CITIC SEC: Lowering the target for normal inventory levels of live pigs, capacity reduction expected to continue to advance.

CITIC SEC released a research report stating that on May 14, 2026, the Ministry of Agriculture and Rural Affairs issued the "Comprehensive Implementation Plan for Comprehensive Regulation of Pig Production Capacity (Revised in 2026)" (hereinafter referred to as the "Plan"). The Plan lowered the national target for the normal stock of breeding sows to 37.5 million, detailed the comprehensive regulation plan, and strengthened determination to stabilize pig prices. Currently, with pig prices fluctuating at a low level, policy efforts combined with deep industry losses are expected to further boost the disposal of production capacity. Key points from CITIC SEC: Lowering the target for the normal stock of breeding sows, further refining production capacity regulation The "Plan" made key adjustments in the following dimensions: 1) The policy objective changed from "stabilizing production and ensuring supply" to "promoting pig prices to return to a reasonable level". 2) Once again, the normal stock of breeding sows was lowered to 37.5 million. As of the end of March 2026, the industry's stock of breeding sows was 39.04 million, 4% higher than the normal stock. 3) Narrowing the control range, making the regulation more precise and diverse. The fluctuation range of the production capacity's "green zone" in this round is 11% (compared to 13% in the previous round), the "yellow zone" fluctuates between 3% and 4% (compared to 5% - 7% in the previous round), with more detailed adjustments for the "yellow zone" and "red zone". In terms of regulation measures, it is clearly stated that the full chain regulation strategy involves long-term adjustment of breeding sows, medium-term adjustment of piglets, and short-term adjustment of fattening pigs, and the restocking plan for piglets and the slaughter weight of fattening pigs are included in the regulation toolbox. 4) Strengthening guidance for large pig enterprises and dynamic risk warnings for operations, and including large group breeding enterprises with a stock of breeding sows of over 100,000 heads and their subsidiaries in the national comprehensive regulation monitoring list for pig production capacity; implementing annual production filing management. 5) Strengthening local responsibilities. Emphasizing local responsibilities in the "yellow zone" and "red zone". Continued policy efforts, strengthened determination for production capacity regulation From a policy perspective, there have been frequent conferences related to stabilizing pig prices since the end of May 2025. Since the end of May 2025, the National Development and Reform Commission and the Ministry of Agriculture and Rural Affairs have provided guidance to leading companies several times on "reducing production capacity, reducing weights, and banning second pregnancies". The Central Committee's No.1 document in February 2026 further proposed annual production filing management for leading pig farming enterprises, orderly regulating the national stock of breeding sows, and recent meetings of the Political Bureau and expanded meetings of the Party group of the Ministry of Agriculture and Rural Affairs once again made statements on stabilizing pig prices and production capacity. The launch of this "Plan" is the further implementation of the spirit of previous conferences, and provides guidance for the subsequent introduction of more detailed policies. It is expected that more specific measures will be implemented in the future. Gradual deepening of capacity reduction, low valuations continue to recommend the pig sector Looking at the industry's losses, since March, pig prices have repeatedly hit new lows, with industry average losses per head remaining above 300 yuan, and with piglets also falling into losses at the same time, the industry's cash flow pressure has gradually increased, and the market-driven capacity reduction has gradually begun. With the combined efforts of policy and market-driven capacity reduction, it is estimated that the capacity reduction will gradually deepen in 2026. In terms of valuation levels, the average market value per head of the pig sector is not high at present, with an average market value per head of about 2000-3000 yuan, which is relatively low compared to historical cycles. In the medium to long term, with the guidance of national policies, leading companies stabilize production, the stability of pig prices strengthens, industry capital expenditure continues to be lower than depreciation, production capacity improves, and it is expected that the future valuation paradigm of the pig sector will gradually shift from the previous growth logic to the value dividend logic. Continuation of recommendations: 1) companies with cost leadership and strong dividend expectations; 2) companies with low valuations. 3) companies that are expanding into the cattle farming sector. Risk factors The intensity or pace of policy implementation may not meet expectations; livestock prices may not meet expectations; large-scale outbreaks of animal diseases; food safety issues; natural disasters; geopolitical and trade frictions; intensified industry competition risks, etc.