August 11, 2009

Zhongpin Inc, a leading Chinese meat and food processing company, reported Monday (Aug 10) higher revenues, net income and diluted earnings per share for the second quarter of this year.

During the second quarter, Zhongpin's revenues rose 17.7 percent to reach US$161.8 million compared to US$137.5 million achieved in the same period last year. Meanwhile, the company's net income in the second quarter increased 25.9 percent to settle at US$10.7 million as compared to last year's US$8.5 million. The company's diluted earnings per share also increased 24.1 percent to US$0.36 compared to US$0.29 in the second quarter of 2008.

In late April 2009, the AH1N1 flu was reported in Mexico, the US, Europe and other countries. China reported its first AH1N1 flu case in June 2009, which severely affected the country's pork industry. Pork sales significantly declined in China as consumers were afraid of contracting the disease through pork consumption.

In order to ease the fear and resume the consumption of pork products as well as protecting the hog breeding and pork industries, the Chinese government educated the consumers that eating pork will not cause the flu and it also renamed the virus as the AH1N1 flu, which is the same identification used by the World Health Organization and the US Centres for Disease Control and Prevention. Through these efforts, pork consumption in China recovered in mid-May, about two weeks after the initial reports of the outbreak of AH1N1 flu in North America.

During the second quarter, hog and pork prices decreased sequentially about 20 percent from the first quarter as the hog supplies were higher than the market demand. The imbalance in supply and demand was primarily caused by the oversupply of hogs, the seasonal decline in pork demand in the summer as well as the global outbreak of the AH1N1 flu virus in April 2009.

Zhu Xianfu, chairman and CEO of Zhongpin, said the company managed to minimise the impact and maximize its potential benefit from the temporary price and volume declines by increasing sales in its highest gross margin products, which are prepared pork products. The company also extended payment terms to encourage sales, especially in prepared pork products.

Furthermore, Zhongpin purchased more hogs amid falling prices to increase its frozen pork inventory based on the assumption that prices were temporarily depressed and would recover. Thus, the company would be able to reap higher gross profits as it sell its lower-cost inventory at higher prices. Lastly, the company sustained its market share through a series of capacity expansions and research and development programs.

Meanwhile, pork prices were also affected in June by the Chinese government's procurement of frozen pork to add to the country's state pork reserves, with its main aim to stabilise the price and protect the interests of hog breeding farmers. The government authorised certain qualified enterprises, including Zhongpin, to acquire hogs and to slaughter, process, and stock them as frozen pork. As a result, hog and pork prices have risen about 10 percent since the end of the second quarter of 2009.