China's hog prices have become a spectacle in world agricultural markets, exceeding 20 yuan per kilogram and staying high. Shuanghui Development (000895.SZ), at the downstream of the pork industry chain, appears to have weathered this round of high hog prices.

On April 28, Shuanghui Development announced its Q1 2016 results, with both revenue and profit achieving double-digit growth.

According to the company's announcement: During the reporting period, the company slaughtered 3.48 million hogs, up 3.02% from the same period in 2015; sold 341,200 tons of fresh and frozen products, up 19.7% year-on-year; and 373,700 tons of high- and low-temperature meat products, up 7.98% from the same period in 2015. Revenue reached 12.740 billion yuan, up 28.28% year-on-year; total profit was 1.443 billion yuan, up 20.10%; net profit attributable to shareholders of the parent company was 1.074 billion yuan, up 16.65% from the same period in 2015.

Shuanghui's strong performance was built on sales growth. Against the backdrop of soaring hog prices, some pig farmers hoard hogs waiting for better prices, while consumers reduce consumption due to high prices. Meat companies often see slaughter volumes decline or stay flat due to these factors.

One reason Shuanghui's sales of fresh and frozen meat and meat products significantly outpaced the growth in slaughter volume is that in Q1 2016, Shuanghui imported approximately 600 million yuan worth of cut meat, carcass parts, bones, and by-products from related party Rotex Limited, whose pork supply comes from imports. If the pace of 600 million yuan per quarter continues, Shuanghui's pork imports in 2016 will reach 2.4 billion yuan, a significant increase from about 2.1 billion yuan in 2015.

The cost of imported pork is less than half of domestic pork, so the more imported, the higher the profit.

However, Shuanghui has not opened the floodgates to imported pork.

Feng Yonghui, chief analyst at Soozhu.com, told Yicai that China does not currently impose quota management on pork imports, but that does not mean imports can be unrestricted. The pork Shuanghui imports from the U.S. already meets Chinese official requirements, including not using lean meat powder during the breeding stage. Additionally, imported pork is subject to strict quality control measures in inspection and quarantine. China is the world's largest pork producer, and Feng said, "Unconditional opening would have unimaginable consequences."

Furthermore, Shuanghui's previous inventory came in handy during the high hog price period.

In the same period of 2015, Shuanghui's inventory was about 3.4 billion yuan, but in Q1 2016 it was only about 2.6 billion yuan, a decrease of 800 million yuan, much of which was slaughter products in stock. These stocked slaughter products have now caught up with the good times when hog prices exceed 20 yuan per kilogram, and releasing them now has saved Shuanghui a lot of costs.

The financial report shows that Shuanghui has allocated a large amount of funds for wealth management. At the end of Q1 2016, Shuanghui's monetary funds were 1.5 billion yuan, down 900 million yuan from 2.4 billion yuan in the same period of 2015, mainly because funds were used to purchase wealth management products. Shuanghui Finance Company was approved to be established at the beginning of 2016. Making money from slaughtering pigs and selling meat is hard work, so Shuanghui also wants to dig for gold in the financial market.

With hog prices high, consumers are tightening their wallets, and government subsidies have become more important for boosting profits. In Q1 2016, Shuanghui's non-operating income exceeded 41 million yuan, an increase of nearly 20 million yuan from the same period in 2015, up 87.28%, mainly due to an increase in government subsidies recognized in the period.

Shuanghui's double-digit profit growth is also due to good cost control. While wages and other expenses generally only increase, Shuanghui managed to reduce its administrative expenses. In Q1 2016, Shuanghui's administrative expenses were 310 million yuan, a decrease of nearly 50 million yuan from the same period last year.

A source said that some of Shuanghui's factories have compressed reception expenses to almost zero. In addition, Shuanghui recently optimized its personnel, which reduced administrative expenses. Besides lower salary costs, some positions, such as administrative posts, can save about 10,000 yuan per person per year in management expenses.

Source: Yicai