The national leader in cattle genetics and semen sales, Xinjiang Tianshan Animal Husbandry Bio-Engineering Co, has reported a sharp deterioration in profits for the third quarter of 2016 and is warning of a third consecutive year of losses as the firm continues to suffer the effects of low pricing from a glut of dairy-focused Holstein cattle in China.
Tianshan is on course to make a loss for 2016, despite strong growth in revenues to RMB3.34 billion for the first three quarters, representing an increase of 107% and a trebling since the same period in 2014. Ominously, profits fell a worrying 307% on the same period in 2015, with the firm losing RMB57.81m. Tianshan hasn’t made a profit since 2013, according to data filed with the Shanghai stock exchange.
Listed in Shanghai, Tianshan is now promising investors that its “big beef” strategy will reap profits. The strategy will see the firm shift its emphasis towards breeding and processing beef cattle as well as providing semen, calves and consultancy services to beef firms. Late last year Tianshan set up a new subsidiary to focus on expanding its beef feedlots, while the firm invested RMB273m in acquiring a controlling stake in Hemu Yangguang, a beef feeder and processor.
Beef cattle are “scarce” in China according to Zhu Kuaizhen, an analyst at Xi Nan (Southwest) Securities, a brokerage which follows the firm. Zhu believes that Tianshan’s presence across the beef value chain will “increase the company’s profitability”.
Mounting debt also puts a question over the company’s ability to borrow more to fund further expansion. Debt stood at RMB4.8bn as of the end of September 2016, with assets at RMB9.7bn. Meanwhile, the company’s costs rose 42.2% compared to the same period last year due to the “increase in scope of business” into beef breeding and processing. It’s not clear how much of the rise in costs is related to financing costs.
However, Tianshan’s new emphasis on beef (rather than dairy) breeding is a turning point, noted Zhu, who was upbeat on the company’s outlook. “The company’s performance was lower than we expected, but we do note, in the first three quarters, the company’s operating income continued to maintain rapid growth,” said Zhu.
Lower prices for Holstein cattle have hurt Tianshan’s margins, explained Zhu, pointing to Tianshan’s supply of calves, cows and semen to Chinese dairy farms, which have suffered a glut in milk supply since 2014. Revenues from beef semen – Tianshan imports semen for Australian Angus as well as Continental European breeds like Charolais and Simmental – grew 180.1%, while mutton semen sales (Tianshan imports semen for Texel and Suffolk sheep) rose 144.5% in the first three months of 2016. Tianshan’s semen business depends on Chinese government subsidies – paid to farmers as a means of improving the quality of China’s herd.
It remains to be seen how fast Tianshan can expand its cattle fattening capacity: the firm currently has capacity for 2,000 cattle on its own land, but keeps another 10,000 Angus cattle with farmers in a “company and farmers” model.
Investors in the firm will certainly be hoping the company can turn things around. After three years without a dividend pay-out, Southwest Securities is projecting per share earnings of RMB0.10 and RMB0.17 in 2017 and 2018. That would represent a price-to-earnings ratio of 162 and 98 respectively.