ian nih - DBS Bank...Senior Research Analyst DBS Group Research [email protected] Alice HUI, CFA...

DBS Group Research • July 2017DBS Asian Insights45n

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SECTOR BRIEFING

China Pork A Meaty Task to Meet Demand

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DBS Asian Insights SECTOR BRIEFING 4502

China Pork A Meaty Task to Meet Demand

Produced by:Asian Insights Office • DBS Group Research

go.dbs.com/research @dbsinsights [email protected]

Goh Chien Yen Editor-in-ChiefJean Chua Managing EditorGeraldine Tan EditorMartin Tacchi Art Director

Alison FOK Senior Research Analyst DBS Group [email protected]

Alice HUI, CFA Research Director DBS Group [email protected]

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Executive Summary

A Middle-Class Consumption StoryFuture Required Capacity – How Big Is the Pork Market?Income Growth and Expenditure

Implications On Infrastructure And Key Challenges

China’s Pork Supply Chain – Who Are the Players?

Hog FarmsSlaughtering And Fresh Pork ManufacturersProcessed Pork ManufacturersPork Distributors And RetailersCold Chain LogisticsThe Raw Material Suppliers – the Feedstock Producers

Business ModelCost of Producing a Pig in ChinaCosts in China Versus Other Countries

Case Study of a Global Player: USAOpportunities Across the Industry ChainAppendix

lready the world’s largest pork market – representing around half of global demand – China’s market is expected to sustain a steady growth of 1.3-1.4% per annum going forward. Growing income, along with a rising middle class and continual urbanisation, would drive Chinese consumers towards a diet based more heavily

on animal protein. In addition, with an expanding population, we estimate that China’s demand for pork would increase an additional 3.5m tonnes in the next five years.

While the higher demand would mean opportunities for domestic players, it has also created more demand for pork imports, which have been surging since late 2015. Widening price disparity between domestic and overseas prices in recent years has made this an increasingly attractive option. While pork imports represent a mere 3% of total demand in 2016, this ratio could swell to 7% by 2020, based on our estimates.

Despite growing demand, China has faced a number of food scandals and disease outbreaks due to a lack of environmental and regulatory enforcement, which has created high volatility in supply and prices historically. With growing land, feed, water, and environmental constraints, the government has initiated industrialisation and standardisation as well as more stringent food safety protocols to ensure a safer and more secure supply chain.

In particular, the Chinese government is looking to move hog farms away from urban areas and water sources, with many farms located in the restricted areas being forced to close down or relocate. The stricter environmental laws have also led to closure of smaller and outdated hog farms, to the benefit of large-scale hog producers. Based on our estimate, these closures could potentially create a shortfall of 77m hogs from now till 2020, and the majority of these will benefit major players which have the ability to expand their capacity.

Apart from market consolidation, opportunities for large-scale hog players would be in increasing efficiency. Cost of hog production, despite the rising scale of some players, is still higher in China than overseas, largely due to inherently high feed costs and less efficient farm management. As such, improving efficiency/productivity is a key goal for the government’s current five-year plan for hog production.

We expect decent growth outlook for downstream processed meat demand, driven by an increasing focus on convenience as well as westernising dietary habits. This is, however, also a sector where competition is expected to intensify, as domestic players strive to gain share and overseas players have the competitive edge. especially in the premium market.

Executive Summary

APork demand still on the rise....

.. and so are pork imports

Sectoral reform

Market consolidation to continue

Raising productivity

Processed meat production


The focus on food safety and production efficiency has driven both upstream and downstream players to go for vertical integration. Most of the leading feed companies in China today have exposure to hog-raising – and some even in slaughtering – and vice versa, as hog producers produce more feed themselves. Major slaughterhouses are also expanding their raw-material sources by investing in hog farms, with some even venturing overseas (WH Group’s acquisition of Smithfield) as imports become a more viable option, given the price disparity.

In summary, we see the below key trends/growth potential in the China pork market:

1. industry consolidation, with larger players benefitting as smaller players are phased out due to cost and environmental issues;

2. vertical integration to maximise profit and secure food safety;

3. rising focus on production efficiency, given the higher cost in China at the moment; and

4. product innovation, especially for the downstream processed meat sector.

The latter two are areas where global players could have an added advantage.

Convergence a growing trend

Scale and efficiency matter

We estimate that China’s demand for pork would increase by 3.5m tonnes in the next five years


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Future Required Capacity – How Big Is the Pork Market? Already the world’s largest pork market representing c.50% of the global consumption, pork consumption in China has been growing at a CAGR of 1.0% in the past six years, reaching 54.5m tonnes in 2016. On a per capita basis, pork consumption in China is estimated at 31.6kg in 2015 (OECD data), growing at a 1.2% compound annual growth rate (CAGR) since 2010.

Pork consumption

Diagram 1. China pork consumption

Diagram 2. China’s pork consumption per capita (1995 – 2025E)

Source: OECD, DBS Bank

Source: CEIC, DBS Bank’s estimates

A Middle-Class Consumption Story

m tonnes

At 31.6kg, China’s per capita consumption of pork ranks relatively high globally, being only slightly behind that of the European Union’s (EU) but higher than most Asian countries as well as the US and Canada. This likely reflects the dominance of pork in Chinese society. In fact, if compared to HK where per capita consumption exceeds 67kg, China still has ample growth potential. In terms of overall meat consumption, China’s 50kg per capita is still below levels for most other countries, indicating that there should be room to grow.

While pork has remained the major type of meat consumed in China, representing c.60% of total, consumption of other types of meat products have been rising. Per capita consumption of beef and lamb, for example, have posted a CAGR of 2.4% and 2.3%, respectively, during 2010-15, vs 1.2% growth in pork and 1.1% in poultry. This trend, we believe, indicates that as consumers become more affluent, they are diversifying their protein consumption towards more “expensive” ones. In China, beef and lamb typically costs more than twice the price of pork and poultry.

As such, we expect growth in pork consumption to continue lagging that of beef and mutton, but should maintain its dominant position, considering the Chinese dietary preference towards pork. Moreover, the slower growth for pork consumption in the past two years was also partly due to supply constraints, as the pig-farming sector has been undergoing consolidation, hence limiting supply. As supply growth is expected to resume gradually, this should also help consumption ahead. Pork consumption per capita is expected to grow mildly by 0.8% in CAGR till 2020E.

Growing per-capita consumption aside, pork demand would be further fuelled by an expanding population, increasing urbanisation, and a rising middle class. At close to 1.38b in 2016, China’s population will reach 1.43b – an additional 50m – by 2020, the country’s

A gradual change?

Room to rise

Demand for the next five years


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Diagram 3. China’s per-capita meat consumption (1990-2025F)

Source: OECD, DBS Bank

In terms of overall meat

consumption, China’s 50kg

per capita is still below that in

other countries


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National Health and Family Planning Commission estimates. This alone would translate into an additional demand of 1.6m tonnes. On top of that, the continual urbanisation would bring in an additional 80m urban population by 2020. And with rural consumption per capita being less than 70% of urban consumption, this would represent another 0.8-0.9m tonnes of additional demand. Summarising the above, we estimate an overall pork demand growth of 1.3-1.4% p.a., or an additional demand of 3.5m tonnes from now until 2020.

Income Growth and Expenditure

Disposable income per capita in China has been growing at c.10% p.a. in the past five years, slightly ahead of the GDP growth. With a slower economy ahead (DBS economist forecasts GDP growth at 6.5% in 2017, vs 7.9% p.a. in the last five years), we expect disposable income per capita (urban) in China to post a softer 8% CAGR, from RMB23,821 in 2016 to RMB32,408 in 2020. In fact, China’s GDP growth has been outperforming most of its Asian peers’ and is expected to remain so despite slower growth ahead.

Along with higher income, China’s per-capita expenditure has been growing at a similar rate of 9.7% in CAGR since 2010, reaching c.RMB21,400 in 2015. Of which, food is the largest item representing about 30% of total expenditure, followed by residence, telecom, and education. And among various food categories, spending on meat alone (excluding dairy and aquatic products) is estimated at 20%, or close to RMB1,300 p.a, with the bulk being pork.

Diagram 4. Disposable income per capita (2011-2016)

Source: National Bureau of Statistics of China, DBS Bank

Rising disposable income...

… to support higher spending

China’s GDP growth has been outperforming

most of its Asian peers’ and is expected to

remain so despite slower growth

ahead

In terms of food consumption, two trends have been getting more prominent in the past 15-20 years: (i) caloric intake for the Chinese has been rising faster than in most other countries, up 26%+ to 3,073 from 1,991 to 2011; (ii) there has been a shift from a grain-based diet towards more diversified ones including more meat, dairy and eggs.

Both trends would be in favour of meat demand going ahead. In 2011, meat represented 17% of total caloric intake for an average Chinese, up from a mere 10% back in 1991. Meat,


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Source: Frost & Sullivan, Company data, DBS Bank

Source: National Geographic, DBS Bank

Diagram 5. Per-capita income versus consumption expenditure of urban households

Diagram 6. Household expenditure breakdown (%)

Shifting diet

dairy and egg together accounted for c.23% of total caloric intake in China, still well below the 24-32% levels for most Western countries, indicating room to grow further ahead.


Diagram 7. Meat, dairy, and egg consumption by country

Source: National Geographic, DBS Bank

rom 2011-16, pork production had been growing at 1% CAGR, more or less in tandem with the demand growth (1.3% CAGR). The biggest pork market globally, China produces c.700m heads of hog every year. Production has witnessed some declines since 2015, largely a result of the market consolidation as smaller players

were phased out due to stricter environmental rules and regulations. In 2016, national hog inventory declined 3.3% y-o-y to 685m heads, or an 6.8% drop from its 2014 peak.

The shortfall, however, has been partly fulfilled by imports, which saw tremendous growth in 2016 as the price gap between domestic and international prices widened. While pork demand is expected to sustain a 1.3-1.4% growth in CAGR going forward, we believe the actual supply/capacity growth required could likely lag, as part of the demand could be satisfied by imports.


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Diagram 8. Hog production

Source: MoA, DBS Bank

Implications On Infrastructure And Key Challenges

FWould production need to rise?


Imports represented a mere 1.8% of total demand in 2015. This ratio, however, has surged to c.3% (or 5.6% including by-product volume) in 2016. While China hog prices have retreated from their peak in mid-2016, they remain at significant premiums over overseas prices (c. 60% more expensive than US hogs as of March 2017). This price disparity would continue to make imports a viable proposition, especially for downstream pork players. For example, WH Group, one of the major players to import pork into China from the US, has targeted imports to grow by another c.30% in FY17, following a spectacular surge of 87.5% in FY16.

