CHANGGE and BEIJING, China,
May 2, 2011
/PRNewswire-Asia-FirstCall/ -- Zhongpin Inc. ("Zhongpin", Nasdaq:
HOGS), a leading meat and food processing company in the People's Republic of China, today
announced that its 2011 proxy statement and Chairman's annual
letter to shareholders are available in the investor relations
section of its website at www.zpfood.com.
The Chairman's letter to shareholders is available in the 2010
annual report to shareholders. Zhongpin is following the U.S.
Securities and Exchange Commission's rules for "notice and access"
of annual meeting related materials, and making its 2011 proxy
statement and 2010 annual report to shareholders available to
shareholders at a specific website for electronic voting, the
address of which is being mailed to shareholders of record as of
the close of business on April 20,
2011.
Zhongpin's annual meeting of stockholders will be held at its
representative office located at Room 605A, Tower A, Raycom Info
Tech Park, No. 2 Kexueyuan South Road, Haidian District,
Beijing, People's Republic of China 100190, on
June 15, 2011, beginning at
10:00 a.m. local time.
Complete text of Chairman's letter to shareholders
April 20, 2011
Letter to Shareholders
from Mr. Xianfu Zhu,
Chairman, President, and Chief Executive Officer of Zhongpin
Inc.
Dear fellow shareholders:
In fiscal 2010, we marked the third anniversary of our NASDAQ
listing by presiding over the opening bell ceremony in New York's Times Square. In addition to this
symbolic milestone, we made substantial progress in an ongoing
program of business expansion that is fundamental to our strategy
of becoming a dominant national brand in pork and pork products.
Our double-digit growth in revenues, net income, and earnings per
share in 2010 reflected the impact of added capacity as well as a
rebalancing of our product lines to reflect the increasingly
diversified demands of Chinese consumers.
The Business Model
In 2010, Zhongpin ranked fourth in the world's largest single
market for pork and pork products. In 2010, according to the US
Department of Agriculture, China
accounted for 49% of global production and consumption of pork,
which in value terms is the second largest sector in China's retail food market. Expanding from our
original base in Henan Province,
in central china, where the Zhongpin brand is entrenched through
our network of branded stores, showcase stores and supermarket
counters, we have extended our integrated business model
geographically to include key regions beyond Henan. We now have meat processing facilities
in north China, east China, northeast China and southwest China.
Currently in north and east China, we are building industrial clusters
based on the Henan model, bringing
advanced processing facilities close to major markets together with
our retail approach based on branded points of sale. As part of
this expansion, which will see a 35% increase in processing
capacity for chilled and frozen pork and a 78% increase in capacity
for prepared pork products in 2011, we are gradually tilting our
product mix towards more high value-added products. In 2010, we
began to set up an upstream dimension through a joint venture with
a nationally recognized hog sire breeder in Henan, which will come on line in August 2011 and provide 20,000 head of premium
sire boars annually for our hog suppliers. We added a new
downstream product with our business in pork oil, with the opening
of a production facility at our headquarters in Changge,
Henan. We are also developing a
cold-chain logistics service that will leverage our national
network of cold storage and transport facilities.
Building industrial clusters and rebalancing the product
mix
As we expand, we are keenly aware of the need to develop our
integrated business model to anticipate and lead the development of
a modern meatpacking and processing industry. This means deploying
state-of-the-art processing equipment as well as information
technology based logistics in order to improve our operational
efficiency. In several of our recent expansion projects, we
developed these functions in strategic proximity in order to
maximize opportunities for synthesis and operational
innovations.
Typical of this strategy are the facilities under construction
this year. In Changge, we are investing $58.5 million to build a new production, research
and development, and training complex. On the production side, we
will be adding 100,000 metric tons of annual capacity for prepared
pork production. The R&D facility, which we expect to open by
the fourth quarter of 2012, is expected to strengthen our
advantageous status of national-level pork processing R&D
center and quality control center. In Changchun, we are investing $61.5 million to build a slaughtering and
processing plant, low temperature prepared pork plant, logistics
center, and R&D center. Here, we will add a total of 125,000
tons of annual capacity – 70,000 tons of chilled pork, 25,000 tons
of frozen pork, and 30,000 tons of prepared pork products. At the
same time we have another high-standard facility under
construction, located in Jiangyan, Jiangsu Province.
