Shares of Zhongpin (HOGS: Charts, News, Offers), a Chinese meat and food processing company with a small market cap of 703 million, have surged nearly 100% in the past four months on very little news or coverage. Is this simply another small-cap speculative Chinese play overheating, or is there some sturdy fundamental scaffolding on which this stock is perched? At the end of last year, Zhongpin’s twelve plants produced 358 lines of meat products, primarily focused on pork, and 34 kinds of vegetable and fruit products. Its sales channels are networked through nation-wide wholesale and retail, which includes regular supermarkets and company showcase stores.
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Zhongpin’s eight meat processing plants produce an average of 541,760 metric tons of pork products, and its three prepared pork product plants produce 90,000 metric tons annually. Its sole vegetable and fruit plant has a yearly capacity of 30,000 metric tons. From these numbers it can be easily ascertained that pork is the company’s backbone. Its customers include 3,205 retail outlets, 27 international and domestic fast food stores within the country, 49 processing factories, 1,686 schools, as well as army outposts, factories and government departments. Zhongpin’s meat products are also exported to South Korea, Japan, Russia, Eastern Europe and the European Union. Zhongpin’s pork products use every bit of the animals, as internal organs, trotters, ears and heads are all commonly used in Chinese cuisine and have a readily local customer base. More prime cuts, such as loins, shoulders, ribs or legs, are used in its chilled and frozen products, which include ham, bacon and sausage. These products are sold to domestic customers within a 500 km delivery radius of its processing facilities, which are located in Henan, Jilin and Sichuan provinces. In addition, Zhongpin has contracts with over 100 primarily small farms (10-50 hectares) in Henan to produce vegetables and fruit, which are selected in accordance to proximity to its primary plants, which include asparagus, sweet corn, broccoli, mushrooms, lima beans, strawberries and capsicum, and are flash frozen at their plants for export.
Zhongpin has asserted that its focus is on the changing tastes of the newly emerging middle class, with a focus on more expensive meat-based breakfasts, as traditional Chinese breakfasts tend to have less meat and are more flour-based. For the Chinese population, pork demand peaks annually in September and October, for the Mid-Autumn Festival and National Day respectively, when outdoor barbecues and family gatherings are common and cause a huge drop in the country’s supply. The company’s net margins have decreased slightly to 5.57%, down from 6.28% the previous year. However, pork prices continue to rise due to the limited pork supply and increasing demand. In August 2010, the pig stock across the PRC numbered 44 million heads, a year-on-year decrease of 3.57%, and the brood sow, female pigs used for breeding, stock numbered 4.5 million, a year-on-year decrease of 4.9%. The Russian grain ban, in effect from now until the end of the year, has caused corn and wheat prices to soar, which has increased the price of pig feed, which decreases margins further for Zhongpin.
Zhongpin’s primary competitors include Henan Shuanghui, Yurun Food Group and People’s Food Holdings. The stock price has bounced in wide range between $10-$20 and currently trades with a trailing P/E of 13.4 and a P/B ratio of 2.05. These technically sound numbers are an increasing rarity in the Chinese stock market, in which rampant speculation and outrageous claims often result in highly inflated stock prices with unsustainable P/E ratios and unachievable cash flow expectations. With over 15% insider ownership and plenty of room to run, given its small cap status in the world’s second largest economy, Zhongpin is a safe Chinese bet in a jungle of overbought companies.
Other News About Zhongpin
Hedge funds are taking an interest in Zhongpin
Global Hunter Securities Reiterates a ‘Buy’ on Zhongpin ; Increasing Nationwide Footprint and Raising Capacity – (HOGS: Charts, News, Offers)
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Leo Sun is long-time market follower and finance writer. He regularly contributes to the Stock of the Day analysis.