Imports getting more prominent

Diagram 9. Pork imports (% y-o-y)

Diagram 10. Pork imports as % of total demand

Source: WIND, DBS Bank

Source: USDA, DBS Bank

Assuming that imports grow at a more modest CAGR of 15% going forward (vs a CAGR of 34.7% in 2012-2016), its contribution to total would swell to 7% in 2020 – this means that local pork production capacity would need to edge up merely 0.6% p.a. to fulfil the demand.


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Source: CEIC, Bloomberg Finance L.P, DBS Bank

Source: China Customs, DBS Bank

Diagram 11. China-US hog price

Diagram 12. China’s pork imports by source (2016)


While our analysis above indicates that China, as a whole, may not need to expand its total pork production capacity by much, there would be significant changes in the composition of these capacities, most notably a shift from backyard hog farming towards big-scale commercial farming, due to the following challenges:

Land: As China’s urbanisation continues to rise, more land previously used as hog farms would be converted for other uses, both for commercial as well as environmental reasons. For example, the Ministry of Agriculture (MoA) has set targets to cap production growth in urban areas (see Market Trends in Appendix). This would mean farms in these locations, mostly small backyard operations, would be forced to relocate or shut down.

Environment: The Chinese government has been adopting stricter environmental regulations on hog farming. Following the launch of the new environmental law in 2015, the government is looking to move hog farms away from urban areas as well as waterways, with provincial governments assigning certain areas/zones where hog farming is prohibited or limited. Hog farms which are located in the restricted areas would be forced to close down or be relocated by end of 2017. Based on some industry estimates, these closures had already reduced total hog supply by more than 50m heads in 2016, with another 40m heads or so to be cut in 2017.

As such, this would limit total hog supply in China. Based on the current classification, there is likely a gradual shift of production towards northeast China which is a major corn-producing region, as well as to the Southwest (Yunnan and Guizhou).

Efficiency, quality, and the environment

Source: Historical - World Bank, Forecast based on Thirteenth Five-Year Plan; DBS Bank

Diagram 13. China’s urbanisation rate


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Diagram 14. Environment tax 2018

Company Infrastructure Works

Law Description

Air pollutant Rmb1.2/hog

Water pollutant tax Rmb1.4/hog

Noise pollution RMb350-11,200 per month (depending on noise level)

Applicable to hog farms above 500 hogs in size. If only accounting for air and water pollutant tax, the minimum cost for a 500-hog size farm will be Rmb1,300.

The implementation of the environmental tax will also start in 2018, which will bring additional costs to hog farms, and thus further accelerate the industry consolidation, which has already been happening in the past few years.

Cost efficiency: Smaller and outdated farms are also losing their competitiveness against big farms which should likely possess better cost efficiency given scale benefits. As environmental regulations are tightened, farms would need to invest more on related facilities, hence boosting their capex requirement as well as operating costs. Based on our estimates, around 15-16% of total capex for a modern farm nowadays are for investing in related environmental facilities. In the northern regions, capital expenditure is typically higher by RMB100/head as heating facilities will be required. Smaller farms could find it hard economically to justify such an investment.

Quality assurance: Last but not least is the focus on food safety for both government and consumers. This is again an area where big farms have an advantage given their stronger control on production processes and better support in technology. For example, big farms like COFCO have established a product traceability system and obtained ISO qualification for its key production procedures. Wen’s, the biggest hog player in China, has also installed a real-time platform to monitor its farm operations.

Given the above challenges, outdated hog capacity in China, predominantly small backyard farms, will be phased out. In fact, the number of hog farms with fewer than 50 heads in China has been declining sharply in the past 15 years, shrinking more than half to 46m in 2014 from over 100m in 2002. As such, the capital expenditure required to support the growth in China hog production would be much more than just the organic growth, as that would include also replacement capex for those capacity closures.

Investment required



Assuming that the reduction of small farms with less than 50 heads continues at c.7% p.a. just like in the past few years, while farms with less than 500 heads sustain a moderate 2% p.a. decline, we estimate this would create a total shortfall of c.77m heads from now till 2020. This, coupled with an extra 40m heads required to produce additional pork demand of 3.5m tonnes organically, would translate into a total of 117m heads of hog capacity. Premised on around RMB1,000 per head of estimated capex, this would translate into c.RMB117bn total capex required for hog farms alone for the next five years.

Diagram 15. China’s hog production data

Source: WIND, China Customs, DBS Bank

Large-scale farming expansion

Sow inventory

Hog Inventory

Year-end live hogs

Pig production

Pig slaughter

Import volume

Export volume

Consumption

m heads m heads m heads m tonnes m heads m tonnes m tonnes m tonnes

2012 50.0 463 475 53.4 696 0.5 0.08 53.9

2013 49.4 457 474 54.9 716 0.6 0.07 55.4

2014 42.9 422 466 56.7 735 0.6 0.07 57.2

2015 38.0 384 451 54.9 708 0.8 0.07 55.6

2016 36.7 367 435 53.0 685 1.6 0.10 54.5

n this section, we provide a detailed walkthrough of each of the key segments in the pork supply chain, including the feed stock producers, the hog farms, the slaughterers, the processed meat producers, as well as the distributors and retailers.


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Diagram 16. China’s hog production data

Source: Company data, DBS Bank

China’s Pork Supply Chain – Who Are the Players?

I


Hog Farms

A sector traditionally dominated by backyard farms, the Chinese hog farming sector has witnessed changes in the past few decades with the rise of large-scale commercial farming. Although market concentration is still low with backyard farmers remaining the dominant contributor of hog output, accounting for 57% as of 2015, their significance has been reducing sharply from 74% in 2007. Large scale farms, on the other hand, posted the strongest growth with their contribution having more than doubled from a mere 4% in 2007 to 10% in 2015. Mid-sized farms with more than 500 hogs in production have also witnessed strong growth with contribution rising to one-third of the total in 2015.

To be classified as a large-scale hog farm, a farm must have a minimum of 300 sows and 5,000 hogs for slaughter per year. The farms must abide by the Animal Law, Animal Epidemic Law, Livestock and Poultry Scale Pollution, Prevention, and Control regulation, and other relevant laws and regulations. The farm must register for an Animal Epidemic Prevention Conditions Certificate, as well as have two consecutive years without major disease outbreaks or quality issues. In 2016, 208 hog farms qualified for large-scale production, according to MoA.

There are various forms of hog operations in China but the most common types for the major players are (i) self-owned and operated industrial-scale farms, which engage in the whole hog production process from breeding and gestation to finished hogs; and (ii) contract farming where the hog company provides seed stock, feed etc. to the farmers in return for the finished hogs.

Diagram 17. Market share of hog farms

Source: Frost & Sullivan, DBS Bank

Commercial farming


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Currently, the largest hog player in China is Guangdong-based Wen’s, with a market share of 2.5%, well above its closest competitors. Adopting the contract farming with a total of 22,200 farms under its helm, or the “Company plus farm” model, this relatively asset-light business model enables Wen’s to swiftly expand its capacity. The company’s annual hog production has doubled since 2012 to 17m heads in 2016, more than the combined total of the next four biggest players.


Diagram 18. Types of farming

Type of farming

Description Pros Cons

Industrial scale farming

This is the most labour and capital intensive type of farming. The farm begins with the breeding and gestation process up until market weight. Although this takes the longest in ramping up, the stricter enforcement of environmental laws may require this to be the way forward to ensure a secure supply chain.

Secured integrated value chain, embraces the trend ahead

High initial capital, assume most risk

Company + Farmer

Under contract farming, farmers typically use the company's seed stock, feed, veterinary medicine, and in return is paid a growing income in an off-take arrangement.

Initially fast expansion, lower initial capital; farmers will assume the growth, labour, and land responsibility

The value chain not as secure; dependent on the farmers under contract; difficulty in finding new farmers when prices are high and profit may be higher if they sell externally

Company + Farmer (looser model)

Farmer puts up the land, capital. In return, the company will have a purchase contract with the farmer, with additional services such as farm management, veterinary medicine, feedstock

Fast expansion, lower initial capital; farmers take on market risks

Insecure value chain; may not be up to current strict environmental standards

Mid-sized farms with more than 500 hogs in production have also witnessed strong growth

After Wen’s, the next five biggest hog players are Zhengda, Muyuan, Chuying, Zhengbang, and COFCO Meat, each commanding a market share of 0.2-0.6%. Among these players, COFCO Meat adopts the self-owned and operated format while the others adopt a mixed approach with both self-owned and contract farming.

There are also numerous feed/pork players which expanded into hog farming as part of their business extension. Leading feed producers such as New Hope, for example, has been involved in hog production as well as slaughtering. Zhengda (CP Group) and Zhengbang, two major feedstock producers in China, are also in hog farming and are ranked among the top six in terms of hog production.

But regardless of the business model these hog players adopt, the market share of the leading players are expected to rise further. The top six accounted for merely 5.1% of the total in 2016 (2015: 4.1%). With the government’s increasingly stringent requirements on food safety and the environment, large-scale producers have also begun establishing strategic agreements with local governments to support local needs through a secure food chain. For example, in October 2016, Wen’s announced that it will build an administrative building, feed plants, commercial hog farms (both self-owned and company-family model) to supply 500,000 hogs in Bei-an, Heilongjiang.


Diagram 19. Hog production market share by company (2016)

Source: DBS Bank compilation *Zhengda – derived from news sources

The large are getting larger


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Diagram 20. Hog production by top 6 companies (2014-16)

Source: DBS Bank *Zhengda – derived from news sources

Northeast and Southwest

Sichuan, Henan, Hunan, Shandong, and Hubei were the top five pork producing regions in China, accounting for 45% of total pork production in 2015. Going forward, growth in some major regions such as Hunan and Hubei are expected to be limited given constraints on land and environmental issues. The government has classified key cities including Beijing, Tianjin, and Shanghai, as well as Jiangsu, Zhejiang, Fujian, Anhui, Hubei, Hunan, and Guangdong, as the Development Control Area where new capacities would be limited. Instead, regions close to the Corn Belt, especially in Northeast and Southeast China, would be the key development areas.

