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Chinese Pork Industry Consolidation Boosts Zhongpin's Results

18 March 2013

CHINA - Meat and food processing company, Zhongpin, has reported higher revenues and lower net income for its 2012 financial year.

Zhongpin Inc., a leading meat and food processing company in the People's Republic of China, has reported higher sales revenues and lower net income for the year ended 31 December 2012 than the previous year.

Among the 2012 highlights are an increase in sales revenues of 13 per cent to US$1,639.6 million in 2012 from $1,456.2 million in 2011 primarily due to higher sales volume for pork products sold at lower average selling prices.

Net income decreased 31 per cent to $44.1 million in 2012 from $64.2 million in 2011 primarily due to a lower gross profit margin, the cost of more employees to support expansion, higher salaries, higher promotional activities, rising labor and utility costs, and higher interest expenses. The higher expenses were mainly due to the higher volume of business and intense competitive pressure in the pork market due to the ongoing industry consolidation.

Basic earnings per share (based on net income attributable to Zhongpin shareholders) decreased 29 per cent to $1.18 in 2012 from $1.66 in 2011. Weighted average basic shares outstanding decreased three per cent to 37,273,652 shares in 2012 from 38,505,027 shares in 2011. Diluted earnings per share (based on net income attributable to Zhongpin shareholders) decreased 29 per cent to $1.18 in 2012 from $1.66 in 2011. Weighted average diluted shares outstanding decreased 3 per cent to 37,328,792 shares in 2012 from 38,539,880 shares in 2011. As of 31 December 2012, Zhongpin had 40,376,182 shares of common stock issued, of which 37,209,344 were outstanding and 3,166,838 were held as treasury stock.

Chairman/CEO comments

Mr Xianfu Zhu, Chairman and Chief Executive Officer of Zhongpin, said: "In 2012, our sales revenues increased 13 per cent on higher tonnage at lower average prices, compared with 2011, primarily due to the intense competitive market pressure generated mainly by the continuing pork industry consolidation in China.

"Our costs continued to increase, mainly in support of our current operations and planned expansions. As a result, our gross profit margin declined to 9.4 per cent in 2012 from 10.7 per cent in 2011 and our net profit margin declined to 2.7 per cent in 2012 from 4.4 per cent in 2011.

"We are sustaining our prudent expansions in geographic markets and operations to gain market share for our long-term success in the face of the ongoing industry consolidation. We are managing our costs to maintain as much gross and net profit margin as possible and are aggressively working to further increase our asset utilization, effectiveness and efficiency.

"In 2013, we expect that the demand for pork in China should remain strong and that Zhongpin's revenues from pork and pork products are likely to increase modestly based on higher tonnage sold at lower average prices, while live hog prices will remain at current levels, compared with 2012. We anticipate that our net profit margin in 2013 will decrease due to increased competition in the industry, the expected increase in labor cost and overheads, and the expected increase in quality assurance and control costs in response to increased importance on food safety placed by the government and consumers," said Mr Zhu.

Capacity and market expansions in 2012

Zhongpin is investing approximately $58.5 million to build a new production, research and development, and training complex in Changge, Henan province, excluding the cost of land use rights that it has already obtained. When completed, this new facility is expected to have an annual production capacity of about 100,000 metric tons for prepared pork products. Adjacent to this new production facility, Zhongpin plans to develop a centre for research and development, training, and quality assurance and control. Construction for the first phase with a production capacity of approximately 50,000 metric tons for prepared pork products started in the second quarter of 2011 and was completed in the second quarter of 2012. Trial production started in July 2012, and the plant has been in regular production since the end of the third quarter of 2012.

Zhongpin established a joint venture company in June 2011, of which the Company owns 65 per cent, with Henan Xinda Animal Husbandry Company Limited. The joint venture company is financed by capital contributions and bank loans. All capital contributions to the joint venture company have been made. The joint venture company is expected to provide 20,000 sire boars annually. Upon the completion of the building of infrastructures for sire boar breeding in the third quarter of 2012, we leased the facility to a third party for annual rental in the amount of RMB5.0 million.

