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BEIJING and NEW YORK, June 5, 2011 -- Zhongpin Inc. ("Zhongpin", Nasdaq: HOGS), a leading meat and food processing company in the People's Republic of China, today summarized the briefings and discussions held during its investor tour of Zhongpin's factories on May 30 and 31, 2011, and provided other information of interest not covered.
Mr. Xianfu Zhu, Chairman and Chief Executive Officer of Zhongpin Inc., said, "We are very pleased that 30 investors and security analysts came to visit our production facilities in Tianjin and Changge. They saw firsthand our plants, production, processes, and quality assurance, and learned how we achieve the highest product quality and safety – from farm to fork. To extend the understanding of our production-focused briefings and discussions to other investors, we are providing the summary of the major points in our briefings and discussions during the two days, plus other information of interest not covered."
Tour on May 30
On the afternoon of May 30 in Tianjin, tour participants visited the Zhongpin's chilled and frozen pork production operations, the adjacent construction site for the second phase of the site development, which will be a plant producing prepared pork products, and nearby supermarket counters where Zhongpin products are sold.
Highlights of the briefings and discussions in Tianjin, plus other information not covered, include the following points:
1. Zhongpin's gross profit margins are usually higher than Chinese industry peers for the following reasons.
Companies determine their own transaction patterns, industrial layouts, and development strategies, and so on, depending on their conditions. Different product and distribution channel structures, sales strategy, positioning, and resource allocations result in gross margin differences.
Zhongpin's industrial cluster approach is duplicated in each of the geographic locations in which the company expands.
Our industrial cluster model has evolved over several years into a proven "best practice" that includes comprehensive market analysis, the design and structure for each processing facility, and the design, structure, integration, and synergy of each of the processing facilities into the whole industrial cluster. In addition to production, included are quality assurance and quality control, employee training, cold-chain logistics, and often a research & development facility.
Our integrated industrial cluster approach has reduced management and transaction costs due to both effectiveness and efficiency.
For example, for chilled pork, the benefits have led to improved earnings among regions, time periods, channels, and product structures.
In our product line structure, we are focusing on increasing the proportion of our sales derived from high-margin products that include chilled pork and new customized products, especially those developed through our R&D to have the taste desired in specific regional markets and to be easy to prepare.
The structure of our distribution channel is based on providing the highest product quality and safety -- from our plants to our customers' coolers or freezers – by using our cold-chain logistics system integrated with our advanced IT system.
In developing our customers, we focus on four market segments: (1) customers in retail channels who require the highest quality and highest value products – for example, upper income food store chains, (2) customers who cater to upper income customers – for example, upper income restaurants and restaurant chains, (3) organizations that provide group meals with requirements for customized services – for example, government customers, including the military, government food services, and from time to time, the national pork reserve, (4) and high-volume customers who require high quality – for example, food facilities that feed employees in major companies.
Our downstream operations, of course, involve mainly our cold-chain logistics distribution system and our customers.
We also are involved in the upstream supply of raw materials, since they influence our pork product quality and safety.
We have perfected a strategic cooperation model integrating resources that include the raisers of sire boars, feed producers, farms, local commercial banks, and the government. The government helps us to coordinate the whole model.
The upstream – before the hogs reach our plants – includes our support for creating the best sire boars that will provide the best male hogs for meat, the best feed providers and best feed formulations that will result in the best pork meat, and the best farms with the best farm management and best medical support for hogs, especially larger professional farms where the managers view the production of hogs for premium pork as a full-time professional business.
Then comes our slaughtering and meat processing facilities, our integrated IT, and our cold-chain logistics distribution systems.
Downstream from us are our customers and their coolers and freezers, of course.
Also downstream, in another sense, are the local commercial banks that extend credit to these farms and farmers to help them expand their inventories.
2. Zhongpin's advanced processes usually produce higher yields of carcass meat and all pork products than are typical.
The concept of the carcass dressing rate is different from the pork products production rate.
The dressing rate of carcass meat is calculated by dividing the weight of carcass meat – primarily the muscles that are used for food (excluding the head, trotters, skin, viscera, etc.) -- by the weight of the live hog. Carcass meat usually is about 65% to 70% of the live hog's weight, and the average weight of carcass meat is around 65 to 85 kilograms per hog.
