Equity Analysis /
China

Coronavirus may create opportunity in Chinese meat stocks

  • The coronavirus outbreak that began in Wuhan, central China, has dramatically escalated.

  • Parallels have been drawn with the SARS crisis, which created a severe downturn in several Asian markets.

  • The outbreak has hit Chinese meat stocks hard, with Muyuan, Wens, Cofco Meat and WH Group all down.

Coronavirus may create opportunity in Chinese meat stocks
Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

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Tellimer Research
24 January 2020
Published byTellimer Research

If the outbreak is arrested promptly, we think it may provide investors the opportunity to accumulate meat stocks in the region. 

The coronavirus outbreak that began in Wuhan, central China, has dramatically escalated. Several medical workers have been infected, 26 fatalities have been reported out of nearly 900 cases. Travel restrictions have been imposed and at least ten cities have been shut down. People have been infected by the Wuhan virus (as it is known) in Shanghai, Tianjin, Zhejiang and Henan, and cases have been reported in Japan, Thailand and South Korea. Although the WHO has said it was "too early" to declare the virus a global emergency, fears have spread. 

Parallels have been drawn with the SARS crisis (that killed 800 people in 2003), which created a severe downturn in several Asian markets. However, the Wuhan virus seems far better contained. The ratio of fatalities to infections is less than 3%, whereas SARS killed a tenth of the c8000 people that were infected. Public health standards now seem to be superior.

If the Wuhan virus is arrested promptly, it may provide investors to accumulate meat stocks in the region. This sector is viewed as the epicenter of the crisis. The Wuhan virus is said to have originated from an urban “wet market” – markets where animals are freshly slaughtered rather than chilled.

The outbreak has hit Chinese meat stocks hard, with players such as Muyuan Foodstuff (002714 CH), Wens Foodstuffs (300498 CH), Cofco Meat (1610 HK) and WH Group (288 HK) all down 7-10 % in the last three days. Even ASEAN-based meat stocks such Japfa Ltd (JAP SP) and Charoen Pokphand Indonesia (CPIN IJ) have fallen by 7%. There is panic selling as investors fear a consumer slowdown. Also, there could be restrictions on meat sales, particularly in "wet markets".

Chinese and ASEAN-based meat stocks have fallen since the outbreak

Source: Bloomberg

However, it is misleading to paint the Asian meat sector with the same brush – one must distinguish between the meat producers (COFCO Meat, Muyuan Foodstuff and Wens Foodstuffs) and the pork processors (WH Group and Charoen Pokphand Foods). With pork prices having skyrocketed by 70% over the last year in China due to the African Swine Fever (ASF), there is a sharp divergence between the performance of pork producers and processors in this pork bubble. Chinese pork producers such as Muyuan Foodstuff (002714 CH), Cofco Meat (1610 HK), Wens Foodstuffs (300498 CH) have risen sharply ytd. In contrast, companies that use pork inputs for processed products such as WH Group (288 HK) and Charoen Pokhpand Foods (CPF TB) have weakened.

Even with the Wuhan virus, pork prices may not remain at these elevated levels, and a sharp correction could be in the offing. Hence, we urge investors to focus on the potential opportunity in meat processors such as CPF TB and 288 HK. The virus could be contained as dramatically as it rose and underperforming meat processors may prove to be great value.