Regions close to the Corn Belt, especially in Northeast and Southeast China, would be the

key development areas


Diagram 21. Pork output by province (2014) (‘000 tonnes)

Hainan486

Guangdong2,826

Hunan4,581

Jiangxi2,598

Fujian1,511

Heilongjiang1,426

Inner Mongolia

Ningxia77

Gansu527

Qinghai105

Sichuan5,272

Chongqing1,585

Shaanxi918

Hubei

Shanxi642

Yunnan2,924

Tibet15

Xinjiang339

Hebei2,812

Henan4,780

Jiangsu

Shanghai188

Zhejiang1,270

2,324

Shandong4,068

Anhui2,648

Guangxi2,663

Guizhou1,656

Jilin1,404

Liaoning2,403

Beijing240 Tianjin

299

4,581

Jiangxi2,598

Fujian1,511

Heilongjiang1,426

Inner Mongolia

Ningxia77

Gansu527

Qinghai105

Sichuan5,272

Chongqing1,585

Shaanxi918

Hubei

Shanxi642

Yunnan2,924

Tibet15

Xinjiang339

Hebei2,812

Henan4,780

Jiangsu

Shanghai188

Zhejiang1,270

2,324

Shandong4,068

Anhui2,648

Guangxi2,663

Guizhou1,656

Jilin1,404

Liaoning2,403

Beijing240

Hunan

Guangdong2,826

Hainan486

Key development area

Restricted development area

Potential growth area

Moderate development area

Tianjin299

Source: Ministry of Agriculture, DBS Bank


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Diagram 22. Listed hog farms’ key operating parameters


Wenshi Foodstuff

Muyuan Foodstuff

Chuying Agro Zhengbang COFCO Meat

廣東溫氏食品牧原食品雛鷹農牧集團正邦集團中糧肉食HQ Guangzhou Henan Henan Jiangxi BeijingDate of establishment 1983 1992 1988 1996 2009Est. market share 2.5% 0.5% 0.4% 0.3% 0.2%Hog production volume (mn)2016 17.1 3.1 2.5 2.3 1.7 2015 15.4 1.9 1.4 1.6 1.2 Sales (Rmb m)2016 59,355 5,606 6,090 18,920 6,616 2015 48,237 3,003 3,619 16,416 5,056 2014 38,723 2,605 1,762 16,998 3,746 GPM (%)2016 28.1 45.6 24.6 13.7 21.0 2015 19.6 24.6 15.3 9.3 9.3 2014 13.5 7.7 11.4 6.7 5.2 NPM (%)2016 20.6 41.4 14.3 5.5 13.5 2015 13.8 19.8 6.4 1.9 (2.8)2014 7.7 3.1 (10.5) 0.5 (8.1)Total asset (Rmb m)2016 41,438 12,931 16,928 12,259 8,307 2015 32,735 7,068 10,181 9,764 7,438 2014 27,686 4,119 7,241 8,205 8,029 Total liability (Rmb m)2016 10,059 5,661 10,127 6,040 3,868 2015 9,705 3,546 5,470 6,212 4,794 2014 10,407 2,171 4,361 5,444 5,592 Net gearing (%)2016 -3% 44% 9% -12% 23%2015 -3% 42% 21% -38% 119%2014 4% 56% 55% -79% 58%Current ratio (x)2016 1.9 0.7 1.8 1.1 1.3 2015 1.7 0.9 1.5 1.1 0.8 2014 1.3 0.9 0.8 0.9 0.8 Inventory days (no.)2016 90 314 94 46 29 2015 84 186 160 37 41 2014 91 157 328 37 96 Receivable days (no.)2016 1 3 18 9 9 2015 1 1 22 10 12 2014 2 1 32 7 19 Payable days (no.)2016 23 34 71 29 28 2015 17 83 71 24 19 2014 17 41 115 24 29 Cash conversion days (no.)2016 69 283 41 26 10 2015 68 105 112 23 34 2014 75 117 245 20 86


Slaughtering And Fresh Pork Manufacturers

Although the slaughtering industry in China has been undergoing consolidation since 2008, the sector’s concentration remains low. The top ten players in China represent a mere 5.1% of the total market (by sales revenue) in 2015, significantly below developed countries such as the US, where the top five players already account for almost 70% of the market (by daily capacity). The top player in China at the moment is Henan Shuanghui, and other major players include Yurun, People’s Food, Zhongpin, New Hope, etc.

Most players in the slaughtering industry are involved in multiple segments within the pork value chain. For example, major players such as Shuanghui and Yurun are also leaders in the processed meat market.

Utilisation in the China slaughtering sector remains low, as reflected in weakening profitability in China Yurun, one of the leading slaughterers. China Yurun had a total of 55.8m heads of slaughter capacity in 2016, with an 11.9% utilisation rate, significantly below breakeven levels of c.30%.

According to the Outline of Development Plan of the National Hog Slaughter Industry (2010-2015), the Chinese government aimed to enforce stricter food safety and production efficiency to ensure faster industry consolidation. Hence, the number of slaughterhouse licenses had declined to c.4,000 in 2015 versus 28,600 in 2008. This trend is expected to continue with the number of slaughterhouse licenses expected to cut by another half to 2,000 by 2018, according to Frost & Sullivan’s projection.

Top ten players

There is overcapacity

…but it should improve

Diagram 23. Market share by revenue (2015)

Source: Frost & Sullivan, DBS BankOther players include People’s Food,

Zhongpin, Goajin, Longda, TRS, COFCO etc

We believe one reason for the persistent overcapacity in the industry, despite the substantial cut in the number of slaughtering licenses’, is the presence of illegal slaughter houses, and the slow execution of local governments in phasing out non-compliant players. The situation, however, should likely improve going forward as the Chinese government has tightened the implementation of its regulations since mid-2016. As of December 2016, the government had already closed down 4,839 slaughter plants, of which 2,715 were illegal ones while the remaining plants were those not meeting the required standards.

With lower hog production as the market consolidates, slaughtering volume has been on a declining trend since 2015. In 2016, slaughtering volume declined 3.3% y-o-y. However, as hog production recovers gradually, we expect slaughtering volume to resume mild growth going forward.

In terms of seasonality, January and December are typically the peak slaughtering seasons due to higher demand during the holidays. Slaughtering volume usually falls after Chinese New Year but begins to rise starting September in anticipation of the peak festive holidays.

Another key trend in fresh meat consumption is the shift towards chilled and frozen pork. Depending on different chilling processes, fresh pork in China are sold under three major formats - warm fresh pork, chilled fresh pork and frozen pork. While warm fresh pork, typically sold in traditional wet markets, remains the largest category representing 55.4% of domestic consumption in 2015, demand for it has been on a declining trend. As modern trade channels continue to expand, demand for chilled and frozen pork is expected to rise rapidly. Chilled pork, in particular, has witnessed over 20% CAGR in 2010-15, and is expected to maintain a double-digit growth ahead.


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A shift towards chilled fresh pork

Diagram 24. Slaughtering volume



This trend should benefit major players as their focus is more on the chilled and frozen meat category. Leading players like Shuanghui produces only chilled and frozen meat while Yurun derived more than 80% of its revenue from chilled pork.

Processed Pork Manufacturers

As mentioned, major slaughterers in China are also involved in the processed meat market. Shuanghui (under WH Group) is currently the biggest player in the market, followed by Yurun, People’s Food, Zhongpin, and TRS Group. The top five players are estimated to account for 14.3% of the total market in 2015, based on Frost & Sullivan’s estimates. Given that processed meats have higher added value, and the opportunity to use by-products to enhance margins, both domestic and foreign players are paying close attention to this segment.

Source: Frost & Sullivan

Source: Frost & SullivanOther players include People’s Food,

Zhongpin, Goajin, Longda, TRS, COFCO etc

Diagram 25. China’s fresh pork consumption breakdown by category (2010-20E)

Diagram 26. China’s processed pork market share by sales (2015)

m tonnes

According to Frost & Sullivan, processed meat consumption is expected to grow at a faster rate of 6% in 2015-20E, against 2010-15 CAGR of 4.6%. This is driven by an increase in disposable income, expansion of the middle class, and changing dietary habits. Processed meat can be categorised into LTMP (ham, sausages, and bacon) and HTMP (ham, sausages, and canned pork). It is expected that LTMP products, such as bacon and ham, will grow at a faster rate as western-style products gain popularity while the cold chain in supporting the chilled product category improves.

Although growth is expected to be quite promising for this segment, competition is also quite intense, as margins have been relatively attractive. Leading player WH Group, for example, has managed to command a decent operating margin of over 20% for its China packaged meat division, doubling that of its US packaged meat margins. To capture growth, packaged meat players have been striving to improve their product mix, with premiumisation becoming a more evident trend as consumers focus more on food safety and quality.


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Westernisation and premiumisation

Source: Frost & Sullivan

Diagram 27. Breakdown of processed meat consumption

Although growth is expected to be quite promising for this segment, competition is also quite intense, as

margins have been relatively attractive

m tonnes


The premiumisation trend has also attracted more foreign participation in the packaged meat product market, though overall market share of international brands remains relatively low at c.5% (based on Euromonitor). Hormel, which entered China as early as 1994, had tripled its processing capacity in 2016. Danish Crown also announced in late 2016 of its plan to invest around DKK300m in a new processing plant in Shanghai. WH Group has also introduced its Smithfield brand into China with the commencement of a dedicated production plant for its brand in 2016.

Increasing foreign participation


Source: Company compilation, DBS Bank

Diagram 28. Shuanghui’s packaged meat gross profit margin

Diagram 29. Investment by foreign companies

Company Origin Description Relationship with Chinese company

Hormel Food USA Food processor with brands under Applegate, Jennie-O, Muscle Milk, Skippy, Spam and more

JV with Beijing Capital Agricultural Group, Shanghai Shangshi Meat Products

BRF S.A Brazil Meatpacker and food processor Strategic investment in COFCO Meat (US$20m)

Danish Crown Denmark A global meat processor To open up a meat processing plant in China

Smithfield USA Largest pork company globally Acquisition by Shuanghui International, now under WH Group

Pork Distributors And Retailers

Pork is traditionally sold in the form of fresh and warm format through wet markets and now more so in modern retail chains (supermarkets, and hypermarkets), hotels and restaurants, and retail stores (grocery stores and branded chain stores). Around 70% of pork are sold fresh, while frozen (25%) and chilled (5%) are smaller but growing faster, particularly in the chilled category as China’s cold chain logistics improve.

The wet market still dominates the fresh pork channel, distributing over 56% of total volume in 2015. But with rapid urbanisation and the rise of the middle class, the preference has been shifting towards modern retailers and retail stores. The modern retailer channel is expected to grow at a CAGR of 14% between 2015-20E, vs a decline in the traditional wet market channel.


