Hot commodity
Pork is central to the Chinese diet. But despite consuming half the world’s pig meat, Chinese domestic supply is haphazard, much of it coming from small-scale farmers with backyard hoggeries. This kind of fragmented market has contributed to fluctuating pork prices. But it has also created opportunities for new players to come into the business, often rather unexpectedly. Cue property heavyweight Vanke, which is the latest to try its luck with pork.
The plan became public early this month when the property giant put out recruitment ads for roles at a pig farm in Shenzhen. The staff openings are at Vanke’s food business unit, which was established in March and is led by one of its general partners, Tan Huajie.
The recruitment drive coincides with a period of sizzlingly high prices for pork. The wholesale price in China was about Rmb45 per kilogramme in April, down from the record of Rmb54 ($7.59) last October, but still 121% above the levels of a year earlier. Although increases in imports have helped to move prices a little lower, domestic supply is still struggling to meet demand. At least 40% of China’s hog herd was lost to African swine flu last year and pork output shrank another 29% year-on-year in the first quarter because of Covid-19, marking a sixth straight quarter of declines.
These dynamics have helped the better producers to rake in huge profits. Riding on the price rally since last June, Guangdong-based Wens Foodstuffs Group, the largest domestic pig breeder, saw its profit surge 2.5 times to nearly Rmb14 billion last year. Muyuan Foods, another major hog farmer based in Henan, recorded a 10-fold increase in profit in the same period to Rmb6.1 billion. Chengdu-based New Hope Liuhe, which shifted from making animal feed to pig farming and food processing in 2016, logged a 196% growth in profit to Rmb5 billion.
Returns like these are a sharp contrast to the sluggishness in the property sector, which has been hampered by policies designed to cool the housing market since 2016 (see WiC462). Sales this year have been further stymied by the pandemic. For the first four months, the top 100 developers saw contracted revenues decline 17% from a year ago, while Vanke reported a 11% fall in the same period. Gross profit margins in its main business are now lower than a lot of the major hog producers.
But is venturing into pig farming really a way for Vanke to diversify its income meaningfully, just as its local rival Evergrande tried to invest in electric cars (see WiC438)? Most analysts are unconvinced, given that Vanke is planning slaughter capacity for 250,000 pigs a year initially. That translates into Rmb175 million in net income, representing less than half a percent of company profit last year, Financial Tuya, a zimeiti, suggests. That also assumes that things go to plan and that pork prices stay near their current levels.
Vanke explains that its move into animal husbandry is driven by a desire to deliver a “farm-to-table” service to its customers. “Pork prices skyrocketed in 2019, and the coronavirus outbreak since the beginning of the year has made food purchasing inconvenient,” it notes in its job ads. The idea is to provide safe and healthy meals at affordable prices from a new division that focuses on pig breeding, vegetable farming and catering services.
Perhaps that makes more sense since Vanke’s chairman Yu Liang announced the end of “runaway home prices” in China a couple of years ago. But when Wanda – another major property player – made its own bid to get into pig farming in 2014, the project didn’t last long. “Our research shows that none of the top five domestic hog companies really make any money. Basically they oscillate between profitable and loss-making in alternating years. Over a 10-year horizon the business will reach break-even. Yet how to keep going without any profit?” lamented Wanda’s boss Wang Jianlin.
© ChinTell Ltd. All rights reserved.
Sponsored by HSBC.
The Week in China website and the weekly magazine publications are owned
and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is
involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these
publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will
therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.
Download Apps