TheMeatSite.com - TheMeatSite.com - news, features and articles for the meat processing industry

News

Higher Revenue, Costs Reported by Zhongpin

13 May 2013

CHINA - Zhongpin has reported higher revenues and lower net income for the first quarter of 2013. The company reports the increase in cost of sales was consistent with but considerably lower than increase in sales revenues.

Sales revenues increased 2.0 per cent to US$382.4 million in the first quarter 2013 from $374.1 million in the first quarter 2012 primarily due to higher sales volume of pork products sold at lower average selling prices.

Net income decreased 13 per cent to $10.6 million in the first quarter 2013 from $12.2 million in the first quarter 2012 primarily due to higher operating expenses in support of higher sales, more employees to support expansion, higher promotional activities and higher interest expense, partly offset by higher gross profit. The higher expenses were mainly due to the higher volume of business and intense competitive pressure in the pork market due to the ongoing industry consolidation.

Basic earnings per share (based on net income attributable to Zhongpin shareholders) decreased 12 per cent to $0.29 in the first quarter 2013 from $0.33 in the first quarter 2012. Weighted average basic shares outstanding decreased 1 per cent to 37,209,344 shares in the first quarter 2013 from 37,498,563 shares in the first quarter 2012.

Diluted earnings per share (based on net income attributable to Zhongpin shareholders) decreased 15 per cent to $0.28 in the first quarter 2013 from $0.33 in the first quarter 2012. Weighted average diluted shares outstanding decreased 1.0 per cent to 37,278,630 shares in the first quarter 2013 from 37,503,019 shares in the first quarter 2012.

As of 31 March 2012, Zhongpin had 40,376,182 shares of common stock issued, of which 37,209,344 were outstanding and 3,166,838 were held as treasury stock.

CEO's Comments

Mr Xianfu Zhu, Chairman and Chief Executive Officer of Zhongpin, said: "Our results for the first quarter of 2013 clearly illustrate the intense competitive pressure in the meat industry in China.

"While the demand for all our pork products, measured by our tonnage sold, was up 10.6 per cent in the first quarter 2013 from last year's first quarter, the average price per ton for those products dropped 7.5 per cent. Sequentially, the first quarter 2013 average price for all our pork products was only 1.0 per cent higher than in the fourth quarter 2012.

"Both comparisons are substantially different from the normal seasonal pattern, when the first quarter prices often peak for the year due to the high demand for pork during the Chinese New Year. Those prices reflect strong competition to gain market share that is pressuring prices and financial performance.

"Our gross profit margin increased 0.6 percentage points to 10.1 per cent in the first quarter from 9.5 per cent in the first quarter 2012 primarily due to higher gross profit margins on our prepared pork products and from an increase in the spread between pork prices and hog prices, due to lower hog prices.

"Our operating expenses continued to increase to support higher sales. We added more employees to support expansion and had higher promotional activities and higher interest expense, all mainly due to the higher volume of business and expansion, plus the intense competitive pressure in the pork industry.

"For the year 2013, we expect that the demand for pork in China should remain strong and that Zhongpin's revenues from pork and pork products are likely to increase modestly based on higher tonnage sold at lower average prices compared with 2012. We anticipate that our net profit margin in 2013 will decrease due to increased competition in the industry, the expected increase in labor cost and overheads, and the expected increase in quality assurance and control costs in response to increased importance on food safety placed by the government and customers."

Capacity and Market Expansions Update

Zhongpin is investing approximately $58.5 million to build a new production, research and development, and training complex in Changge, Henan province, excluding the cost of land use rights that it has already obtained. When completed, this new facility is expected to have an annual production capacity of about 100,000 metric tons for prepared pork products. Adjacent to this new production facility, Zhongpin plans to develop a centre for research and development, training, and quality assurance and control. Construction for the first phase with a production capacity of approximately 50,000 metric tons for prepared pork products started in the second quarter of 2011 and was completed in the second quarter of 2012. Trial production started in July 2012, and the plant has been in regular production since the end of the third quarter of 2012.

Zhongpin established a joint venture company in June 2011, of which the Company owns 65 per cent, with Henan Xinda Animal Husbandry Company Limited. The joint venture company is financed by capital contributions and bank loans. All capital contributions to the joint venture company have been made. The joint venture company is expected to provide 20,000 sire boars annually. Upon the completion of the building of infrastructures for sire boar breeding in the third quarter of 2012, the joint venture company leased the facility to a third party for an annual rental in the amount of RMB 5.0 million.

Zhongpin is investing approximately $18.0 million in a cold-chain logistics distribution centre in Anyang, Henan province. This distribution centre will have a temperature-adjustable warehouse with a floor area of approximately 27,000 square meters, processing capacity, a distribution centre, and a quality control centre. The distribution centre will be used for third-party cold-chain logistics service. Zhongpin expects to put this distribution centre into operation in the second quarter of 2013.