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Wet market still dominant…

… but modern trade picking up fast



Diagram 30. Fresh pork distribution channels (%)

Diagram 31. Fresh pork distribution channel (%)

m tonnes


Another key trend is the rise of the food services channel like hotels and restaurants, especially in the top-tier cities. Frost & Sullivan estimates sales in this channel to grow at over 8% CAGR till 2020. To tap the food services channel, pork players are not only extending their processed product offerings, but some are also working with restaurant chains to collaborate at a central kitchen level, and even providing cooked processed products as a value-add for its clients. This subsequently reduces the proportion of processed meat sold to wholesalers, and increases it at higher-margin channels.

Pork players have also extended their channel offerings into specialty outlets (standalone outlets) under their own brands to increase brand awareness and create deeper penetration into local regions. This could be through wholly-operated stores or franchise outlets. Some have established membership loyalty programmes to enhance the number of repeat customers. In addition, specialty stores allow cross-selling of other brands and products, and provide a platform for pork players to gather more on-the-ground market insights.

Last but not least is the fast growing e-commerce channel. The revenue of online fresh-food grocery shopping, reached RMB50bn in 2015, and is expected to grow at a CAGR of 68% in 2015-18E, according to iResearch. The strong growth of this channel has two implications: (i) Domestic brands are placing more focus on digital marketing; (ii) the online platform also provides a channel for international brands to get into China.

Hotels and restaurants

Specialty outlets

E-commerce

Source: DBS Bank

Diagram 32. Pork brands

Company Brand

WH Group Shuanghui (雙匯)

Yurun Yurun (雨潤)

People's Food Jinluo (金鑼)

No. 1 Pig No. 1 Pig (壹號土豬)

COFCO Meat Joycome (家佳康)

COFCO Meat Maverick (萬威客)

Beijing Shunxin Shunxin (順鑫)

Muyuan Longda (龍大)

Cold Chain Logistics

Along the pork industry supply chain, the growth in cold chain logistics in China has been crucial in supporting the development of downstream chilled meat and processed meat sector. According to China Warehousing Industry Bluebook 2016, the cold chain warehouse capacity grew by 12% in 2015 to 27m tonnes, with cold chain warehouse space per capita reaching 78 litres (vs 53 litres in 2011). The penetration, however, remains far below global level. US, for example, has a per capita space of 372 litres, more than 4x that of China.

A report by ITA in 2016 also revealed that China’s cold storage penetration has been lower than that of some developing countries such as India and Brazil.


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Source: iResearch

Source: ITA, US Department of Commerce, DBS Bank

Diagram 33. Fresh grocery e-retailing

Diagram 34. Cold storage by country per capita (cubic m)


With the increasing demand for fresh products and rising food safety concerns, the cold chain logistics market is expected to sustain solid growth. At the moment, the market is fragmented but some large players have been emerging. Some pork players have also been developing their own cold chain logistic operation. Case in point being Shuanghui, whose cold chain logistic operation is among the largest in China.

The Raw Material Suppliers – the Feedstock Producers China is the largest feed producer globally, accounting for 20% of global output, followed by the US and Brazil. Current demand for feed is driven mainly by the swine sector, which represented c.42% of total feed output in 2015, followed by poultry and aquaculture. During 2010-15, total feed output in China grew at a CAGR of 4.3%, or which swine feed output saw a stronger CAGR of 6.9%, according to China’s Feed Association.

Diagram 35. Top 10 cold chain logistics providers in China (2015)

Capability Remarks

1 Rokin Logistics 80,000 sqm of refrigerated warehouse plus over 450 cold trucks

Bought by CJ Korea Express in 2015

2 Shuanghui Logistics 17 logistics centres plus 1,200 cold trucks

Subsidiary of Shuanghui Development

3 Henan Xianyi Supply Chain

Over 20 logistics centres A logistic solution provider and a subsidiary of Zhongpin

4 Shanghai Lingxian Logistics

55,000 sqm of refrigerated warehouse, 26 logistics centres

Subsidiary of Bright Dairy

5 ZM Logistics 600+ cold trucks Investors include Sequoia Cap, Cathay Capital PE

6 SF Express 130,000 sqm of refrigerated warehouse, 497 cold trucks

Largest courier service provider in China

7 Havi Logistics Specialised in providing logistic support to restaurant brands

Global logistic provider

8 Zhongrong Logistics Focus on meat, dairy, vegetable, and pharmaceutical cold chain logistic

Third-party cold chain logistic provider

9 DCH Logistics Manages over 3m sf of godown Subsidiary of DCH Group

10 China Merchants Americold

14 refrigerated warehouse with total 154,000 sqm

JV between China Merchant Logistic & Americold Realty Trust

Source: China Cold Chain Logistics Committee, Company websites, DBS Bank


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Source: China Feed Association; DBS Bank


Diagram 36. 2015 China feed output breakdown (%)

Diagram 37. 2010-2015 China’s total feed output

m tonnes


Being the largest feed market globally, China has also produced some of the biggest feed companies. Domestic market leader New Hope Liuhe, estimated to command 7% of the market in 2015, ranked third globally in terms of volume after CP Group and Cargill. Other major players in China include Haida, CP, Zhengbang, etc.

The consolidation in the hog production segment during the past two years has affected demand for feed in China. While we expect hog production to resume growth, the new capacities should come mostly from large-scale farms, whose feed demand will be largely filled by self-production. Major hog farms like Cofco have been expanding their feed production capacity, looking to build a vertical integration chain.

While this would post a challenge for the feedstock companies, we believe their opportunities lie on the following:

Market consolidation: The abuse in the use of feed additives and the H7N9 outbreak have led to stricter licensing standards on local farms, as well as on the feed companies to meet acceptable raw material standards (Regulation on the Administration of Feed and Feed Additives). The Ministry of Agriculture also initiated a strict re-licensing campaign in 2014, requiring feed companies to meet stricter standards. This has been causing a decline in the number of feed companies since 2014. On top of this, the government also plans to phase out the smaller feed manufacturers, given their inefficiency and pollution problems. It is estimated that around 3,000 smaller players will be closed in the next five years.

Challenges and opportunities

Source: Companies, DBS Bank

Diagram 38. Feed players’ market share (2015)

Material costs: Corn is the largest component of feed, making up more than 60% of total raw material, followed by soybean meal. In September 2015, China announced a 10% cut on state support prices, the first since 2008 when the price support was put in place. The government has also announced stricter quality requirements on state purchases. If the standards are not met, the farmers will have to sell on the market at a discount. In March 2016, NDRC announced that the temporary reserve policy in Northern provinces and Inner Mongolia will be replaced by direct subsidies. With a cut in support prices and as indicated by the Thirteenth Five-Year Plan, corn planting acreage is expected to reduce by 70m acres in 2015-20E. Nevertheless, corn prices were roughly 90% higher in China as compared to the US in 2016. Hence, we expect domestic feed prices to decline in FY17F.

In summary, this indicates rising liberalisation of the market, with efforts to relieve state reserves as well as to narrow the rising pressure of cheaper imports.


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Liberalising agricultural sector

Source: Bloomberg Finance L.P, DBS Bank


Diagram 39. Corn price – China vs. US

Diagram 40. Thirteenth Five-Year Plan production target

2015 2020

Corn m acre 570.0 500.0

Soybean m acre 98.0 140.0

Cotton m acre 57.0 50.0

Oil Planted m acre 210.0 200.0

Meat production m tonnes 86.3 90.0


Unlike pork, we believe corn alternatives may find it more difficult to enter into China as a form of protectionism. A smaller proportion of feed is comprised of Distiller-Dried Grain Soluble (DDGS). DDGS is a corn-based by-product used as a substitute for corn and soy meal. In 2015, China purchased 6.8m tonnes of DDGS, valued at US$2b. However, since September 2016, MOFCOM has been stepping up on anti-duty subsidies on DDGS, in efforts to support the domestic corn sector. Anti-dumping duties will now range between 42.2% and 53.7%, while anti-subsidy tariffs will be between 11.2% and 12% over the next five years (previous anti-dumping duties: 33.8% and anti-subsidies: 10-10.7% in September 2016).

Some reprieve

Diagram 41. Corn production

Diagram 42. DDGS export (US to China)

Source: MoA, WIND, DBS Bank


m tonnes m tonnes

m tonnes

Business Model

Cost of Producing a Pig in China

The biggest cost component in raising a hog is feed, which is estimated to account for c. 60% of total production costs in China. Feed mainly comprises of corn, follow by soybean meal, cottonseed, and other oilseed meals. While some backyard farms still use fodder, which include food scraps, vegetables, and other by-products of food processing, well over 90% of the farms in China now use feed concentrates (grains, oilseed meal, etc), given its better effectiveness in weight gain.

Other costs include utilities, labour, depreciation, vaccine, and other expenses. Hog production costs in China have been rising sharply since 2005, largely due to higher feed costs, as well as rising labour costs. The lower feed costs since 2015 has helped ease overall production costs in the past two years.

In terms of profit and cost allocation along the whole industry chain, we estimate that the farms and the retailers/distributors earn the biggest portion, while the slaughterers’ profits are slimmer. For every kg of pork sold in China, we estimate that close to 60% of the value goes to the farms.


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Diagram 43. Pork production cost and income breakdown (%)

Source: Yearbook of Cost and Income of Agricultural Products (China), DBS Bank

Assumptions:(i) Based on live hog weight of RMB15.6/kg, and cost to raise on Yearbook scalable farming costs

(ii) 85% pork yield


Costs in China Versus Other Countries

While China is the world’s largest producer of pork, its hog production costs are relatively high compared to other countries. Based on ADHB, farmer cost in the US is c.56% below the cost in China, likely due to cheaper raw materials, economies of scale and better farm management. China’s hog production costs are also relatively high against key European and American producers.

Diagram 44. Retail price breakdown by industry chain players

Diagram 45. Cost of hog production (2015/16)

Source: Yearbook of Cost and Income of Agricultural Products (China), DBS Bank estimate

Source: Yearbook of Cost and Income of Agricultural Products (China), ADHB, DBS Bank

In the following sections, we compare some of the key operating parameters and examine the cost differences in more details:

Feed cost per kg China’s feed costs have doubled in the past ten years, a reflection of higher corn prices. Due to the government’s pricing policies, China’s corn prices have been at a significant premium over that in US. We estimate that China’s feed cost per kg is close to double of US’s feed cost, while it stands at 4% above EU’s. We note feeder cost is not included in China’s feed cost/kg.


