China Tracker - Details for Zhongpin (HOGS)

 Zhongpin
 Analyst Coverage
2011-08-29Piper JaffrayReiterationOverweight$21.30
2011-08-26ChardanReiterationBuy$14.50
2011-08-22Piper JaffrayReiterationOverweight$21.30
2011-08-10Roth CapitalReiterationNeutral$10.00
2011-08-09Piper JaffrayReiterationOverweight$26.50
2011-08-09Cowen & Co.ReiterationOutperformn/a
2011-08-04Roth CapitalDowngradeNeutral$10.00
2011-08-02ChardanReiterationBuy$18.00
2011-07-20ChardanReiterationBuy$18.00
2011-07-19Piper JaffrayReiterationOverweight$26.50
2011-07-19Cowen & Co.ReiterationOutperformn/a
2011-07-19Roth CapitalReiterationBuy$18.00
 

Management hosted a conference call today to address accusations from a recent short report. Based on our third-party verifications, we are comfortable with HOGS’ reported annual hog slaughtering numbers. While we believe the reported retail store count is accurate, we plan to verify store counts in two-to-three cities in the next week.

2011-07-08Cowen & Co.ReiterationOutperformn/a
2011-07-06ChardanReiterationBuy$18.00
2011-06-27Roth CapitalReiterationBuy$18.00
2011-06-22ChardanReiterationBuy$18.00
2011-06-10Morgan JosephReiterationBuy$23.00
 

Thursday morning, before the market opened, HOGS announced it would start building a new processing plant in Tangshan city in the Hebei province. Construction is expected to start in 3Q11 and we believe the plant should start producing chilled and frozen pork by 3Q12 and prepared pork by 2Q13. This plant is projected to add 102,000 metric tons of annual capacity (60,000 chilled pork, 20,000 frozen pork and 22,000 prepared pork products).

We think management is likely to finance this expansion with cash on hand and its line of credit with China Construction Bank. The company had $234 million of cash on hand at the end of 1Q11 and we project cash from operations should total $172 million over the next seven quarters. Currently, the company has five expansion efforts underway that together are expected to cost $254 million ($21 million for Tianjin Prepared Pork, $63 million for Taizhou, Jiangsu, $62 million for Nong’an, Jilin, $59 million for Changge, Henan, and $49 million for Tangshan, Hebei ). All expansion projects should be completed by 2Q13. Finally, HOGS has a $1.5 billion line of credit with China Construction it could tap into if needed.

With this announcement, HOGS now has expansion efforts underway that should increase the company’s capacity 70% by 2Q13. Current annual capacity now sits at 703,760 metric tons. The Tianjin adds 36,000 metric tons, Jiangsu adds 130,000 metric tons, Jilin adds 125,000 metric tons, Changge adds 100,000 metric tons, and Tangshan adds 102,000 metric tons. This should expand the company's total capacity to 1,196,760 metric tons by 2Q13, a 70% increase.

No change to our annual EPS estimates; however, we are revising our revenue and capital expenditure estimates. We now assume an incremental $7 million in quarterly capital expenditures starting in 3Q11 through 1Q13 for Tangshan. Furthermore, we assume an additional $53 million in 2H12 revenue as the Tangshan facility comes online.

While we believe Zhongpin is going to have its hands full as it aggressively ramps up production, we think this is a smart long-term move. The Chinese government revoked 8 slaughter house licenses when Zhongpin opened the Tianjin plant and we think the government will continue to close wet facilities once new dry capacity is in place. Therefore, we continue to rate the shares a Buy with a $23 price target.

2011-06-09Piper JaffrayReiterationOverweight$26.50
2011-05-26Cowen & Co.InitiationOutperformn/a
2011-05-10Rodman & RenshawReiterationOutperform$21.00
 

Rest of 2011 looks to be supported by firm hog price and capacity expansion Hog price in China has been firm in the first half of 2Q11, and we expect it will remain strong for the rest of 2011 in light of China's increasingly inflationary environment. We also believe Zhongpin will benefit from its capacity expansion efforts as the 36,000-MT prepare pork plant in Tianjin is expected to come on-line in Q2 and the 25,000-MT frozen pork and 70,000-MT chilled pork plants are expected to start operations in Q4. In this regard, we expect the company will have no problem achieving its 2011 financial performance guidance.