By the end of 2012, such activities will bring total capacity of
chilled and frozen pork to 758,760 metric tons annually, from
563,760 metric tons at the end of 2010. Annual capacity for
high-value added prepared pork products will rise to 306,000 metric
tons, nearly double our current capacity of 110,000 metric tons,
bringing the share of prepared pork products from 15.6% of total
production to around 28%. This reflects our strategy of bringing
our product mix into line with rising consumer demand for prepared
pork products, as well as willingness to pay higher prices for
them. We currently offer more than 150 prepared meats under the
Zhongpin brand, ranging from sausages and hams to Chinese cured
ham, out of a total product line of more than 390 distinct meat
products and 35 fruit and vegetable products. As of the end of
2010, we had more than 100 new products under development.
Investing in technological innovation to be competitive in a
changing market
There are many reasons for investing in technological
superiority. Broadly speaking, the most important of these is food
safety, followed closely by our view on coming changes to the pork
industry as the Chinese government moves to modernize the meat
industry.
A reputation for using healthy, natural products is integral to
our brand. Traditional wet markets still dominate the national pork
market, leading to lapses all across the supply chain in terms of
health and safety. Cold chain logistics are replacing the wet
market system dependent on a myriad of small farms and brokers. We
believe that changes in the industry will accelerate over the next
five years because Chinese consumers increasingly demand an end to
the misery of tainted food.
In March 2011, our industry faced
concerns when a major pork manufacturer, Henan Shuanghui Investment
and Development Company, discovered that some of its hogs had been
fed clenbuterol.
Our quality assurance system ensures that only healthy hogs are
slaughtered at our slaughterhouses. We believe that the scandal has
actually benefited Zhongpin, not only because of our existing
reputation for quality assurance but because it has focused our
attention on doing a good job even better. It has given a new
impetus to our existing program of developing better upstream
controls.
In terms of upstream management, we intend to increase the
proportion of hogs that we buy from large-scale breeding farms,
currently 30%, and strengthen supervision of brokers, from whom we
buy the remaining 70%. We have increased our inspection sampling
for hogs from the 5% mandated by the government to 10%. We are also
taking steps to control the upstream industry, including our joint
venture sire breeder farm, which is scheduled to begin operation in
August 2011. We are applying a "six
party" model to our upstream ventures, through which we integrate
breeder hog farms, breeding farms, feed plants, veterinary medicine
and vaccine companies, and banks, together with the resources of
the Zhongpin Group.
On the policy side, in 2010 the China Meat Association, or CMA,
published a strategy report corresponding to China's 12th Five-Year Plan
(2011-2015). This called for a decrease in sales of room
temperature sales of pork to below 50% in cities at or above the
county level by 2015, and an increase sales of chilled pork from
10% to 30% of pork sales across the country. Of even greater impact
may be a plan to reduce outstanding slaughterhouse licenses from
21,000 to around 3,000.
If enforced, the new policies will give an enormous advantage to
market participants who have the quality controls, processing
technology, and cold-chain logistics supported by information
technology to meet the new standards. At present, the top five pork
manufacturers have a market share of less than 10%. Over the next
five years, the modern sector of the meat industry is likely to
grow quickly as the fragmented "wet" supply chain is replaced by
regional and national companies managing "dry" supply chains
characterized by cold storage, delivery systems with electronic
inventory and traffic controls, and "dry" end users such as
supermarkets. At Zhongpin, we see these trends as extremely
supportive of our own business objectives, which include serving as
an industry consolidator as the traditional system is replaced in
large part by a modern system reflecting the information age.
