Saturday, May 26, 2007
Zhongpin Inc (ZHNP)
Someone wanted me to look at this (which I already did, but I'll do it quickly again and take notes).
...meat and food processing company that specializes in pork and pork products, and vegetable and fruits in the Peoples Republic of China (PRC). The Company is developing a nationally recognized high quality brand for meats and food products that encompasses a meaningful part of the everyday Chinese meals.... In 2005, Zhongpin was ranked the sixth largest producer in the national meat industry in terms of revenue. Zhongpin’s also exports its products to the European Union, Eastern Europe, Russia, Hong Kong, Japan, and South Korea.10-K for period ending Dec 31, 2006
13.8 million shares and 5.3 million preferred shares on March 15, 2007.
16 international and domestic fast food companies in the PRC.
36 export-registered processing factories
1,531 school cafeterias, factory canteens, army posts, and national departments
2,721 retail outlets in PRC
Compound annual revenue growth of 56% in the last 5 years.
Zhongpin, Inc. owns 100% of Falcon Link Investment Ltd (British Virgin Islands)
Falcon Link owns 100% of Henan Zhongpin Food Co. Ltd
Henan Zhongpin Food Co. owns 90% of Henan Zhongpin Food Share Co., Ltd
Individual shareholders, mostly Zianfu Zhu (as required by PRC law to use the word "Share") own 10% of Henan Zhongpin Food Share Co., Ltd
Henan Zhongpin Food Share owns 100% of a bunch of companies:
- Henan Zhongpin Industry Co., Ltd.
- Henan Zhongpin Imports and Exports Trade Co., Ltd.
- Zhumadian Zhongpin Food Ltd.
- Anyang Zhongpin Food Co., Ltd.
- Deyang Zhongpin Food Co., Ltd.
- Henan Zhongpin Fresh Food Logistics Co., Ltd.
- Henan Zhongpin Business Development Co., Ltd.
Most sales are in open-air markets and on streets.
New hygene regulations in 1995 encourage replacement of open-air markets by modern stores. The trend is happening. Also a major trend toward frozen and fresh/chilled meat which is possible with the improving cold chain infrastructure.
The market is fragmented and has hygene issues.
These guys are serious:
We regard our logistics capabilities as the keystone to our growth strategy and believe our comprehensive plan for logistics management, which includes the integration and coordination of our transportation, warehouse management and inventory control systems, as well as the integration of our marketing and manufacturing efforts, will enable us to accelerate our growth by expanding our operations across the PRC and internationally. At December 31, 2006, we operated sales offices and warehouses in over 50 cities in the PRC, including Shanghai, Beijing, Guangzhou, Zhengzhou, Wuhan and Xi'an. We plan to expand our network of sales offices and warehouses in up to 14 additional cities in the PRC by the end of 2007, and are targeting cities with over 1,000,000 residents, annual per capita income exceeding 10,000 RMB ($1,245) and good infrastructure, including transportation, telecommunications and a positive commercial environment.They're also focused on expanding the product line.
map of China
They own and operate two (now three?) slaughterhouses, both in Henan (an inland province about halfway between Beijing and Chongqing). They lease and operate a slaughterhouse in Heilongjian (extreme NE). Expanding new plants in Henan.
Pigs come from local pig farms in the vicinity. All have health certificates from relevant authorities. Processwise they got ISO 9001 in 2002. Also some hazard and sanitation certifications. Veterinarians take blood and urine samples from a random sampling of pigs and test for disease. The pigs are quarantined for 24 hours with water only, then another inspection with inspectors of the Animal Husbandry Dept.
106 QA employees (18 engineers, 88 staff).
2,870 employees total (2,037 in operations), 532 sales, 67 R&D, 234 admin).
Customer concentration: Five customers were 20% (down from 22% and 26% in prior years) of revenues. No 10%ers in the last 3 years. No government contracts.
Xianfu Zhu is a controller shareholder: 46.3% of the shares. Other insiders own another 10.2%.
91.5% of revenue is from PRC.
Low tax rate.
Revenue and net income increases:
2003: 22%.... 47%
2004: 45%.... 79%
2005: 31%.... 113%
2006: 96%.... 8% (realistically more like 80%, removing the liquidating charges)
Earnings per diluted share:
2002: 5 cents
2003: 7 cents
2004: 13 cents
2005: 27 cents
2006: 31 cents (realistically more like 45 cents, removing the liquidating charges)
2002: $4.8 million
2003: $5.8 million
2004: $10.1 million
2005: $10.2 million
2006: $32.6 million
Return on total ending assets:
2006: 6.3% (really more like 10%)
Return on total starting assets:
2006: 12% (really more like 18%)
We're looking at about a 10% return on assets. It's being hurt by gross margins.
2006: 4.42% (really more like 7%)
They have good credit and can borrow lots of cash at rates of around 7%.
12% construction in progress
9% intangibles (way up from prior year)
Current ratio is around 1.
Liabilities + Equity:
23% short term loans
Equity increased greatly in 2006 due to additional paid-in capital from preferred stock.
Free cash flow roughly matches net income over the years, although there are big shifts in assets and liabilities.
Huge expansion expenditures that are financed by short term loans and the big preferred stock conversion.
Let's take a quick look at Q1.
still 13.8 million shares on May 1, 2007.
Cash, AR, and construction contract assets increased.
More short term loans.
Liabilities increased significantly.
Equity is 47% of assets now.
Revenue up 83% over prior year.
14% gross margins.
8.2% net margins.
Earned 22 cents diluted.
annualized return on assets would be around 15%. (Checking Q1 2006 results vs full year and seeing them being roughly 1/4 of it, this seems like a reasonable thing measure.)
More preferred stock converted.
Free cash flow is ok, matches net income.
More big construction investment.
More net short term loans.
These guys are pushing it to win. That's a good thing, especially since it's a one-time situation where the future leaders will be established now.
For an inefficient area of business like this, I would have expected higher margins and returns on assets for a company in this situation (scaling up, improving productivity against open-air markets and such). What happens if this really turns into a slugfest and a competitor has better economics for some reason? ZHNP could end up in deep pig-doo-doo.
This looks better now after looking more closely.
If this were insanely cheap like ETLT (say $5 per share), then I'd definitely be interested. But the stock is selling for $10.75. That's a good price, possibly a 50% discount from full value. Maybe I'll think about it. Perhaps the price will come back down.
My gut instinct says this is good.
UPDATE Tuesday May 29, 2007:
Thanks to James Altucher for the compliment! Maybe someday I can quit my day job and do this for a living.
Really nice job on this ! Thanks so much for taking time to look at it. I'm hoping it comes back down a bit as well so I can add to my holdings. I think this will see $20 in a year or so. With 80% growth from here seemingly very likely, I'll takes my chances...
Still about a double from here inside of 12 mos IMO.