2011-05-09Roth CapitalUpgradeBuy$20.00
 

We maintain our $20.00 PT based on 11.5x our 2011 EPS of $1.74 and upgrade our rating from Neutral to Buy, reflecting 26% share price upside to our PT. We expect increased economies of scale to stabilize profitability in long term.

2011-05-09Piper JaffrayReiterationOverweight$26.00
2011-05-03Morgan JosephReiterationBuy$23.00
2011-04-18ChardanReiterationBuy$23.00
2011-04-15Piper JaffrayReiterationOverweight$26.00
2011-04-15Global HunterDowngradeAccumulate$18.00
2011-03-17ChardanReiterationBuy$23.00
2011-03-15Global HunterUpgradeNeutral$15.00
 

On March 7, 2011, Zhongpin reported Q4 and FY2010 results and announced that the company began a follow-on stock offering of 5MM shares with a 15% over-allotment option, following which we downgraded the company to a Reduce rating with a $15 price target citing our concerns with the company’s serial equity dilutions and concentration on empire building versus generating positive returns and free cash flow to investors. HOGS shares closed at $14.95 on Tuesday, declining 27% since the day of the announcement. As a result, we believe that shares of Zhongpin are fairly valued at this point and we are upgrading the stock to a Neutral rating.

2011-03-10Global HunterDowngradeReduce$15.00
 

Zhongpin reported record Q4 and FY2010 results, exceeding consensus estimates and its prior full year guidance. Operationally the company showed that it is benefiting from the ongoing capacity build out and the ability to pass through price increases to account for food cost inflation. On the earnings call, HOGS outlined a number of capex initiatives that should continue to drive revenue and net income growth in FY2011 and FY2012, but at this point we are concerned with the ability to grow EPS and free cash flow, as well as management's lack of focus on building shareholder value. We now expect the company to report 2011 revenues of $1.2 billion and EPS of $1.79, indicating minimal EPS growth for the second consecutive year and facing yet another year of negative free cash generation. We remain positive on the Chinese agriculture and food processing industries as a whole and do not mean to discredit Zhongpin’s efforts to become the largest pork processor in China. However, we are merely concerned with shareholders' ability to generate incremental value in the process as empire building does not tend to benefit the shareholders whose backs and capital it is built upon. Despite the strong quarterly results we feel that investors are likely to see minimal potential EPS growth over the medium term, which will likely lead to multiple contraction as the stock currently trades at a premium to the majority of the US-listed China peers. As a result, we are downgrading our rating to Reduce and we recommend investors use any strength in the share price to exit positions, looking to reestablish positions when the valuation becomes compelling again.

2011-03-08Morgan JosephUpgradeBuy$23.00
 

We are increasing our 1Q11 EPS estimate to $0.55, decreasing our FY11 EPS estimate to $1.95, and introducing a FY12 EPS estimate of $2.40. Our 1Q11 EPS estimate moves up $0.07 on strong pricing and spreads, while our FY11E EPS goes down $0.05 on the anticipated secondary dilution.

2011-03-07Piper JaffrayReiterationOverweight$26.00
2011-03-07Roth CapitalDowngradeNeutral$20.00
 

Although HOGS reported better-than-expected results driven by higher ASPs, we believe meeting HOGS's 2011 guidance, which projected a 5-10% price increase and a 79% utilization rate, will be challenging. We are disappointed by the continued price decline in LTM sector, down 9.2% y/y, in an up-trending industry price environment, indicating fierce competition in high-end markets. We question HOGS' aggressive growth strategy, which requires equity financing every 18-months, including highly leverage in order to maintain 25%+ y/y revenue growth. Furthermore, management's decision to meet capacity requirements by constructing new facilities has led to lower operating efficiency, longer payback periods, and limited room for profitability improvement compared with competitors. We lowered our 2011 EPS estimate due to the pending share count increase from the announced offering, and downgrade HOGS to Neutral rating with a PT of $20.00.

