Zhongpin (NASDAQ:HOGS)

NEW YORK, NY--(Marketwire - Jul 29, 2011) - Pork prices have skyrocketed close to all-time this year, prompting the Chinese government to step in to stabilize the market. This is welcome news for larger Chinese agricultural firms, as generous government investments are encouraging increased hog production. The Bedford Report examines the outlook for companies in China's Consumer Goods Sector and provides equity research on AgFeed Industries, Inc. (NASDAQ: FEED) and Zhongpin, Inc. (NASDAQ: HOGS)

The Bedford Report releases investment research on China's consumer goods sector so investors can stay ahead of the crowd and make the best investment decisions to maximize their returns. Take a few minutes to register with us free at www.bedfordreport.com and get exclusive access to our numerous analyst reports and industry newsletters.

The Bedford Report provides Market Research focused on equities that offer growth opportunities, value, and strong potential return. We strive to provide the most up-to-date market activities. We constantly create research reports and newsletters for our members. The Bedford Report has not been compensated by any of the above-mentioned companies. We act as an independent research portal and are aware that all investment entails inherent risks. Please view the full disclaimer at: http://www.bedfordreport.com/disclaimer.

NEW YORK, NY--(Marketwire - Jul 29, 2011) - Pork prices have skyrocketed close to all-time this year, prompting the Chinese government to step in to stabilize the market. This is welcome news for larger Chinese agricultural firms, as generous government investments are encouraging increased hog production. The Bedford Report examines the outlook for companies in China's Consumer Goods Sector and provides equity research on AgFeed Industries, Inc. (NASDAQ: FEED) and Zhongpin, Inc. (NASDAQ: HOGS)

The Bedford Report releases investment research on China's consumer goods sector so investors can stay ahead of the crowd and make the best investment decisions to maximize their returns. Take a few minutes to register with us free at www.bedfordreport.com and get exclusive access to our numerous analyst reports and industry newsletters.

The Bedford Report provides Market Research focused on equities that offer growth opportunities, value, and strong potential return. We strive to provide the most up-to-date market activities. We constantly create research reports and newsletters for our members. The Bedford Report has not been compensated by any of the above-mentioned companies. We act as an independent research portal and are aware that all investment entails inherent risks. Please view the full disclaimer at: http://www.bedfordreport.com/disclaimer.

Rodman and Renshaw on HOGS                   5/10/2011

1Q11 Results a Touch Shy of Expectations; Tweaking Price Target to $21

Zhongpin Inc. (“Zhongpin”, Nasdaq: HOGS, “Market Outperform”) reported 1Q11 results that were either in-line or slightly below our expectations. Total revenue increased 40% YoY to $285.8 million, but was below our estimate of $288.3 million. Gross profit came in at $35.9 million, a touch shy of our estimate of $36.2 million. Actual gross margin of 12.6% however, was almost in-line with our estimate of 12.5%. Net income increased 27% YoY to $16.9 million, below our estimate of $17.9 million. This translates to diluted EPS of $0.47, a penny shy of our estimate of $0.48. The company reiterated its prior 2011 guidance of realizing revenue of $1.18-1.23 billion, gross margin between 11.7% and 12.4%, and net margin between 5.7% and 6.3%. It also provided an updated EPS guidance (after the March secondary issuance) of $1.66-1.91 for the year.

1Q11 Highlights and Discussions

Product segment contributions Chilled pork, with 1Q11 sales of $168.6 million, continued to be the largest revenue contributor for Zhongpin, generating 59.0% of the company’s total revenue. During Q1, chilled pork tonnage increased 9% YoY while the average selling price increased 35% YoY. Frozen pork revenue also increased, up 46% YoY, to $73.5 million. It benefited from an average selling price increase of 46% YoY while sales volume actually decreased 0.3% YoY. Prepared pork provided revenue of $41.3 million on higher sales volume (up 25% YoY) and lower average price (down 9% YoY). It is worth noting that revenue from prepared pork products actually decreased sequentially from $45.7 million in 4Q10.

Rest of 2011 looks to be supported by firm hog price and capacity expansion Hog price in China has been firm in the first half of 2Q11, and we expect it will remain strong for the rest of 2011 in light of China’s increasingly inflationary environment. We also believe Zhongpin will benefit from its capacity expansion efforts as the 36,000-MT prepare pork plant in Tianjin is expected to come on-line in Q2 and the 25,000-MT frozen pork and 70,000-MT chilled pork plants are expected to start operations in Q4. In this regard, we expect the company will have no problem achieving its 2011 financial performance guidance.

