Shuanghui's Wan Long expects pig prices to fall to 16 yuan/kg by the end of the year
On August 22, Wan Long, chairman of WH Group and chairman of Shuanghui Development, said: in the first half of this year, domestic pork prices fell from 21 yuan per kg to 18.5 yuan, and are expected to continue falling to 16 yuan by the end of the year.
On August 22, WH Group released its report for the first half of 2016, with operating revenue of 69.4 billion, up 2.4% year on year, and net profit of 3.6 billion, up 81.8% year on year. It also planned to distribute a cash dividend of 9 yuan per 10 shares (including tax) to all shareholders, marking WH Group's first high interim dividend. Against the backdrop of such outstanding results, both WH Group, listed as a whole in Hong Kong, China, and domestic Shuanghui Development attracted strong interest from securities institutions.
On August 22, Wan Long, chairman of WH Group and chairman of Shuanghui Development, said: in the first half of this year, domestic pork prices fell from 21 yuan per kg to 18.5 yuan, and are expected to continue falling to 16 yuan by the end of the year. The reasons for the decline in pig prices in the second half of the year include: first, high pig prices will suppress people's daily consumption, and this situation has already occurred; second, feed prices are not high and have fallen compared with 2014 and 2015; third, the pig cycle pattern; fourth, pig prices in Europe and the United States are relatively low.
Here we need to distinguish that WH Group includes the total global business of China, the United States (Smithfield) and other regions, among which the China business is Shuanghui Development. As for WH Group's entire business, it is mainly divided into meat products, fresh pork (slaughtering business), hog farming and others. Among these, meat products are WH Group's core business, accounting for 51.1% of its total revenue, while operating profit accounts for more than 91% of total profit. In other words, from a global perspective, WH Group relies on meat products for its development, which is very different from domestic Shuanghui Development (revenue from Shuanghui Development's slaughtering business accounts for more than 50% of total revenue).
Although China accounts for only 37% of revenue, net profit is roughly on par with the United States. The main reason is WH Group's support in the first half of 2016 for promotions and activities by meat product distributors in the China region. For WH Group, the growth in profit margin in China is far greater than in the United States. In China, its main battlefield, pig prices rose sharply in the first half of this year. In addition to cost transfer and strategic stockpiling, Shuanghui Development also used imported Smithfield pork to reduce costs.
According to statistics, in the first half of the year Shuanghui imported 1.92 billion worth of pork. Calculated at an average price of 7 yuan/kg, Shuanghui's imported pork volume was about 130,000 tons. Calculated at a slaughter weight of 110 kg, that is equivalent to 1.2 million hogs. It is expected that in 2016 Shuanghui will import 300,000 tons of pork, equivalent to 2.7 million hogs, roughly 18% of Shuanghui's 15 million head slaughter volume. Judging from the slaughter volume and inventory of domestic Shuanghui Development, Shuanghui was indeed reducing the scale of slaughtering and inventory against the backdrop of high pig prices, in order to reduce its dependence on the domestic hog market.
Wan Long said that pig prices in Europe and the United States are roughly 7 yuan/kg. By cost calculation, the raw material cost per ton of domestically produced air-dried meat is 30,000 yuan, while in the United States it is about 22,000 yuan per ton, so the cost per ton can be reduced by 5,000 to 8,000 yuan. Therefore, increasing imported meat will help the company lower costs, and it is expected to import 300,000 tons this year. If Shuanghui's pork imports reach 300,000 tons this year, that would account for nearly one fifth of Shuanghui's volume, a relatively large scale.
Whether the pig price of 16 yuan/kg by the end of the year is accurate remains to be verified, but it can be foreseen that in the future Shuanghui will have a more obvious advantage in reducing its production costs.