Expanding our footprint
In order to take advantage of these opportunities, we have
expanded our marketing and distribution capability along with
production capacity. By the end of 2010, we had sales offices in
127 cities in China and warehouses
in 92 of those. We will be expanding our network of sales offices
and warehouses into up to 10 additional cities by the end of 2011,
targeting cities with between 1-3 million residents and annual per
capita income of over RMB 10,000. We
have been building our network of showcase stores, branded stores,
and Zhongpin supermarket counters. We increased the number of these
modestly in 2010, to a total of 3,326 outlets, an increase of 121
stores, with the largest geographic sector growth in third-tier
cities, up 10% to 421 outlets. This compares to an increase of 144
stores in 2009. By the end of the year, we had 157 showcase stores,
1,072 network stores, and 2,097 supermarket counters. Zhongpin has
established distribution networks in 20 provinces, plus
Beijing, Shanghai, Tianjin, and Chongqing, covering parts of the north, east,
south, and mid-south regions of China, and has also formed strategic alliances
with leading domestic supermarket chains within China.
In addition to the new projects we have highlighted as part of
our strategy of developing industrial clusters, we completed
several major capacity expansion projects in 2010. These included
our new facility in Tianjin, which
went into operation in January 2010
with an annual production capacity of 100,000 metric tons of
chilled and frozen pork. Phase two of the Tianjin facility began construction in
October 2010, with a planned capacity
of 36,000 metric tons of prepared pork products. Our new pork oil
plant in Changge, with a capacity of 20,000 metric tons, began
operation in April 2010. We completed
an expansion of our facility in Anyang City in Henan Province in August 2010 as planned, increasing capacity from
63,000 metric tons to 85,000 metric tons. In October 2010, we also broke ground for a
$63 million combined production
facility, warehouse, and distribution center in Taizhou,
Jiangsu Province, that will have a
production capacity of about 100,000 metric tons of chilled and
frozen pork, and 30,000 tons of prepared pork products. Of the
chilled and frozen output, 80% will be for chilled pork including
easy-to-cook products, and 20% for frozen pork.
Managing our financial resources wisely
At this critical juncture, the Chinese economy is maintaining a
robust growth trajectory and national policy supports consolidation
of the industry. The only way forward is growth, to avoid the
pressures that will inevitably fall upon smaller, weaker players.
At the same time, we have exercised a conservative fiscal strategy,
based on paying off debt and leveraging our equity. We believe that
our existing cash and cash equivalents, together with our ability
to secure bank borrowings, will be sufficient to finance our
investment in the operating requirements of these new facilities.
For all of 2011, we anticipate capital expenditures of about
$142.8 million. As of December 31, 2010, our debt to total capital was
36%, and our net debt to total capital was 25%. Interest coverage
for the year was 8.9 times. We believe that moderate de-leverage
and our good interest coverage gives us reasonable financial
flexibility should we need it.
Part of the reason for our healthy cash position is a follow-on
public offering of 5 million shares of common stock, completed on
March 22,2011. Our aggregate net proceeds were $66.4 million after deducting underwriting
discounts and commissions as well as offering expenses paid by
Zhongpin. Out of the proceeds, some 60% will be used to support
expansion projects while the remaining 40% has been allocated to
general corporate use. Although this has led to some dilution for
existing shareholders, the overall impact has been to strengthen
our fiscal position as we undertake our current expansion
program.
One final piece of good news on the financial front is
continuing national support for our capacity expansion, which is
viewed as part of a national priority to modernize the meat
industry. In 2010, we received government subsidies of $4.2 million, an increase of $0.8 million over 2009. In 2011, we anticipate
subsidies of at least $5 million.
2010 Operating Highlights
China overtook Japan to become the world's second largest
economy after the United States in
2010, with a nominal GDP of $5.88
trillion. Its 10.46% growth rate, the highest of any major
economy, triggered risks of overheating, and China's central bank raised interest rates
twice during the year. Macroeconomic cooling measures have helped
to reduce inflationary pressures to some degree, and policymakers
view 9.8% as a reasonable growth forecast for 2011.
Although concerns have been raised at the national level with
rising food prices, we believe that the cause of higher pork prices
during the year was largely due to a combination of government
subsidies for hog farmers in the first half of 2010, as well as
drought and floods in several parts of China that increased agricultural prices and
increased the cost of raising hogs. The result was a sustained
increase in hog prices that lasted several months and contrasted
with the normal pattern of short periods of price change followed
by periods of stability.
