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Higher Revenues and Income for Zhongpin

by 5m Editor
9 November 2011, at 10:04am

CHINA - Chinese meat and food processing giant Zhongpin has reported higher revenues and net income for the third quarter of the year.

Revenues increased by 65 per cent to $398.1 million in the third quarter 2011 from $241.1 million in the third quarter 2010.

Gross profit margin was 10.1 per cent in the third quarter 2011 compared to 11.3 per cent in the third quarter 2010.

Operating profit margin was 6.2 per cent in the third quarter 2011 compared to 6.6 per cent in the third quarter 2010.

Net profit margin was 4.6 per cent in the third quarter 2011 compared to 6.1 per cent in the third quarter 2010.

Net income increased 25 per cent to $18.3 million in the third quarter 2011 from $14.7 million in the third quarter 2010.

Basic earnings per share were $0.46 in the third quarter 2011, up 9.5 per cent from $0.42 in the third quarter 2010 on average basic shares outstanding that were 15 per cent higher in the third quarter 2011 than in the third quarter 2010.

Diluted earnings per share were $0.46 in the third quarter 2011, up 9.5 per cent from $0.42 in the third quarter 2010 on average diluted shares outstanding that were 13 per cent higher in the third quarter 2011 than in the third quarter 2010.

Xianfu Zhu, Chairman and Chief Executive Officer of Zhongpin Inc., said: "We continued to achieve good results in the third quarter 2011 in our operations, financial results, and geographic and capacity expansions.

"Revenues grew 65 per cent and net income was up 25 per cent from third quarter 2010 as we continued to invest aggressively to expand our operations and marketing to support higher revenues and net income for the future. Total tonnage sold of pork and other products was up 6.8 per cent, with average prices up 54.6 per cent, in third quarter 2011 over third quarter 2010.

"Given our strong performance in this third quarter, we have maintained our guidance for the year 2011.

"Our construction projects are on schedule, with three coming into operation in the fourth quarter. These projects will help support growth in our current markets and in our geographic market expansions in northern and eastern China, which we expect will result in higher sales and a larger market share of the national pork market. These three projects include two facilities for chilled and frozen pork and one facility for prepared pork products. The openings of these production facilities are timed to support the higher demand from our new markets during the Chinese New Year from the last week of January through first week of February 2012.

"We are continuing to increase consumer awareness and purchases of Zhongpin products through sustained marketing and promotion programs, especially in the geographic regions where we are expanding our operations to support the growing demand for pork and related products.

"Under our Stock Repurchase Program, Zhongpin has purchased a total of 1,822,438 shares of its common stock for $15.8 million (including sales commissions) through September 30, 2011. We believe that these purchases will create additional value for shareholders.

"We remain on plan to deliver a very good year in 2011."

Capacity and Market Expansions

Zhongpin began operating its new phase 2 plant in Tianjin in September 2011, as planned. Phase 2 has a production capacity of 36,000 metric tons for prepared pork products. The phase 1 of the same facility began operating in January 2010 with a production capacity of 100,000 metric tons for chilled and frozen pork.

Zhongpin is investing about $61.5 million to build a slaughtering and processing plant, low temperature prepared pork plant, logistics centre, and research and development centre in Nong'an county in Changchun, Jilin.

This plant will have a production capacity of about 70,000 metric tons for chilled pork, 25,000 metric tons for frozen pork, and 30,000 metric tons for prepared pork products.

Construction began in September 2010.

The company expects to begin operating the chilled and frozen pork facility in the fourth quarter of 2011 and the prepared pork products facility in the third quarter of 2012.

Zhongpin is investing about $63.0 million to build a production plant, warehouse, and distribution centre in Taizhou, Jiangsu. This plant will have a production capacity of about 80,000 metric tons for chilled and frozen pork, including easy-to-cook products, 20,000 metric tons for frozen pork, and 30,000 metric tons for prepared pork products.

