Shanxi: Focus on the reduction of pig production capacity and the integration of feed exports. The pet industry is still expected to maintain growth.

Shanxi released a research report indicating that most hog companies saw a further increase in their debt-to-asset ratios at the end of Q1 2026 compared to the previous quarter, and some companies remain at historically high levels of debt. The overall task of reducing liabilities and repairing balance sheets in the pig farming industry is not yet complete. As of the end of June 2026, the inventory of breeding sows has decreased to 37.8 million, a new low since 2022, and is approaching the normal holding level of around 37.5 million set by the "Comprehensive Regulation and Control Implementation Plan for Pig Production Capacity (2026 Revised)." If the industry continues to incur losses and cash flow tightens, this may further drive market-oriented capacity reductions, potentially laying the groundwork for the next cycle of hog price increases, with improvements expected in the fundamentals and valuations of the pig farming industry. Shanxi's main points are as follows: Against the backdrop of industry consolidation and rising raw material prices, market share is expected to accelerate towards leading enterprises, and it is recommended to pay attention to opportunities with Guangdong Haid Group. (1) The competition in the feed industry has gradually shifted from purely product competition to competition based on the value of the industrial chain. Guangdong Haid Group has continuously increased its domestic market share due to its efficient internal management, effective business incentives, and outstanding industrial chain service advantages; (2) The rising prices of raw materials like fishmeal have placed significant cost pressure on small and medium-sized feed companies, while Guangdong Haid Group is expected to utilize its scale and R&D advantages to accelerate market share expansion; (3) The market capacity for feed business in the Asia-Africa-Latin America region is large and still a "blue ocean." The companys overseas feed business is expected to continue its trend of high growth and high profit margins, becoming another growth point for performance; (4) The company's current valuation is at a historical low, providing a high margin of safety. The supply of poultry meat is generally ample, with some structural differentiation emerging within the broiler industry. The white feather broiler industry is expanding in scale, with supply being relatively loose and continued pressure in the industry; the yellow feather broiler industry has seen a recovery in prices compared to last year after experiencing sluggish market conditions and capacity reduction in 2025. From a cyclical allocation perspective, low valuation and cost-advantaged leading companies at the cycle's low point may offer a favorable risk-reward ratio and attractiveness, making it advisable to pay attention to Jiangsu Lihua Foods Group and Fujian Sunner Development. With the increasing penetration of pet ownership and trends in consumption upgrading, the pet industry is still expected to maintain growth. In 2026, domestic manufacturers are actively upgrading their brands, driving brand awareness through research and development, while iteratively upgrading food functionality and processes, with a clear trend towards high-end products entering a new development phase. The international market is showing structural growth trends, with high elasticity for cat wet food in the US and Europe, while dog food faces some pressure. Despite challenges from tariff policies and exchange rate fluctuations, the demand for pet food imports in the US has not diminished. As of Q1 2026, China's exports have shown signs of recovery, and with overseas production capacity gradually coming online, OEM business revenue and gross margins are expected to marginally recover. Entering a new stage of development, competition among pet food enterprises continues, with ongoing investments in marketing, R&D, and supply chains. It is recommended to focus on Gambol Pet Group, which leads in proprietary brands, and Yantai China Pet Foods, which leads in global industry layout. Risk warning: risks associated with farming epidemics; risks from natural disasters; risks related to fluctuations in raw material prices; food safety risks; risks from currency exchange rate fluctuations.