Zhongpin Inc. (HOGS) was incorporated in the State of Delaware on February 4, 2003. The Company is a public holding company having an equity interest in operating subsidiaries that are located in the People’s Republic of China (the “PRC”) and focus on two business divisions: pork and pork products (more than 98% of total sales), and vegetables and fruits (less than 2% of total sales). As of December 31, 2009, it operated approximately 145 showcase stores; 1,012 network stores; and 2,048 supermarket counter locations, or 3,205 total retail locations, which is up from 2,100 total retail locations on December 31, 2005. They also export its products to Europe, Russia, Hong Kong, Asia, and South Africa.
The trading of pork and pork products is generally not thought of as a growth industry except in the hallowed halls of the U.S. Congress. However, with a population of approximately 1.34 billion, the People’s Republic of China ranks number one (1) with about 19.5% of the world’s total population, which translates into a lot of customers for HOGS. By way of comparison the United States is currently ranked number three (3) with a population of approximately 310 million or about 4.5% of total world population. Zhongpin has capitalized on this enormous opportunity by growing its sales from just under $30 million in 2003 to $726 million in 2009. Analysts covering the company are estimating 2010 sales to be approximately $930 million and to reach $1.1 billion in 2011. The Company has been profitable since its inception in 2003 and has experienced significant growth in recent years as shown below:
Based on the July 23, 2010 closing price of $13.87, the company has a current market cap of approximately $489 million (using the diluted shares outstanding of 35.2 million as of March 31, 2010), a price earnings ratio of 8.9 X and a ratio of market cap to sales of 0.6. Below is a table showing certain valuation and other metrics based on the years 2006-2009 and the trailing twelve months ended March 31, 2010.
In order to reach the 2011 consensus estimated EPS of $2.07 the company needs to grow EPS by 17% compounded over two years from 2009, which appears quite conservative based on the company’s historical record of performance. I believe it is reasonable to forecast that HOGS could be trading in the mid $20’s in the year 2011, which would provide an excellent return from the current price of $13.87 on July 23, 2010..
Whenever looking at a China company I try to assure myself there are no glaring inconsistencies in the Income Statements and Balance Sheets that might point to accounting irregularities, which has been a problem for some China companies. The operating margins, income and expense ratios to sales (gross profit %, SG&A expenses to sales, operating income to sales and net income to sales etc.) have been fairly consistent in the calendar years 2007-2009 and Q-1 2010 and also to other companies in the same industry.
The balance sheets appears to be a good reflection of the company’s growth in recent years and equity financings done in 2007 ($62.8 million of net proceeds from issuing common stock) and 2009 ($57.1 million of net proceed from issuing common stock). These financings were used to grow the company’s investments in plant, property, machinery and equipment (fixed assets net of accumulated depreciation) and reduce the liabilities to equity ratio (66.5% as of 03-31-10 versus 94% as of 12-31-06). Below is a table with certain information from balance sheets as of year ends from 2006-2009 and at 03-31-10.
Inventory turns have been better than 20 X a year and accounts receivable days outstanding have averaged below 20 days, which all points to good financial controls.
I believe most equity investors should have some exposure to certain overseas markets and economies, which are anticipated to outperform the United States. In general, I believe the best way to achieve this is by investing in mutual funds that focus on these regions and have people making personal visits to companies located in these regions. For China and Asia the best known name in the industry is Matthews, which has a number of funds that have performed very well over the years. Below is data about the annual total returns of certain foreign mutual funds operating primarily in the Asia Pacific (mostly excluding Japan) Region, which includes six Matthews’s Asia Pacific mutual funds and one Matthews India fund (MINDX). A pension fund that I manage is currently invested in two of these Asia Pacific funds (MACSX and MCHFX) and also in the Matthews India Fund, MINDX.
The average return for the twelve foreign funds listed above was impressive in the years 2006 through 2009 despite the big decline in equity markets from October 2007 to March 2009. Ten thousand dollars ($10,000) invested equally in the foreign funds shown above on January 1, 2006, would have grown to approximately $16,500 by December 31, 2009. This was relatively good performance considering it included one of the worst down periods (from October 2007 to March 2009) experienced in the equities markets. By contrast equal investments made into a composite index of the Russell 2000, Dow Jones Industrials, S&P 500 and NASDAQ, plus assuming an additional return of 2% a year for dividends paid out, would have resulted in a $10,000 investment made on January 1, 2006, growing to approximately $10,400 by December 31, 2009.
For the first six months of 2010 this outperformance by the foreign funds versus the composite of US stock indexes continued (returns of -1.29% versus -5.86%). This comparison points out why it makes sense to have at least some limited exposure to equities in the Asia Pacific (excluding Japan) region and other emerging markets for long-term growth.
In summary, I believe Zhongpin Inc. (HOGS) represents a good investment opportunity for long-term investors based on their historical performance of strong growth since its inception in 2003; current valuation in relation to its fundamentals; and the anticipated growth including Sales and EPS for the years 2010 and 2011. Currently, my target price for HOGS is the mid $20’s by sometime in the year 2011
Disclosure: Long HOGS, MACSX, MCHFX, MINDX