Zhongpin Chairman Calls 2011 ‘Exceptional Year’

3 May 2012, at 8:23am

CHINA - In his annual letter to shareholders, the Chairman and CEO of Zhongpin described 2011 as an exceptional year for the company, with sales revenues up 54 per cent to US$1.45 billion. Investments added more than 200,000 metric tons of annual capacity for pork and pork products.

In his annual letter to shareholders, Xianfu Zhu, Chairman and Chief Executive Officer of Zhongpin Inc., wrote: “I am pleased that the Zhongpin team achieved an outstanding year in 2011. Sales revenues grew by 54 per cent to US$1.45 billion, with our chilled and prepared pork products registering increases in both average prices and tonnage, while frozen pork sales increased in price on slightly lower volume.

“We are committed to meeting the needs of contemporary lifestyles with China’s favourite meat product, pork, by delivering flavour, convenience, and variety. Our philosophy and drive have helped us to stand out in a changing marketplace, where China’s traditional wet markets and butchers are being replaced by cold-chain logistics and supermarket distribution.’

“We had an excellent year in sales, exceeding our expectations. Net income increased by 10 per cent to $64.2 million, with a gross profit margin of 10.4 per cent and a net profit margin of 4.4 per cent. Net income and profit margins were a little less than we had provided in our guidance for the year, due to market and competitive pressures in hog and pork prices.

“We ended the year with cash of $135.8 million, an increase of $51.7 million over 2010, and a moderate debt level with a debt ratio of 34.9 per cent net debt to total capital, subtracting cash and cash equivalents. Interest coverage for the year was 4.2 times net interest expense. Our moderate debt leverage and reasonable coverage give us adequate financial flexibility should we need it.

“We are not just one of China’s top pork producers – we have a unique branded retail concept that includes our own showcase stores and branded stores, as well as dedicated Zhongpin counters in supermarkets. At the end of last year, our distribution network covered 20 provinces and 3,428 retail outlets. The bigger our national footprint becomes, the more we are investing to bring Chinese consumers a range of choices to meet their amazing diversity of tastes. Last year we launched 79 new pork products, bringing our current total products to over 410, and today we have about 90 new products under development.

“China’s pork market is the largest in the world, accounting for nearly 50 per cent of global production and consumption in 2011, or 49.5 million metric tons. China’s hog sector is 4.6 times the size of the United States. To give you an idea of the scope and scale of changes underway in the industry, the Chinese government aims to reduce the number of hog slaughtering facilities from over 20,000 to around 3,000 by 2015 to encourage large producers with hygienic facilities. Modern hog operations currently represent 30 per cent of production.

“To benefit from the growth opportunities in the world's largest pork market that is in the throes of modernization and industry consolidation, we will need to continue investing for the long term. As a result, we have put substantial resources into two areas of strategic importance – processing capacity and cold-chain logistics,“ wrote Mr Xianfu Zhu.

On capacity expansion in strategic markets, he continued: “In 2011, we invested $169.1 million on construction, purchase of land use rights, and property and equipment, adding 201,000 metric tons of annual capacity for pork and pork products. We brought our total capacity at year end 2011 to 728,760 tons of chilled and frozen pork, and 126,000 tons of prepared pork. New production facilities came on line during the year for pork products, at Phase 2 of our Tianjin facility, and for chilled pork and frozen pork in Changchun, Jilin province and Taizhou, Jiangsu province. These capacity additions give us improved ability to meet demand in key urban markets in central China, northeast China, and eastern China, as well as help us to meet our goal of achieving a large national market share.

“In 2012, we will be shifting emphasis in capital expenditures, with a reduced rate of capacity expansion and greater focus on making use of our existing facilities through business innovation. Nonetheless, we will add 50,000 tons of capacity at a new production, research, and training complex in Changge, Henan province. We also will begin work on a complex in Tangshan, Hebei province, for pork and logistics functions that will add 102,000 metric tons in capacity for chilled, frozen, and prepared pork products by 2013.“

The chairman wrote about cold–chain logistics and business innovation: “A key element of our strategy is to expand our cold–chain logistics capacity. We will build new cold warehouses in our Tianjin location and new cold–chain logistics centres in northeast China and central China, which are critical connecting points in our distribution network. We expect our logistics operation to become a separate business, providing both third-party logistics storage and distribution services and the cold–chain logistics system that is integrated into our own operations. A new cold–chain logistics distribution center in Anyang, Henan province, will service third–party clients. We are also building a cold–chain logistics centre at our new chilled and frozen food processing and distribution centre in Kunshan, Jiangsu province, near Shanghai.

“We are also seeking ways to maximise the use of our existing resources through new product and process developments and innovations. We will be investing about $10.5 million in a by-product processing plant in Changge to produce sausage casings and the raw material used to make heparin sodium, in one example of how we are working to develop higher utilization and profits from hogs, our raw material. We also are moving upstream with a new joint venture to improve the quality of hog breeding by supplying about 20,000 premium sire boars annually to help create the high-quality hogs for pork products.

“The goal of our strategy and actions is simple – to maximise the long-term returns to shareholders and boost capacity utilisation. In 2012, we expect our capacity utilisation will be about 75 per cent for our combined pork and pork products operations."

Looking ahead, Mr Xianfu Zhu added, “The year 2011 was one of rapid growth for us, leading to some pressure on margins. In 2012, our focus is on sustainability, deepening of our business model, and preparing to thrive in the aggressive industry consolidation that is accelerating and is expected to be completed in about five years.

“Our market growth, our integrated application of science, industrial processes, and information technology to our business, and our steadfast aggressiveness and determination have afforded us opportunities, but we must continue to advance and grow rapidly within the massive pork industry consolidation that is happening in China. Looking ahead, and with the help of all our stakeholders, from customers to shareholders, employees, and suppliers, I believe Zhongpin will continue to do well for the benefit of all its stakeholders,“ he concluded.