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Diagram 46. Changes in costs of hog production (y-o-y)

Diagram 47. Feed cost per kg

Source: Yearbook of Cost and Income of Agricultural Products (China), DBS Bank

Source: Yearbook of Cost and Income of Agricultural Products (China), AHDB, DBS Bank

2012 2013 2014 2015

Total production cost 3% -9% -9% 15%

Live hog price 7% 1% -2% 0%

Piglet 4% -7% -11% 11%

Feed 9% 5% 2% -4%

Energy 0% -3% 2% -1%

Veterinary 1% 3% 2% -3%

Mortality -4% 1% -8% -4%

Technology -1% -1% 0% -4%

Indirect cost 3% 4% 11% -2%

Labour cost 22% 15% 6% 4%


In terms of daily weight gain, China’s average daily weight gain is largely similar to that of the EU’s and USA’s.

Feed conversion ratioFeed conversion ratio is an indicator of the efficiency of feed use. Based on NDRC and USDA data, China’s industry feed ratio is at 3.0-3.1x (2006-15), a premium versus the US’s 2.76x (2013). However, based on our conversations with large-scale players, their feed conversion ratio has already reached 2.8x. We expect large-scale players to continue focusing on improving feed mix, environmental impact, genetics, and to pay close attention on improving feed diet. Wen’s, the largest hog producer in China, indicated that its feed conversion ratio is as low as 2.4.

Diagram 48. Average daily weight gain

Diagram 49. Feed conversion ratio (x)

Source: CNDRC, USDA, DBS Bank

Source: Yearbook of Cost and Income of Agricultural Products (China), AHDB, DBS Bank

Pigs weaned per sowIn terms of piglets weaned per sow (“PSY”), China’s large-scale farms average 22-23 piglets weaned per year, but the figure is likely to be lower at smaller backyard farms. Although some farms such as New Hope reported PSY of more than 26 heads (in 1H16), China farms’ PSY in general is towards the low end compared to global standards, suggesting a higher mortality rate and further room for better nutrition.

Average live weight at slaughterProduction cycle is slightly longer in the Western countries, where they typically grow the finishing hog to a heavier weight to achieve maximum production efficiency. On the other hand, China’s average live-weight at slaughter is slightly lower, likely due to higher demand for piglets, as well as lower efficiency.


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Diagram 50. Average no. of pigs weaned per sow/annum

Diagram 51. Average live weight at slaughter

Source: AHDB (based on 2014), Company data (China - COFCO Meat), DBS Bank

Source: Yearbook of Cost and Income of Agricultural Products (China), ADHB, USDA, DBS Bank


Mortality rateWith a larger percentage of hog farms below 500 hogs in size, we expect hog farms in China to be more vulnerable to disease outbreaks, and higher mortality rate. Pre-weaning piglet losses – Pre-weaning process is likely the most vulnerable stage in hog production, as the piglet will detach from milking to dry feeds. To reduce the overall mortality rate, stronger vaccination of gestating sows, regular hygiene procedures for sows in the farrowing units, as well as greater nutrition (iron, milk) for the newborns and piglets are various ways to reduce overall mortality.

Finishing mortality rate – Feeder-to-finish mortality rate is generally lower. Key options to improve this would include maintaining optimal temperature in barns, hygiene, environmental waste treatment, and pro-active screening of diseased animals.

Labour costsLabour is one of the key concerns for the upstream hog players, given the high worker turnover rate and lack of skilled agriculture labour force. In terms of percentage of total production cost, labour cost is largely in line with that in Western countries. According to Yearbook of Cost and Income of Agricultural Products, labour costs account for 11% of total production costs, versus 12.4% in the US and 9% in EU. To improve efficiency, we expect labour spent on per hog basis to be reduced as the industry continues to move towards large-scale farming.

Hog-to-corn ratioThis is a strong indicator to determine the pork industry’s profitability. In the US, when the ratio is above 15x, it indicates attractive profitability. In China, the hog-to-corn ratio range is much lower, likely a reflection of the higher feed costs. We expect the pork sector to attract capacity growth when the ratio is at 6.5x and above.

Diagram 52. Labour cost as a percentage of production cost

Source: AHDB, Yearbook of Cost and Income of Agricultural Products (China), DBS Bank

We believe the lower production costs in the US largely reflect the stronger productivity of the hog players there. With much higher market concentration in the US hog industry, the cost difference lies in:

Higher average finishing hog weight in the US at least over 120kg per head, compared to China where the typical weight is around 117kg;

1. Closer proximity to cheaper and readily available feed materials for US players, while China feed costs, representing 60% of production costs and comprising corn, soybean, DDGS and other materials, are typically higher.

2. Better feed conversion, lower mortality rate in the US, hence better yields.

3. Imports to grow

As China demand grows, import has become increasingly important. In 2006, the blue ear swine disease sent hog prices surging, and created an opportunity for imports, leading the boom in 2006-2008. In 2009, there was an immediate plunge in imports due to the 2009 flu pandemic (Swine Flu). This caused China to fully ban pork imports from countries such as the US. The ban was thereby lifted in 2010, which led to a resurgence of pork imports. Currently, China’s pork self-sufficiency is roughly at c.97%, which we expect to drop as the market consolidates.


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Diagram 53. Hog-to-corn ratio (US vs. China)

Source: Iowa State estimates, CEIC, DBS Bank

Net importer of pork


Import requirementsImports are typically subjected to a tariff (fresh or chilled – 20%, and frozen – 12%), as well as 13% VAT for most items. Based on industry players, an average of 1.4x above domestic prices will be required for import volume to be profitable. Aside from this, imported pork must not contain ractopamine, and the meat processing plants are required to be monitored by a third-party testing organisation.

In 2016, pork imports and value grew 108% to 1.62m tonnes and 120% to US$3.2bn respectively, accounting for 3.1% of domestic pork production. If we include pork by-products, imports account for 5.6% of total volume. In February YTD, pork import volume grew 29.6% y-o-y to 2.2m tonnes. The key exporting countries include the EU, US, Canada, Germany, France, and Spain.

The EU accounted for 58% of total pork imports into China in 2016, followed by the US (13%), and Canada (11%).

Diagram 54. US pork exports to China (Inc. HK) (2007-2016)


tonnes


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Diagram 55. China monthly imports (2016)

Dec-16 YTD % y-o-y "YTD % y-o-y"

Import value (US$m)

Canada 27 320 94 205

Spain 31 520 (9) 104

Argentina 7 87 29 70

Chile 7 87 11 68

UK 6 68 7 48

France 11 189 (26) 93

Denmark 14 334 (30) 90

Germany 49 666 0 83

US 25 409 57 109

Total 213 3,190 14 120

Import volume (m kg)

Denmark 4 43 32 53

Chile 4 46 8 47

UK 4 43 17 31

France 5 87 (27) 103

Canada 16 179 94 192

Spain 16 260 (7) 90

Denmark 7 159 (27) 96

Germany 27 344 7 68

US 14 216 58 112

Total 113 1,620 18 108


he US now commands one of the most competitive pork industries in the world. Its hog production, despite being much smaller than that of China, has been growing at a decent 1.3% p.a. during 2011-16, with 20.8% of its production are now exported to other countries. The development in the US pork industry, which saw significant

productivity gain as well as structural changes in the past two decades, could possibly shed some light on how China pork industry could move going forward.

The change in market structure has been a major trend in the US pork industry since the 90s. While the US hog production has been rising, the number of hog farms declined by more than 70% between 1992 and 2009, based on USDA’s data. This resulted in larger farms; the average size of a hog farm grew from 945 heads in 1992, to 8,389 heads in 2009.

Hog farming consolidation

Case Study of a Global Player: USA

TProduction volume

(m heads) China US

2011 662 111

2012 698 113

2013 716 112

2014 735 107

2015 708 115

2016 685 118

2017e 672 123

Diagram 56. Hog production – China vs US


Back in 1994, hog production from farms with more than 5,000 heads in the US represented less than 30% of total. In 20 years’ time, this number has surged to 93% (2014), indicated that bigger hog farms are taking market shares from the smaller players – number of hog operations with fewer than 5,000 heads shrank significantly from over 210,000 in early 90s to fewer than 70,000 in 2006.


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Production volume

(m heads) China US

2011 662 111

2012 698 113

2013 716 112

2014 735 107

2015 708 115

2016 685 118

2017e 672 123

Diagram 57. Average size of a hog farm - US

Diagram 58. Pig crop distribution by size of operations - US


Source: U.S. Pork Powerhouse, Successful farming, USDA, DBS Bank


Apart from market structure, there has also been a notable change in the way farms operate. Farms have been increasingly focused on a single phase of operation, rather than the traditional farrow-to-finish format (i.e. from hog breeding to hog raising). Market shares for feeder-to-finish producers (only involved in raising piglets to market hog) increased from 19% in 1992 to 47% in 2009 while farrow-to-finish players saw shares declining from 54% to 23% during the same period.

This apparent shift is likely also related to the increasing popularity of contract farming, which represents 48% of US hog production in 2009, a significant jump from merely 3% in 1992.

The above changes, coupled with adoption of better technology and knowhow in genetics, equipment, veterinary services etc have helped to improve overall productivity in the industry. During 1992-2009, US hog production costs have fallen between 27-43%, with significant improvement noted in key parameters such as hogs per litter, feed, and labour efficiency.

Specialised farming & contract farming

Improvement in productivity

Diagram 59. Type of hog producers as % of total operations -US

Diagram 60. Hog per litter – US



The structural change in the US pork industry in the past 20 years also helped produce some of the biggest pork companies in the world. The top three pork companies in the US now have more sows than the combined total of the top 25 producers back in 1996. Smithfield, the leader in the industry, has grown its sow stocks by more than seven times in the past 20 years.

Through both organic expansion as well as acquisition. Smithfield became the top player via acquisition of two of its biggest rivals, Carroll’s Foods and Murphy Family Farms. Triumph Foods was formed by several major pork producers. Seaboard Foods grew both organically as well as through acquisition.