2011-03-03Morgan JosephReiterationHoldn/a
2011-03-02ChardanReiterationBuy$24.00
2010-12-13Global HunterUpgradeAccumulate$24.00
 

Zhongpin has been both a beneficiary and a victim of the food price inflation issues that have plagued China over the past several months. Q3 was negatively impacted as the company was unable to fully pass through rising input costs. We believe this was a timing issue and that the company has been proactive in managing to protect its gross margin. We believe that current and future quarters could see some margin pick up if government intervention is able to curb food price inflation. We had downgraded the company from Buy to Neutral in November, when shares reached our $24 target. However, given the recent pullback to just above $17, the company provides investors with an opportunity to own an industry leader in one of the most crucial areas to the Chinese populous. We view Zhongpin as the consolidator of choice in the processing industry. Given the critical mass it has attained, the company should be well positioned to expand its downstream production, driving brand value, revenue growth and margin expansion. 

2010-12-13Piper JaffrayReiterationOverweight$28.60
2010-11-10Morgan JosephDowngradeHold$21.00
2010-11-10Roth CapitalReiterationBuy$24.00
 

Lower 3Q10 production volumes reflect management price discipline and gross margin stability efforts in rising cost environment. We anticipate higher volumes in Q4, reflecting stronger demand relating to holidays and the Chinese New Year. We maintain a positive view on the long-term fundamentals despite our lower estimates as capacity buildout should contribute to substantial growth over the next two years. The recent valuation multiple expansion for shares reflects the company's industry-leading position and we believe the current valuation multiple is appropriate given the 20%+ growth potential of the business. Applying a 13x multiple to 2011 EPS, we arrive at our $24 PT (up from $18), which translates into 10.9x EBITDA.

2010-11-09Global HunterDowngradeNeutral$24.00
 

Zhongpin reported Q3 results, basically in line with estimates, showing a slight miss relative to both top and bottom line estimates and reiterating its previous FY10 guidance. We are concerned that the recent run up in share price, which has achieved our price target of $24, indicates that investors were expecting an ahead of consensus quarter and likely increase of guidance. As a result of both our price target having been met and our concern regarding investor expectations, we are reducing our rating to Neutral. Shares have appreciated over 80% since our June initiation, closing at $23.16 yesterday, which translates to 11.7x FY2011 on a P/E basis and 9.8x FY2011 on an EV/EBITDA basis. We remain positive on the Chinese agriculture and food processing industries as a whole and Zhongpin's prospects in particular; however, we feel shares of Zhongpin have become fairly priced at these levels relative to near term earnings growth prospects.

Zhongpin reported Q3 results and reiterated its previous FY10 guidance. Revenues for the quarter came in at $241.1MM, corresponding to 23.7% Y/Y growth; however, the number was slightly below ours and consensus estimates of $246.2MM and $246.7MM, respectively. Gross margins have contracted by ~90bps Y/Y, showing 11.3%, below our estimate of 12%, while gross profits in dollar terms grew by 15.1% Y/Y to $27.3MM. The primary reason behind the revenue miss and margin contraction was the significant increase in hog prices since late October due to government purchases initiated to stabilize hog prices and protect hog farmers. This inflated Zhongpin's input costs but was not reflected in an increase in pork product ASP by enough to offset it. The company expects pork prices to continue to rise in the near term due to the approaching holiday season and resulting strong demand, which should help to normalize the company's margins going forward.

Operating income in Q3 increased by 2.2% Y/Y to $15.8MM, while operating margin contracted by 130bps to 6.6%; below our expectations of $18.4MM and 7.5%. SG&A expenses increased Y/Y due to higher advertising costs and depreciation, as well as a $0.5MM increase in bad debt provision. Interest expense also increased during the quarter as a result of additional $35.7MM in long term and $3.2MM in short term debt. The company benefited during the quarter from $1MM in government subsidies and $1.1MM in other income stemming from the reversal of a tax payable accrued from the sale-lease back transaction. Zhongpin reported net income of $14.7MM, or $0.42 per fully diluted share, vs. our and consensus estimates of $0.43.