The Clenbuterol Pork Scandal and its effect on Zhongpin On March 15, CCTV (China’s sole national TV network) exposed some tainted pork products from Henan province containing chemical clenbuterol. The chemical, harmful to human, was illegally used as a feed additive by unscrupulous pig farmers for the purpose of producing leaner pork. Henan Shuanghui (SHE: 000895, Not Rated), China’s largest pork processor, was at the center of this scandal, while China Yurun (HKG: 1068, Not Rated), another major domestic meat processor, also announced a recall of 100 boxes of luncheon meat that contained the chemical. The scandal provoked a nationwide outrage that even led to comments on food safety by China’s president, Hu Jintao.


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This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

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Rodman & Renshaw on HOGS

4Q10 Results Strong, but Lowering Price Target Due to Dilution 

Zhongpin Inc.(“Zhongpin”, Nasdaq: HOGS, Market Outperform) reported 4Q10 results that mostly matched or exceeded our and Street’s expectations. Total revenue climbed 32.9% YoY to $286.3 million, higher than our estimate of $264.3 million and Street consensus of $269 million. Gross margin was 11.6%, 20bps lower than 4Q09 but in-line with our expectation. Non-GAAP net income (excluding stock compensation expenses) grew 50.3% YoY to $18.6 million, above our estimate of $14.4 million and Street consensus of $16.1 million. Non-GAAP EPS increased 46.3% YoY to $0.52, easily beating both our estimate of $0.41 and consensus of $0.42. On a yearly basis, total revenue rose 30.4% YoY to $946.7 million, exceeding the company’s guidance range of $900 million to $940 million. Net income reached $58.3 million, or $1.65 per diluted share, also higher than the respective guidance range of $52-57 million and $1.49 to $1.64 per diluted share. 

4Q10 Highlights and Discussions 

Prepared pork products became the largest growth driver: During 4Q10, revenue from prepared pork products grew 62.5% YoY to $45.7 million, primarily due to larger volume sold partially offset by lower ASP. The segment contributed 16.0% of total revenue in the quarter. We expect this growth will continue to outpace that of frozen pork and chilled pork. Since the prepared pork segment carries a much higher gross margin (~20% vs. 11% for chilled pork and 8% for frozen pork), we expect it will drive margin expansion considerably going forward as it contributes a larger portion of revenue. 

Aggressive capacity expansion bears fruits: Zhongpin has been aggressively expanding production capacity in various new markets, which significantly drove its volume growth. As of December 31, 2010, the company had annual capacity of 563,760 MT for chilled and frozen pork, 90,000 MT for prepared pork products, 20,000 MT for pork oil, and 30,000 MT for vegetables and fruits. Looking forward to 2011, Zhongpin will have additional capacity come online, including 195,000 MT for chilled and frozen pork and 86,000 MT for prepared pork products. The company expects to lease, acquire, or build new facilities to support new market development, which we believe is appropriate and prudent. We note that, except the facilities in Gongzhuling, Jilin (leased) and Deyang, Sichuan (acquired), all other current facilities were built or being built by Zhongpin. 

Guidance for 2011 provided: Zhongpin expects revenue will be in the range of $1.18 billion and $1.23 billion. Gross margin is expected to be within the range of 11.7% to 12.4% and net margin within the range of 5.7% to 6.3%. Diluted EPS is guided to between $1.89 and $2.18, assuming average diluted common shares outstanding of 35.5 million in 2011. 

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman & Renshaw

3Q10 results slightly missed expectations Zhongpin’s sales revenue for the quarter was $241.1 million, slightly below our expectation of $242.2 million, but clearly missed the much more optimistic Street consensus of $246.6 million. GAAP net income for the quarter was $14.7 million, below our estimate of $15.0 million. Diluted GAAP EPS for the quarter was $0.42, a penny shy of both Street and our expectations of $0.43. On the margin side, gross margin was 11.3%, below our estimate of 12.0%. Net margin was 6.1%, a touch shy of our 6.2% projection. 

The company also maintained its previous guidance for 2010: revenue for the year will be between $900 million and $940 million; gross profit will be between $106 million and $115 million; net income will be within the range of $52 million to $57 million; and full year diluted EPS will be between $1.49 and $1.64.

Our take In our opinion, the company has actually delivered a fairly respectable financial performance. We believe the slight miss was largely due to the Street as a whole having an overly optimistic expectation on the back of increasing hog prices in China during the past quarter. Unfortunately for the company, pork prices did not increase as much and as fast as hog prices did. This, coupled with a typical seasonality (Q3 tends to be a weaker quarter for pork sales) and the company’s efforts of controlling sales in regions with what it believed were less-than-ideal pork prices, led to the below-expectation top line result as well as some pressure on the margin front. Aside from that, we believe Zhongpin’s operations were pretty much as-expectedly strong. Looking forward to Q4, we expect pork prices will catch up to the increases in hog prices for the second half of the quarter and the spread between the two should return to more of a normal level. Thus we expect Zhongpin’s margins will improve from their Q3 levels. 

