first nine months of 2025, farming and slaughtering contributed 96% and 3% of gross profit, respectively, indicating that farming remains the absolute core business, although slaughtering has begun to provide an additional contribution. New profit sources are also gradually expanding. Slaughtering volume reached 17mn head in 1H26, up 51% year over year, and the slaughtering business is transitioning from a supporting operation into a profit contributor. Overseas operations have also begun generating earnings. The report therefore believes that future profit improvement will depend not only on a recovery in hog prices but also on lower farming costs, expanding slaughtering scale, and incremental contributions from overseas operations. Industry supply contraction is another pillar of the margin recovery thesis. Data from the National Development and Reform Commission show that China's breeding sow inventory stood at 37.8mn head at end-June 2026, down 3% month over month and 7% year over year, indicating that industry-wide capacity rationalization remains underway. BofA therefore remains positive on a recovery in hog prices and margins toward 2027. Whether capacity reduction translates into better pricing will still depend on demand, government intervention, disease, and other factors, but the report believes the current inventory trend supports a medium-term recovery. In terms of valuation, the H-share target price was lowered from HKD48 to HKD42. The new target price is based on the 2027 EBITDA forecast and applies the industry peer average of 7.3x 2027 EV/EBITDA, compared with 10.0x previously. The valuation base was also rolled forward from the average of the 2026 and 2027 fiscal-year forecasts to fiscal 2027. The report believes that Muyuan Foods, as the industry's largest and most cost-competitive leader, would normally deserve a premium. However, given the relatively limited liquidity of the H-shares, it continues to apply the industry-average multiple. The H-shares currently trade at 9.7x forecast 2027 P/E. The A-share target price was lowered from RMB52 to RMB48, based on the H-share target price of HKD42 and a three-month average A-H share premium of 30%, versus 20% previously. Despite lowering the target prices, BofA maintains Buy ratings on both the A-shares and H-shares, reflecting a shift in focus from the short-term loss in 2026 toward the recovery of hog prices, costs, and margins in 2027.

Analysis framework

The report first compares first-half results with the profit warning and the prior-year period, then derives the second-quarter loss from the half-year results and breaks down the source of earnings deterioration through selling prices, sales volumes, slaughter weights, and unit losses. It subsequently assesses the unit-cost trajectory based on management's cost targets, farm optimization, biosecurity, breeding, and digitalization initiatives, and uses changes in breeding sow inventory to validate the contraction in industry supply. Finally, it updates annual earnings and EBITDA forecasts and determines the H-share and A-share target prices using the industry-average 2027 EV/EBITDA multiple and the A-H share premium, respectively.

Methodology notes

• Valuation MethodEV/EBITDA valuation

  2027 EV/EBITDA Peer Valuation

  The report applies the industry peer average of 7.3x 2027 EV/EBITDA to the company's 2027 EBITDA forecast to derive an H-share target price of HKD42. The industry average, rather than a leadership premium, is used to reflect the relatively limited liquidity of the H-shares.

• Industry/Sector Analysis FrameworkVolume-price decomposition

  Decomposition of Sales Volume, Selling Price, Slaughter Weight, and Unit Profit

  The report separately examines hog sales volume, average selling price, average slaughter weight, and loss per kilogram to determine that the wider second-quarter loss was driven primarily by lower hog prices rather than contracting sales volume.

• Industry/Sector Analysis FrameworkSupply-demand framework

  Breeding Sow Inventory and Hog-Price Recovery

  The report uses year-over-year and month-over-month declines in breeding sow inventory to measure industry capacity reduction and accordingly concludes that future hog supply is likely to contract, supporting a recovery in hog prices and margins in 2027.

• Corporate Fundamentals and Financial FrameworkEarnings Quality Analysis

  iQmethod Business Performance and Earnings Quality Metrics

  The report uses metrics under BofA's iQmethod framework, including return on capital, return on equity, operating margin, EBITDA margin, cash realization ratio, leverage, and interest coverage, to compare operating performance and earnings quality on a consistent basis.

• Valuation Method

  A-H Share Premium Mapping

  The A-share target price starts with the H-share target price and then applies the three-month average A-H share premium of 30%; the premium used previously was 20%.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Muyuan Foods H-shares (2714.HK)

  Lower costs, industry capacity contraction, and incremental contributions from slaughtering and overseas operations support margin recovery in 2027; the report maintains its Buy rating.

  Strengths

  Leading hog farming scale globally and in China, industry-leading all-in costs, flexible feed formulations, and smart farming capabilities.

  Weaknesses

  H-share liquidity is relatively limited, so the valuation uses the industry-average multiple without assigning a leadership premium.