During these months, market prices for pork were unable to match
the sustained increase in hog prices, and as a result Zhongpin's
third quarter profit margin was lower than in the third quarter of
2009. By November, the spread between hog prices and pork prices
returned to a more normal level. Although hog prices continued to
rise through the end of the year, pork prices rose still more
rapidly than hog prices and we were able to achieve more normal
profit margins in the fourth quarter and for the year as a whole.
Gross profit margin declined slightly, from 11.9% in 2009 to 11.7%
in 2010. The outlook for pork and pork products in 2011 remains
strong, buoyed by consumer demand. In 2011, live hog prices are
expected to increase in the first half despite ample supply.
Average pork prices are expected to increase between 5-10% during
the year.
Against this backdrop of economic growth and higher commodity
prices, Zhongpin's strong performance exceeded our guidance and
expectations for 2010 with an increase in revenues by 30% to
$946 million, and an increase in net
income by 28% to $58.3 million. This
compares with 2009, when revenue grew by 35% and net income
increased by 32%. Basic earnings per share increased by 13% to
$1.65 on a fully diluted basis,
compared with $1.33 in 2009.
We made significant progress during the year executing a growth
strategy based on increasing our brand recognition and sales;
expanding our market presence; increasing our production capacity;
expanding and optimizing our product lines; and maintaining our
technological superiority.
Geographic expansion was among the major themes during the year,
with nine facilities put into service in Changge, Zhumadian,
Anyang, Yongcheng, and Luoyang, all in Henan province, and a new 100,000 metric ton
production facility in Tianjin,
the gateway to the Bohai Gulf Region. Another four facilities will
begin operation in 2011, and three in 2012, in locations ranging
from Taizhou in Jiangsu Province
to Changchun in Jilin Province. Going forward, $145.5 million in new construction is planned or
underway. During the year, Zhongpin added 89,000 metric tons in new
capacity, bringing the total to 703,760 metric tons.
The impact of higher prices was felt mainly in our segments for
chilled pork and frozen pork, accounting for 54% of sales and 27%
of sales respectively. Both segments reported growth in revenue and
tonnage, with revenue from chilled pork products increasing by 30%
from 2009 to $514.6 million and
tonnage increasing by 24% to 265,315 metric tons. The average price
per metric ton of chilled pork increased by 5% from 2009. Frozen
pork revenues increased on higher tonnage at slightly higher
average prices. Revenues from frozen pork products increased by 15%
in 2010 to $258.5 million. Frozen
pork tonnage increased by 15% in 2010 to 152,766 metric tons. The
average price per metric ton for frozen pork increased 0.1% in 2010
from 2009. Revenue from chilled pork was $514.6 million and revenue from frozen pork was
$258.5 million. The performance of
these two segments was quite different from 2009, when average
prices for fresh and chilled pork fell by 18% and average prices
for frozen pork declined by 23%.
Our strongest relative performance was in prepared pork
products, a segment representing only 17% of sales but one that is
growing quickly. We saw sales growth of 69% in 2010 to $157.4 million, up from $93 million in 2009, and volume growth of 86%,
based on a 9% decrease in average prices in 2010 from 2009. Based
on projects currently underway, this segment will continue to see
double-digit growth in 2011.
Our fruit and vegetable segment also performed well. Revenues
for the segment increased on higher tonnage at higher average
prices. Vegetable and fruit revenues increased by 34% in 2010 to
$16.2 million. Tonnage of vegetables
and fruit increased 22% in 2010 to 20,497 metric tons. Revenues in
the segment contributed 2% to total sales in 2010.
Balance sheet and cash flow
Through conservative management, we were able to end up with
significant improvements in our balance sheet despite an aggressive
program of capital expansion. We ended the year with cash and cash
equivalents of $84.1 million,
$83.6 million in long-term debt and
working capital of $34.7 million
(current assets of $211.3 million
less current liabilities of $176.6
million). Stockholders' equity as of December 31, 2010 was $370.9 million, up 25% from $296.8 million at the end of 2009.
