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Tianli Broadens its Horizons

by 5m Editor
20 August 2010, at 12:00am

A profile of Tianli Agritech, a leading producer of breeding pigs in central China, which has recently commenced trading on the Nasdaq Global Market.


Tianli Agritech is one of the largest producers of breeder hogs in China's Hubei Province. With a projected annual capacity of 130,000 hogs, the company operates nine hog farms in Wuhan, the biggest city in central China with a population of nine million people. Hubei Province, with 60 million residents, is famous for its breeder hogs due to its central geographic location and moderate weather. Wuhan is a key hub for China business and logistics.

The company operates in a highly fragmented market with hundreds of small operators ready to be consolidated. With support from the government, the company has the growing strength to make successful economic and strategic acquisitions that will drive growth and profitability.

Revenue is primarily generated through the sale of breeder hogs to other hog farmers. The company also sells hogs that do not meet breeder standards to slaughter houses for meat production. The company receives a nominal amount of revenue from the sale of hog waste products. Its three largest customers account for just over one-third of total revenue.

The company's proprietary superior feed technology has reduced cost and improved the quality of the hogs. The company recently acquired a 3.4 million square foot parcel of land that will support strong organic growth. The company has a positive reputation for low pollution operations and low-additive pork products.

There are over 40 local pig breeds in China. Tianli's primary varieties are Yorkshire, which originated in England, the Landrace, which originated in Denmark and the Duroc, which originated in the United States.

The company employs sophisticated nutrient feeding and disease control technology. To reduce the effects of antibiotics and drugs used by other hog farmers, the company has developed its own premix feed, which improves the health of the hogs and has greatly reduced feed cost.

Margins are maximised by continuously improving operations using up-to-date technology and proactive management strategies. The company has 230 employees. Tianli has received a number of national awards related to lean-meat pig breeding and large-scale farming.


The Market

China is the world's biggest hog producer and pork consumer. The country consumes more than 600 million pigs a year. Pork accounts for approximately 65 per cent of total Chinese meat consumption – well ahead of poultry, beef, sheep and goat.

China dominates the global pork market with estimated 2009 sales of 47 million metric tons. Production is expected to reach 68 million metric tons by 2015, a gain of 45 per cent. Increasing urbanisation and rapid growth of the Chinese middle class are major drivers of the growing demand for pork.

Hog production in the People's Republic of China is currently dominated by backyard farms that sell five to 10 hogs a year and small farms that sell fewer than 100 hogs annually.

These farms account for some 75 per cent of China's total hog production. Large farms selling 100 to 500 hogs a year account for 21 per cent, those selling 500 to 10,000 account for three per cent and the remaining two per cent is from farms selling between 10,000 to 50,000 hogs a year. Tianli is one of a relative handful of 'super' hog farms with 2009 production over 50,000 hogs a year and a production capacity of 110,000 hogs a year.

Underlying the growth of China's pork market is the growth of the Chinese economy itself, which has averaged 10 per cent over the past 25 years. China's population of 1.35 billion is growing at a rate of 0.6 per cent a year and represents 20 per cent of the world's population.

The Chinese government is actively encouraging the development of large hog breeding companies in order to increase national production. Tianli has benefited from these efforts including approximately US$455,000 in government grants and subsidies and income tax holidays in 2008 and 2009.

The Initial Public Offering

The initial public offering (IPO) raised gross proceeds of $12 million through the sale of two million shares with the price of the offering based on a P/E of approximately 6.5 times projected 2010 earnings. Prior to the IPO, there were 8,125,000 shares outstanding. Proceeds will be used for the construction and/or acquisition of hog farms to increase capacity by an aggregate amount of 40,000 hogs. Proceeds also will be used to purchase or import purebred hogs for breeding stock, the establishment of retail shops in Wuhan City and working capital for general corporate purposes.


Outlook

The Company's strategic goal is to become a vertically integrated producer of premium pork products. It plans to operate a complete operation starting with feed mills all the way through purebred hog farms, crossbred hog farms, meat hog farms, slaughter houses, pork processing plants and retail chains.

The Chinese government maintains strong price support regulations favourable to hog farmers. Because of the importance of pork in the Chinese diet, the government is sensitive to adverse political and social issues should there be any noticeable decline in the availability of pork. The government subsidises large commercial farms and provides them with favourable tax treatment.

Goldman Sachs, Deutsche Bank, Hormel, Smithfield Foods, Tyson and DSM have all made investments in Chinese pork companies.

The company has its own pork brand Hanshi and has applied for Green Food Certification. It is currently in with major supermarket chains to carry the Hanshi brand. In 2010, the company expects to market pre-packaged ground pork, shredded pork, pork chops and pork slices with branding based on green, no-antibiotics labels.

Tianli is also considering expanding into the food service segment. Other planned growth strategies include opening retail locations, acquisitions and the feed business with sale of the company's proprietary premix feed.

Company revenues increased 44 per cent in the first fiscal quarter ended 31 March 2010 to $4.46 million. The number of breeder hogs sold in the quarter was up 137 per cent at a price 1.7 per cent higher than 2009. Revenue from meat hogs sales was up 22 per cent. Gross margins in the quarter increased to 42 per cent from 37 per cent a year earlier. Net income for the quarter was $1.67 million, up 39 per cent from $1.21 million in the first quarter of 2009. The company continued to generate positive cash flow.

Management expects continued organic growth in the sale of breeder hogs with positive trends in sales volumes. Revenue growth from the sale of meat hogs is also expected to continue to rise although at a slower rate than the rate for breeder hogs.

Government pricing support and subsidies for the development of large hog farms are also expected to continue.

Management Team

Ms Hanying Li, Founder and CEO. Highly honored entrepreneur, Law degree from Hubei Finance & Economics University.

Mr Bihong Zhang, CFO, CPA, CPT, former accounting firm partner. Completed numerous Chinese IPOs.

Nine Member R&D team composed of experienced hog breeders, agriculture professors and veterinary medicine experts.

Further Reading

- Go to our news item on this story by clicking here.


August 2010