Construction began in September 2010. The Company expects to begin operating the chilled and frozen pork facility in the fourth quarter of 2011 and the new facility for prepared pork products in the third quarter of 2012.

Zhongpin is investing about $58.5 million, excluding the cost of land use rights that it has already obtained, to build a new production, research and development, and training complex in Changge, Henan. When complete, this new facility will have a production capacity of about 100,000 metric tons for prepared pork products.

Adjacent to this new facility, the Company expects to develop a centre for research and development, training, and quality assurance and control.

Construction for the first phase with an annual production capacity of about 50,000 metric tons for prepared pork products began in the first quarter of 2011 and should be completed by the fourth quarter of 2011.

The second phase, with a production capacity of about 50,000 metric tons for prepared pork products, should be completed by the fourth quarter of 2012. Zhongpin plans to open the research and development and training centre by the fourth quarter of 2012.

Zhongpin has established a joint venture company, of which the Company owns 65 per cent, with Henan Xinda Animal Husbandry Company Limited in June 2011.

The joint venture company is financed by capital contributions, which have been made to date, and bank loans. The joint venture company is expected to provide 20,000 sire boars annually.

The facility for sire boar breeding is under construction and should start operations in the first quarter 2012.

Zhongpin is investing approximately $18.0 million in a cold chain logistics distribution centre in Anyang, Henan.

This distribution centre will have processing capacity, a temperature adjustable warehouse with a floor area of approximately 27,000 square meters, a distribution centre, and a quality control centre. The distribution centre will be used for third-party cold chain logistics service. We expect to put this distribution centre into operation in the third quarter of 2012.

Zhongpin plans to invest approximately $87.5 million in a chilled and frozen food processing and distribution centre in Kunshan, Jiangsu, which is near Shanghai. The whole centre will be built in three phases.

The first phase will include a processing centre, cold chain logistics centre, and business complex. Zhongpin expects to invest about $35.0 million on the first phase and expect to put it into operation in the fourth quarter of 2012.

As of September 30, 2011, Zhongpin had an annual capacity of 563,760 metric tons for chilled and frozen pork, 126,000 tons for prepared pork products, 20,000 tons for pork oil, and 30,000 tons for vegetables and fruits, for a combined total of 739,760 metric tons.

Outlook for Pork Demand and Prices in China

China's economy continues to expand and pork continues to be China's preferred protein. Zhongpin believes that the outlook for China's pork processing industry remains quite positive.

The company's purchasing cost of hogs and our selling price of pork both increased 60 per cent in the third quarter of 2011 compared with the same period last year, primarily because the supply of hogs was insufficient to satisfy demand and inflation increased the cost to raise hogs.

Zhongpin expects hog prices to remain stable in the fourth quarter 2011 and to increase moderately during the first quarter of 2012 due to the strong demand for pork during the Chinese New Year.

Guidance for 2011

Mr. Warren Wang, Zhongpin's Chief Financial Officer, said, "We are maintaining our guidance for the year 2011.

"The guidance for 2011 is based on several assumptions and judgments that include:

  • Continuation of China's policies designed to stimulate domestic consumption and economic growth.
  • Average pork prices in China are expected to remain relatively high for the rest of 2011, assuming steady economic growth and the forecast for the supply of and the cost to raise hogs.
  • A higher percentage of sales from our higher-margin chilled pork and prepared pork products in 2011 than in 2010, while continuing to increase the sales volume of processed pork products to optimise our product mix.
  • Average capacity utilization for the year of about 75 per cent for pork products.
  • Increasing distribution efficiencies and reduction in the duration of delivery times by expanding our cold chain logistics system, networks, and services.
  • Continuing to reinforce awareness, recognition, and selection of Zhongpin brand products nationally and in the major regional markets and to increase our market share and price premium.
  • And continuation of the Chinese government's support and subsidies for producers of agricultural products, such as Zhongpin. Total government subsidies for Zhongpin are expected to exceed $5 million in 2011.

"Given those assumptions, here are our guidance numbers.

