The average stock in this industry has more than doubled in the past 12 months.
“The coronavirus outbreak that has battered business has left one surprising winner standing.” – Nikkei Asian Review, March 17
With markets around the world struggling to climb back from the coronavirus crash, there is still one bright spot, and it’s a welcome surprise for investors.
Key companies in this little-known industry saw their revenue triple over the past three years, and their profits more than double.
Shares are trading at record low PE ratios. And stocks are soaring, with 18-month returns reaching as high as the mid-triple digits.[i]
These aren’t the kind of small-cap companies in an up-and-coming industry that you’d expect to see with those kinds of numbers, either. The industry is well established, some of the companies turning in these numbers boast market caps of several hundred billion dollars. Analysts say the growth spurt isn’t over either, calling for bottom line revenue to increase by as much as 2.3 times this year.[ii]
Hengsheng Asset Management says stocks in the industry “are expected to continue their strong performance.”[iii]
TF Securities says “the industry could be generating strong profits for the next three years.”[iv]
It will no doubt surprise you that we’re talking about pork producers. Hormel Foods (HRL) has done well over the past two years, returning 59% to investors in the last 24 months. And JBS S.A. (JBSAY), the world’s largest meat producer, has shot up 89% in the same time.
But the real opportunity for investors is in China’s publicly traded mega-pork producers.
China produces and consumes fully half of the world’s pork.[v] And nearly half of world’s 31 pork mega-producers are in China.[vi]
Companies like Muyuan Foods, with a market cap of $261 billion…New Hope Liuhe Co., with a market cap of $118 billion…and Jiangxi Zhengbang Technology Co., with a market cap of $44 billion are just a few of these behemoths.
Now a perfect storm of conditions has put China’s large publicly traded pork producers in a very sweet spot, causing these mega-companies to suddenly act like small growth stocks.
Fueled by the world’s largest middle class
China’s rising middle class is demanding pork. Always the country’s favorite meat, few could afford to eat it except on special occasions until the boom of economic growth over the past few decades.
Today pork accounts for nearly 70% of all meat consumed in China. It is a $128 billion a year industry and its stability is a key concern of the government, which knows that quality of life for the Chinese people equates in large part to low food prices.
An outbreak of African swine fever (ASF) has shaken that stability, plunging the country’s pork output to a 16-year low and forcing up prices. A combination of ASF and low prices of the last market cycle worked to drive small producers out of business, further constraining supply and pushing prices higher. At the same time, the U.S.-China trade war made U.S. imports prohibitively expensive, applying further pressure on supplies and prices.
The combined result is a greater than 40% decline in supplies in 2019 and pork prices that have shot up 140% in a little more than a year.[i] Analysts expect supply to fall another 10% to 15% by year-end.[ii] Meanwhile, China’s pork producers are benefitting from skyrocketing prices, though consumers and the government are not.
While the largest, most well-known producers, most of which are listed on the Shenzhen Stock Exchange, have seen massive share price increases, there are a few less-known companies that stand to benefit most going forward.
One of them is the Nasdaq-listed company, China Xiangtai Food Co.(NASDAQ: PLIN)
China Xiangtai Food Co.(NASDAQ: PLIN) is poised to grow
With a market cap of just $40.65 million, China Xiangtai is smaller by far than multi-billion dollar pork mega-producers like Muyuan Foods or New Hope Liuhe. But even with China Xiangtai’s Nasdaq listing, investors haven’t discovered the stock yet.
That hasn’t stopped China Xiangtai from turning in some pretty impressive numbers.
While Jiangxi Zhengbang and New Hope Liuhe saw their revenue grow 17% and 13.44% respectively over the past three years, China Xiangtai tripled revenue, growing from $34.63 million to $102.55 million over the same period.
That puts China Xiangtai’s revenue growth closer to industry leader Muyuan Foods, which saw its revenue multiply by around three and a half times.
China Xiangtai (NASDAQ: PLIN) is a vertically integrated company with operations across key sections of the industry value chain, including slaughtering, packing, distribution, and wholesale of a variety of fresh pork meat and parts.