Zhongpin is investing approximately $18.0 million in a cold-chain logistics distribution centre in Anyang, Henan province. This distribution centre will have a temperature-adjustable warehouse with a floor area of approximately 27,000 square metres, processing capacity, a distribution centre and a quality control centre. The distribution centre will be used for third-party cold-chain logistics service. Zhongpin expects to put this distribution centre into operation in the third quarter of 2013.

Zhongpin is investing approximately $87.5 million in a chilled and frozen food processing and distribution centre in Kunshan, Jiangsu province, which is near Shanghai. The centre will be built in three phases. The first phase will include a processing centre, cold-chain logistics centre and business complex. Zhongpin invested about $35.0 million on the first phase that was put into operation in February 2013.

Zhongpin put a new by-products production facility in Changge, Henan province, into operation in November 2012, eight months after the construction began in March 2012. The new plant has an annual production capacity for 100 million metres of sausage casings and 300 billion units of raw material to make heparin sodium. Cost was approximately $10.5 million.

Zhongpin will be investing approximately $47.6 million to build a cold-chain logistics distribution centre in Tangshan, Hebei province. This distribution centre will have a 27,000 square meter temperature-adjustable warehouse, processing capacity, distribution centre, and quality control centre. This distribution centre will be used for third-party cold-chain logistics service and is expected to be in operation in the fourth quarter of 2013.

In November 2012, Zhongpin decided to stop production in its Deyang Zhongpin facility in Sichuan province because its western location was inconsistent with Zhongpin's strategy to focus on Central China, North China, East China, and Northeast China markets. As a result, Zhongpin's annual capacity for chilled and frozen pork was reduced by 45,000 metric tons in 2012.

As of 1 March 2013, Zhongpin had an annual capacity of 683,760 metric tons for chilled and frozen pork, 176,000 tons for prepared pork products, 20,000 tons for pork oil, and 30,000 tons for vegetables and fruits, for a combined total of 909,760 metric tons. In addition, its annual capacity for sausage casings was 100 million metres and for the raw material to make heparin sodium was 300 billion units.

Sales revenues in 2012

Total sales revenues increased $183.4 million or 13 per cent to $1,639.6 million in 2012 from $1,456.2 million in 2011 primarily due to higher sales volume for pork and pork products sold at lower average selling prices.

The higher revenues resulted mainly from continued increases in the number of retail outlets, geographic expansion of its distribution network and processing facilities, and higher sales to food service distributors in China, which were partially offset by the lower average pork price resulting from market fluctuations and industry competition.

Chilled pork revenues increased on higher tonnage at lower average prices per metric ton. Chilled pork revenues increased 14 per cent in 2012 from 2011. Chilled pork tonnage increased 27 per cent and the average price per metric ton decreased 10 per cent in 2012 from 2011. The higher revenues from chilled pork were mainly due to higher tonnage sold as a result of higher capacity, increased sales to existing customers, and increased volume of sales from new geographic markets, expanded points of sales, and added new customers, partly offset by the lower average selling price that resulted from fluctuations in market prices for chilled pork or chilled pork-related products in a more competitive market.

Frozen pork revenues decreased on higher tonnage at lower average prices. Frozen pork revenues decreased four per cent in 2012 from 2011. Frozen pork tonnage increased two per cent and the average price per metric ton decreased seven per cent in 2012 from 2011. The lower average selling price of frozen pork products was the result of fluctuations in market prices for frozen pork or frozen pork-related products in a more competitive market, which was partly offset by higher tonnage sold.

Prepared pork revenues increased on higher tonnage at higher average prices. Revenues from prepared pork products increased 35 per cent in 2012 from 2011. Prepared pork tonnage increased 22 per cent and the average price per metric ton increased 11 per cent in 2012 from 2011. Prepared pork products are becoming more important to the company's business since customers are increasingly demanding them for their flavour and convenience and are willing to pay higher average prices for these products. Zhongpin plans to gradually increase sales from prepared pork products by increasing brand recognition and expanding capacity for these products.

Pork products totalled 99.1 per cent of total sales revenues in 2012 and 98.9 per cent in 2011.

Further Reading

You can view the full report by clicking here.

ThePigSite News Desk



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