The overall production rate is calculated by dividing the weight of all pork products (muscles plus other parts that can be used as co-products or by-products) by the live hog's weight. All pork products typically total about 94% to 95% of the live hog's weight or about 90 to 110 kilograms per hog.
3. Zhongpin's advanced industrial cluster concept usually results in more rapid improvement in capacity utilization for new plants than is typical.
Generally, a company's capacity utilization will be temporarily lower when new facilities are opened. Capacity utilization for a new plant then usually increases to its reasonable level in about three to six months. This is because the market is often new to a company and the production increases as the market develops and grows. Sometimes the mix of products demanded is different than expected and production is changed to produce the products demanded.
Our new facility in Tianjin reduced our capacity utilization by only a little for a short period of time. This is because our original leased facility in Tianjin had been operating for two years, so we already had several significant customers and had established a good market distribution channel, so our market share increased nicely as our new capacity came on line. In addition, most employees in the new Tianjin plant are experienced workers from the original leased factory.
Tour on May 31
During May 31, the investor group visited the company's home town of Changge in the Henan province and saw chilled and frozen pork production, prepared pork production, and the cold-chain logistics and transportation system. They also visited retail stores and supermarket counters, and received summary briefings on government policies, food safety, and industry consolidation.
Highlights of the briefings and discussions in Changge, plus other information not covered, include the following points:
4. Zhongpin's capital investment intensity is intentionally higher than is typical because Zhongpin has chosen to focus on high income markets and to provide the highest product quality and safety to customers.
Zhongpin's capital investment intensity is at the upper level of the industry – because we have focused on supplying the upper income market.
To provide product quality and safety at the highest world standard, we have correctly chosen the best approach that has resulted in the integration of the best equipment and industrial process engineering, the best quality assurance system backed by quality control labs with scientific verification, efficient temperature-controlled cold storage facilities, supporting R&D for new products and new processes and for current product & process improvements, and our cold-chain logistics distribution system that assures that the quality and safety of our products are maintained until they are delivered to our customers. Much of the machinery in our new facilities comes from the United States, South Korea, and Europe.
By creating the most effective and efficient operations as a complete end-to-end standardized system, plus extensive employee training, the results are highly reliable, consistent, high-volume, and safe operations that produce high-quality and safe products, are energy efficient, and have a low cost per metric ton produced over the longest period of time. In other words, it provides essentially the best of everything at a low competitive cost per metric ton over the life cycle.
5. Zhongpin also added further explanation about its new bank line of credit with China Construction Bank ("CCB").
The new framework agreement with China Construction Bank provides Zhongpin with a credit line of RMB 10 billion. As with all bank lines of credit, the company will negotiate all terms and conditions with CCB when it needs to access funds. Those include use of proceeds, duration, interest rate, temporary pledge of assets, and so on.
About Zhongpin
Zhongpin Inc. is a meat and food processing company that specializes in pork and pork products, vegetables, and fruits in China. Its distribution network in China covers 20 provinces plus Beijing, Shanghai, Tianjin, and Chongqing and includes 3,378 retail outlets. Zhongpin's export markets include Europe, Hong Kong, and other countries in Asia.
Safe harbor statement
Certain statements in this news release are forward-looking statements made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Zhongpin has based its forward-looking statements largely on its current expectations and projections about future events and trends that it believes may affect its business strategy, results of operations, financial condition, and financing needs.
These projections involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements, which may include but are not limited to such factors as downturns in the Chinese economy, unanticipated changes in product demand, interruptions in the supply of live pigs and or raw pork, the effects of weather on hog feed production, poor performance of the retail distribution network, delivery delays, freezer facility malfunctions, Zhongpin's ability to build and commence new production facilities according to intended timelines, the ability to prepare Zhongpin for growth, the ability to predict Zhongpin's future financial performance and financing ability, changes in regulations, and other information detailed in Zhongpin's filings with the United States Securities and Exchange Commission.
You are urged to consider these factors carefully in evaluating Zhongpin's forward-looking statements and are cautioned not to place undue reliance on those forward-looking statements, which are qualified in their entirety by this cautionary statement. All information provided in this news release is as of the date of this release. Zhongpin does not undertake any obligation to update any forward-looking statement as a result of new information, future events, or otherwise, except as required by law.
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