April 1st, 2009:
Zhongpin Inc (HOGS)
Current Price: $9.16
www.zpfood.com
Zhongpin, Inc. (HOGS) engages in the processing and distribution of meat and food products in the People's Republic of China and internationally. HOGS provides fresh meat, frozen meat, and fruits and vegetables. Its principal products include pork products, such as chilled pork, frozen pork, pig by-products and various meats, and prepared meats; and fruits and vegetables, which comprise white asparagus, green asparagus, green cauliflowers, strawberries, sweet corn, yellow peach, and shepherd's purse.
HOGS supplies its products to fast food companies, processing factories, school cafeterias, factory canteens, army posts and national departments, and retail outlets through a sales team, a network of agents, Zhongpin specialty stores, food retailers, foodservice distributors, restaurant operators, and noncommercial foodservice establishments. It also exports its products to European Union, Hong Kong, Japan, South Korea, and the Russian Federation.
HOGS has a complete state-of-the-art vertically-integrated fresh meat and meat products supply chain from farming, slaughtering, cutting, processing and wholesaling to retailing. HOGS’s advanced logistic system includes integration and coordination of the transportation, warehouse management and inventory control systems as well as the integration of its marketing and manufacturing. All of the production lines are ISO 9001 certified, have passed HACCP (Hazard Analysis and Critical Control Point) under GMP (Good Manufacturing Practice) and SSOP (Sanitation Standard Operating Procedure in China).
China’s average meat consumption per inhabitant is expected to grow more than 40% in the next decade. China is among the world’s largest producers and consumers of animal proteins, of which pork is the largest type of meat consumed in China.
HOGS has experienced a compound annual revenue growth rate of 77% from 2003 through 2007. In 2007, revenues increased 103% to $291.4 million from $143.8 million for 2006. In 2008, HOGS's revenues grew 85% to a record $539.8 million. HOGS's gross profit increased 83% in 2008 to $68.6 million with a gross margin of 12.7%. Net income in 2008 grew 69% to a record $31.4 million, or $1.05 per fully-diluted share.
In January 2009, HOGS commenced production at its new chilled and frozen pork facility in Yongcheng City, which is on the main farm belt in eastern Henan Province. This new facility has a total annual production capacity of 80,000 metric tons, approximately 75% of which is dedicated to the production of chilled pork and 25% to the production of frozen pork. HOGS expects to quickly ramp up production at this facility to achieve an over 60% utilization rate by the second quarter of 2009. Also, HOGS recently completed the construction of its fruits and vegetables production line in Changge City, Henan Province, which is expected to commence operations this month. With the additional capacity from this new facility and further consolidation of existing capacity, HOGS's annual fruit and vegetable capacity will increase 14% to 30,000 metric tons from the current 26,280 metric tons.
HOGS new pork production facility in Tianjin will commence construction in April 2009. The new facility will add 100,000 metric tons of chilled and frozen pork products annually and 36,000 metric tons of prepared meat products.
HOGS has given full year 2009 guidance for revenues to be in the range of $780 million to $810 million with a gross margin of approximately 12%, net profit margin of at least 6% and fully-diluted earnings per share to be in the range of $1.50 to $1.63, assuming a fully-diluted share count of 30.7 million shares outstanding. This guidance excludes the impact of any future acquisitions.
We believe China's pork industry will continue to experience robust growth as the Chinese government is encouraging the modernization of the meat processing industry, improving the hygiene and quality standards, and supporting the transition from traditional wet markets to modern dry markets. The Chinese government's RMB 4 trillion economic stimulus package is expected to improve the overall health of the rural economy, which should open additional market opportunities for HOGS by fostering the development of value-added agricultural products, modernizing the agricultural industry and increasing the living standards of farmers.
NIA believes HOGS could be a very profitable long-term play for investors as we see a boom in China agriculture stocks due to the current worldwide economic environment.
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