Zhongpin, Inc.: HOGS Can Fly

With the tremendous increase in worldwide demand for food and the constant reminders on the nightly news of food shortages in many countries I decided to try to find a company that fills that need in a growing market. China's growth and rising middle class are creating more and more demand for higher quality meat and produce. Zhongpin Inc. (HOGS) is a leading meat and food processing company that just announced a doubling of their yoy revenue growth with revenues of $291 million. China is the largest pig and pork production country in the world as pork makes up almost two thirds of meat consumed in China.

HOGS sells it's products, primarily pork,to international fast food companies, processing factories, school cafeterias, factory canteens, army posts, and national departments. It also sells directly to retail outlets, including supermarkets. Chinese consumers are transition to shopping at supermarkets, currently only 25% of meat is purchased at modern supermarkets, which leaves HOGS with ability to continue strong growth for many years to come as they broaden their market penetration and Chinese consumers move towards purchasing their meats in supermarkets. Their revenue projections for 2008 are between $490 and $520 million dollars.

HOGS has several new facilities under construction to expand their capacity to meet the growing demands of the consumers. The Company is ahead of schedule in the construction of its western Henan Province facility in Luoyang City which is now expected to begin operations by the end of second quarter of 2008. Zhongpin's eastern Henan Province facility in Shangqiu City is expected to begin operations in the third quarter of 2008. The new western and eastern facilities will add 70,000 metric tons and 80,000 metric tons annual capacity, respectively, of chilled and frozen pork. Once these facilities are completed, Zhongpin will have total capacity of 471,560 metric tons of chilled and frozen pork excluding the outsourcing from OEM.

In March 2008, Zhongpin began construction of a new prepared meat facility at Zhongpin's Industrial Park located in Changge City, Henan Province. The new facility will add 28,800 metric tons in annual capacity of prepared meat for a 114% increase over Zhongpin's current capacity of 25,200 metric tons, bringing total capacity of prepared meat to 54,000 metric tons. The facility is expected to begin production in September 2008.

HOGS trades at a very reasonable valuation with a PE of 12 and a forward PE of 7, their book value is over $5/share and they are currently trading around $10/share, making them very attractive at these levels. Currently HOGS is still flying under the radar of most investors.

Disclosure: Long

Comments

[Ames Tiedeman:]

China is going to have a mess of a time "managing" the Olympics. Their stock will drop when people see this mess.

2008 Apr 18 09:25 AM

[chinesepetti:]

I like to remind readers here; Mr Petti worked for Bear Stern and also he is working in a State Chinese Communist run school at the moment. Details please visit seekingalpha.com/autho...

China has many problems on its own; but it's very ironic the red communists do not mind Mr Petti (who is paid salary by the Chinese communist run school) being so critical of everything in China even the air he breathes every day.

2008 Apr 18 09:40 AM

[J.D:]

Doubling revenues sounds in line with inflation, so not a positive indicator of growth. Chinese govt agencies are putting large subsidies to boost pork production. Looks like a tough market to predict with growing government intervention, inflation, widespread disease, and import/export restrictions. In the absence of transparency and a true competitive, commercial market HOGS is just a high-risk gamble.

2008 Apr 18 11:46 AM

[jimidean:]

<Their stock will drop when people see this mess. >

Yes indeed, the Chinese People will stop eating pork because of the Olympics. Just like Americans stopped eating at McDonalds after the Olympic Park Bombing.

2008 Apr 18 12:20 PM

[huangthomas:]

Chinese consumers dislike chilled or previously frozen pork, such as those sold in modern markets. They prefer warm meat (slaughtered night before) from conventional vendors.

How well do they control the "blue ear disease" of pigs. Otherwise the communicable disease will be a risk factor in investing in pig-raising enterprises

2008 Apr 18 02:31 PM

[jimidean:]

<They prefer warm meat (slaughtered night before) from conventional vendors. > So did Americans 60 years ago. People change.


