Jiangxi Zhengbang Technology Company Limited
Heady expansion plans fall short of ambitious goals
by David LIN and YANG Yang
Located in Nanchang city, Jiangxi Zhengbang Technology Co., Ltd. (Zhengbang Technology) is a subsidiary of Zhengbang Group. In the Chinese media, however, Zhengbang Technology is often referred to interchangeably as Zhengbang Group, symbolising its status as the core asset of the group.
Mainly engaged in the manufacture and sale of feedstuffs, as well as pig breeding and pig farming, Zhengbang Technology is one of the leading agricultural enterprises in China with 35 subsidiaries across the country. In August 2007, the company was listed on Shenzhen Stock Exchange and became the first private company in Jiangxi province with a successful IPO.
Financial status
In the third quarter of 2013, Zhengbang Technology posted an operating income of RMB4.08 billion (US$674.08 million), down 2.65% on-year; while net profit plummeted 58% on-year to RMB11.18 million (US$1.85 million).
For the first three quarters of 2013, the company's operating income hit RMB11.10 billion (US$1.83 billion), an increase of 11% on-year. However, net profit fell sharply by 86% on-year to RMB15.91 million (US$2.63 million) during the same period.
Recent development
Mainly established as a feed manufacturer, Zhengbang Technology has its own pig production business unit that covers pig breeding, pig production technology and disease prevention. The company initiated the "One Million Head Project" soon after it was listed. From 2007 to 2012, the company increased its sales of pigs more than 10 fold from 83,200 head to 849,000 head.
In a strategic move, Zhengbang Technology shifted its business focus from feed milling to swine production in 2010. It also set a goal of increasing its inventory of breeder pigs to 1 million head, while producing 10 million market hogs and 1 million tonnes of organic meat per year by 2016.
To reach that goal, the company laid out expansion plans to increase its share of the Chinese swine market. The company's pig production business was divided into two units: pig breeding and market hogs. The pig breeding unit focuses on markets in Jiangxi, Henan and Shandong provinces, while the market hog unit is responsible for the business in Jiangxi, Guangdong, Inner Mongolia, Anhui, Hubei provinces and China's northeast region.
Data compiled by China Business News shows that while China's hog output is becoming increasingly integrated, the number of pigs produced by the top 10 integrated enterprises accounts for only 3% of the total number. Despite the fact that China has half the world's hog inventory, small-scale operators and backyard farms still play an important role in China's swine sector.
Having said that, the country's swine sector is transitioning from a scattered network of backyard farms to large-scale integrators. With the structural change in the pig farming sector, competition between pig breeding companies is shifting from price wars to a contest for quality, brand and service. Tapping into this trend, Zhengbang Technology poured capital into pig breeding technology and has been promoting its own brand - Genmax.
As a subsidiary of Zhengbang Technology, Genmax Pig Breeding Technology (Beijing) Co., Ltd. (Genmax) serves as Zhengbang Technology's pig breeding foundation. Genmax has established a complete pig breeding system that includes four core breeding farms, eight great parent stock breeding farms and 33 parent stock breeding farms. It has also set up regional branches in provinces across China, including Jiangxi, Hubei, Anhui, Henan, Hebei and Shandong.
In November 2012, Zhengbang Technology raised RMB543 million (US$89.78 million) for the construction of a 2,500-head sow breeding farm in Anfu county, Jiangxi province; a 3,600-head sow breeding farm in Ji'an county, Jiangxi province; and a 9,600-head parent stock breeding farm in Fuyu county, Jilin province. To build its own brand of breeder pigs and compete in the high-end market, the company also invested additional RMB340 million (US$56.22 million) in Genmax.
In addition, Zhengbang Technology has made a spate of investments in pig production projects in recent years. In June 2012, the company agreed to build a 500,000-head pig farm in Shanxi province, and started the 2-million-head pig production project in Jilin province. In Heilongjiang province, the company is jointly investing RMB3.5 billion (US$578.81 million) with Beidahuang Group in a 6-million-head pig production project, touted to be the largest investment ever made in Chinese hog farming.
