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China Pork a Meaty Task to Meet Demand 19 SECTOR BRIEFING number DBS Asian Insights DBS Group45 Research • July 2017 China Pork A Meaty Task to Meet Demand 19 DBS Asian Insights SECTOR BRIEFING 45 02 China Pork A Meaty Task to Meet Demand Alison FOK Senior Research Analyst DBS Group Research [email protected] Alice HUI, CFA Research Director DBS Group Research [email protected] Produced by: Asian Insights Office • DBS Group Research go.dbs.com/research @dbsinsights [email protected] Goh Chien Yen Editor-in-Chief Jean Chua Managing Editor Geraldine Tan Editor Martin Tacchi Art Director 19 DBS Asian Insights SECTOR BRIEFING 45 03 04 Executive Summary A Middle-Class Consumption Story 06 Future Required Capacity – How Big Is the Pork Market? Income Growth and Expenditure Implications On Infrastructure And 11 Key Challenges China’s Pork Supply Chain – Who Are 17 the Players? Hog Farms Slaughtering And Fresh Pork Manufacturers Processed Pork Manufacturers Pork Distributors And Retailers Cold Chain Logistics The Raw Material Suppliers – the Feedstock Producers 37 Business Model Cost of Producing a Pig in China Costs in China Versus Other Countries 46 Case Study of a Global Player: USA Opportunities Across the Industry 51 Chain 53 Appendix DBS Asian Insights SECTOR BRIEFING 45 04 Executive Summary Pork demand still on lready the world’s largest pork market – representing around half of global demand the rise.... – 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 Aon 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. .. and so are pork While the higher demand would mean opportunities for domestic players, it has also imports 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. Sectoral reform 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. Market consolidation In particular, the Chinese government is looking to move hog farms away from urban areas to continue 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. Raising productivity 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. Processed meat We expect decent growth outlook for downstream processed meat demand, driven by an production 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. DBS Asian Insights SECTOR BRIEFING 45 05 Convergence a The focus on food safety and production efficiency has driven both upstream and growing trend 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. Scale and efficiency In summary, we see the below key trends/growth potential in the China pork market: matter 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. We estimate that China’s demand for pork would increase by 3.5m tonnes in the next five years DBS Asian Insights SECTOR BRIEFING 45 06 A Middle-Class Consumption Story Future Required Capacity – How Big Is the Pork Market? Pork consumption 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. Diagram 1. China pork consumption m tonnes Source: CEIC, DBS Bank’s estimates Diagram 2. China’s pork consumption per capita (1995 – 2025E) Source: OECD, DBS Bank DBS Asian Insights SECTOR BRIEFING 45 07 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. A gradual change? 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. In terms of Diagram 3. China’s per-capita meat consumption (1990-2025F) overall meat consumption, China’s 50kg per capita is still below that in other countries Source: OECD, DBS Bank Room to rise 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. Demand for the next Growing per-capita consumption aside, pork demand would be further fuelled by an five years 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 DBS Asian Insights SECTOR BRIEFING 45 8 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 Rising disposable Disposable income per capita in China has been growing at c.10% p.a. in the past five years, income... 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. Diagram 4. Disposable income per capita (2011-2016) China’s GDP growth has been outperforming most of its Asian peers’ and is expected to remain so despite slower growth ahead Source: National Bureau of Statistics of China, DBS Bank … to support higher Along with higher income, China’s per-capita expenditure has been growing at a similar rate spending of 9.7% in CAGR since 2010, reaching c.RMB21,400 in 2015.
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