The company is located in the megacity of Chongqing, a free trade zone established by the Chinese central government. Significantly, that designation grants companies streamlined regulation, investment liberalization, and beneficial tax incentives.[i]
The city lies at the convergence of the Yangtze and Jialing rivers, and though it is 870 miles inland, its vast ports make it a busy center for direct foreign trade, making it easy for China Xiangtai’s pork and pork products to be sold and distributed as far away as Shenzhen, in China’s far southeastern Guangdong Province.
China offers pork producers financial incentives
On March 16, China announced a range of policy incentives to boost investment in the aftermath of the African swine fever. Ranging from subsidies for purchases of automatic feeding and waste treatment facilities, to easier access to land use to encourage expansion, the incentives are available to the country’s large pork producers. Bric Agriculture Group, a Beijing-based farm-consulting firm, estimates that the total investment will be more than $14.3 billion.
This could provide significant wind beneath China Xiangtai (NASDAQ: PLIN) sails, increasing the company’s ability to expand into far-away markets.
Consequentially, in February 2020 China Xiangtai announced a collaborative agreement with Chongquing Good Helper Commerce Co., a financing company backed by the Chongquing provincial government. The deal calls for an infusion of up to $4.9 million for the expansion of operations and diversification of distribution channels.
A month earlier, in February 2020, China Xiangtai entered into an agreement with Manhattan-based Dragon Gate Investment Partners. The investment firm focuses on globalizing companies in the U.S. and China.
Dragon Gate Managing Director Lijie Zhu said of the deal, “As a public company listed on NASDAQ, China Xiangtai can serve as a bridge to connect supply and demand in the food industry between US and China.”
China Xiangtai (NASDAQ: PLIN) expands holdings
Currently, around 70% of China Xiangtai’s sales are derived from the distribution of fresh pork. This is in keeping with China’s consumption patterns with its traditional emphasis on fresh meats.
However, with urbanization and growth of the middle class, frozen pork sales are expected to grow at about 12.4% annually. Consequently, Chian Xiangtai is focusing growth of its product lines to include processed meats including bacon and sausage, pickled and canned meat, shredded and packaged meats, and prepared meat products such as salty braised pork and stewed meats.
On March 26, the company announced its intent to acquire a 51% controlling interest in the Chongquing Ji Mao Cang Feed Company (JMC) in order to expand its market and accelerate growth. The purchase is in line with China Xiangtai’s strategy of expanding its product portfolio across the value chain.
Plenty of growth ahead and value-priced
Institutional investors and hedge funds like what they see when they compare China Xiangtai to its mega-producer peers. It’s clear that Muyuan, with a PE of 40.47, and Jiangxi Zhengbang, with a whopping 191 PE, have their future growth priced in.[ii] Conversely, with a PE of just 11.78, China Xiangtai (NASDAQ: PLIN) is still a bargain.
In Q4 2019 the $16 billion Squarepoint Capital investment fund increased its holdings by 232%, and now owns 48,000 shares. That same quarter, international trading firm Jane Street Capital bought 15,729 shares, offsetting shares sold by Citadel Advisors.[iii]
Perhaps the best measure of China Xiangtai’s potential growth, however, is the confidence of its executive team, as evidenced by the number of insider shares owned.
A February 2020 SEC filing shows that company executives and directors own 60% of the company.[iv] This is a firm sign that senior managers have a strong positive outlook for China Xiangtai’s growth prospects.
PLIN began trading on the Nasdaq exchange on August 14, 2019 at $4.50. Since then, with little publicity or investor awareness, shares have slid as to low as $1.22. However, a recent rally has boosted the stock, which is up 39% from its previous low as of this writing.
Investors interested in emerging growth stocks in solidly growing industries might consider looking closely at China Xiangtai (NASDAQ: PLIN). And as always, make sure to perform your own in-depth due diligence.
For more information, please visit China Xiangtai’s website.
[i] Muyuan Foods (002714.SZ) 9-16-18 through 3-8-20
[ii] Huatai Securities forecast of Wens Foods: https://asia.nikkei.com/Business/Food-Beverage/Chinese-pork-producers-on-a-tear-amid-coronavirus-outbreak2