Muyuan Foodstuff Company Limited
A leading hog producer enjoys a vast national market but is subject to the ups and downs of China's volatile swine sector
by David LIN and YANG Yang
Mainly engaged in the breeding of swine and the sale of breeders and commercial hogs, Henan-based Muyuan Foodstuff Company Limited (Muyuan) is one of China's leading hog producing enterprises.
Formerly known as Neixiang county Muyuan Farming Company Ltd., it was founded by two investors, Qin Yinglin and Qian Yunpeng in July 2000. In February 2010, the company officially changed its name to Muyuan Foodstuff Company Limited.
On January 28, 2014, Muyuan was listed on Shenzhen Stock Exchange, making it the second public listed hog producer from Henan after Truein Group Animal Husbandry Company.
Financial Status
From 2010 to 2012, Muyuan's net profit grew rapidly from RMB85.61 million (US$13.80 million) to RMB356.64 million (US$57.49 million) and RMB330.21 million (US$53.23 million), respectively.
In 2011, the company's net profit surged 317% in just one year, mainly due to the increase in hog sales multiplied by hog price hyperinflation. The average price of the company's commercial hogs rose to RMB16.94/kg (US$2.73/kg) in 2011, a jump of 42% compared to RMB11.96/kg (US$1.93/kg) for 2010.
Over the next two years, Muyuan's hog sales continued to rise. The company sold 917,600 head in 2012, representing a hike of 51%. However, despite a healthy growth of RMB350 million (US$56.42 million) in sales revenue, tumbling pork prices in China led to a drop of RMB26.43 million (US$4.26 million) in its net profit.
Based on the company's estimated figures, Muyuan sold 1.25 million to 1.32 million head of hogs in 2013, a sound increase of 36% to 44% on-year. However, in the wake of a turbulent year for China's hog market, the company's net profit is estimated to fall to the range of RMB300 million to RMB320 million (US$48.36 million to US$51.59 million), a decrease of RMB10 million to RMB30 million (US$1.61 million to US$4.84 million) compared to 2012.
Recent development
Over the past decade, Muyuan has evolved into an integrator that incorporates feed processing, pig breeding and commercial hog production into its internal supply chain. As of June 2013, the company's assets included three feed manufacturing plants and 25 hog farms (including subsidiaries).
In the pig breeding business, the company owns 8,175 breeders that produce swine varieties ranging from the Piétrain to Duroc, Yorkshire to Landrace breed, making it one of China's leading pig breeding companies by size. In its commercial hogs unit, the company produces hogs exclusively at its own farms, instead of employing contract farmers or co-operative farms.
Muyuan sold 359,000 head of hogs in 2010, 609,800 head in 2011, 917,600 head in 2012 and 505,300 head in the first half of 2013, affirming its status as one of the leading hog producing enterprises in Henan province. In 2012, the company ranked number two in Henan in terms of hog production, second only after another Shenzhen-listed company - Truein Group.
The company's operations are centred near its home base in Neixiang county, Henan province and in neighbouring Dengzhou city. As of June 2013, the company owned one feed plant and 21 farms in Neixiang county, boasting an annual production capacity of 1.3 million head.
In early 2010 at Dengzhou city, it established a subsidiary and plans to build a hog farm with a production capacity of 2 million head per year. As of June 2013, the Dengzhou subsidiary owned two feed plants and two farms that were partially operating, contributing a collective production capacity of 250,000 head to the company.
Later that same year, Muyuan set up a subsidiary in Wolong county, Nanyang city. As of June 2013, two farms owned by its Wolong subsidiary were partially operating with an initial capacity of 400,000 head per year, towards a full capacity of 1.5 million head that will be achieved within a few years.
In a bid to extend its industrial chain into pig slaughtering and meat processing, Muyuan entered a joint venture with Shandong Longda Foodstuff Group Company in May 2008 and established a mutually owned subsidiary, Longda Muyuan Food Company Limited.
Currently, 11 of Muyuan's hog farms have been approved by the Henan provincial authority to supply Longda Muyuan Food Company, which slaughters and processes pork for export to Japan.
Growth potential
Based on Muyuan's annual reports, the company's hog production and annual capacity are shown in table 1, with processing capacity rising at an average annual rate near 25% in the years since 2010.
|
|
2010 |
2011 |
2012 |
|
Capacity (head) |
500000 |
800000 |
1050000 |
|
Production (head) |
380900 |
657300 |
981400 |
|
Utilisation rate |
0.762 |
0.822 |
0.935 |
Table 1: Muyuan's productive capacity and utilisation rate
In the past three years, Muyuan's utilisation rate had been growing consistently and topped out at 93.5% in 2012. However, based on estimated figures, the company produced 1.25 million to 1.32 million head of hogs in 2013. Based on the company's capacity of 1.55 million for 2013, it would translate into an utilisation rate of 80.65% to 85.16%, an evident drop of 8.31% to 12.82% from a year ago.
As of June 30, 2013, Muyuan's annual production capacity reached 1.75 million head. The company plans to increase that figure to 4.8 million, taking into account the 800,000-head hog farm that the company plans to build this year with the funds gathered through its recent IPO.
Assuming a continuation of Muyuan's compounded production capacity growth rate over the past three years, it will take 2.5 years to reach full capacity at its new farms. Assuming that no other farms will be built, the company's production capacity will reach about 2.4 million, 3.9 million and 4.8 million head in 2014, 2015 and 2016, respectively. Based on a capacity utilisation rate of 90%, hog production will total 2.16 million, 3.51 million and 4.32 million head for 2014, 2015 and 2016, respectively.
Factoring in the average gross profit margin of 26.54% that Muyuan has achieved in the past three years, and based on the average hog price of RMB14.7/kg (US$2.37/kg) for 2012 and an average weight of 100kg/head for the company's hogs, Muyuan would thereby generate approximate revenue of RMB3.18 billion (US$513.11 million) for 2014, RMB5.16 billion (US$832.59 million) for 2015 and RMB6.35 billion (US$1.02 billion) for 2016 (shown in table 2).
|
|
2014 |
2015 |
2016 |
|
Capacity (head) |
2.4 million |
3.9 million |
4.8 million |
|
Production (head) |
2.16 million |
3.51 million |
4.32 million |
|
Revenue (US$) |
513.11 million |
832.59 million |
1.02 billion |
Table 2: Projected hog production and revenue for Muyuan from 2014 to 2016
Risk analysis
Of course, that is not to say the company has plotted a smooth course for its hog production business, as these projections suggest. With the frequent fluctuations in China's hog prices, the company's road will be as volatile as the China's highly unstable swine market.
Moreover, market trends have become increasingly unpredictable for China's hog industry. Recent years have seen hog prices fluctuate between their highest and the lowest point by up to 40% within a year.
In 2011, China's hog price started at RMB14/kg (US$2.26/kg) in January and peaked at RMB20/kg (US$3.22/kg) in July and August, swinging by almost 43% in six months. In 2013, price topped out at RMB18/kg (US$2.90/kg) in January and soon tumbled 38.9% to RMB11/kg (US$1.77/kg) in April as a consequence of the floating dead pigs in Huangpu River.
The last year has seen even more bizarre hog market behaviour. Swine market even defied the millennium-old norm of climbing in the three months leading up to Chinese New Year, and went into free fall during mid-December 2013.
Given the swine market's volatility and wild price swings, Muyuan faces serious challenges in growing its business. It needs to anticipate trends in both hog prices and feed costs to make the best of its capacity expansion and input procurement strategies.
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