China Yurun Food Group Limited Net Profit Up 48.6% to RMB 254 Million in 1H2006
China Yurun Food Group Limited (HKEX: 1068):
Financial Highlights For the 6 months ended 30 June Change (RMB Million) % 2005 2006 Turnover 2,194 2,081 -5.2% Gross Profit 304 354 16.3% Net Profit 171 254 48.6% Earnings Per Share(RMB) 0.176 0.175 -0.6% Change (% pts) Gross Profit Margin 13.9% 17.0% 3.1 Net Profit Margin 7.8% 12.2% 4.4
China Yurun Food Group Limited (“Yurun Food” or “the Company”, together with its subsidiaries, collectively “the Group”; HKEX: 1068), a leading meat products provider in China, announced its interim results today for the six months ended June 30, 2006.
During the period, the Group had revenues of RMB 2.081 billion, a slight decrease of 5.2% compared with RMB 2.194 billion last year. The decline in revenue was due to a sharp reduction in hog prices that affected the retail prices of high value-added chilled pork and Low Temperature Meat Products (LTMP).
Gross profit during the first half of 2006 increased by 16.3% to RMB 354 million compared to RMB 304 million in 2005. Operating profit was RMB 253 million, an increase of 22.8% from RMB 206 million in the first half of 2005. In addition, net profits increased by 48.6% to RMB 254 million, up from RMB 171 million in the preceding year. Earnings per share were RMB 0.175 (the earnings per share (diluted) in the first half of 2005 were RMB 0.176).
The board of directors proposed an interim dividend of HK $0.042 per share, representing a payout ratio of 24.9%.
Mr. Zhu Yicai, Chairman of the Group, said, “The year 2006 is the first year after the Group’s listing on the Hong Kong Stock Exchange. In the first half, we introduced an array of new products, expanded into new markets, and conducted a series of market initiatives. Our chilled pork and LTMP businesses achieved rapid growth, and we also saw a sustainable growth in profits. During the period, We also expanded production capacity in order to prepare for an increase in demand for our products.”
Adding his perspective, Mr. Bi Guoxiang, Chief Executive Officer and Executive Director of Yurun Food, said: “In the first half of 2006, the group focused on development of high-end products with better gross margins. We also developed modern sales channels including hypermarket, supermarket and convenience stores to cultivate the up-market client base, taking advantage of the popular “Yurun” brand to make further inroads into the rapidly growing domestic market for safe, reliable meat products.”
Business Review
The first half of 2006 saw robust growth in the Group’s sales and the Group expanded sales of chilled pork and LTMP. During the period, sales of chilled pork were RMB 906 million, representing an increase of 19.6% compared with corresponding period last year. This represented 41.3% (1H2005: 32.3%) of the Group’s total sales before inter-segment elimination and 59.0% (1H2005: 43.2%) of upstream sales. Sales of LTMP were RMB 556 million, representing an increase of 15.9% compared with the corresponding period last year. This represented 25.4% (1H2005: 20.5%) of the Group’s total sales before inter-segment elimination and 84.3% (1H2005: 80.9%) of the Group’s turnover in processed meat products.
The Group continued to expand its product range by developing high-end products with better gross margins. The Group strengthened marketing, sales and distribution, particularly in small to medium-sized cities with high growth and in north and northeastern China. The Group also launched “Yurun” branded products for the first time in Hong Kong this year, where they are now being sold in major supermarkets and achieve encouraging sales results.
In order to strengthen its flagship brand, the Group is gradually re-branding all of its chilled pork business under the Yurun brand. The Group stepped up its efforts to produce advertisements on mainstream television and mobile telephone media with high viewer rates in order to strengthen recognition and reputation of the Yurun brand in mid-to-high-end markets.
The Group has expanded production capacity through acquisitions, construction of new facilities, and upgrading existing production in order to keep up with the market demand. The acquisition of Yurun Beixu Food Products Company in Henan Province added a total capacity of 500,000 head per year to the Group’s slaughter capacity. The acquisition also enabled the Group to extend its geographical coverage to eastern and central China, including such cities as Wuhan and Zhengzhou. Yurun Beixu is based in Henan Province, which offers a stable supply of low-priced source of hogs. As of June 30, 2006, the Group’s slaughter capacity reached 8.86 million head, representing an increase of 1.01 million head from 7.85 million head at the end of 2005.
Capacity expansion of the Group’s downstream processing facilities will support expanded market coverage, eliminate bottlenecks and provide upgrading of key facilities. Meanwhile, production capacity of the Group’s downstream processing business increased from 163,000 tons per year at the end of 2005 to 168,000 tons per year as of June 30, 2006. The increase was due to the completion of a new factory in Xinjiang and upgrading of partial production facilities in Nanjing during the period.
As its market coverage and product sales continue to see rapid growth, the Group was able to maintain a stable utilization rate while further expanding its production capacity. On average, utilization rates were 68% for the upstream businesses and 55% for the downstream businesses during the first half of 2006.
Financial Review
The Group’s overall gross profit margin during the period was 17.0% (2005 1H: 13.9%). The increase was due to a combination of factors. The Group was successful in marketing higher-margin chilled pork and LTMP segments, and lower hog prices created downward pressure on costs for downstream processed meat products.