"For the year 2011, we expect that Zhongpin's sales revenues should be within a range of $1.33 billion to $1.37 billion.

"Gross profit margin is expected to be within the range of 11.2 per cent to 11.8 per cent.

"Net profit margin is expected to be within the range of 5.2 per cent to 5.8 per cent.

"Diluted earnings per share for the year 2011 is currently expected to be within the range of $1.80 to $2.05 per share, assuming average diluted common shares outstanding of about 38.0 million shares in 2011.

"Zhongpin believes that China's meat and food industry will continue to consolidate in 2011 at a more rapid pace than in 2010, which may result in higher market shares for our main competitors. However, we believe that Zhongpin is equipped to meet the challenge of increasing competition and that our guidance for 2011 can be achieved."

Sales Revenues

Sales revenues increased $157.0 million or 65 per cent to $398.1 million in the third quarter 2011 from $241.1 million in the third quarter 2010, primarily due to higher pork prices, higher sales volume in pork products resulting from the continuing increase in the number of retail channels, geographic expansion, and higher sales to chain restaurants, food service providers, and wholesalers and distributors in China. The following table presents our sales by product division for the third quarters of 2011 and 2010.

Chilled pork revenues increased on higher tonnage at higher average prices. Revenues from chilled pork products increased 90 per cent in the third quarter 2011 from third quarter 2010. Chilled pork tonnage increased 19 per cent in the third quarter 2011 from the prior third quarter. The average price per metric ton for chilled pork increased 59 per cent in the third quarter 2011 from the third quarter 2010.

Frozen pork revenues increased on lower tonnage at higher average prices. Revenues from frozen pork products increased 38 per cent in the third quarter 2011 from the third quarter 2010. Frozen pork tonnage decreased 14 per cent in the third quarter 2011 from the third quarter 2010. The average price per metric ton for frozen pork increased 60 per cent in the third quarter 2011 from the third quarter 2010.

Prepared pork products revenues increased on higher tonnage at higher average prices. Revenues from prepared pork products increased 36 per cent in the third quarter 2011 from the third quarter 2010. Prepared pork tonnage increased 13 per cent in the third quarter 2011 from the third quarter 2010. The average price per metric ton for prepared pork products increased 20 per cent in the third quarter 2011 from the third quarter 2010.

Pork and pork products totaled 98.7 per cent of total revenues in the third quarter 2011 and 98.1 per cent in the third quarter 2010.

Vegetables and fruits revenues increased on lower tonnage at higher average prices. Vegetables and fruits revenues increased 11 per cent in the third quarter 2011 from the third quarter 2010. Tonnage of vegetables and fruits decreased 7 per cent in the third quarter 2011 from the third quarter 2010. Average price per metric ton for vegetables and fruits increased 20 per cent in the third quarter 2011 from the third quarter 2010. Vegetables and fruits were 1.3 per cent of total revenues in the third quarter 2011 and 1.9 per cent in the third quarter 2010.

Distribution Channels

The sales of meat and vegetable products are closely related to the particular regional markets in which our distribution channels are located. Therefore, the increase in metric tons sold for the third quarter of 2011 was partly attributable to our efforts to expand our distribution channels. The following table shows the changes in our distribution channels.

The expansion of Zhongpin's distribution channels and geographical coverage has been a significant factor in the increase in its sales volume. The following table shows revenues by distribution channel.

The increase in sales to different distribution channels was primarily due to the following factors:

  • the Company has built up its brand image and brand recognition through general advertising display promotions and sales campaigns;
  • the Company has increased the number of stores and other channels through which it sells its products;
  • Zhongpin believes that consumers are placing increased importance on food safety and are willing to pay higher prices for safe food products; and
  • pork prices began increasing in the middle of 2010 and peaked in the third quarter 2011.

Revenues from export sales increased $7.3 million or 192 per cent to $11.1 million in the third quarter 2011 from $3.8 million the third quarter 2010.