Lean Hogs refers to pork (hog) contracts from which the majority of pork meat consumed in the United States comes. This is in contrast to pork bellies, from which bacon is made.
Trends, Forces & Business Financials Of Lean Hogs In China, The Main Pig Producer In The World
Zhongpin, Inc. (Nasdaq: HOGS) emerged during the early stages of the People’s Republic of China reformation of the agricultural industry and since then, has kept pace with the advancement of the market and the economy. Zhongpin plans to embark on an expansion to become a nationally recognized, high quality brand for meats and food products in China. Zhongpin is most well known for their high quality pork products, which is the preferred meat in China.
Zhongpin focuses on the higher end of the market and provides quality meats and vegetables to Chinese consumers using advanced refrigeration techniques to keep the meat fresh. Other companies sell their products in “wet markets,” and this practice has been responsible for many food poisoning outbreaks due to the unsanitary conditions in which the meat is stored.
Zhongpin is a relatively small company – around $350 million in market capitalization – and is growing rapidly. As China’s middle class expands rapidly, Zhongpin is seeing demand for high quality – and safe – pork and vegetable products skyrocket. To meet this increased
demand, Zhongpin completed new production facilities in the third quarter of 2007 capable of processing 116,000 metric tons of chilled
and refrigerated pork, bringing their total capacity to 359,000 metric tons. This was a 172% increase in production capacity from the third quarter, 2006. In the third quarter of 2008, Zhongpin planned to add another 150,000 metric tons of capacity at two new plants in Henan Province.
In their Q3 2007 conference call, Zhongpin stated that hog supply increased from Q2 2007 levels, thanks to government intervention and
smaller players exiting the hog processing business. As weaker players exit the market and consolidation occurs, Zhongpin will be able to leverage its growing capacity and maximize output, resulting in fantastic gains in revenue. Zhongpin saw significant revenue growth in Q3 2007, despite tight supply.
The company is also focusing on expanding their distribution network. In the third quarter of 2007, Zhongpin added 39 new retail outlets, or 1.5% increase over the previous 2863 retail outlets, and plans on continuing to add more both in the remainder of 2007 and throughout 2008.
Zhongpin’s customer list includes Wal-Mart, Metro, KFC, Carrefour, and McDonalds. They also export their products to the EU, Eastern Europe, Russia, Hong Kong, Japan, and South Korea.
Along with increasing production capacity, Zhongpin is also increasing revenues by a staggering amount. For the first 9 months of the 2007 year, Zhongpin increased revenue by nearly 100% to $190.8 million.
Zhongpin ended the third quarter of 2007 with nearly $37 million in cash and almost $22 million in accounts receivable. In addition, they maintain $16 million in inventory that will be shipped out to retail locations. On the liabilities side, Zhongpin has $88 million in current liabilities, including short-term loans payable and other accounts payable.
Total assets stand at $177 million for Q3, 2007, compared to $102 million for the same period in 2006, representing a 73.5% increase in
assets. Total liabilities were up almost the same amount, 83.6%, to $90 million in the third quarter of 2007 as compared to $49 million in the third quarter of 2006. This increase, while large, fuels the marketing and sales engines that have propelled revenues.
In late 2007, Zhongpin was granted $1.2 million from the Finance Department of China’s Central Government to promote pollution free
fruits and vegetables, another of Zhongpin’s product lines. This boost in capital will help build the pollution free fruits and vegetables plant in China and is scheduled to come on-line in late 2008. In the United States, we take our fruits and vegetables for granted. In China, pollution runs rampant and Zhongpin is leading the charge to change that, with the help of the government.
In 2007, an outbreak of deadly blue-ear disease hit Chinese hog farms, forcing many farmers to cull the infected hogs. This, combined with higher feed-grain prices, led many farmers to give up on raising hogs. Pork supplies dropped nearly 10%, driving prices up nearly 55%. Zhongpin, along with all other pork processing operations, felt pressure on their bottom line, primarily due to the increased difficulty of maximizing processing facility output. Many of the smaller operations are having trouble staying profitable, and it is likely that consolidation within the industry will occur.
This crisis has not gone unnoticed by the Chinese government. They have made hog supply a top priority and have doubled incentives for hog farmers in an effort to stimulate supplies. In the third quarter of 2007, Zhongpin saw an increase in hog supplies and they believe the government stimulation was the primary driver. It is important to note that while hog supplies may experience some turbulence in the short term, the Chinese government has large warehouses of pork – similar to America’s strategic oil reserve – that they can distribute in exceptional times, and they continue to stimulate the raising of hogs to support the Chinese pork industry.