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China’s Food Revolution Drives Growth for Packaging Provider BEST

|Includes:Shiner International, Inc. (BEST)

The Chinese government warned food manufacturers that future food safety violators will be punished with the death penalty, the Wall Street Journal recently reported. This severe new warning highlights how seriously the PRC government views the issue of food quality and safety. Two executives were sentenced to death in 2009 for their roles in the 2008 tainted-milk scandal that killed at least six children and sickened nearly 300,000 people across China. The Chinese government also approved new food safety regulations last year following a series of highly publicized food safety scandals.

China’s increasingly strict stance on food safety coincides with the nation’s rapid urbanization and economic development. Chinese consumers are growing wealthier and busier, resulting in increased demand for packaged convenience foods such as snack packs, microwaveable meals, and frozen foods. According to market research firm RNCOS, the Chinese processed food market has grown rapidly in the past few years. Chinese sales of processed food reached an estimated value of RMB 4.5 trillion (approximately US $6.7 billion) in 2009. RNCOS expects the market to grow at a compound annual growth rate of 33% from 2010 to 2013.

As China’s processed food market continues to grow, so will demand for protective food packaging that preserves freshness and seals out potential contaminants. High-quality food packaging can extend a product’s shelf life, provide a barrier against oxygen and moisture, prevent tampering, and protect product integrity. Food packaging is part of one of China’s largest, fastest-growing industries: China’s packaging industry is worth over $81 billion and contributes approximately 2.5% to the country’s GDP. Market research firm Euromonitor reports that the Chinese packaging industry has been growing steadily since the mid-1980s and forecasts that the industry’s total output value will expand at an annual growth rate of 16% through 2015.

One of the top innovators in this highly lucrative industry is Shiner International, Inc. (NasdaqCM: BEST). Shiner is China’s largest provider of coated films used in food safety packaging, with a market share of roughly 50%. The Company produces packaging films for a variety of consumer products, including processed foods, tobacco products, CDs and DVDs. Shiner’s global client base includes several of China’s top food manufacturers as well as media giants Sony and Warner.

Shiner is growing sales in all of its product lines in 2010, with its coated film segment experiencing the highest growth (up 136% year-over-year during the first half of 2010). Revenues grew 65% year-over-year to $13.2 million for the second quarter of FY10, up from $8.0 million for the same period a year ago. Net income was $0.94 million for the second quarter of FY10, compared to a net loss of $0.28 million in the same period last year. Shiner recently opened two new sales offices in Shanghai and Hong Kong and plans to open 14 additional sales offices worldwide by the end of 2011 to better serve its international customers.

As China’s government cracks down on the quality control and safety practices of food providers and China’s increasingly affluent and mobile population demands greater convenience in its eating choices, Shiner International is in an ideal position to grow and benefit from the industry’s growth. Shiner’s CEO, Qingtao Xing, recently stated that the Company expects “improved operating results in the years ahead as we position ourselves for the marketplace changes that are occurring.” We couldn’t agree more.

Disclosure: The subject security is a client of RedChip Companies, Inc. RedChip Companies, Inc., employees and affiliates may have positions and affect transactions in the securities or options of the issuers mentioned herein. For full financial disclosures for all RedChip clients, please visit http://www.redchip.com/disclosures.asp?src=rcv.

Stocks: BEST