Zhongpin has reported higher revenues, net income, and diluted earnings per share for the second quarter 2009 and reaffirmed its prior guidance for the full year 2009.
Xianfu Zhu, Chairman and Chief Executive Officer of Zhongpin Inc., said, “The second quarter was unusual for us, primarily due to the temporary fear consumers had about getting the A(H1N1) flu from pork products, which the world’s health agencies have confirmed is not possible.”
In June 2009, the A(H1N1) flu was reported in China, which adversely affected the country’s pork industry, as it has in other countries throughout the world. Pork sales significantly declined in China due to consumers’ fear of contracting the disease through pork consumption. The Chinese government took steps to ease the fear by educating consumers that eating pork will not cause the flu and by renaming the virus as the “A(H1N1) flu” in an effort to resume the consumption of pork products and to protect the hog breeding and pork industries. With these efforts, the consumption of pork in China recovered in mid-May, approximately two weeks after the initial reports of the A(H1N1) flu in North America.
Pricing and tonnage
Hog and pork prices decreased sequentially about 20% during the second quarter from the first quarter 2009, primarily because the supply of hogs was higher than the market demand. The imbalance in supply and demand was due primarily to three factors (1) an oversupply of hogs, (2) to a lesser extent, the seasonal decline in market demand for pork that is typically associated with warmer weather, and (3) the global outbreak of the A(H1N1) flu virus in April 2009, which temporarily scared consumers and adversely affected the hog and pork industries.
Hog and pork prices began to increase in June and have continued at higher levels in July and early August 2009.
Pork prices were also affected in June by the Chinese government, which bought frozen pork to add to the country’s national pork reserves. The government increased the national pork reserves to stabilise the price and protect the interests of hog breeding farmers. The government’s purchasing policy is based on the relationship of the price of hogs to the price of corn (the principal hog feed).
The government authorised certain qualified enterprises, including Zhongpin, to acquire hogs and to slaughter, process, and stock them as frozen pork. That purchasing has tended to support higher hog and pork prices, so that the market price of hogs was above the breakeven point for farmers. Since the end of the second quarter of 2009, hog and pork prices have increased about 10%.
Steady growth expected
For the second half of 2009, we continue to expect steady growth in the sales of our pork and pork products. The recent decline in the price of live hogs has caused a number of hog breeders to terminate their breeding operations, which we expect will reduce the oversupply of live hogs during the second half of 2009. We anticipate a change in the supply of live hogs, which we expect will cause prices to stabilize and to begin increasing in the second half of 2009.
“With China’s live hog prices and pork prices beginning to recover during the latter part of the second quarter, we expect that the upward trend is likely to continue in the cooler second half of 2009, when pork consumption typically increases. Further supporting that outlook is China’s economy, which is expected to grow at higher rates than in the first half of 2009.
“Based on our operating results for the first half of 2009, we remain confident in our ability to reach our forecast results for the full year 2009 and are maintaining our prior guidance.”