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China's Hog Industry a Tasty Investment Opportunity

China’s consumer price index rose to 4.6 percent in December, slowing from 5.1 percent in the previous month. While inflation may have eased, it continues to be well above the government’s annual inflation target, and remains a large concern for investors looking to get into mainland equities.

Pig Farm
Pig Farm

Higher input costs and rising interest rates, as a result of monetary policy tightening, could squeeze margins at Chinese companies.

However, Colin Bradbury, regional chief strategist at Daiwa Capital Markets, is confident that some Chinese consumer staples offer a safe and promising investment opportunity.

Bradbury has identified leading meat product supplier China Yurun, and food and beverage maker Want Want China as two companies with the ability to defend their profit margins amid rising raw material costs. In addition he expects strong increases in revenue. “We forecast top-line growth for each of these two companies of more than 25% year-on-year for the next six months,” says Bradbury.

Staples with Pricing Power

China Yurun, the country's biggest hog processor, engages in the slaughtering of animals and the processing of the meat into chilled and frozen products. The company has a production network with 34 plants located in both coastal and inland provinces.

According to Bradbury, the firm’s strategic placement across the country and pricing power in its downstream processed meat business puts it ahead of many of its smaller competitors.

He says China’s lower to middle class consumers, the company’s main customer base, are constantly looking to “upgrade” their lifestyle and will therefore continue to purchase meat products despite small price increases.

Want Want China is the nation’s largest snack maker, specializing in rice cakes and flavored milk beverages. The company started business in the mainland in 1992 and was listed on the Hong Kong Stock Exchange in 2008.

The stock has risen over 120 percent since its debut, and Bradbury expects the strong momentum to continue. He is forecasting a 25 percent upside for the stock and has a six-month price target for the company of HK$8.15 from the current price of HK$ 6.47.