Zhongpin (NASDAQ:HOGS)

Q: Can you give me some background on the company?

A: Started in the Hog Business in 1993. It has been listed for less than 5 years. But we are in the industry for about 17 years. Founder has almost 30 years of experience in this industry. Our Chairman is also the founder of the company and is the major holder of the company. Other members have worked with him for decades. One of three senior officials in the pork industry with 27 years experience or more. All the Chairman does is work everyday. No wine, no cigar, no holiday, no golf, he is just devoted to managing the company.

Q: What does the company look like in the next 3-5 years?

A: The Chinese government is consolidating the hog industry. In the next 3-5 years, it is a key period for all the market players in this industry, we are the 4th largest pork suppliers in China. We are the seventh largest meat supplier in China. The first job for us is to keep the leading position in this industry. We should benefit from the market consolidation trends. We will try to maintain our leading position. Of course our long-term goal is to be ranked among the top 3 in the next 3-5 years.

Q: Who are your competitors?

A: Largest company is Shineway， – listed in China 5-6x as big, Yurun， 2nd listed in Hong Kong 3-4x larger, 3rd people’s food is 2- 3x larger as a listed company in Singapore.

CEO has long time friendships with the founders of some large competitors. They are trying to dominate this industry together and build their kingdom of the hog industry. We work together to consolidate the industry rather than to have a pure competitive relationship. We want to partner with them to educate the market to educate consumers to buy more chilled pork products.

Q: Who is your auditor?

A: BDO now, but more and more investors strongly suggest we using Big 4. Our legal counsel is OMM

Q: Where do you see your company over the next 5 years?

A: In the last 5 years, our CAGR for revenues and net income is more than 70%. Our capacity expansion for the last two years grew around 25-30%. We believe we can maintain at least 20% for the next 5 years. We should be able to at least maintain our current margins. We are trying our best to improve the margins. This is a commodity industry, low margins is very common.

Q: Can you explain your segments?

We have 3 categories:

1. Chilled and frozen pork – around 80%
2. Prepared pork 18%
3. Vegetables 2%

Q: What are the industry trends for your business?

A: Government has encouraged people to consume more low temperature meats. From the distribution channels, Chinese government is reducing the wet market (open air market) and will close a lot of these and increase consumption in the supermarkets. This is beneficial because most of our products are chilled meat. All of our products are sold to supermarkets, chain restaurants, and institutional customers. We don’t sell in the open air market. Chinese meat industry 5 year plan announced in the end of 2009 that by the end of 2015 slaughtering houses and the meat processors will be reduced by around 90%. China has over 21,000 slaughtering houses nationwide. By the end of 2015 there will only be around 3,000, so many will need to be shut down.

Q: What differentiates Zhongpin from its competitors; how do you keep high margins?

A: Aggressively expand capacity and integrate the whole supply chain not only as a meat supplier and also a service provider to our customers. This is why we developed our cold chain logistics and IT systems. The way we ensure our products quality. We can build a long term relationship with our customers. We try to be competitive in every unit of the supply chain. From the slaughtering house to the supplier of the products to the end users. Main growth is through organic growth and that is why we have built new capacity by ourselves instead of acquiring others.

Q: Can you explain your distribution networks?

A: We have wholesale and retail channels, and also branded stores, and sell directly to some institutional customers like schools, army post, or some food processing companies that need chilled and frozen pork as their raw material, chain restaurants and hotels, high end restaurants.

Q: What could be potential problems you could run into?

A: Food safety is the main risk in this industry. Also hog diseases are problems. Very strict quality control in every step of the supply chain to try and avoid food safety risk. Our revenue is related to the hog price. Demand is stable and hog prices fluctuates in a cycle is about 18 months- 3 years.

Q: What are competitive risks?

A: The pork market is highly fragmented, the market share of the top 5 is less than 10%. All the top 3 are several times larger than us, and they are also expanding themselves. Each player is trying to grab more market share and get more opportunities in the market. Our margins are higher than the average margin in this industry.

Q: What do you expect for capital raises?

A: No plans to raise capital, we will just use our own cash flow and credit lines to continually reinvest. We have enough in lines of credit for the commercial. We don’t plan on going to the markets in the short term.

Q: Can you explain your capital investments?

A: Most of plants we build consist of slaughtering house, the processing plant, and the cold chain logistics center and the R&D center. It is not just the slaughtering house. Living area of the employees, dining hall of the employees. Total amount of plants is 15 with most of the plants in Henan province.

Q: Who competes with you in your regions?

A: Top 10 players in China and also small and regional players.

Q: What do you think of Agfeed and Energroup?

A: Dalian Chuming is just a local player in the industry. We have heard it is a strong player but I don’t see their products.

Q: Will you expand internationally?

A: No international expansion plans, for our vegetables and fruit products, we export to a few selected countries in Asia. China is so big for us, we just have the goal of being a dominant player in the national market.

Q: What would an M&A target look like?

A: We target the well known local brands in the prepared foods. For M&A we need to ensure the target companies facilities and channels matched our requirements. The target we want to acquire must have high standards in terms of facilities, quality controls.

Q: What is the value of the cold chain logistics system?

A: We need to distribute low temperature meat products nationally to become a national player and. We need to have strong cold chain logistics to support our delivery. Some companies use third parties for this service. Food safety is #1 in the whole industry and ensures our product quality. As a cold chain logistics provider, we provide this logistics service to large players such as Wal-Mart. The reason why Wal-Mart chooses us is because compared with other cold chain logistics providers, our service are more prompt and in time, we can always satisfy our clients requirements. Cold chain logistics is a value added business unit for us. Also we want the first mover advantage in this space. It is not like the US where cold chain logistics are very mature. In China, cold chain logistics utilization rate per capita is only 20% of that in the US. So there is huge potential for cold chain logistics development in China in the near future.