Tangrenshen Group Co., Ltd.
by David LIN and YANG Yang
Headquartered in Zhuzhou city, Hunan province, Tangrenshen Group Co., Ltd. is an integrated agricultural company mainly engaged in pig farming, meat processing and feed manufacturing. Founded in September 1992, it was initially a joint venture between Zhuzhou Feed Co., Ltd. and Hong Kong-based Dashenghang Feed Co., Ltd.. The venture soon expanded its business through the acquisition of pig breeding and meat processing enterprises, and formed three major business units that cover feed manufacturing, pig breeding, pig slaughtering and food processing.
In March 2011, Tangrenshen Group was listed on the Shenzhen Stock Exchange. Its two largest shareholders, Hunan Tangrenshen Holding Investment Co., Ltd. and Hong Kong Dashenghang Feed Co., Ltd. own 24.77% and 20.06% shares, respectively.
For the third quarter of 2013, Tangrenshen Group realised sales revenue of RMB1.98 billion (US$326.26 million), rising by an immaterial 0.98% on-year; while the company's net profit dropped to RMB39.87 million (US$6.57 million), down by 26% on-year.
From January to September 2013, the company generated sales revenue of RMB5.07 billion (US$835.42 million), an increase of 2% on-year; while net income plummeted 33% on-year to RMB78.04 million (US$12.81 million) during the same period. The company's earnings per share (EPS) were RMB0.19/share (US$0.03/share), a rather mediocre performance in China's livestock and food processing industry.
Since the beginning of 2013, Tangrenshen Group's profitability has been hit by a series of factors, including the H7N9 epidemic, the rising cost of feed raw materials and the slowing Chinese economy.
Business structure and product portfolio
Currently, feed sales contribute to about 90% of Tangrensheng Group's total revenue. In 2012 alone, the company sold a total of 2.24 million tonnes of feed, of which, approximately 80% was pig feed.
In recent years, the company has carried out plans to increase the ratio of high-end feed products and the proportion of large-scale pig farms in its client base. In order to raise profitability and boost customer loyalty, the company has been modifying its product offering and trying to change the composition of the client base. Through the reform in marketing strategies and product positioning, the group is exploring more business opportunities outside Hunan province.
Tangrenshen Group has formed a partnership with American swine genetics company Whiteshire Hamroc LLC since 2008. Within the strategic framework, Whiteshire Hamroc provides pig breeding technologies, including swine genetics, building systems and production protocols, and sources pigs from its nucleus herds to supply Tangrenshen Group with tested and selected Yorkshire, Landrace and Duroc pigs.
In addition, Whiteshire Hamroc uses the internet-based genetic and production management capability to monitor and assess daily production activities at Tangrenshen Group's farms, and provides genetic analysis and recommended mating to the nucleus herds for the group. The partnership with Whiteshire Hamroc, the largest purebred genetic producer in the United States, ensures that Tangrenshen Group gets strong technological support for its pig breeding activities, and thus guarantees the quality of pigs and meat products it produces.
The company's meat products consist of three categories: Chinese-style products, Western-style products, and fresh pork products. Of these three categories, Chinese-style meat products are well-established in the market. Led by Chinese bacon and other Chinese-style products, Tangrenshen Group takes up 60% of market share in Hunan province. However, due to the difference in eating habits, those products are yet to find their way outside the region.
For ham and other western-style products, the company faces strong competition from Shuanghui Group and Yurun Group. As for its fresh pork business, the company has maintained stable growth in this category. In the one million pigs that the company slaughters annually, close to 30% goes to the processing of fresh pork products.
To capitalise on the synergy between the company's feed and pig breeding businesses, Tangrensheng Group's long-term strategy is to increase investment in these two areas, while ensure a steady growth in the slaughtering business.
In an effort to accelerate the development of its feed business in Shandong region, Tangrenshen Group signed a strategic cooperation framework agreement with Tibet Hemu Investment Consulting Co., Ltd. (Hemu Investment) on November 29, 2013. According to the agreement, Tangrenshen Group will pay RMB486 million (US$80.04 million) to purchase 40% shares of Shandong Hemei Group Co., Ltd. (Hemei Group) from Hemu Investment.
With a 60% stake, Hemu Investment is the controlling shareholder of Hemei Group. After the transfer of the shares, Tangrenshen Group will be made the largest shareholder of Hemei Group.
Hemei Group produces about 1 million tonnes of feed per year, with poultry feed accounting for 90% of the total volume. The company's revenue from feed sales is projected to reach RMB3 billion (US$494.03 million) in 2013, while net profit is expected to top RMB80 million (US$13.17 million).
Initially founded by Liuhe Group in 2003, Hemei Group managed to maintain a 100% growth rate in its sales revenue for the first five years. Though it has slowed in the last five years, the company's growth rate has stayed around the range of 50%.
Hemei Group is an integrated agricultural enterprise with large-scale feed processing capability. It is the third-largest poultry feed manufacturer in Shandong, after Shandong Liuhe Group Co., Ltd. and Shandong Pacific Zhonghui Group Co., Ltd.. The company owns 24 feed plants in Shandong with an aggregate annual production capacity of 3.50 million tonnes. It also has an inventory of 500,000 broilers with a daily slaughtering capacity of 400,000 birds.
Though pig feed processing has been Tangrenshen Group's strong suit, the company's market presence remains limited in Shandong province. After taking control of Hemei Group, Tangrensheng Group will tap onto Hemei Group's resources in Shandong.
This will entail leveraging Hemei's production facilities, sales network and sales support, to increase its share of Shandong's feed market. Meanwhile, by providing easier access to feed supply, the expansion in Shandong is also set to benefit the pig breeding farm that Tangrenshen Group has recently invested in Hebei province.
Hemei Group is expected to generate net profit of RMB100 million (US$16.48 million) in 2014, and RMB110 million (US$18.13 million) to RMB120 million (US$19.78 million) in 2015, which will translate into a contribution of RMB0.10/share (US$0.016/share) and RMB0.28/share (US$0.046/share) to Tangrenshen Group's EPS over the next two years.
Due to the mediocre 2013 financial results and a slack Chinese stock market, Tangrenshen Group's share price sagged. At the end of July, it bottomed at RMB6.86/share (US$1.13/share) from the peak of RMB10/share (US$1.65/share). Though it rebounded later, the performance trailed behind those of rivals, such as Da Bei Nong Group, Tongwei Group, and New Hope Group.
However, within a day after the announcement about the purchase of Hemei Group's shares, its share price nearly shot back to the peak of RMB10/share (US$1.65/share).
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