China Yurun Food Group Ltd, the country's biggest pork processor, will spend HK$4 billion (US$513 million) to expand and acquire rivals, seeking to benefit from tighter regulations and a government stimulus plan.

The company plans to double capacity and has enough cash and loans to fund the expansion over the next two years, Chief Operating Officer Zhang Yuanfei said on Sunday in an interview in Harbin City, northeast China.

Rising incomes in China have spurred consumption of meats and the government has introduced laws to reduce the number of pork processors.

"In the longer term, it's sensible and essential for China Yurun to seek a bigger market share because the market is so fragmented, but the government policy is in favor of industry consolidation," Renee Tai, a Hong Kong-based analyst, told Bloomberg News. "The aggressive capital expenditure may put pressure on China Yurun's cash flow and balance sheet in the next two years."

China Yurun, based in Nanjing, rose 6.9 percent yesterday to close at HK$9.95 at 4:10pm in Hong Kong trading, beating a 3.5-percent gain in the benchmark Hang Seng Index. China Yurun is partly owned by Goldman Sachs Group Inc and JPMorgan &Chase Co.

China's economy grew at its slowest pace in five years in the third quarter. The government plans to spend 100 billion yuan (US$14.6 billion) this quarter from a stimulus package announced on Sunday, boosting investment in housing, roads, railways and airports. It will also allow tax deductions for purchases of assets such as machinery.

"Household income is expected to continue to rise, though economic growth is slowing," Zhang said. "China is less affected than other western countries in this financial turmoil."

China Yurun buys pigs from farmers, kills the animals and processes the meat into chilled and frozen pork, and makes sausages and ham. In April, it announced plans to double its slaughtering capacity to 30 million heads, and meat processing capacity to 400,000 metric tons.

China tightened licensing rules for its 20,000 pork processors in August to enhance food safety. There may be 7,000 plants left in the next three to five years, China Yurun Chairman Zhu Yicai said.

The proposed expansion will lift China Yurun's market share in hog-slaughtering to as much as 6 percent from about 1 percent, and in meat processing to 20 percent from 15 percent, said Zhang. Pork accounts for 70 percent of meat consumption in China.

"We're not going to scale back our expansion," said Zhang. "We don't want to miss this chance to do so when the newly introduced licensing rule is expected to accelerate the elimination of smaller players."

China Yurun doesn't need to raise funds from banks or the market for its expansion, said Zhang. The company has HK$1.7 billion of cash as of June, and in August secured loans of HK$450 million. It also has an annual cash flow of between HK$700 million and HK$800 million, Zhang said. The firm is also benefiting from the lower cost of pork in the second half from a year ago.

(Shanghai Daily November 11, 2008)