In January 2013, the company signed an agreement with Heilongjiang's Bayan county to construct a farm with 1 million head of annual hog production. According to the agreement, the company will invest RMB2 billion (US$330.63 million) to build five ecological pig farms in the county. With all these investments, Zhengbang Technology could have a total annual pig production capacity of 9 million head.
At the same time, the company's 30 pig farms dispersed in Heilongjiang, Liaoning, Guangdong, Shandong, Hubei, Henan and Jiangxi provinces also went operational in 2012. Together with these farms, the company's annual hog production capacity could amount to 10 million head.
Troubling signs abound
However, despite the quick expansion of the pig production operation, the company's production capacity did not increase significantly. According to Zhengbang Technology's annual report for 2012, the company sold 849,000 pigs that year, including 40,000 breeders, 519,000 piglets and only 290,000 market hogs. The figures lagged behind another animal husbandry company listed on Shenzhen Stock Exchange - Truein Group, which sold 1.488 million pigs in 2012, including 49,000 breeders, 1.17 million piglets and 269,000 market hogs.
In the first half of 2013, Zhengbang Technology's statement shows that the company produced 549,000 pigs, including 29,000 breeders, 325,000 piglets and only 195,000 market hogs. Though the company forecast it would sell 1.2 million head of pigs in 2013, it is still far from the target of 10 million head.
|
Year |
2007 |
2008 |
2009 |
2010 |
2011 |
2012 |
2013 (forecast) |
|
Number of pigs sold (head) |
83,200 |
95,500 |
167,800 |
422,200 |
713,400 |
849,000 |
1.2 million |
|
Growth rate on-year |
|
14.78% |
75.71% |
151.61% |
68.97% |
19.01% |
41.34% |
Table 1: Zhengbang Technology's pig production capacity from 2007 to 2013
While Zhengbang Technology has expanded the pig breeding and production business, its performance is flagging and troubles have surfaced in the company's operation. For example, the company's production capacity utilisation rate remained low. Especially at the two farms managed by its Hubei subsidiary, Shayang Zhengbang Modern Agriculture Company, operational capacity was running at only 32%.
Established in 2009, Shayang Zhengbang Modern Agriculture Co., Ltd. was aiming to become Zhengbang Technology's major pig production base in central China. In 2010, Zhengbang Technology increased RMB284 million (US$46.94 million) capital in Shayang subsidiary to construct five farms for market hogs.
However, investigations by the Chinese financial paper 21st Century Business Herald found out that four of the five farms did not even start operation. The paper also pointed out that in 2010 and 2011, the Shayang county government provided subsidies for the company to kick off operation of the farms, signalling the troubling situation that Shayang subsidiary was facing.
Another worrying sign is that the company's deficit reached a dangerous level. By the end of 2012, Zhengbang Technology had accumulated debts worth approximately 70% of its assets, with bank loans accounting for 60% of total liability.
Though the bank loans provided the capital support for Zhengbang Technology's business expansion, they became a burden for the company and adversely affected the profitability. The company's profit in 2012 plunged 36% to RMB80.34 million (US$13.28 million), compared to RMB126.19 million (US$20.86 million) in 2011; while in 2013, profit dropped further to RMB15.91 million (US$2.63 million).
While Zhengbang Technology made a lot of moves to raise its pig production capacity, the company also took big risk in the venture.
Firstly, the company did not establish its own network of slaughtering and processing plants to work in tandem with its pig production operation. When the pig production exceeds its slaughtering capacity, inventory costs will also rise. Secondly, with the pig farms scattered across the country, logistics has brought up the production cost for the company, while chances of pigs getting sick or even death during the transportation have gone up.
Stock information
Due to the consistently weak performance in the past few years and the mounting debt the company is carrying, Zhengbang Technology's stock prices have been on a slippery slope since July 2012.
In July 2013, the company's share price plunged to RMB5.39/share (US$0.89/share). It rebounded later and has been hovering around RMB7/share (US$1.16/share).
Source: Bloomberg
All rights reserved. No part of the report may be reproduced without permission from eFeedLink.
