The China Perspective caught up with Zhongpin Inc (HOGS.NASDAQ) executive vice president Ben Baoke in July to ask about the NASDAQ-listed company’s growth prospects. The country’s fourth largest meat processor has recently raised its income guidance for 2008 so we felt it was a good time to check back in.
What are the major factors contributing to your positive outlook and do you see these trends continuing into 2009?
The Chinese government’s supportive policies on hog farming really had an impact during the third quarter of 2008. Driven by an increasing hog supply, hog and pork prices began to decline in the third quarter, reducing the burden of rising costs for meat processors. As a result, we experienced robust growth in our sales volume due to lower pork prices and additional capacity from our Luoyang plant which came into production at the beginning of the third quarter. Traditionally the first and fourth quarters are peak seasons in our industry and we expect the additional capacity from the Luoyang plant to further contribute to our revenue growth. We are confident in our ability to achieve our full year 2008 guidance.
Our growth in 2009 will come mostly from production volume increase and product mix improvement. We expect a steadily growing demand from Chinese consumers for pork, especially the high-quality and healthy pork offered in the dry market. To meet this demand, we plan to expand our production capacity and improve our utilization rate. At the same time, we will focus on the development of high value-added products such as prepared meat products and further-processed pig by-products
What is your market share of the chilled and frozen pork markets and how much more room for expansion do you see?
By sales revenue in 2007, Zhongpin is the 4th biggest pork processor in China, but our market share in China is less than 1%. Meanwhile, we maintain very high market share in regional target markets we have selected. For example in Henan province, after our Shangqiu plant comes on-line by the end of this year, the total slaughtering capacity from our five plants in Henan will account for 10% of the total slaughtering capacity in this province, making Zhongpin the biggest pork processor in Henan. We also enjoy a leading market position in key cities such as Wuhan and Tianjin.
China’s pork processing industry is still highly fragmented. The nation’s top 3 pork processors altogether account for less than 5% of the total market share. This industry dynamics will definitely provide many growth opportunities for leading processors such as Zhongpin. We are actively applying our successful model in Henan to other regions of the country.
In our last interview you expected your Shangqiu production facility to come online sometime in the 4th quarter. Is this on schedule and how much capacity will it add to your current capacity? Also do you have plans for further production capacity increases during 2009?
The Shangqiu production facility will have a total annual capacity of 80,000 metric tons for chilled and frozen pork products. Construction at the facility is on schedule and it is expected to begin production in the fourth quarter of 2008.
Going forward into 2009, we will continue to increase our processing capacity to meet the demand for healthy and nutritious meat and meat products. We have already identified Northern and Northeastern China regions as the key target areas we’d like to expand our processing capacity. Based on our well-defined strategy, we will bring on-line new capacity in an effective and efficient way, mostly through new plants, lease, or acquisition.
Zhongpin already has a well established distribution network, what areas in the distribution are you most focused on expanding?
We will focus more on maintaining and expanding our retail channel. Among our four sales channels (export, restaurant and non-commercial, wholesale and retail), the retail channel represents a more profitable option with high growth potential. We will expand our network of showcase stores and branded stores, increasing both the number of stores and sales revenue per store. We will also enhance our cooperation with China’s supermarket operators to penetrate into new markets. The development of our retail channel relies on our supporting system including our cold-chain logistic system, IT infrastructure and customer services, which is another area we will focus on.
Lastly the most recent 17th Party Congress greatly focused on rural reform and improving the overall health of the rural economy. Are there any specific policies that will benefit Zhongpin and how do you see the overall rural reforms effecting your business?
To increase farmers’ net income has become a top priority in rural reform. One of the most effective methods to do so is to process primary agricultural products into value-added ones, which will be partly driven by China’s leading agriculture companies. Chinese government will provide various support to such companies in order to eventually create more high-income jobs for farmers. Zhongpin will benefit from such favorable policies.
Other key points in rural reform include land transfer policy, cooperation entity development and rural financial system improvement. These reform polices will reorganize resources to match market demand and push forward the modernization of the industry, creating a favorable environment for Zhongpin to develop our raw material bases.
Meanwhile, the government will pay more attention to the standardization and technology improvement of this industry. Zhongpin’s future development will also benefit from the many market opportunities stemming from such policies.
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