March 15, 2023

 

Keming Foods spots opportunity in Chinese pig farming

As pig prices plummeted in November 2022, Hunan-listed company Keming Foods announced its acquisition of Xingjiang Muge Foods — a key development concerning Keming's venture into the pig industry.

 

The company also increased its capital investment to obtain a controlling stake in Xingjiang Muge. Following the acquisition, Keming Foods will have an annual production capacity of 300,000 pigs.

 

Keming Foods started as a noodle manufacturer, with its operating income from noodle and flour production accounting for over 73% of its total income in 2021. Thus, one reason for the acquisition of Xingjiang Muge is the diversification of Keming's business.

 

Another reason is the soaring production costs of flour and related products, which squeezed Keming's gross profit margin.

 

According to the company, the pig farming business is expected to become the new growth driver for the company's profits. While the profit margin of its noodle business is relatively thin, the profit margin of pig breeding is considerably high — but comes with higher risks.

 

In fact, some analysts believe that Keming's involvement with pig farming is untimely and may add to the company's burden; the debt ratio of Keming Foods is already increasing amid a low-profit margin.

 

Additionally, a volatile, live pig market can either result in a positive or negative outcome for Keming. The company's acquisition of Xingjiang Muge is a bold move, as it is uncertain if it can indeed profit from pig farming.

 

Keming can look to the past years in Chinese pig production and prognosticate the possible consequences, should its stake in pig farming goes south. Following the outbreak of African swine fever in 2018, the profit margins of pig farming soared as the pig price rally lasted for more than a year. This enticed Haid Group, Hefeng, Lihua Foods and other non-pig producers into pig farming. However, a sharp drop in pig prices since 2021 has hammered these companies with losses.

 

As such, Zhengbang Technology, a seasoned pig producer in China (with an annual slaughter volume of more than 10 million pigs in 2021), is now selling its asset to service its huge debts.

 

Other companies are also leaving the pig farming industry to cut losses — which only makes Keming's entrance to the market an intriguing move that will capture the attention of industry players in the coming year.

- David Lin, eFeedLink