We generated $68.6 million in cash
flow from operating activities, an increase of $27.8 million compared to net cash provided by
operating activities of $40.8 million
in 2009. Net cash used in investing activities decreased by
$18.2 million to $100.8 million in
2010 from $119.0 million in 2009. The
company invested $28.2 million less
on the construction of new production facilities, $2.7 million more on acquiring land use rights,
and $5.1 million more in restricted
cash so that the company could issue bank payable notes. The cash
invested for building new production facilities was part of the
company's development strategy to increase its geographical market
coverage. Counterbalancing the increase in net cash flow was a
decline of $60.5 million to $44.9
million in cash provided by financing activities in 2010,
from $105.4 million in 2009. In 2009,
the company received $57.1 million of
net proceeds from issuing common stock, but the company did not
issue common stock in 2010. In 2010, the company received
$20.8 million more in net proceeds
from long-term bank loans (net of repayments), and $21.1 million less in net proceeds from capital
lease obligations. In addition, it repaid $12.4 million more in short-term bank loans
during 2010.
Zhongpin believes its existing cash and cash equivalents,
together with our ability to secure bank borrowings, will be
sufficient to finance its investment in new facilities, with
budgeted capital expenditure of about $142.8
million over the next 12 months, and to satisfy its working
capital needs. It intends to satisfy its short-term debt
obligations that mature over the next 12 months through additional
short-term bank loans, in most cases by rolling over the maturing
loans into new short-term loans with the same lenders.
2011 Guidance
In 2011, we expect that Zhongpin's sales revenues will be within
a range of $1.18 billion to $1.23
billion, with gross profit margin with the range of 11.7% to
12.4%, and net income margin within the range of 5.7% to 6.3%. The
resulting diluted earnings per share for the year 2011 are
currently expected to be within the range of $1.89 to $2.18 per share, assuming average
diluted common shares outstanding of about 35.5 million in 2011.
This guidance is based in part on an expectation that we will
achieve a higher percentage of sales from our higher-margin chilled
pork and prepared pork products in 2011 than in 2010.
Food safety
Our ability to maintain the highest quality products is based on
three key strategies. We believe that these will serve us well as
major consolidation begins within the Chinese meat products
industry.
First, Zhongpin's upstream hog suppliers are for the most part
standardized live hog breeding farms and brokerages. Zhongpin's hog
suppliers share the same commitment to the strictest quality
assurance and control systems as Zhongpin and make their own
quality control guarantees. In this way, we are able to satisfy
national quality standards, quality assurance and control
requirements, and the demand of our high-end clients for the
highest quality.
Second, Zhongpin possesses national-level quality inspection
centers, and each of its slaughtering and processing facilities
meet and comply with all relevant certifications, including ISO
9001, HACCP (Hazard Analysis and Critical Control Point), GMP, and
SSOP. All live hogs, half-finished products, and finished products
are inspected to the strictest standards. As a standard operating
procedure, if any contaminants or illicit or poisonous chemicals,
such as the lean drug clenbuterol, are found in the processing
lines, Zhongpin immediately conducts harmless disposal to eliminate
all possibly contaminated material and contaminates. This standard
practice is rigorously followed. The Chinese government has
provided subsidies to help assure that our products are safe.
Third, because Zhongpin starts with the highest quality hogs and
has the most advanced quality assurance systems available together
with quality control inspections, Zhongpin is recognized as a
premium supplier. Our customers are willing to pay a higher price
for our products because of the reputation we have established for
food safety. This is an element of our brand image that will be
invaluable as the industry moves into a restructuring phase, driven
both by government policy and consumer demand.
Outlook
By 2025, according to the McKinsey Global Institute,
China will add 350 million people
to its cities, more than the population of the United States today. China's GDP will be five times larger, and
urban consumer markets will rise from 25% of GDP, or RMB 3.9 trillion, to 33% or RMB 21.7 trillion by 2025. The tastes, habits,
and aspirations of this "urban billion" will reshape not only the
Chinese economy but potentially the global economy as well. Much of
the growth will come from third tier cities – China will have 221 cities with populations
over 1 million(1).