  Comparison

  The target price uses the industry peer average of 7.3x 2027 EV/EBITDA; the company holds a leading position in scale and cost competitiveness.

  Risks

  Hog prices below expectations, feed costs above expectations, or a material decline in sales volumes caused by disease.

• Muyuan Foods A-shares (002714.SZ)

  The A-shares share the same operating and earnings recovery thesis as the H-shares; the report maintains its Buy rating.

  Strengths

  Comprehensive advantages in scale, costs, biosecurity, breeding, and digitalization.

  Weaknesses

  2026 earnings are highly sensitive to falling hog prices, and forecast EPS has been sharply reduced from RMB1.57 to RMB0.06.

  Comparison

  The A-share target price is based on the H-share target price and applies the three-month average A-H share premium of 30%, up from 20% previously.

  Risks

  A slower-than-expected recovery in hog prices, weaker-than-expected or delayed government intervention, rising feed ingredient costs, and disease shocks.

Key data

• 1H26 Net ProfitNet loss of RMB6.1bnNet profit was RMB10.5bn in the same period of 2025, and the result was broadly in line with the profit warning.
• 2Q26 Net ProfitImplied net loss of RMB4.9bnThe first-quarter net loss was RMB1.2bn, with the loss widening further in the second quarter.
• Second-Quarter Average Hog Selling PriceRMB9.6/kgDown 33% year over year and 15% quarter over quarter.
• Second-Quarter Unit ProfitLoss of approximately RMB1.8/kgThe decline in selling prices offset relatively stable operating performance.
• Second-Quarter Hog Sales Volume20.3mn headUp 1% year over year and 10% quarter over quarter.
• Second-Quarter Average Slaughter WeightApproximately 126kgDown 4% year over year and up 2% quarter over quarter.
• First-Half Cumulative Hog Sales Volume38.6mn headUp 1% year over year.
• July All-In CostRMB11.5/kgThe management target has been achieved while maintaining the company's industry-leading position.
• First-Half Slaughtering Volume17mn headUp 51% year over year, with the slaughtering business beginning to contribute profits.
• Nationwide Breeding Sow Inventory37.8mn headAs of end-June 2026, down 3% month over month and 7% year over year.
• 2024 Hog Farming Market ShareChina 10.2%/Global 5.6%According to Frost & Sullivan data, the company is the largest hog producer in both China and globally.
• Soybean Meal Usage Ratio7.3%The industry level was 10% to 17% in 2024, while feed ingredients account for approximately 60% of production costs.
• 2026 EPS Forecast RevisionReduced from RMB1.57 to RMB0.06Corresponding to a 95% cut in the 2026 attributable net profit forecast.
• 2027 EPS Forecast RevisionRaised from RMB2.96 to RMB3.14The report's main text leaves the 2027 attributable net profit forecast unchanged.
• 2028 EPS Forecast RevisionRaised from RMB3.74 to RMB4.77Reflecting expectations for a subsequent earnings recovery.
• H-Share Target PriceReduced from HKD48.00 to HKD42.00Based on 7.3x 2027 EV/EBITDA; the current price is HKD34.62.
• A-Share Target PriceReduced from RMB52.00 to RMB48.00Based on the H-share target price and a three-month average A-H share premium of 30%; the current price is RMB39.22.
• H-Share Forecast 2027 P/E9.7xTrading valuation at the time of the report's publication.

Impact & implications

The report expects 2026 earnings to be near breakeven due to weak hog prices, but stable sales volumes, continued declines in unit costs, and industry capacity contraction keep the 2027 profit recovery thesis intact. Expanding slaughtering scale and initial earnings contributions from overseas operations mean future profit sources will be more diversified than before. However, the lower target prices reflect recent earnings pressure, a lower valuation multiple, and constraints on H-share liquidity.

Risks

• If demand recovers slowly, or government intervention is weaker than expected or delayed, hog prices may fall below expectations.
• Weather shocks, trade restrictions, or export bans could disrupt feed ingredient supplies and increase costs.
• Higher crude oil or fertilizer prices amid tensions in the Middle East could push feed costs above expectations.
• Disease outbreaks could cause a material decline in sales volumes, although the resulting increase in hog prices may partially offset the impact.

What to watch

• Monitor whether feed costs remain stable in 2H26 and whether the all-in cost continues to decline below July's RMB11.5/kg.
• Monitor whether declines in breeding sow inventory and further industry capacity reduction translate into a recovery in hog prices and margins toward 2027.
• Monitor whether farm optimization and biosecurity measures before winter reduce seasonal mortality and winter cost increases.
• Monitor the effects of demand recovery, government intervention, and disease developments on hog supply, demand, and prices.
• Monitor growth in slaughtering volume and the actual earnings contribution from overseas operations.