FEED Business Worldwide - August 2012
 
China's feed sector consolidation
 
by David LIN
 
 
Entering the 21st century, there has been a sharp rise in the prices of China's macro feed ingredients. A portion of small and medium-scale feed mills, increasingly challenged by escalating ingredients costs and shrinking profitability, were squeezed out of the industry. Meanwhile, large feed mills, which enjoyed the advantages of economies of scale and
strong capital backup, continued to expand by mergers, reorganisation and expansion of production facilities. Statistics show that in 2006, there were 15,501 feed mills in China.
 
The number rapidly decreased to 13,612 in 2008, and to 10,834 in 2010 - a sharp reduction of 30% in a short span of 4 years. From 110 million tonnes in 2006, feed output jumped almost 54% to 169 million tonnes in 2011. This output rise was mostly driven by an increase in the number of large-scale feed mills and in their average capacity level.
 
In 2006, there were 140 feed enterprises with annual output of 100,000 tonnes of feed or more. By 2008, there were 187 feed mills of such scale. By 2010, 283 feed mills produced 100,000 tonnes of feed or more, 30 feed mills with annual production exceeding 500,000 tonnes, and 19 producers with annual output above one million tonnes. Enterprises producing 500,000 tonnes of feed annually have captured 43% of China's market.
 
Currently, there are 11 listed feed companies in China, namely New Hope Liuhe, Haid Group, Da Bei Nong Group, Tecon Animal Husbandry Bio-Technology, Tong Wei, Zhenghong Science and Technology, Ningbo Tech-Bank, Tong Wei, Shenzhen Jinxinnong Feed, Zhengbang Technology, TRS Group and Kondarl Group. According to these companies' annual report statistics, their combined sales of feed in 2011 increased by a prominent 29.71% from 2010 levels. With the addition of Wellhope Agri-Tech, (which is currently applying for listing), these 12 companies produced a total of 33 million tonnes of feed last year, accounting for 19.58% of China's supply - the result of consolidation over the past several years.
 
 
Fast growth of newcomers
 
Out of the 11 listed companies, other than Kondarl, Zhenghong, New Hope and Tong Wei, which had their companies listed before 2000, the remaining seven companies were all listed after 2007.
 

2011 change in sales volume of listed feed producers

Company

Volume (thousand tonnes)

Growth rates (%)

New Hope

15,400

20.88%

Haid

3,390

42.21%

Da Bei Nong

1,810

44.49%

Tecon

700

-

Tong Wei

3,350

21.30%

Jinxinnong

380

28.85%

Zhenghong

590

11.89%

Tech-Bank

240

35.83%

Zhengbang

3,530

47.94%

Kondarl

330

-

TRS

1,780

-

Wellhope*

1,580

14.00%

TOTAL

33,080

29.71%

Growth rate of Zhenghong, Kondark and TRS are derived figures; those of other companies are compiled from open sources. 

*Wellhope is applying for listing

 
 
Statistics show that growth rates of new listed companies were higher than those of the companies listed earlier. In 2011, growth rates of the four companies that were listed earlier were between 10% and 20%, whereas companies listed after 2007 generally achieved higher growth rates.
 
For instance, the sales of Da Bei Nong's in 2011 rose by 51.62% to RMB694 million (US$108.8 million), and 89.21% of this sales figure was contributed by feed sales, which increased 44.49% to 1.81 million tonnes. Haid Group's feed sales amounted to 3.39 million tonnes, helping to boost its annual revenue to RMB11.98 billion (US$1.88 billion), a tremendous rise of 55.58% compared with 2010. By restructuring itself and focusing on the livestock sector, Zhengbang successfully pushed up its sales of feed to 3.53 million tonnes, registering the highest increment of 47.94% last year.
 
 
Low profit margins vs high ROE
 
Last year, other than Kondarl, whose net profit jumped 36% due to a sharp rise in water supply business' revenues, the gross and net profit margins of all listed feed companies were on the low side. Da Bei Nong achieved the highest gross profit margin of 18.58% while Zhengbang had the lowest, at 3.75%; on average, the gross profit of listed feed companies was 9.6%. Although feed producing enterprises enjoy tax benefits, the net profits of feed manufacturing were unimpressive.
 
Da Bei Nong recorded the highest net profit margin of 6.43%, while Jinxinnong, Haid and Tecon had about 2% of net profit margin. Other listed feed companies made less than 1% net profit margins. However, feed companies have done well with regards to return on equity (ROE), ranking among the highest in agribusiness. This is because of the high turnover and sales of the feed industry.
 
 
Challenges, strategies
 
Orient Securities pointed out that high turnover in feed industry has been overlooked. Feed is usually regarded as an industry with low gross profit margin and little technical content. Hence, the advantages of high turnover rates are often ignored, resulting in low attention and valuation of feed companies' stocks. For instance, in 2011, the ROE of feed sector is seven times, six times and 4.5 times that of seed, aquaculture and vaccine sectors respectively. According to Haid Group's annual report, average days sales outstanding (DSO) was 4.68 days and average days sales of inventory (DSI) was 22.32 days.
 
As Haid Group wrote in its annual report, there is a high dependency on manpower due to high turnover and sales rates. In other words, the advantage of the industry is also its weakness in the past few years, as China's surging labour costs have cut into thin profit margins.
 
In recent years, domestic production of feed grains has seen its growth decelerate. Animal husbandry faces chronic shortages of feed grains and protein meal ingredients. Prices of soymeal have been volatile while those of corn stood stubbornly at record-high levels, 50% higher than what they cost in the west. As corn and soymeal account for about 55% of raw materials costs, the strong prices are putting considerable pressure on feed suppliers.
 
 
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