All of us whose business depends on the future shape of the
Chinese economy see similar trends. At Zhongpin, we are preparing
ourselves for a period of industry consolidation over the next five
years, as government policy and market demand combine to reshape
the Chinese meat industry. We believe that we have the financial
and managerial resources to thrive during this challenging
period.
For us, it will be a period of growth and opportunity. We have
positioned Zhongpin to take advantage of urbanization and the
aspirational values associated with it, that demand better quality,
variety, and above all safety in food products. Our core business,
pork, is at the heart of this transformation simply because it is
in the heart of the Chinese people and very much on the menu of
every special occasion. At Zhongpin, we celebrate the rise of the
Chinese consumer and his and her demand for higher standards in all
areas of life.
Looking back at 2010 and ahead to 2011, I would like to thank
all of you for your support, whether you are a fellow shareholder,
a management colleague, one of our 121 research and development
personnel, 306 quality assurance specialists, 1,275 sales people or
5,402 operating personnel, out of our corporate family of 7,138
people. Our most heartfelt thanks must go to our customers, for
their lively interest in new products and attachment to
China's favorite source of
protein, pork.
(1) McKinsey Global Institute, "Preparing for China's urban billion", March 2009
Xianfu Zhu
Chairman, President and Chief Executive Officer
About Zhongpin
Zhongpin Inc. is a meat and food processing company that
specializes in pork and pork products, vegetables, and fruits in
China. Its distribution network in
China covers 20 provinces plus
Beijing, Shanghai, Tianjin, and Chongqing and includes more than 3,300 retail
outlets. Zhongpin's export markets include Europe, Hong
Kong, and certain countries in Asia. For more information, please visit
www.zpfood.com.
Safe harbor statement
Certain statements in this news release are forward-looking
statements made under the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Zhongpin has based its
forward-looking statements largely on its current expectations and
projections about future events and trends that it believes may
affect its business strategy, results of operations, financial
condition, and financing needs. These forward-looking statements
can be recognized by the use of words such as "anticipates,"
"estimates," "expects," "intends," "plans," "projects," "will," or
words of similar meaning. These forward-looking statements are not
guarantees of future performance and are based on a number of
assumptions about the Zhongpin's operations, and are subject to
risks, uncertainties, and other factors beyond the Zhongpin's
control.
These projections involve risks and uncertainties that could
cause actual results to differ materially from those in the
forward-looking statements, which may include but are not limited
to such factors as downturns in the Chinese economy, unanticipated
changes in product demand, interruptions in the supply of live pigs
and or raw pork, the effects of weather on hog feed production,
poor performance of the retail distribution network, delivery
delays, freezer facility malfunctions, Zhongpin's ability to build
and commence new production facilities according to intended
timelines, the ability to prepare Zhongpin for growth, the ability
to predict Zhongpin's future financial performance and financing
ability, changes in regulations, and other information detailed in
Zhongpin's filings with the United States Securities and Exchange
Commission. These filings are available at www.sec.gov or at
www.zpfood.com.
You are urged to consider these factors carefully in evaluating
Zhongpin's forward-looking statements, whether written or oral, and
whether made by or on behalf of Zhongpin, and are cautioned not to
place undue reliance on those forward-looking statements, which are
expressly qualified in their entirety by this cautionary statement.
All information provided in this news release is as of the date of
this release. Zhongpin does not undertake any obligation to update
any forward-looking statement as a result of new information,
future events, or otherwise, except as required by law.
For more information, please contact:
Zhongpin Inc.
Mr. Sterling Song (English and
Chinese)
Investor Relations Manager
Telephone +86 10 8286 1788 extension 101 in Beijing
ir@zhongpin.com
Mr. Warren (Feng) Wang (English
and Chinese)
Chief Financial Officer
Telephone +86 10 8286 1788 extension 104 in Beijing
warren.wang@zhongpin.com
Christensen
Mr. Christian Arnell (English and
Chinese)
Telephone +86 10 5826 4939 in Beijing
carnell@christensenir.com
Mr. Tom Myers (English)
Mobile +86 139 1141 3520 in Beijing
tmyers@christensenir.com
Ms. Kathy Li (English and
Chinese)
Telephone +1 212 618 1978
kli@christensenir.com
SOURCE Zhongpin Inc.