On the earnings call, management reaffirmed its prior full year 2010 guidance. Zhongpin continues to expect full year revenue in the $900MM-$940MM range and gross profit in the $106MM-$115MM range, corresponding to approximately 12% gross margin. The company further stated that it expects net income in the $52MM-$57MM range, which comes out to fully diluted EPS of $1.49-$1.64.

Downgrading Zhongpin to Neutral based on valuation. We initiated coverage of Zhongpin in June 2010 with an $18 price target and selected it as one of our top picks for the year. Subsequently, on October 11, 2010, we raised our price target to $24 citing the recent positive trends in pork prices coupled with increased investor interest in the name, leading to a multiple expansion. Our $24 price target was based on 11.1x FY2011 on a P/E basis and 9.1x FY2011 on an EV/EBITDA basis. Zhongpin's stock price has had a phenomenal run since our initiation, appreciating over 100% from recent lows. At the current price of approximately $23.16 per share, we believe Zhongpin's stock is fairly valued based on our 2011 estimates and do not foresee material appreciation in the near term. 

2010-11-09Roth CapitalReiterationBuy$18.00
 

HOGS reported relatively weak results in a typically-strong quarter, mainly attributable to lower than expected sales volume (q/q decline). Also, a record-low GM reflects the impact of lower chilled pork profitability, as the company was presumably unable to pass-through increased hog prices to customers. Debt increased sharply to fund capacity expansion (acquisition of land, plant, and equipment). Our estimates, rating, and price target are under review pending Tuesday's conference call.

Results missed on lower-than-expected sales volume & margin - 3Q10 revenue grew 24% y/y to $241mm, below our $251mm estimate and consensus of $246mm, attributed to lower sales volume in a typically-strong quarter. Sales volumes for chilled, frozen, and prepared meat were 119.4K tons, down 7.5% sequentially and up 16% y/y, in-line with the total capacity increase for the same period. Net income of $14.7mm or $0.42/share was below our estimate of $15.4mm or $0.44/share, also impacted by lower GM. GM of 11.3% was down 90bps from last year and 50bps sequentially, and below our 21.1% estimate. Lower than expected margins were caused primarily by lower GM of chilled pork segment (54% of total revenue). Chilled pork GM was 10.4%, down from 11.4% of last year and last quarter.

Debt increased 36% or $60mm sequentially to $227mm, which funded $35mm investment activities and cash increase. Cash from operations was $1.4mm, largely affected by decrease of A/P from $22.5mm last quarter to $9.1mm this quarter. HOGS expects to spend an additional $106mm to increase total capacity by 44% from 674K tons to 969K tons by the end of April 2012 for chilled, frozen and prepared meat.

As expected, management maintained its 2010 guidance, calling for revenue of $900-$940mm and net income of $52-$57mm, or $1.49-$1.64/share. Maintain BUY rating and $18.00 PT based on 11x 2010 EPS of $1.64, equal to a peer group multiple traded in the U.S and a discount to the closest competitor listed in Hong Kong.

2010-11-09Rodman & RenshawReiterationOutperform$26.00
 

3Q10 results slightly missed expectations Zhongpin's sales revenue for the quarter was $241.1 million, slightly below our expectation of $242.2 million, but clearly missed the much more optimistic Street consensus of $246.6 million. GAAP net income for the quarter was $14.7 million, below our estimate of $15.0 million. Diluted GAAP EPS for the quarter was $0.42, a penny shy of both Street and our expectations of $0.43. On the margin side, gross margin was 11.3%, below our estimate of 12.0%. Net margin was 6.1%, a touch shy of our 6.2% projection.

The company also maintained its previous guidance for 2010: revenue for the year will be between $900 million and $940 million; gross profit will be between $106 million and $115 million; net income will be within the range of $52 million to $57 million; and full year diluted EPS will be between $1.49 and $1.64.