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Scale matters

Diagram 61. Top US pork companies

Diagram 62. Smithfield’s stock



Top 10 in 2016 Top 10 in 1996

Smithfield 880,000 Murphy Family 260,300

Triumph Foods 385,500 Smithfield 112,000

Seaboard Foods 290,000 Carroll's Foods 111,400

The Maschhoffs 218,000 Tyson Foods 110,000

Pipestone System 185,000 Premium Standard 105,000

JBS 177,000 Prestage Farms 102,200

Prestage Farms 175,000 Cargill 90,000

Iowa Select Farms 171,000 Seaboard 90,000

Carthage System 145,000 DeKalb Swine 72,000

AMVC Management 115,000 Iowa Select Farms 62,000

Total 2,741,500 Total 1,114,900

Top 10 as % of total 45% Top 10 as % of total 17%


Another common feature among these big players is that they are integrated players involving in multiple stages of the production chain. Smithfield is the leading player in hog production, slaughtering as well as processed meat production. Both Triumph and Seaboard are also engaged in the processed meat business.

We believe the development in the US pork industry indicated that there should still be lots of room for China to improve its productivity, as the market consolidation should drive scale of pork players. Rising adoption of contract farming, which enabled better specialization as seen in the US, should likely apply to China too. One such example is the market leader Wen’s, which specialisation in the contract farming model has helped double the company’s hog business in four years. Last but not least, some form of integration along the supply chain appears to be the way to help efficiency as well as to ensure food safety.

Vertical integration

Implications for Chinese players

Diagram 63. Breakdown of slaughter’s daily capacity (Spring 2016)

Source: EMI Analytics, National Hog Farmers, DBS Bank

(I) Food safety a top priority

Food safety and productivity improvement are the key priorities of the Chinese government. To achieve this, the government has imposed licensing requirements for the feed sector, hog farms and slaughterhouses, as well as strengthening environmental regulations as a way to consolidate the market. These changes would bring opportunities to different players along the industry chain.

(II) Hog farm - scale, know-how and integration

Hog farming, being the most fragmented segment along the chain, is likely to be the most vibrant segment in terms of market potential. Apart from expanding scale to capture the shortfall due to closures of smaller farms, there are room for industry players to further improve their productivity via better farming technology and know-how.

Meanwhile, we expect the Company + Farmer model to get increasingly popular, as it offers a speedy way of expanding with much lower capital needs. Last, but not least, is the potential for hog farms to extend their presence along the supply chain (upstream to feed production and downstream to fresh meat and processed meat manufacturing) to capture greater profits.

(III) Other segments with opportunities

With demand for processed meat expected to outgrow other segments, we expect product innovation, brand awareness, and consumers’ trading up will be the key captures. We also expect food services will require accountability from its upstream, which represents opportunities for stronger partnerships. Lastly, import should display strong growth, as long as the hog price disparity (including tariff) remains attractive.

(IV) Stabilising overall profitability in the sector

While pork prices may appear to be softening, we believe the market consolidation, softer corn prices and volume expansion by large players will continue to stabilise the overall profitability in the sector. Pork imports and potential overseas partnerships could drive greater


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Opportunities Across the Industry Chain


premiumisation in the long run. For a mature market, the pork sector is marked to grow in a stable manner, favouring large-scale players.

No. Key trends & opportunities Examples

Feedstock a Since the removal of floor pricing in corn, hog producers are building internal capacity.

COFCO Meat plans to build feed mills to fulfil 35-40% of its needs by 2017F.

Wenshi is fully sufficient in its feedstock to supply to its farmers.

CP Group, Zhengda, New Hope are either building hog farms or building farm+company model to capture demand.

Hog farm a With stricter environmental laws, backyard farmers are forcibly removed if they do not meet the requirements

The closure of hog farms reported up to 50m heads in 2016

b Players are fast expanding their capacity/ influence in regions to gain market share, which requires high capital

Heavy capital needed to own their own farms, while some opt for Company+ Farmer off-take contracts to expand at a faster pace.

Larger players have set long-term targets of close to doubling their existing capacity.

c There are difficulties in recollecting land due to the fragmentation of rural land.

By offering Company-Farmer Contract, the Company guarantees a growing fee to farmers to ensure stable income, thereby able to consolidate land use.

Slaughter / fresh pork

a There is an overcapacity situation in the sector at the moment, which has resulted as the weakest link in the pork sector in terms of profitability.

There may be opportunities in the sale of defunct plants.

b Distribution channel is changing from wet-markets to modern and e-commerce fresh retailing channels.

Franchising or own-operated specialty outlets have been a good option in adapting to such changes, and improve retailing margins.

Processed pork

a LTMP is increasingly a more popular choice of meat.

Product innovation, brand awareness and market penetration will be required to gain market share.

b Distribution channel is changing from wet-markets to modern and e-commerce fresh retailing channels.

Building brand awareness in local areas, and working with e-commerce retailers would be key to gain market share as the channel noticeably shifts.

c Import volume is growing rapidly as consumers are increasingly able to accept chilled pork.

International players are looking for domestic partners or at their own capacity to expand over. Danish Crown announced it will be building its own processing plant in Nov'16.

d Food chains demand greater accountability from the upstream value chain to ensure greater food safety.

Hog players could work with food chains to produce value-added products and service the entire supply chain to ensure greater food safety.

Diagram 64. Growth opportunities


(I) Market Trends

Environmental concerns leading to closure of smaller farms. In March 2013, it was reported that at least 10,000 dead pigs were found floating on the Huangpu river, near Shanghai Songjiang section. The carcasses were found to have porcine circovirus, and were disposed off by farmers in Jiaxing. In other years, pork products were found to contain clenbuterol, a lean meat chemical, which caused a recall of products.

Since 2014, China began the reconstruction, or closure of several pig farms in China. According to news sources, over 13k farms closed down in Fujian Province in 2H15, while 70k farms closed in Zhejiang by end-Sept-14. Several more news sources conferred in Guangdong, Guangxi, Hunan, Shandong, Hainan and more on news of forcible closure of hog farms not up to regulatory standards.

Heavy investment into upstream pork. The closure of small hog farms has enticed large companies to expand their hog farming capabilities. In 2016, hog players came forward with indicative targets for the next 3-10 years on hog production capabilities via organic growth, collaboration with family farms or offering services for farmers (farm structure, feedstock, and veterinary medicine).

While the companies’ targets appear aggressive, several of the companies may rely on management or cooperation with family farms, thereby lowering overall investment expenditure.


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Source: News sources, DBS Bank

Appendix

Environmental standards set in respective regions

Reconstruction or closure of pig farms

2014 Anhui (69,597 farms closed, 97.92% of total)

2015 Fujian (30,900 farms closed, 90% completed), Sichuan

2016 Beijing, Shanghai, Nanchang, Louxing District

2017 Shaanxi, Liaoning, Shandong, Henan, Jiangsu, Guangdong, Guangxi, Guizhou, Yongchuan

2020 Yunnan


(II) Which Province Produces the Most Meat?

Pork accounts for 63.4% of total meat output. In 2016, China total meat output reached 83.64m tonnes (-1.1% y-o-y). Of which, pork production reached 52.99m tonnes (-3.4% y-o-y), versus beef at 7.17m tonnes (+2.4% y-o-y), poultry at 30.95m tonnes (+3.2% y-o-y), and dairy at 36.02m tonnes (-4.1% y-o-y).

Top 10 provinces account for 58% of output. The top 10 pork production provinces are Sichuan, Henan, Hunan, Shandong, Hubei, Yunnan, Hebei, Guangdong, Anhui, and Guangxi. These provinces account for roughly 58% of total output.

III) Optimising Regional Distribution

In 2014, MOA set indicative targets for industry standards to reach higher levels by 2020E. While the overall hog production volume is not expected to change significantly (2020E has a +1.4% difference with 2014 production output), MoA aims to improve overall production efficiency in the sector by 2020E, and cap growth in urban areas.

Land, environmental and social constraints remain a key issue due to the fragmentation of the market. The government has structured a guideline on the growth rate in each province to ensure standardisation and improve productivity to optimal regional distribution use. In order to reduce costs, hog farms are encouraged to be situated closer to the Corn Belt to reduce transportation costs.


Meat production y province (%) – 2014

According to recent environmental regulations, the key development regions include Hebei, Shandong, Henan, Chongqing, Guangxi, Sichuan and Hainan. Production volume is expected to grow 1% y-o-y, which will also cater to neighbouring regions such as Shanghai, Jiangsu, Zhejiang, and Guangdong.

Regions with limited production (Limited Regions) include Beijing, Tianjin, Shanghai, Jiangsu, Zhejiang, Fujian, Anhui, Jiangxi, Hubei, Hunan, Guangdong, and other Southern regions due to land constraints. Their volume growth is expected to be flat.

The key potential growth region is northeast China, which includes Liaoning, Jilin, Heilongjiang, and Inner Mongolia, as well as Yunnan and Huizhou. These locations offer good land space and their volume growth is expected to increase by 1-2% y-o-y. This will be the key pork producing region in the future.

Southern Water Network. In November 2015, the MoA issued the “Southern Water Network on the promotion of the layout of the optimal adjustment of pig farming guidance,” to reiterate regional focus on agricultural land, particularly focusing on the Limited Regions. This particularly focuses on Shanghai, Zhejiang, Jiangsu, Guangdong, Anhui, Jiangxi, Henan, Hubei, Hunan, etc. due to strong hog production and growing water and waste constraints. By 2020E, MoA aims to increase hog farms with >500 heads each to cover up to 70% market share, and up to 85% market share for those with adequate disposal treatment facilities. By outlining designated zones, those that do not fit the criteria will be forcibly removed.


55

Source: MoA

Hog production target

2010 2014 2020E

Pork production (m tonnes) 50.7 56.7 57.6

Above 500 hogs farms (%) 38 42 52

Industrial-size slaughter house (%)

66 68 75

Ex-inventory target (%) 144 155 160

Per sow provides (heads) 15 19

No. of hogs managed per person (Hog/ person)

500 650 1,000

Feedstock to pork 2.90 2.80 2.70


(IV) Others

National swine breeding programmeSince 2010, the Ministry of Agriculture (MoA) has implemented a swine genetic improvement programme with 100 selected core national breeding fields. Among these, 74 were selected as core breeding companies. Aside for basic permits and complete breeding facilities and equipment required, the core number of sows (large-white pigs) must be more than 600, with over 300 heads of Duroc breed. The company must have a clear programme for breeding pigs, with over two years of experience and work report. The key objective of the programme is to facilitate performance testing, and to ensure sustainable development of the seed-stock in China to raise overall quality and efficiency of the existing breed.

Bio-security & government supportBio security measures and government support. Since 2005, the Chinese government has provided subsidies for animal protein players in breeding stock, construction of industrial-scale farms, insurance, environmental-related purposes, compensation for culled animals, warehousing facilities, subsidies for village veterinarians and free vaccination.

