Zhongpin Inc., a leading meat and food processing company in the People's Republic of China, reported higher revenues and net income for the third quarter 2010 from the third quarter 2009.
Third Quarter 2010 and recent highlights:
- Net sales revenues increased 24 percent in the three months ended September 30, 2010 to $241.1 million from $194.9 million in the third quarter 2009.
- Net income increased 11 percent to $14.7 million in the third quarter 2010 from $13.2 million in the third quarter 2009.
- Basic and diluted earnings per common share declined $0.02 or 5 percent to $0.42 in the third quarter 2010 from $0.44 in the third quarter 2009, on higher net income but with higher weighted average number of shares outstanding in the third quarter 2010.
- Since the end of the second quarter of 2010 through early November, hog prices have increased more rapidly than pork prices. We estimate that pork prices will gradually increase so that the spread between pork prices and hog prices will return to their historical relationship.
- Prior guidance for the year 2010 has been maintained.
Mr. Xianfu Zhu, Chairman and Chief Executive Officer of Zhongpin Inc., said, "Our third quarter continued our good long-term trend of higher sales and net income. The consistency of our operating and financial performance comes from our established strategy, business model, and effective execution, all of which have remained in place."
"We have two primary goals. Our operating goal is to become a major consolidator of the Chinese meat industry and our financial goal is to increase value for our shareholders.
"Our strategy and actions to achieve that goal can be summarized in six points.
"First, we determine our new growth markets for pork based on several factors that include China's meat industry development policies, market size, potential growth, hog production, and the supporting infrastructure needed for success.
"Second, we develop all the critical success factors, including good relationships with hog farmers; our proven production, high-quality, and logistics systems; marketing and promotion to create brand recognition and market demand; our own stores; and sales contracts with retailers, wholesalers, local and chain restaurants, government organizations, and others.
"Third, in our current markets, we further optimize our product structure - working to increase the sales of our most profitable products and further expand our retail outlets and sales channels to gain more market share and higher sales.
"Fourth, we actively continue to apply advanced technology to our business.
"Fifth, we maximize the yield from our raw materials, maximize our energy efficiency, and minimize our waste.
"And sixth, given that our primary product is pork, we look for every logical extension of our primary business. For example, this year we started a new product line by opening our new premium pork oil facility.
"We also have been expanding our cold-chain logistics system into a new commercial service.
"Our strategy, business model, and actions have proven to be very effective, and we are delivering the expected good results. We expect that to continue in the future."
New market and capacity expansions
Zhongpin continued its expansion in the third quarter.
The improvement in our pre-cooling facility and expansion of our capacity in our Anyang plant was completed in August 2010 as planned. The plant's capacity for chilled and frozen pork has increased 35% to 85,000 metric tons from 63,000 metric tons.
We will be investing approximately $61.5 million to build a slaughtering and processing plant, low temperature prepared pork plant, logistics center, and research and development center in Nong'an county, Changchun, Jilin province of China. This facility will have a production capacity of approximately 70,000 metric tons for chilled pork, 25,000 metric tons for frozen pork, and 30,000 metric tons for prepared pork products. The construction work started in September 2010. We expect to put the new facility for chilled and frozen pork into operation in the fourth quarter of 2011 and the new facility for prepared pork products into operation in the third quarter of 2012.
We put the first phase of our new facility in Tianjin into operation in January 2010. That phase has a production capacity of approximately 100,000 metric tons for chilled and frozen pork. The construction of the second phase started in October 2010 and should be in operation in the second quarter 2011. The second phase will have a production capacity of approximately 36,000 metric tons for prepared pork products.
We will be investing about $63 million to build a production facility, warehouse, and distribution center in Taizhou, Jiangsu province. This facility will have a production capacity of about 100,000 metric tons for chilled and frozen pork, of which 80% will be for chilled pork (including easy-to-cook products) and 20% for frozen pork, plus 30,000 metric tons for prepared pork products. Construction started in October 2010. We expect to put the new facility for chilled and frozen pork into operation in the third quarter of 2011 and the new facility for prepared pork products into operation in the second quarter of 2012.
As of October 31, 2010, Zhongpin has already reached its expected year-end annual capacity of 563,760 metric tons for chilled and frozen pork, 90,000 metric tons for prepared pork products, 20,000 metric tons for premium pork oil, and 30,000 metric tons for vegetables and fruits, for a total production capacity of 703,760 metric tons. As Zhongpin adds new markets and new plants, it also extends its cold-chain logistics system for delivery.
Based on our established and successful capacity expansion model, we will duplicate our integrated operations in other regions, such as north China, east China, and northeast China, which we believe will leverage further our operating and financial success.
New joint venture
Zhongpin will establish a new joint venture with a nationally recognized professional sire boar breeder in Henan province. The registered capital of the new joint venture will be $2.2 million. Zhongpin will own 65% of the new joint venture, which will provide 5,000 premium sire boars annually. The new venture is expected to integrate the best resources of both companies and further enhance Zhongpin's role in the industry.
Zhongpin has been officially notified that it will be granted $3.7 million in government subsidies, with $3.0 million supporting its sire boar breeding program and the remaining $0.7 million for its cold chain logistics facility in Tianjin. The dates for the subsidy payments have not yet been determined.
Hog prices and pork prices
Since the end of the second quarter of 2010 through late October, hog prices have increased about 30%, primarily due to government purchases to stabilize hog prices and protect the interests of hog farmers in the first half of 2010, droughts and floods in several sections of China that increased agricultural prices, higher costs of raising hogs and hog supplies that have been better balanced with hog demand.
The result was several months of sustained increases in hog prices, which was a much different pricing pattern than the normal hog price movements characterized by short periods of price change followed by periods of price stability.
During the same months, pork prices in the market were not able to match the sustained rise in hog prices. As a result, Zhongpin's gross profit margin was lower than normal in the third quarter 2010 and lower than in the third quarter 2009.
In early November, the spread between pork prices and hog prices has started to return to a more normal relationship.
Due to the approaching seasonal and holiday peak demand for pork, Zhongpin believes hog prices will continue to increase by about 10 percent from September 30, 2010 through December 31, 2010 and will remain at a higher level during 2011. Pork prices are expected to rise to rebalance the traditional relationship between hog prices and pork prices and more normal gross profit margins are expected.
Outlook for pork demand in China
China's economy continues to expand, with pork at the top of the food buying list as China's preferred protein. The industry outlook for pork processing remains positive. Zhongpin's brand awareness and higher market share in the pork category continues to strengthen, and we are continuing to broaden into additional geographic markets and new products lines based on our research and development. The expansion of our processing plants and distribution networks is giving us the ability to satisfy the increasing market demand for our high quality products.
Government and consumers take the food safety as one of their top priorities. With the government support, the consolidation of the industry is accelerating. We believe the government targets stated in Hog Slaughtering Industry Development Guidelines for 2010-2015 can be achieved in the next five years.
Because Zhongpin has a strong brand presence in the meat industry, high quality facilities and products, outstanding quality assurance, and rapid-responding logistics systems, the company believes it has the opportunity to expand its market share in China as the pork industry consolidates in the next several years.
Mr. Zhu continued, "Through 2015, we expect to expand our production capacity within the government's selected markets and further increase our market share across China, while continuing to expand our leadership in the meat industry.
"Given our good performance during the first nine months this year, we believe the outlook for the remainder of 2010 continues to be good, so we are reaffirming our previous performance guidance."