Zhongpin is investing approximately $87.5 million in a chilled and frozen food processing and distribution centre in Kunshan, Jiangsu province, which is near Shanghai. The centre will be built in three phases. The first phase will include a processing centre, cold-chain logistics centre, and business complex. Zhongpin invested about $35.0 million on the first phase that was put into operation in February 2013.

Zhongpin will be investing approximately $47.6 million to build a cold-chain logistics distribution centre in Tangshan, Hebei province. This distribution centre will have a 27,000-square metre temperature-adjustable warehouse, processing capacity, distribution centre and quality control centre. This distribution centre will be used for third-party cold-chain logistics service and is expected to be in operation in the fourth quarter of 2013.

As of 31 March 2013, Zhongpin had an annual capacity of 683,760 metric tons for chilled and frozen pork, 176,000 tons for prepared pork products, 20,000 tons for pork oil, and 30,000 tons for vegetables and fruits, for a combined total of 909,760 metric tons. In addition, its annual capacity for sausage casings was 100 million metres, and its annual capacity for the raw material to make heparin sodium was 300 billion units.

Sales Revenues in the First Quarter of 2013

Total sales revenues increased $8.3 million or two per cent to $382.4 million in the first quarter 2013 from $374.1 million in the first quarter 2012 primarily due to higher sales volume for pork and pork products sold at lower average selling prices.

The higher revenues resulted mainly from continued increases in the number of retail outlets, geographic expansion of its distribution network and processing facilities, and higher sales to chain restaurants, food service providers, and wholesalers and distributors in China, which were partially offset by lower average pork prices resulting from market fluctuations and industry competition.

Chilled pork revenues decreased on higher tonnage at lower average prices per metric ton. Chilled pork revenues decreased two per cent in the first quarter 2013 from the first quarter 2012. Chilled pork tonnage increased six per cent and the average price per metric ton decreased eight per cent in the first quarter 2013 from the first quarter 2012. The lower revenues from chilled pork were mainly due to lower average selling prices for chilled pork as a result of fluctuations in market prices of chilled pork or chilled pork-related products, partly offset by the higher tonnage sold.

Frozen pork revenues decreased on lower tonnage at lower average prices. Frozen pork revenues decreased 13 per cent in the first quarter 2013 from the first quarter 2012. Frozen pork tonnage decreased one per cent and the average price per metric ton decreased 12 per cent in the first quarter 2013 from the first quarter 2012. The lower tonnage in the first quarter 2013 was primarily due to Zhongpin's strategic adjustment of its product mix towards selling less frozen pork, which has a lower profit margin. The average price per metric ton for frozen pork decreased due to fluctuations in the market prices of frozen pork or frozen pork-related products.

Prepared pork revenues increased on higher tonnage at lower average prices. Revenues from prepared pork products increased 41 per cent in the first quarter 2013 from the first quarter 2012. Prepared pork tonnage increased 43 per cent and the average price per metric ton decreased two per cent in the first quarter 2013 from the first quarter 2012. Prepared pork products are becoming more important to our business since customers are increasingly demanding them for their flavuor and convenience and are willing to pay higher average prices for these products. Zhingpin plans to gradually increase sales from prepared pork products by increasing its brand recognition and expanding capacity for these products.

Pork products totalled 99.4 per cent of total sales revenues in the first quarter 2013 and 99.3 per cent in the first quarter 2012.

Cost of Sales and Gross Profit Margin

Cost of sales primarily includes the costs of raw materials, labour costs and overhead. Of the total cost of sales, the cost of raw materials typically accounts for about 95.5 per cent to 95.8 per cent, overhead typically accounts for 2.7 per cent to 2.8 per cent, and labour costs typically account for 1.5 per cent to 1.7 per cent, with slight variations from period to period. All meat products are derived from the same raw materials, which are live hogs. Vegetable and fruit products are purchased from farmers located close to Zhongpin's processing facility in Changge in Henan province. As a result, the purchasing costs of live hogs and vegetables and fruits represent substantially all of the costs of raw materials. The increase in cost of sales was consistent with but considerably lower than increase in sales revenues.

Gross profit margin (gross profit divided by sales revenues) increased to 10.1 per cent in the first quarter 2013 from 9.5 per cent in the first quarter 2012 primarily due to (a) a higher percentage of revenues from prepared pork products, which contribute a higher margin than other products, and (b) an increase in the gap between pork prices over hog prices, with hogs being the bulk of the cost of sales.

Further Reading

You can view the full report by clicking here.

 

TheMeatSite News Desk



Our Sponsors

Partners


Seasonal Picks

Meat Cuts and Muscle Foods - 2nd Edition