Vaccination is required starting from sow (pre-pregnancy stage), piglet, to finishing hogs. MoA periodically conducts tests at designated breeding farms on (i) respiratory syndrome, swine fever, pseudo rabies, circovirus disease, porcine parvovirus disease and others, (ii) the grandparent stock testing on highly pathogenic avian influenza, avian leukaemia, and others.

Government support can come from various farms relating to

1. the raising of environmental standards through better wastage management, piglet and feed loans and insurance premiums,

2. introduction of quality breed sow (RMB400-600/head),

3. introduction of large-scale farming,

4. vaccination support programmes,

5. insurance premium support, and more.


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No. of incidences of disease



Common hog diseases

Disease Prevention/ Treatment

Foot and Mouth Disease 口蹄疫 Vaccination

Porcine Epidemic Diarrhoea Virus (PEDV) 豬流行性腹瀉病毒（PEDV）

Vaccination

Blue Eat Disease (PPRS) 藍色食欲疾病（PPRS） Vaccination

Japanese encephalitis (JE) 日本腦炎（JE） Vaccination

Porcine parvovirus Porcine 細小病毒 Vaccination

Swine fever 豬瘟 Vaccination

Swine influenza 豬流感 Vaccination

Porcine pseudorabies (PRVD) 豬偽狂犬病毒（PRVD） Vaccination

Porcine Circo Virus (PCVD) 豬圓環（PCVD） Vaccination

Infectious pleuropneumonia 傳染性胸膜肺炎 Antibiotics

Bacterial (E. Coli) 細菌（大腸杆菌） Antibiotics

Atrophic rhinitis 萎縮性鼻炎 Antibiotics

Salmonella 沙門氏菌 Antibiotics


Top exporting countries European Union (EU). EU is the largest exporter to China. Bilateral protocols have been signed with China to meet veterinary and health requirements. They must register at AQSIQ through CNCA to receive proper certification. Meat products will only enter the country through specific inspection and quarantine centres.

United States (US). The US is competing intensely with EU in exporting to China. With similar requirements in registration and certification, US plants are also required to have third-party testing to confirm no presence of ractopamine in its pork export.

A net importer of pork. China is the world’s largest pork producer, accounting for c.50% of global pork consumption in FY15. It is a net importer of pork, where imports fulfilled 1.4% of domestic consumption. Due to a widening discrepancy between domestic and international pork prices, import share is expected to expand to 3% in 2016F.

Source: pork.org, DBS Bank

Global production est. at 108m tonnes (2016F)


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Source: COFCO Meat Prospectus, DBS Bank

Hog production target

Law Description

Environmental Protection Law of the PRC (Revised, and effective on Jan-15)

Entities that cause environmental pollution and other public hazards must incorporate environmental protection work into their plans, establish an environmental protection responsibility system, and adopt effective measures to prevent and control pollution and other environmental harms caused to the environment by waste gases, wastewater, waste residues, dust, malodorous gases, radioactive substances, noise, vibration and electromagnetic radiation generated in the course of the production, construction or other activities. Enterprises that are in violation of the Environmental Protection Law may be subject to a warning, payment of damages, imposition of a fine, or limitation or suspension of production in accordance with the seriousness of the case. If a criminal offense is committed, the offender may be subject to criminal liabilities

The Administrative Measures on the Prevention and Cure of Pollution Caused by Breeding of Livestock and Poultry and the Regulations on the Prevention and Control of Pollution from Large-scale Breeding of Livestock and Poultry (Effective 2014)

Set out the requirements for the prevention and ratification of pollution caused by or contaminants emitted during the breeding of livestock and poultry. In the event of violation of such administrative measures, the relevant authorities of environment protection can impose orders to stop by production and to rectify the violation.

Law on Prevention of Water Pollution of the PRC

Enterprises which discharge water or air pollutants must pay discharge fees based on the types and volumes of the pollutants discharged. The discharge fees are calculated by the local environmental protection authority, which will review and verify the types and volumes of pollutants discharged.

Under the above-mentioned laws and regulations, companies are required to abide by various provisions regarding the environmental protection and prevention of pollution. Companies are required to complete the environmental impact evaluation process prior to commencing a construction project. Companies are also required to obtain discharge permits and pay discharge fees for the discharge of pollutants. Failing to comply with environmental protection laws and regulations would subject the companies to a range of penalties varying from warnings, fines and suspension of the production or operation to other administrative sanctions, depending on the degree of damage or adverse consequences. The responsible person of the breaching entity may be subject to criminal liabilities for serious breaches which result in significant damages to private or public property or personal injury or death.


Others: Overview of major regulations

Laws and regulations Details

Veterinary Drugs Supervision According to Regulations on Administration of Veterinary Drugs (《獸藥管理條例》) , which were promulgated by the State Council on 9 Apr 2004 and became effective on 1 Nov 2004, and were amended on 29 Jul 2014 and 6 Feb 2016, it is prohibited to add in animal feedstuffs or drinking water any hormonal drug or other prohibited drugs specified by the administrative department for veterinary medicine under the State Council, administer human medicine to animals, or to sell animal food products that contain illicit drugs or in which the residual amount of veterinary drugs exceeds the limits. The drugs prohibited to be added in animal feedstuffs or drinking water are listed in detail in the List of Drugs Forbidden to be Used in Feeds or Drinking Water of Animals (《關於禁止在飼料和動物飲用水中使用的藥物品種目錄》) co-promulgated by the MOA, the Ministry of Health, and the State Food and Drug Administration (formerly known as "State Drug Administration") on 9 Feb 2002.

Hog Slaughtering Requirement

"According to Regulations on Administration of Hog Slaughtering (《生豬屠宰管理條例》), which were promulgated by the State Council on 19 Dec 1997 and 19 Dec 2007, respectively, and became effective on August 1, 2008, and Implementing Measures for Regulations on Administration of Hog Slaughtering (《生豬屠宰管理條例實施辦法》), the PRC government implements a system that requires hogs to be slaughtered by designated hog slaughtering plants (houses) and quarantined in a centralized manner. The governments of prefecture-level cities are responsible for issuing the permits and signboards of designated hog slaughtering plants (houses) to the designated plants. A designated hog slaughtering plant (house) is required to: (1) have a source of water supply that is commensurate with the operation scale of the slaughter and meet the standards for water quality set by the national government authorities; (2) have stand-by slaughter rooms, slaughter rooms, emergency slaughter rooms, hog slaughter equipment and means of transportation which conform to the requirements prescribed by the national government authorities; (3) have the technical staff for hog slaughter who have obtained health certificates; (4) have qualified meat product quality inspectors; (5) have inspection equipment and sterilization facilities that conform to the requirements prescribed by the government, and the facilities for pollution prevention and control that conform to the environmental protection requirements ; (6) have the facilities for innocuous disposal of diseased hogs and hog products derived therefrom; and (7) obtain a qualification certificate of animal epidemic prevention. A designated hog slaughtering plant (house) is required to establish a stringent inspection system controlling meat product quality. Inspection of meat product quality must be carried out simultaneously with hog slaughtering, and the inspection results must be recorded truthfully. The records of inspection results must be retained for at least two years. Hog products of a designated hog slaughtering plant (house) shall not leave the plant (house) before they have undergone the inspection process or if they fail such inspection."


61

Source: Company, DBS Bank


Veterinary Drugs Supervision According to Regulations on Administration of Veterinary Drugs (《獸藥管理條例》) , which were promulgated by the State Council on 9 Apr 2004 and became effective on 1 Nov 2004, and were amended on 29 Jul 2014 and 6 Feb 2016, it is prohibited to add in animal feedstuffs or drinking water any hormonal drug or other prohibited drugs specified by the administrative department for veterinary medicine under the State Council, administer human medicine to animals, or to sell animal food products that contain illicit drugs or in which the residual amount of veterinary drugs exceeds the limits. The drugs prohibited to be added in animal feedstuffs or drinking water are listed in detail in the List of Drugs Forbidden to be Used in Feeds or Drinking Water of Animals (《關於禁止在飼料和動物飲用水中使用的藥物品種目錄》) co-promulgated by the MOA, the Ministry of Health, and the State Food and Drug Administration (formerly known as "State Drug Administration") on 9 Feb 2002.

Hog Slaughtering Requirement

"According to Regulations on Administration of Hog Slaughtering (《生豬屠宰管理條例》), which were promulgated by the State Council on 19 Dec 1997 and 19 Dec 2007, respectively, and became effective on August 1, 2008, and Implementing Measures for Regulations on Administration of Hog Slaughtering (《生豬屠宰管理條例實施辦法》), the PRC government implements a system that requires hogs to be slaughtered by designated hog slaughtering plants (houses) and quarantined in a centralized manner. The governments of prefecture-level cities are responsible for issuing the permits and signboards of designated hog slaughtering plants (houses) to the designated plants. A designated hog slaughtering plant (house) is required to: (1) have a source of water supply that is commensurate with the operation scale of the slaughter and meet the standards for water quality set by the national government authorities; (2) have stand-by slaughter rooms, slaughter rooms, emergency slaughter rooms, hog slaughter equipment and means of transportation which conform to the requirements prescribed by the national government authorities; (3) have the technical staff for hog slaughter who have obtained health certificates; (4) have qualified meat product quality inspectors; (5) have inspection equipment and sterilization facilities that conform to the requirements prescribed by the government, and the facilities for pollution prevention and control that conform to the environmental protection requirements ; (6) have the facilities for innocuous disposal of diseased hogs and hog products derived therefrom; and (7) obtain a qualification certificate of animal epidemic prevention. A designated hog slaughtering plant (house) is required to establish a stringent inspection system controlling meat product quality. Inspection of meat product quality must be carried out simultaneously with hog slaughtering, and the inspection results must be recorded truthfully. The records of inspection results must be retained for at least two years. Hog products of a designated hog slaughtering plant (house) shall not leave the plant (house) before they have undergone the inspection process or if they fail such inspection."


