Company Feeding On China's Hearty Appetite For Pork
Companies / Livestock Feb 05, 2009 - 01:00 PM GMTBy: Oxbury_Research
In the United States, pork might be "the other white meat," but in China, it's the only meat. Well, almost.
Far more than any other meat, pork occupies a special place in the Chinese diet and economy. Supporting a hog market estimated to be worth $32 billion annually, the Chinese consume more pork than any other nation. It is prepared in almost every conceivable way, from roasted whole suckling pigs, commonly served during holiday feasts, to sweet and sour pork, whose Americanized version is a Chinese restaurant staple. Pork accounts for two-thirds of the average Chinese's protein intake.
Back in 2007, spiraling pork prices amid shortages tied to severe weather in southern China and an outbreak of "blue ear" disease—a form of swine flu that decimated up to 2 million pigs—left Chinese shoppers suffering from the same sticker shock as Americans checking out in the grocery aisle these days. Last year, pork prices continued to rise as producers who were feeling the pinch of pricey feed and fuel passed along costs to consumers. Over the past six months, hog prices have come down considerably and pork shortages have forced China to import a growing share of the meat. China's General Administration of Customs says china's pork imports rose a whopping 470% in the first 10 months of 2008 to meet demand and stabilize prices.
The vast majority of China's annual production of more than 600 million hogs is raised on small farms. And with the nation's appetite for pork and pork products increasing with consumers' growing prosperity, producers are still unable to meet demand. To fill the supply gap, China has sealed importation deals with U.S. pork and meat processing giant Smithfield Foods Inc. (NYSE: SFD) and its rival Tyson Foods (NYSE: TSN) to put American pork on Chinese tables (imports of pork from the United States doubled in 2008, according to the USDA Quarterly Hogs and Pigs Report). And, the Chinese have paved the way to opening up hog imports from Germany.
Despite surging expenses that are plaguing companies in the sector, AgFeed Industries Inc. (Nasdaq: FEED), China's largest commercial pork producer and largest premix feed company, is bringing home the bacon in the fast-growing market. AgFeed develops, manufactures, distributes and sells pre-mix feed and feed additives primarily for use in China's pork husbandry and slaughter market. It is also engaged in the raising, breeding and sale of hogs for the domestic pork production and hog-breeding markets. The company, which does business through a handful of subsidiaries, has production plants in Shanghai, Nanchang and Nanning, and operates more than two-dozen producing swine farms in China's southern provinces.
AgFeed has made some shrewd moves over the past year or so that has expanded its market share and raised its profile among market watchers:
Last January, it snapped up a 70% interest in both Wannian Xiandai Animal Husbandry Limited Liability Co. and Jiangxi Huyun Livestock Co., Ltd. It also acquired a 60% stake in Ganzhou Green Animal Husbandry Develop. Co., Ltd., a 55% interest in Yichun Tianpeng Domestic Livestock Farm, Ltd., and captured the entire herd and stock of Gang Feng Animal Husbandry Co., Ltd. It announced the acquisition of two commercial hog farms in China's Fujian province in May, and later in the year, the company also acquired a commercial hog farm that serves the lucrative Shanghai area, and gobbled up full ownership of the successful Hainan Hopejia Feed Co., a purchased that immediately contributed to earnings.
In the latter part of 2008, AGFeed began talks with several leading global hog genetics companies, with the goal of implementing a genetics program that could significantly reduce hog production costs. The good news doesn't stop there. Earlier this month, the Chinese government announced measures to stabilize hog production and hog prices to protect the interests of hog farms. Beijing plans to start rebuilding government pork reserves and provide subsidies to hog farmers and meat processors. And regulators at China's National Development & Reform Commissions and ministries have also taken measures to prevent any possible sharp drop in the price of pork by adopting a policy of limiting imports and boosting exports whenever hog prices dip below a certain level (based on pre-established "Grain-to-Hog" price ratios).
AGFeed has had great success executing its growth strategies and smoothly integrating recent hog farm purchases (close to 30 acquisitions since late 2007) resulting in a strong balance sheet. For all its efforts, AGFeed posted record numbers in the most recent quarter, with revenues, net income and gross profit skyrocketing 316%, 296% and 279%, respectively.
Smart management and buy-outs have positioned AgFeed to hogtie an increasing share of China's pork market, which the U.S. Department of Agriculture estimates to be worth $32 billion per year. The pre-mix market in which Agfeed operates accounts for about $1.6 billion of China's $40 billion annual animal feed market, according to the China Feed Industry Association. And its recent acquisition of Hainan Hopejia Feed Co. makes the company the largest pre-mix feed manufacturer in the island province, which imports about 40% of meat hogs from the mainland.
But before you start grabbing FEED stock, tread carefully. The company is not without its problems. Shares have lost almost half of their value, falling to their lowest level in almost two years—a result of tumbling hog prices, the effects of the global economic downturn and troubles in China's financial markets. The current slump has forced AgFeed to retract its rosy 2009 outlook (to sell 1 million hogs) and scale back the planned expansion of its hog farm business.
The flipside is, given the strong synergies created between its hog production and feed business, AgFeed is well-positioned to tap into an increased amount of market share in China's highly fragmented pork market. Moreover, in contrast to trends in international markets, China's domestic demand for pork products has been relatively unaffected by the global economic crisis. And with controls now in place to prevent precipitous drops in pig prices, when all is said and done, this small cap could cash in on China's love affair with pork and leave investors riding high on the hog.
As of this writing, FEED shares are trading well under $2, with the Street's consensus one-year target at $4.
Shannon Roxborough
Analyst, Oxbury Research
Oxbury Research originally formed as an underground investment club, Oxbury Publishing is comprised of a wide variety of Wall Street professionals - from equity analysts to futures floor traders – all independent thinkers and all capital market veterans.
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