In the upstream raw meat business, the gross profit margin for chilled pork was 14.0%, representing an increase of 1.8 percentage points compared to the preceding year. The gross profit margin for frozen pork was 7.9%, a slight decline of 0.4 percentage points compared to 2005. The increase in gross profit margin of the Group’s chilled pork business is attributable to more cash purchases of hogs, which reduced the general purchase cost. At the same time, as the Group’s pricing capacity was enhanced and the popularity of chilled pork products among Chinese consumers continued to increase, the decline of chilled pork price in the period under review was less than the reduction in our hog acquisition price, contributing to a rise in gross profit margin. On the other hand, the price of frozen meat products experienced a drop more than the decline of hog acquisition price which led to a slight decrease in gross profit margin for the frozen pork business.
In the downstream processed meat business, gross profit margin for LTMP during the period was 27.4%, an increase of 4.8 percentage points from the same period of previous year. This increase was mainly due to a drop in the price of raw materials and a greater proportion of high-end products launched. During the period under review, the average realised retail price of LTMP increased despite declining hog acquisition prices. Coupled a reduction in material costs, the Group’s LTMP business achieved a substantial improvement in gross profit margin. The gross profit margin for high temperature meat products (“HTMP”) was 20.1% for the first half of 2006, representing an increase of 1.4 percentage points over that of the same period in 2005, primarily thanks to reduced material costs.
Other operating income included government subsidies and negative goodwill. For the six months ended June 30, 2006, the Group had other operating income of RMB 47.44 million, representing an increase of 179.7% from the RMB 16.96 million of the same period last year. This was largely due to negative goodwill of RMB 40 million from the acquisition of Yurun Beixu.
For the six months ended June 30, 2006, the Group had operating expenses of RMB 148 million, an increase of 28.1% compared to RMB 116 million for the same period last year. Operating expenses represented 7.1% of the Group’s turnover, up 1.8 percentage points compared to 2005, when operating expenses represented 5.3% of turnover. The increase in operating expenses was due to an increase in sales volume, higher promotion costs, increased expenditure on salaries, higher research and development expenses and delivery costs as well as an increase in management costs for the newly set up companies.
The Group’s net financing costs for the first half of 2005 were RMB 30.71 million. There was financing income of RMB 3.37 million in the first half of 2006. This was mainly because after the listing of the Company’s shares on the Stock Exchange last year (“IPO”), all convertible instruments were converted into equity and the Group no longer incurred the corresponding discount cost and amortisation of transaction costs of the convertible instruments in the first half of 2006. In addition, interest income also increased during the first half of this year because the unused proceeds from the IPO were deposited as short-term deposits in banks. Interest expenses also declined as a result of lower balance of bank loans during the period.
Outlook
In view of the fast growing domestic market for chilled pork and LTMP, the Group will continue to expand upstream production capacity, increase the share of chilled pork in its upstream business, strengthen its procurement network and enhance its hygienic control and disease prevention systems. It will streamline the product mix of processed meat products as well as explore high profit margin and high value-added products in order to increase overall profitability.
Finally, the Group will continue to expand upstream production capacity and enlarge its geographical coverage through new production investment, expansion of existing facilities, leasing and joint ventures. It will also continue to base its advertising strategy on high viewer rate television and mobile telephone media, in order to strengthen the penetration and reputation of the Yurun brand in mid- to high-end markets.
Mr. Zhu Yi concluded: “Looking at the second half of the year, the Group will focus its efforts on brand building, to strengthen consumer loyalty to “Yurun” brand products in mid-to-high-end markets. We believe that the Group will emerge as a market leader in the next phase of market consolidation in the meat processing and meat products industry in China, through the concerted efforts of the Group’s workforce. We are confident that the Group will seize further opportunities within the meat processing and meat products industry to increased our market share and achieve more encouraging results to bring greater value to shareholders.”
About Yurun Food
Established in 1993, Yurun Food is one of the leading meat product suppliers in China. By combining advanced production equipment and processing technologies with proprietary formulas, the Group has grown by developing an array of meat products that specifically cater to Chinese consumer tastes. The products are marketed under four major brands- “Yurun”, “Furun”, “Wangrun” and “Popular Meat Packing”.
Yurun Food experienced annual revenue growth of 26.3% from 2002 to 2003 and 33.7% from 2003 to 2004 and 71.8% from 2004 to 2005. Since 2002, it has dominated market share in LTMP sales to large-scale retailers. Also, the Group has been China’s third largest chilled and frozen pork producer. Yurun Food listed on the Stock Exchange of Hong Kong on October 3, 2005.
Disclaimer
This press release includes “forward-looking statements”. All statements, other than statements of historical facts, that address activities, events or developments that Yurun Food expects or anticipates will or may occur in the future (including but not limited to projections, targets, estimates and business plans) are forward-looking statements. Yurun Food’s actual results or developments may differ materially from those indicated by these forward-looking statements as a result of various factors and uncertainties, including but not limited to the level of demand for the products, competitiveness, changes in the regulatory policies and other risks and factors beyond Yurun Food’s control. In addition, Yurun Food makes the forward-looking statements referred to herein as of today and undertakes no obligation to update these statements.