Breeding Farm or Large-Scale Breeding Plot

According to the Animal Husbandry Law of the PRC (《中華人民共和國畜牧法》) which was promulgated by the Standing Committee of the National People's Congress (the "Standing Committee") on 29 Dec 2005 and became effective on 1 Jul 2006, and amended on 24 Apr 2015, and Administrative Measures for Labelling the Livestock and Poultry and Breeding Files (《畜禽標識和養殖檔案管理辦法》), which were issued by Ministry of Agriculture (農業部) (the "MOA") on 26 Jun 2006 and became effective on 1 Jul 2006, livestock and poultry breeding farms and large-scale breeding plots are required to, among other things: (1) have production premises and supporting facilities commensurate with their scales of breeding; (2) have animal husbandry and veterinary technicians in their service; (3) meet the epidemic prevention conditions, as provided for by laws and administrative regulations and prescribed by the administrative department for animal husbandry and veterinary medicine under the State Council; (4) have facilities such as methane-generating pits for the comprehensive use of, or other facilities for innocuous treatment of, the faeces of livestock and poultry, waste water and other solid wastes; and (5) meet other conditions provided for by laws and administrative regulations.

Animal Epidemic Prevention Requirement

According to the Animal Epidemic Prevention Law of the PRC (《中華人民共和國動物防疫法》), which were promulgated by the Standing Committee on 3 Jul 1997, amended on 30 Aug 2007, 29 Jun 2013 and 24 Apr 2015, and became effective on 1 Jan 2008, and Censoring Measures on Conditions for Animal Epidemic Prevention (《動物防疫條件審查辦法》), building an animal breeding farm (small breeding plot) or isolation place, animal slaughtering and processing house, or a place where animals and animal products are given innocuous treatment requires the Certificate of Conformity to the Conditions for Animal Epidemic Prevention (《動物防疫條件合格證》) from the administrative department for veterinary medicine. Before slaughtering, selling or transporting animals, or selling or transporting animal products, the owner shall submit an application to the local animal health supervision institution for quarantine. Quarantine Certificates will be issued for and quarantine marks will be attached on the animals and animal products that have passed the quarantine. Measures for the Administration of Animal Quarantine (《動物檢疫管理辦法》), which were promulgated by the MOA on 21 Jan 2010 and became effective on 1 Mar 2010, further provide that an examination must be conducted by local authorities

Import license According to the Import and Export Administration Regulations and Measures for the Administration of Automatic Import Licensing for Goods (《貨物自動進口許可管理辦法》), which were promulgated by the MOFCOM and General Administration of Customs on 10 Nov 2004 and became effective on 1 Jan 2005, to import goods which are subject to automatic import licensing requirements, the consignee (including importers and imported goods users) shall submit the application for an Automatic Import License with the local or corresponding license issuing authority and obtain an Automatic Import License before going through customs declaration formalities. Chilled and frozen pork is included in the Catalogue of Goods Subject to Automatic Import License Administration for the Year 2014 (《 2014年自動進口許可管理貨物目錄》), and thus are subject to such licensing requirements.



Overview of major regulations (continued)

Others: Major transactions between countries

Regulation Date Description

Livestock and poultry scale pollution prevention and control regulations

Jan-14 The regulation targets the livestock and poultry pollution prevention and regulatory controls. There are specific ban sizes (ideal breeding areas), incentives and penalties available.

Environmental Protection Law

Jan-15 The Environment Law focuses on the livestock farms, breeding areas and slaughter enterprises in the location, construction and management to be compliant to laws and regulation

Water Ten Apr-15 This specifies livestock and poultry breeding prohibition area must be enforced close to Beijing-Tianjin-Hebei, Yangtze River Delta, Pearl River Delta to be relocated.

Guidance by MoA Aug-15 MoA required animal husbandry departments to cooperate with the environmental protection department to set up bans on work areas with submission of the delineation of prohibited regions

Southern Area on the promotion of pig farming layout adjustment and optimisation of guidance

Nov-15 the Ministry of Agriculture promulgated the "Southern Area on the promotion of pig farming layout adjustment and optimization of the guidance." Opinions, the main producing counties to develop pig breeding plan, a reasonable delineation of suitable breeding area and prohibit the construction of livestock and poultry farms and breeding area . Prohibited area in accordance with the "Water Pollution Prevention Action Plan" time limit by the local government legally closed or relocated pig-scale farms, to guide the transfer of live pigs to non-overloaded areas.

Soil Ten May-16 In May 2016, the State Council issued a "soil ten", requiring a clear and reasonable to determine the layout and scale of livestock and poultry breeding, livestock and poultry pollution prevention and control.

Livestock and poultry breeding area designated technical guidelines

Nov-16 The Ministry of Environmental Protection, and MoA issued a "livestock and poultry breeding area designated technical guidelines", will be used as a late all over the country designated the basis of the ban area. After the completion of the document, the local environmental protection and farming and animal husbandry departments shall, in accordance with the unified arrangements of the local governments, actively cooperate with the relevant departments to assist in closing or relocating existing closed farms or relocated ones.

13th-Five Year Plan Dec'16 In the 13th-Five Year Plan, it requires the relocation and closure of livestock farms which are in the prohibited areas by end-2017, such as drinking source areas, nature reserves, scenic spots, urban residential areas, and cultural and educational scientific research, and others.

Date Acquirer Target Target country

Meat Type Description

Nov-16 BRF COFCO Meat

China Pork Stake BRF entered into a cornerstone agreement to acquire 77.6m shares (1.99%) of COFCO Meat as part of a strategic agreement.

Nov-16 Danish Crown n.a China Pork n.a Danish Crown will build a processing plant in China to be close to its target consumers.


63

Source: Company, DBS Bank

Regulation Date Description

Livestock and poultry scale pollution prevention and control regulations

Jan-14 The regulation targets the livestock and poultry pollution prevention and regulatory controls. There are specific ban sizes (ideal breeding areas), incentives and penalties available.

Environmental Protection Law

Jan-15 The Environment Law focuses on the livestock farms, breeding areas and slaughter enterprises in the location, construction and management to be compliant to laws and regulation

Water Ten Apr-15 This specifies livestock and poultry breeding prohibition area must be enforced close to Beijing-Tianjin-Hebei, Yangtze River Delta, Pearl River Delta to be relocated.

Guidance by MoA Aug-15 MoA required animal husbandry departments to cooperate with the environmental protection department to set up bans on work areas with submission of the delineation of prohibited regions

Southern Area on the promotion of pig farming layout adjustment and optimisation of guidance

Nov-15 the Ministry of Agriculture promulgated the "Southern Area on the promotion of pig farming layout adjustment and optimization of the guidance." Opinions, the main producing counties to develop pig breeding plan, a reasonable delineation of suitable breeding area and prohibit the construction of livestock and poultry farms and breeding area . Prohibited area in accordance with the "Water Pollution Prevention Action Plan" time limit by the local government legally closed or relocated pig-scale farms, to guide the transfer of live pigs to non-overloaded areas.

Soil Ten May-16 In May 2016, the State Council issued a "soil ten", requiring a clear and reasonable to determine the layout and scale of livestock and poultry breeding, livestock and poultry pollution prevention and control.

Livestock and poultry breeding area designated technical guidelines

Nov-16 The Ministry of Environmental Protection, and MoA issued a "livestock and poultry breeding area designated technical guidelines", will be used as a late all over the country designated the basis of the ban area. After the completion of the document, the local environmental protection and farming and animal husbandry departments shall, in accordance with the unified arrangements of the local governments, actively cooperate with the relevant departments to assist in closing or relocating existing closed farms or relocated ones.

13th-Five Year Plan Dec'16 In the 13th-Five Year Plan, it requires the relocation and closure of livestock farms which are in the prohibited areas by end-2017, such as drinking source areas, nature reserves, scenic spots, urban residential areas, and cultural and educational scientific research, and others.

Date Acquirer Target Target country

Meat Type Description

Nov-16 BRF COFCO Meat

China Pork Stake BRF entered into a cornerstone agreement to acquire 77.6m shares (1.99%) of COFCO Meat as part of a strategic agreement.

Nov-16 Danish Crown n.a China Pork n.a Danish Crown will build a processing plant in China to be close to its target consumers.

Oct-16 CPF Fujian Sumpo Food

China Poultry M&A CPF agrees to purchase 70% stake in Fujian Sumpo Food, which is principally engaged in the manufacturing and trading of animal feed, farming and trading of poultry products in China.

Aug-16 Zhongfu n.a Australia Cattle land

M&A Shanghai Zhongfu Group (via. Kimberley Agricultural Investment) purchased 476,000 hectare of Carlton Hill in Australia (cattle station ) for US$76m.

Apr-16 Cranswick Crown Chicken

UK Chicken M&A UK Sausage maker, Cranswick buys Crown Chicken for £ 40m.

Apr-16 Foresun Group Margrif Global Food assets

Argentina Meat M&A Foresun Group, acquires for 3 beef slaughterhouses and a livestock confinement unit in Argentina owned by Margrif Global Foods S.A for US$75m .

Apr-16 Group controlled by Shanghai Pengxin Group

S. Kidman Australia Cattle M&A Chinese led group (controlled by Shanghai Pengxin Group) aims to purchase 80% of S. Kidman & Co. for AUS370m.

Jan-16 Foresun Group n.a n.a n.a M&A Foresun Group reports to be planning a backdoor listing through a reverse merger with Sundiro Holding (000571:CH), helped by CDH

Nov-15 Delisi Food Bindaree Beef Group

Australia Beef M&A Delisi Food purchases a 45% stake in Australia's 4th largest meat processor that is expected to be worth US$105m.

Sep-15 Bright Food Silver Fern Farms

New Zealand

Beef M&A Bright Food agrees to purchase 50% stake in New Zealand Meat processor.

Jul-15 JBS USA Cargill Pork business

USA Pork M&A JBS USA agrees to purchase Cargill Pork business for US$1.45bn

Jun-15 Pilgrim Tyson Food Mexican operations

Mexico Pork M&A Pilgrim acquires Tyson Food's Mexico operations

Jun-14 KKR, Baring PE, HOPU, BOYU

COFCO Meat

China Pork M&A KKR, Baring Private Equity, HOPU and Boyu invests in COFCO Meat to build and manage large-scale industrialised hog farms and meat processing plants in China

Jun-14 V&V Walsh Grand Farm

China Lamb JV Western Australia's largest meat processor signs US$1bn deal with Grand Farm, China's largest red meat importer, by supplying lambs and cattle.

Apr-14 Hong Yong Capital Holdings

Tabro Meat

Australia Beef M&A Tabro Meat was sold to Hong Young Capital for US$18m, which CDH Investment also participated.

May-13 Shuanghui Smithfield Foods

China Pork M&A Shuanghui buys Smithfield for US$4.7bn (incl. debt), and becomes the largest pork player globally.


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Disclaimers and Important Notices

The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee.

The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof.

The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.

The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.


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ian nih - DBS Bank...Senior Research Analyst DBS Group Research [email protected] Alice HUI, CFA...

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