<will be a risk factor in investing in pig-raising enterprises>

This company doesn't raise pigs, it buys them and then processess them.

2008 Apr 18 03:08 PM

[globalmacro:]

Bought it too high but agree with this article. Some of the drop is probably attributable to restricted shares being sold. There are some other hedgies in it at higher prices (ie 10-12).

2008 Apr 19 03:27 AM

[GlobelBuster:]

This stock will be back to 7.00 HOGS is just a high-risk , Good Luck!

2008 Apr 19 07:03 PM

[chinesepetti:]

Price control will not kill the inflation; however for a country like China with 1.2 billion people it is extremely important to use price control as a temporary measure in order to stablise the situation so other policies (for example revalue the currency and give tax benefit for R&D investment for improving productivity) can follow. This is very like what The Fed Ben did with a drastic rate reduction and flooding the market with liquidity so the credit situation can be stablised.

If you guys read Ken Fisher; you will understand the most effective measure to overcome inflation is investing in advanced technology to lift productivity, it will take time and lots of capital. China might be lucky in that regard because the internet which makes techonology transfer much easier and cheaper around the world.

At last we I agree to talk about Petti if you guys back off talking down about China; I welcome any constructive criticism on China though! I love to help you guys to understan what is really going on in China so we could make some serious money out of this great historical opportunity.

2008 Apr 20 08:03 AM

[Chungst:]

I looked at this company by accident when I was trying to type HOG (the motorcycle manufacturer) and instead, I typed HOGS. I figured what the heck, I'll take a lot at the financials. I never got comfortable with the HOGS' accounting results. First, I didn't recognize the accounting firm from Utah. Second, I didn't understand why the company has $48.7 million in cash as of 12/31/07 but also had $47.7 million in short term debt -- effectively, no surplus cash on about $291 million of revenues and profits of $18.5 million, respectively (note that comprehensive income, i.e. under FASB 130 -- was higher at $25 million!). Third, the company lacked a long-term (and stable) history. Fourth, keep in mind this company generated something like $24MM in Funds From Operations and Cash Flow From Operation was about half-a-million for 12/31/07 and that was a HUGE red flag in my book.

It may be a great stock, but I never could get my arounds around the firm. In the US, HOGS would be considered a "roll-up" and these types of deals involve considerable risks.

Lastly, most people would rather quote Warren Buffett or Charlie Munger as opposed to Ken Fisher. I don't mean to disrespect Ken's wonderful salemanship skills to grow his asset management firm in the penisula, but it's just thet Buffett and Munger are clearly giants in the investment field. Yes, I read Ken Fisher's book "Super Stock" when it first came out so I knew about the guy and his "glitch" concept when he was relatively unknown. Now, I can't stand the guy due to his incessant commercials.

Cheers.

2008 Apr 21 02:04 AM

[J.D:]

Chungst, great job. You should take a similar look at some of the other stocks pushed on this site.

2008 Apr 21 07:06 AM

[silver-bullet:]

JD - why else would anyone visit this site? To get alternative perspective however far from the left field it comes, or a sense of a stock and/or an industry. Ultimately, it is still 'Buyer Beware'.

In this light, I'll like to add to chinesepetti's take on price controls in China. I agree that controls are temporary measures. However, I think in the longer term, China will revalue their currency - upwards. This will bring down inflation, allow the general masses a more affordable standard of living.

Some will say revaluation will hurt China’s exports. However, I will argue that even with a 40% to 50% upward movement in its currency, it will still be far cheaper for US of A to buy from China. The impact, if any, will be minimal.

Also, remember that China has already gone off the US$ peg a couple of years back, and had since appreciated against the US$. The revaluation has already started, and I dare say price controls in food will happen with decreasing frequency.

Regarding this article and fundamentals on HOGS, Michele Koenig seems to be writing with ground level insight. I am curious to check out his bio when it becomes available before making a judgment.

2008 May 07 07:36 PM