Check on China: Zhongpin, Inc.
Beef may be king in the United States, but in the People's Republic of China pork, stands at the top of the food chain. The Chinese eat more pork than any other type of meat (70% of meat consumption, by some accounts) and more pork, in fact, than any other country.
Rising demand and mounting production costs in 2007 helped fuel already-soaring pork prices, which pushed up the inflation rate to an 11-year high, left the domestic pork industry reeling and prompted the Ministry of Commerce to adopt a series of measures, including providing subsidies to pig breeders, in an effort to keep prices in check.
The pork crisis and China's problems with food safety issues have not put a damper on the growth and profits of one Chinese company in the pork business: Zhongpin, Inc. (Nasdaq: HOGS). Zhongpin is a meat and food processor whose product line consists of more than 200 meat products (largely pork, pig by-products and prepared meats) that are sold through wholesale and retail stores and supermarkets under the Zhongpin brand name. The company also processes fresh fruits and vegetables.
The pork and pork products business segment markets Zhongpin products in China to its branded stores, food retailers and distributors, restaurants, other food processors and noncommercial establishments, such as schools, hotels, hospitals and the Chinese military. Zhongpin’s fruit and vegetables segment has contracts with over 120 Chinese farms to grow more than 20 types of produce, including strawberries, sweet corn, broccoli, mushrooms, asparagus and lima beans. In addition to supplying the domestic market, it also exports to Europe, Japan, South Korea, Hong Kong and Russia.
In the third-quarter of 2007, reported in November, Zhongpin's revenues more than doubled year-over-year to a record $71.3 million, while gross profit increased 87.6% to $9.7 million and net income reached a record $5.9 million, a 122% leap. The company added 39 new retail outlets (they now operate over 2,900). And, it opened two new processing plants, bringing the total number to eight.
Last month, Zhongpin announced plans to add three additional production facilities this year with total annual capacity of 180,000 metric tons of pork, fruits and vegetables. Its annual production capacity for prepared meat products (like ham, sausage and meatballs) is expected to increase by 114% in 2008, due in part to a $13.2 million expansion at the company's main production facility in Henan Province. The new state-of-the-art production line will automate and streamline processing, increasing overall efficiency.
"Our prepared meat products have been widely accepted by consumers and wholesale clients in China. We intend to optimize our product mix and improve our gross margin by expanding our line of prepared meat products," Mr. Xianfu Zhu, Chairman, president and CEO of Zhongpin, said in a statement. "We also plan to implement a creative marketing campaign and deepen our distribution channels to increase market penetration. We believe the combination of new products and additional capacity should enhance margins for our prepared meat product lines in the future."
The sharp rise in food prices in China, particularly of the country's staple meat, is a politically-charged issue (the retail price of pork alone has nearly doubled in the past two years, aggravated by factors like high feed costs and a blue ear disease outbreak that killed as many as one million pigs last year). The Chinese cabinet on Monday, ahead of the early February Lunar New Year celebrations — a time when households stock up on groceries for holiday banquets — took further actions to combat inflation and curb price-fixing. The government increased fines for price manipulation ten-fold and ordered suppliers of meat, eggs and other food products to report all price increases in excess of 5%.
Despite pork shortages and mounting inflation concerns, Zhongpin appears comfortably situated for continued success. Brean Murray initiated coverage on Jan. 2 with a “buy” rating and a 12-month target price set to $18. The analysts said Zhongpin is poised to benefit from the "growing Chinese middle-class population that demands high-quality meat products" and noted that the company's strong balance sheet and access to capital markets should help it gain "significant market share through organic expansion and acquisitions in the highly fragmented meat market."
On Jan. 11, Zhongpin's top brass and government representatives from China rang the opening bell at the Nasdaq in celebration of the company's American debut. Analysts expect the company’s recent U.S. listing and long-term potential (earnings growth of 25% until 2010) to lend upside to its share price.
All things considered, Zhongpin appears well positioned to grab an increasing share of China's pork market, which is estimated to be worth $32 billion annually, according to the U.S. Department of Agriculture.
Zhongpin (HOGS) shares closed at $13.35 on Wednesday, with shares ranging between $6.75 and $15.10 over the past 52 weeks, Analysts’ median one-year target is $16.05.