Our take In our opinion, the company has actually delivered a fairly respectable financial performance. We believe the slight miss was largely due to the Street as a whole having an overly optimistic expectation on the back of increasing hog prices in China during the past quarter. Unfortunately for the company, pork prices did not increase as much and as fast as hog prices did. This, coupled with a typical seasonality (Q3 tends to be a weaker quarter for pork sales) and the company's efforts of controlling sales in regions with what it believed were less-than-ideal pork prices, led to the below-expectation top line result as well as some pressure on the margin front. Aside from that, we believe Zhongpin's operations were pretty much as-expectedly strong. Looking forward to Q4, we expect pork prices will catch up to the increases in hog prices for the second half of the quarter and the spread between the two should return to more of a normal level. Thus we expect Zhongpin's margins will improve from their Q3 levels.

Maintaining Market Outperform while increasing PT to $26 We are maintaining our Market Outperform rating while increasing our price target on the shares of Zhongpin to $26, from $18 previously. We now expect the company will report 2010 revenue, gross profit, and EPS of $924.8 million, $108.2 million, and $1.63, respectively. Our new $26 price target is based on the shares trading at 13x our 2011 EPS estimate of $2.01. The 13x multiple represents a slight discount to the average P/E multiple of 14x currently commanded by Zhongpin's American and Chinese peers. We believe Zhongpin, with its Chinese industry leadership position and strong growth potential, justifies such a valuation.

Major Risks to our rating include the company's ability to maintain an adequate hog supply, movement in pork prices, government and environmental regulations, additional capital needs for future growth, currency exchange risk, as well as country and political risks related to operating in China.

2010-11-09Piper JaffrayReiterationOverweight$28.60
2010-10-11Global HunterReiterationBuy$24.00
 

Raising our price target to $24. Our original $18 price target was based on a very conservative valuation methodology, in which we valued the company at only 8x FY2011 P/E; however, as a result of the recent positive trends in pork prices coupled with increased investor interest we are comfortable expanding our target multiples. Several additional sell-side firms have recently initiated coverage with Buy ratings in the September/August period of this year, respectively, and TPG’s recent 13-D filing with the SEC showing that the fund increased its position size in HOGS by 484% to 1.8MM shares helped to raise investor confidence in the name. Our new price target is based on 11x FY2011 P/E and 9x FY2011 EV/EBITDA.

2010-09-30Brean MurrayInitiationBuy$21.00
 

We view Zhongpin as a key consumer staple pick for investors who want to participate in China’s growing consumer spending, especially in growth driven by increasing living standards and improving diets. Primarily a pork meat processor, the company offers consistent earnings growth in both “bullish” and “bearish” times. With the right strategic moves (e.g., aggressive capacity expansion and upgrade of products and distribution channels) that management has adopted, we believe Zhongpin presents a compelling market consolidation story in the long term. In the near term, rising pork prices offer potential upside in 2H10. We assume coverage with a Buy rating and a target price of $21. Our target price of $21 assumes that Zhongpin shares trade at a multiple of 10x our 2011 EPS estimate of $2.05, implying 29% upside potential from the current level.

2010-09-17Morgan JosephInitiationBuy$21.00
 

We believe Zhongpin offers the most growth potential of any food stock trading on a domestic exchange. In our view, Zhongpin could grow its top line at 20%+ for a number of years. While the 4Q09 equity offering may adversely impact EPS growth in 2010, we believe that, ultimately, the projected 20%+ top-line growth should fall to the bottom line. Current company plans call for increasing capacity more than 41% from now to the end of 2012. In our opinion, Zhongpin should be able to increase its market share of the Chinese pork market for a number of years. Not only is the Chinese pork market extremely fragmented, but the market is also transitioning from the primary distribution channel being the local butcher to the retail supermarket. These trends should benefit Zhongpin in its quest to gain market share.

2010-08-26Maxim GroupInitiationBuy$18.00
2010-08-25ChardanReiterationBuy$19.00
2010-08-11Rodman & RenshawReiterationOutperform$18.00
 

We are maintaining our Market Outperform rating and $18 price target on the shares of Zhongpin. We now expect the company will report 2010 revenues, gross profit, and pro forma EPS of $927.1 million, $111.2 million, and $57.8 million, respectively. Our $18 price target is now based on the shares trading at 9x our 2011 EPS estimate of $2.04. The 9x multiple represents a 25% discount to the average P/E multiple of 12x currently commanded by Zhongpin's peer group. We believe the company, with its brand strategy and aggressive capacity expansion plans that would provide significant revenue and earnings growth potential, easily justifies such a valuation.

