Property

A meaty problem

Yurun boss steps down, but questions remain

Yurun’s founder: Zhu Yicai

The awful conditions in America’s early twentieth century meat-packing industry were exposed to a shocked public in Upton Sinclair’s 1906 novel The Jungle. In it, his Lithuanian characters travel to Chicago’s Packingtown where they find work in the slaughterhouses. They fast become disillusioned, not just by the dangerous work conditions but also by the unsavoury practices in canning pork and beef.

The protagonist Jurgis Rudkus discovers that one of his jobs is to add the carcasses of unborn calves to the canned meat. His relative Antanas describes how scraps of meat are emptied onto a filthy floor, scraped up with the dirt, and added to the mix.

Worst of all, hogs that had died of cholera en route to the factory get processed into lard. Bribes bought the silence of the local mayor and government inspectors.

Sinclair’s meticulously researched book led to improvements in food safety regulations in an industry where profit maximisation had got the better of business ethics. It remains required reading for anyone considering present-day China and its own perennial issues with food safety.

Sure enough, meat-packing firms have come under attack in China in recent weeks, with Yurun Food, the biggest player in the industry in the spotlight.

Its troubles began last year, says the Wall Street Journal, when “media reports in China said Yurun sold pork containing clenbuterol, a banned substance used as a slimming additive in hog feed. Yurun later said it destroyed the one live hog that it had found that contained the additive.”

But as the magazine Business Review points out, any search on the company using Baidu – a local equivalent of Google – throws up what it describes as an “endless stream” of quality-control allegations.

Only last month two fresh incidents reached the media. In Luoyang the local press reported on Yurun selling ham that was past its sell-by date. While in Shangqiu a Yurun subsidiary was reported to have sold unquarantined pigs.

The under-fire company described the “rumours” alleging product contamination as “ungrounded and misleading”.

Nor was that its only denial. Last month Yurun also refuted accusations made by a Chinese brokerage alleging “certain accounting misstatements”.

All of this may explain why Yurun’s founder Zhu Yicai stepped down as chairman last week. Zhu, who retains a 25.82% stake in the Hong Kong-listed firm, remains as a senior advisor and will retain the title of honorary chairman.

But his exit remained a dramatic gesture nevertheless, and clearly signals that all the bad publicity has taken a toll.

It’s quite a reversal of fortune for the Anhui-born entrepreneur. In just two decades, the ambitious Zhu had built a giant in the food industry, capable of processing 40 million pigs a year at 31 huge slaughterhouses spread across the country (China as a whole gets through 20 million hogs a month).

The media says the key to the rapid growth was Zhu’s skill in dealing with local governments. Starting with the purchase of the Nanjing Canning Factory in 1996, Zhu repeated the tactic again and again in acquiring 20 state-owned food firms between 1997 and 2003.

“Yurun became an enterprise that was good at dealing with government,” comments Business Review.

More recently those relations with government have become a source of investor concern. Last year, for example, short-sellers were rumoured to be investigating the firm’s financials, focusing on the fact that 26% of pre-tax profits were classified as ‘government subsidies’. There were also questions over how wisely Yurun was spending in its quest to expand. At its network of slaughterhouses, capacity utilisation was just 60% in 2011, suggesting overinvestment.

Further spooking the fund managers, the firm posted a 38% fall in full-year net profit in February. So far this year Yurun’s stock is down around 35%.

Amid all the uncertainty, investors were clearly concerned about another issue: how far was the expansionist Zhu diversifying away from Yurun’s core business? “Is Yurun a food company,” asks Business Review, “or a firm that has long deviated from the food business? In many cases, the position is rather ambiguous and no one can be completely clear.”

Over the past decade Zhu had grown the firm’s real estate portfolio aggressively. Some analysts had begun to wonder if the property business was now the main focus for investment.

This picture was blurred by Yurun’s trumpeted goal: to become the world’s leading provider of agricultural logistics by 2017.

This, of course, required significant investment in its own right, and the announcements came thick and fast.

Last July, for example, Yurun said it would build a global procurement centre in Shijiazhuang for Rmb10.2 billion; in August it announced another global procurement centre in Harbin costing Rmb8 billion. A further centre (“global procurement” again, now that you ask) was unveiled for Xi’an at a cost of Rmb10 billion more.

Then, in March this year, two more centres emerged: one in Pengcheng in Xuzhou City requiring Rmb10 billion of investment and an even bigger project in Shenyang slated to cost Rmb15 billion.

Business Review calculates that deals actually inked with local governments (in Guangdong, Shaanxi, Liaoning and Tianjin) now amount to Rmb42 billion ($6.58 billion).

It says cities have happily signed off on the agreements – offering cheap land and other subsidies – because bureaucrats view the investments as high prestige.

But the magazine takes the view that Yurun is “engaging in real estate under the guise of agricultural projects”.

For example, the Xi’an project will include 280,000 square metres of offices and 90,000 square metres planned for hotels. No doubt a few apartment buildings might be in the plans too.

Zhu’s strategy – of ‘loin, land and logistics’, WiC suggests – was clearly an attempt to keep Yurun on a high-growth trajectory.

But now that Zhu has stepped down from the helm (assuming that his new role really is advisory only), Yurun must answer its critics. A first step is to rebuild trust in the quality of its meat.

Likewise it will have to persuade investors that its ambitions in logistics (and real estate) will deliver adequate returns.


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