Debt costs bite at Chinese pig breeder Chuying
Chuying reported an 87% drop in profitability to RMB112 million (m) in 2017 at its listed arm. The firm recorded revenues of RMB5.83 billion (bn) last year, down 4.3% while margins for its pig breeding activities averaged a negative 3.5%.
All this came as financial costs rose a whopping 60% year on year. In June 2017, the firm raised RMB1.5bn to finance capacity expansion. Chuying has signed deals with 100 cooperatives in north-eastern China and aims to produce four million hogs in the region as part of the government push to move pig production closer to corn production areas in northern China.
According to Chuying, average pig prices fell 20% in 2017 compared to 2016, while the entry into operation of new capacity was “lower than planned”. Meanwhile, the food trading division reported steady but unspectacular progress, with revenues up 4.5% on 2016, but profitability down 13.5%.
In its bid to diversify into downstream activities, last year Chuying invested RMB20m in a plant and farm in Tibet, using advisors and equipment from the US and Italy to produce smoked legs of pork in a style familiar to Italy or Spain. Meanwhile, it has also partnered with leading petroleum distributor Sinopec to distribute its products while also expanding branches of the ‘Sha Xian’ chain of fast food restaurants across southern China.
Yet even as it seeks to get into higher margin consumer businesses, Chuying remains dependent on volatile pig pricing cycles. While it lost money on pigs in 2017, the average price for finisher pigs rose by 52.8% in 2016, according to Chuying. In 2016, by contrast, Chuying increased its revenues by 66.1% to RMB6.01bn, while net profits soared by 311% to RMB907m. A “very good” market for live pigs saw a 90% rise in profits from the firm’s breeding business while gross profits for breeding rose by 183%, according to the company’s annual report.
However, the company appeared to be performing better in the first quarter of 2018: in a projection issued to investors, it reported profits attributable to the listed company, at RMB330m to RMB380m, were up by between 19.1% and 23.5% in the first three months. Yet that bump is largely attributable to earnings at its investment fund, according to the note to investors.
Chuying sold pigs for an average RMB10.23/kg in March. Data published this month by the key hog-producing region of Liaoning showed that prices averaged RMB10.06/kg, with pigs making an average loss of RMB272.41/head for producers. National pig numbers were up by 1.04% month-on-month to 358 million head, but that figure was down 0.3% year on year. Sow numbers were down 0.8% year on year to 36.1 million.
The market is taking a more benign view of Chuying’s plight, with analyst Zhuo Sha at Guo Jin Securities projecting a recovery in profitability to RMB1.5bn in 2018. Pig prices were close to bottoming out, according to Cheng Xiao Dong, a leading industry watcher at Tai Ping Yang Securities: while pig farmers lost an average RMB200/head in March, Cheng forecast a slow recovery through the rest of 2018, driven by increased pork consumption. He said it made “ long-term sense” to invest in leading pig breeding companies like Chuying.