Maintaining Market Outperform while increasing PT to $26 We are maintaining our Market Outperform rating while increasing our price target on the shares of Zhongpin to $26, from $18 previously. We now expect the company will report 2010 revenue, gross profit, and EPS of $924.8 million, $108.2 million, and $1.63, respectively. Our new $26 price target is based on the shares trading at 13x our 2011 EPS estimate of $2.01. The 13x multiple represents a slight discount to the average P/E multiple of 14x currently commanded by Zhongpin’s American and Chinese peers. We believe Zhongpin, with its Chinese industry leadership position and strong growth potential, justifies such a valuation. 

Major Risks to our rating include the company's ability to maintain an adequate hog supply, movement in pork prices, government and environmental regulations, additional capital needs for future growth, currency exchange risk, as well as country and political risks related to operating in China.

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Globa lHunter on HOGS

We initiated coverage of Zhongpin in June 2010 with an $18 price target and selected it as one of our top picks for the year. Subsequently, on October 11, 2010, we raised our price target to $24 citing the recent positive trends in pork prices coupled with increased investor interest in the name, leading to a multiple expansion. Our $24 price target was based on 11.1x FY2011 on a P/E basis and 9.1x FY2011 on an EV/EBITDA basis. Zhongpin’s stock price has had a phenomenal run since our initiation, appreciating over 100% from recent lows. At the current price of approximately $23.16 per share, we believe Zhongpin’s stock is fairly valued based on our 2011 estimates and do not foresee material appreciation in the near term.
 
Zhongpin reported Q3 results, basically in line with estimates, showing a slight miss relative to both top and bottom line estimates and reiterating its previous FY10 guidance. We are concerned that the recent run up in share price, which has achieved our price target of $24, indicates that investors were expecting an ahead of consensus quarter and likely increase of guidance. As a result of both our price target having been met and our concern regarding investor expectations, we are reducing our rating to Neutral. Shares have appreciated over 80% since our June initiation, closing at $23.16 yesterday, which translates to 11.7x FY2011 on a P/E basis and 9.8x FY2011 on an EV/EBITDA basis. We remain positive on the Chinese agriculture and food processing industries as a whole and Zhongpin’s prospects in particular; however, we feel shares of Zhongpin have become fairly priced at these levels relative to near term earnings growth prospects.
 
Key points:

Zhongpin reported Q3 results and reiterated its previous FY10 guidance. Revenues for the quarter came in at $241.1MM, corresponding to 23.7% Y/Y growth; however, the number was slightly below ours and consensus estimates of $246.2MM and $246.7MM, respectively. Gross margins have contracted by ~90bps Y/Y, showing 11.3%, below our estimate of 12%, while gross profits in dollar terms grew by 15.1% Y/Y to $27.3MM. The primary reason behind the revenue miss and margin contraction was the significant increase in hog prices since late October due to government purchases initiated to stabilize hog prices and protect hog farmers. This inflated Zhongpin’s input costs but was not reflected in an increase in pork product ASP by enough to offset it. The company expects pork prices to continue to rise in the near term due to the approaching holiday season and resulting strong demand, which should help to normalize the company’s margins going forward.
 
Operating income in Q3 increased by 2.2% Y/Y to $15.8MM, while operating margin contracted by 130bps to 6.6%; below our expectations of $18.4MM and 7.5%. SG&A expenses increased Y/Y due to higher advertising costs and depreciation, as well as a $0.5MM increase in bad debt provision. Interest expense also increased during the quarter as a result of additional $35.7MM in long term and $3.2MM in short term debt. The company benefited during the quarter from $1MM in government subsidies and $1.1MM in other income stemming from the reversal of a tax payable accrued from the sale-lease back transaction. Zhongpin reported net income of $14.7MM, or $0.42 per fully diluted share, vs. our and consensus estimates of $0.43.
 
On the earnings call, management reaffirmed its prior full year 2010 guidance. Zhongpin continues to expect full year revenue in the $900MM-$940MM range and gross profit in the $106MM-$115MM range, corresponding to approximately 12% gross margin. The company further stated that it expects net income in the $52MM-$57MM range, which comes out to fully diluted EPS of $1.49-$1.64.

Maxim on HOGS

 We expect HOGS to report quarterly results inline with or slightly below consensus estimates. Consensus estimates are revenue of $246M and GAAP EPS of $0.43, above our estimates of revenue of $237M and EPS of $0.39. Our revenue estimate represents 10% q/q and 22% y/y growth, respectively, while our EPS estimate represents a 10% q/q increase but a 12% y/y decline.

We are raising our price target to $27, from $18. The new price target is based on 17x and 15x our 2010 and 2011 EPS estimates, respectively, or 50% and 40% discounts to Chinese peers. With pork retail prices likely to continue increasing in China and the company’s deep discount to its peers, we believe this higher price target is well supported. Our estimates remain unchanged.