China’s first hog breeding exchange traded fund (ETF) makes its debut on the Shenzhen Stock Exchange on Friday, the first of three tied to the country’s booming pork sector that is rebuilding after African swine fever decimated herds in 2018.
Penghua Fund Management Co’s CSI Livestock Breeding ETF , as well as similar funds to be listed by Guotai Fund Management Co and Ping An Fund Management Co , are China’s first funds tracking the CSI Livestock Breeding Index, consisting of listed hog breeders, pig feed suppliers and vaccine makers.
Chinese hog producers raked in huge profits last year after African swine fever caused pork supplies to collapse and hog prices to surge. Flush with cash, producers are now investing in new, industrialized breeding facilities to rebuild herds, replacing traditional small-scale farms.
Share prices of hog and feedstock producers have also soared. Muyuan Foods, Jiangxi Zhengbang Technology and New Hope Liuhe have outperformed spot hog prices in Shandong <JCI-HOG-SHOUGN>, a major producing province, and national pork prices <PORK-CN-TOT-D> since 2018.
“Fueled by the high boom in pig prices, the hog breeding industry displayed an explosive performance; animal vaccine and feed sectors fully benefited from the hog cycle with bright net profit growth,” said Liang Xing, the fund manager for Guotai’s ETF.
“There is still a big gap between the industrialization of the domestic industry... with (that of) developed countries, so the industry has huge growth space.”
The reforms underway are expected to help China’s livestock industry outperform China’s broader agriculture sector, said Qian Jing, the proposed fund manager for Ping An’s ETF.
“We’ll see the acceleration of industry consolidation, share prices of leading listed companies will increase. The industry is expected to usher in the decade of the ‘golden pig.’”
ETFs, low-cost investment funds that typically track an index and trade like stocks on exchanges, have gained popularity in China among retail investors looking to gain exposure to specific industries.
China launched a live hog futures contract at the start of 2021, but at 16 tonnes per lot it is too large for most retail investors to trade.
The pig-breeding focused ETFs, in comparison, are more accessible to China’s mammoth retail investor community.
While ETFs in China can raise up to billions of yuan, the amounts raised by the three ETFs, just over 1 billion yuan ($154.53 million), during their subscription period are not particularly large. But, the quick uptake of subscriptions reflects the strong investor interest in securing exposure to businesses engaged in rebuilding supplies in the world’s top pork consumer.
The fund management firms, Penghua, Guotai and Ping An, opened their ETFs for subscription in February. Penghua ended its fundraising period a week early after meeting the required units and subscribers ahead of schedule, “to better protect the interest of investors.”
Penghua raised 372.6 million yuan ($57.58 million) while Guotai, whose fund will also list on the Shenzhen exchange on March 8, raised 513.5 million yuan ($79.35 million). Ping An has not announced a listing date on the Shanghai Stock Exchange, but said on Friday its fund raised 225.2 million yuan ($34.78 million).
NOTE OF CAUTION
Despite the bullish near-term outlook for the hog sector, analysts cautioned there are investment risks because of its cyclical supply and price movements.
“Fund houses start to sell livestock breeding ETFs because it’s a good concept in the backdrop of rising inflation concerns,” said Dong Baizhen, a Beijing-based hedge fund manager. “Retail investors can feel the impact from inflation personally, so such ETFs appeal to them.”
However, the ETFs may only deliver gains in the short- to medium-term and may not be ideal vehicles for long-term strategic investment, said Dong.
Another risk is the resurgence of African swine fever, said Wang Dan, chief economist of Hang Seng Bank China, for which there is no vaccine.
“Large farms are more vulnerable as they have a high density of pigs,” she said. “Losses will be big (if infected).”
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