2010-08-11Wisco ResearchReiterationBuy$21.00
 

We continue to think Zhongpin trades at an attractive valuation given the company’s growth profile and low earnings multiple. We are maintaining our F2010 EPS estimate of $1.60 and are now forecasting F2011 EPS will be $2.00 up from our prior estimate of $1.95. Furthermore, we are maintaining our buy rating and $21 price target based on HOGS getting a 13.1 multiple on 2010 EPS of $1.60.

2010-08-10Piper JaffrayReiterationOverweight$20.00
2010-08-10Roth CapitalReiterationBuy$18.00
2010-07-27Wisco ResearchReiterationBuy$21.00
 

We assume an incremental $6.15 million in quarterly capital expenditures starting in F3Q10 through F4Q12 for Nong'an and no material production from Nong'an this year or next. We are maintaining our buy rating and $21 price target based on 13x F2010 EPS of $1.60. 

2010-07-26Piper JaffrayReiterationOverweight$20.00
2010-07-26Roth CapitalReiterationBuy$18.00
 

We maintain our BUY rating and $18.00 PT based on 10.8x our revised 2010 EPS of $1.66, equal to a peer group multiple traded in the U.S and a 45% discount to the closest competitor listed in Hong Kong.

2010-06-23Global HunterInitiationBuy$18.00
2010-06-21Wisco ResearchReiterationBuy$21.00
 

We are increasing our F2011 EPS estimate to $1.95 from $1.90. We assume an incremental $10.5 million in quarterly capital expenditures starting in F3Q10 through F4Q11 for Jiangyan and that the Jiangyan facility will run at 25% capacity utilization in 3Q11 and 50% capacity utilization in 4Q11. We are maintaining our buy rating and $21 price target based on 13x F2010 EPS of $1.60.

2010-05-18Rodman & RenshawReiterationOutperform$18.00
2010-05-11Wisco ResearchReiterationBuy$21.00
 

We continue to think Zhongpin trades at an attractive valuation given the company’s growth profile and low earnings multiple. We are increasing our F2010 EPS estimate to $1.60 from $1.55 to reflect this quarter’s higher earnings and better prospects for the rest of the year.

2010-05-11Jesup & LamontReiterationBuy$21.00
2010-05-10Rodman & RenshawReiterationOutperform$18.00
2010-04-13Wisco ResearchInitiationBuy$21.00
 

We think Zhongpin trades at an attractive valuation given the company’s growth profile and low earnings multiple. Zongpin trades at a 40% discount to our food universe despite having the best growth characteristics of any company in the group. Our buy rating and $21 price target is based on HOGS getting a 13.5 multiple on EPS of $1.55.

2010-04-13Jesup & LamontInitiationBuy$21.00
2010-03-12Rodman & RenshawReiterationOutperform$18.00
2010-01-11Rodman & RenshawReiterationOutperform$18.00
2009-10-21Piper JaffrayInitiationOverweight$21.00
HOGS
Food
SCORE
6
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Current Price:  n/a
F10k Day (2007-03-23): -100.00%$7.50
2009 Close: -100.00%$15.61
2010 Close: -100.00%$20.40
2011 Close: -100.00%$8.52
High (2012-10-11): -100.00%$11.76
Low (2012-04-09): -100.00%$8.26
Exchange:
Market Capitalization: n/a
Total Shares: 35.27 mill
Float: n/a
Avg Volume: 1.46 mill
Short Interest: 6.29 mill
Short Ratio: 21.36%4.3 d
Last Quarter: 2010-12-31
Revenue (MRQ): 286.29 mill
Net Income (MRQ): 17.98 mill
Op. Cash Flow (MRQ): 48.04 mill
all financial data provided without warranty