Through thorough investigation and analysis, we found serious discrepancies that indicates Zhongpin Inc. (NASDAQ:HOGS) is significantly over-reporting the scale of its business in terms of supplies, slaughter production and retail.
- Zhongpin claims it purchases 1.1mil hogs from large breeding farms in Henan annually, but the farms say only 81,000, 93% less than Zhongpin’s reported figures.
- The company claims more than 1,200 retail stores in major cities in Henan, but detailed checks in all five cities failed to find more than 83.
- Zhongpin claims to sell through more than 2,000 supermarkets nationwide. But in Henan, Zhongpin’s most important market, only 51 supermarkets were found to carry Zhongpin brand products.
- Evidence collected indicates slaughterhouse output is insufficient to sustain reported totals, and based on anecdotal evidence could well be only 50% of reported output.
Zhongpin processes and distributes chilled pork, frozen pork, prepared meats and some fruit and vegetable products primarily in the mainland China market. It sells all these products on a wholesale basis to 31 food companies, 59 processing factories, and in retail outlets through a network of showcase stores and branded stores, some owned and some franchised, as well as through supermarket counters.
The company says that it runs 13 processing plants across China; most are located in Henan province, with others located in Jilin province, Sichuan province and Tianjin city. All products are sold under the “Zhongpin” brand name.
After conducting extensive research into Zhongpin, we have determined that Zhongpin is running some level of legitimate business, but we have found clear discrepancies between the company’s disclosed information and reality.
1) Zhongpin claims it purchases 1.1mil hogs from large breeding farms in Henan annually, but the farms say only 81,000, 93% less than Zhongpin’s reported figures:
Our research uncovered a significant discrepancy between the number of hogs Zhongpin would need to purchase from large breeding farms in Henan and the number of hogs large breeding farms actually supply to Zhongpin. According to our calculations, Zhongpin requires about 5.2mil hogs per year to produce its reported quantity of pork products.
The company’s annual report states that about 70% of Zhongpin’s production is generated within Henan. The company says that it purchases live hogs only from farms close to the production sites. This strongly implies that approximately 70% of its hog supply originates from within Henan. In order to meet the annual production and sales quantities that Zhongpin reports, we calculated that the company would have to purchase 5.2mil hogs annually. If 70% of its hogs come from within Henan this means that Zhongpin would slaughter around 3.7mil hogs within Henan annually. This estimate assumes that information contained in Zhongpin’s annual report is accurate. Zhongpin reports that 30% of its annual hog supply comes from large breeding farms in Henan. Zhongpin would therefore need to purchase about 1.1mil hogs from large breeding-farms in Henan annually.
Figure 5 illustrated two ways of deriving Zhongpin’s annual hog purchases and both methods produce numbers that are very close.
We contacted all the large breeding farms in Henan, but despite Zhongpin’s claims, we only found four that confirmed conducting business with the company. This means that Zhongpin could have only purchased somewhere around 81,000 hogs directly from large breeding farms in Henan in 2010, dramatically less than the 1.1mil hogs that would be needed based upon the information provided by Zhongpin.
2) The company claims more than 1,200 retail stores in major cities in Henan, but detailed checks in all five cities failed to find more than 83:
Our investigations indicate that many of Zhongpin’s listed showcase stores and branded [franchised] stores do not exist. Zhongpin’s annual report states the company had 165 showcase stores and 1,105 branded stores in 2010, but our investigation only found 83 in its main market of Henan.
The company’s annual report says the majority of these stores are located in major cities in Henan. Zhongpin’s manager in charge of the operations of all retail stores specified the top five cities where retail stores are located. As a result our field teams went to the downtown areas of each of these five cities and did a street-by-street search looking for the stores Zhongpin claimed to exist. Despite the 1,270 stores referred to in the annual report, our field teams only found a total of 83.
3) Zhongpin claims to sell through more than 2,000 supermarkets nationwide. But in Henan, Zhongpin’s most important market, only 51 supermarkets were found to carry Zhongpin brand products:
In addition to the 1,270 showcase and branded stores mentioned in Zhongpin’s annual report, the company also claims 2,108 supermarket counters nationwide. Because Henan accounts for 70% of Zhongpin’s total revenue, we assume approximately 70% of these counters are located in Henan, or approximately 1,500 supermarket counters, but our search only found 51. Seeing as Henan accounts for the majority of Zhongpin’s revenue, it is doubtful the majority of these kinds of supermarket counters are located outside Henan.
In Zhongpin’s June presentation to investors, the company listed three supermarket/ hypermarket companies that carry Zhongpin’s products. With the exception of one Metro supermarket in Zhengzhou, we did not find Zhongpin products at any of these three brands of supermarket in the four major cities we searched in Henan. The company’s presentations says that it has relationships with major supermarket chains like Wal-Mart, Metro and Carrefour, and these stores only have a handful of stores in Henan. Of the outlets of these major chains, only one metro store in Zhengzhou carries Zhongpin products.
Of the 136 supermarkets in Henan from the chains below, 120 supermarkets are located in Zhengzhou, Luoyang, Anyang and Shangqiu. Out of these 120 supermarkets, only 51 carry the Zhongpin brand. By our count, Zhongpin has significantly overstated its number of supermarket counters.
4) Evidence collected indicates slaughterhouse output is insufficient to sustain reported totals, and based on anecdotal evidence could well be only 50% of reported output:
Our investigations found Zhongpin’s slaughterhouses in Henan are not handling the 3.7mil hogs required annually to meet the company’s reported production. Zhongpin has five slaughterhouses in Henan. This translates to the need for approximately 61,000 hogs processed in Henan per month. We called the sales manager and purchasing manager at each facility and visited two of the five slaughterhouses to talk to junior workers and people working/living close by. Even using the slaughter figures provided by slaughterhouse’s management, not one slaughterhouse achieves the 61,000 hogs monthly that Zhongpin must process per plant to validate its annual report figures.
Disclosure: We have no positions in any stocks mentioned, and no plans to initiate any positions. China Economic Review has no interest or investments in the stocks it covers, and has strict rules for staff with regard to holdings and trading to ensure their impartiality.