Shandong Fengxiang Falls Afoul Of Sagging Poultry Prices

Key Takeaways:

• Shandong Fengxiang’s revenue grew 8.9% in the first half of the year, but its profit declined by 26.8%
• The leading poultry company’s processed chicken products accounted for 53.4% of its revenue during the period

By Lee Shih Ta

Chicken may be a healthier alternative to pork, China’s favorite meat. But falling prices due to oversupply are pecking away at profits for a vast Chinese poultry industry whose products supply the nation’s second-favorite meat. 

A king of the roost in that group is Shandong Fengxiang Co. Ltd., China’s largest exporter of white-feathered broilers, whose latest financial results show its profit fell 26.8% in the first half of this year to 60.09 million yuan ($8.44 million) due to falling prices.

The company’s revenue for the period actually grew 8.9% year-on-year to 2.65 billion yuan as it sold more chickens and chicken products. But the falling prices ate into its gross profit, which fell by 15.9%, while its gross margin fell by 2.7 percentage points to 8.9%. That ultimately filtered down to the bottom line with the big profit decline.

In a previous profit warning, Shandong Fengxiang blamed the decline on a decrease in the average selling price for its chicken products. That included a 14% year-on-year decline for its raw chicken products, and a smaller 4.1% decline for its processed chicken products.

Like the more widely watched pork cycle, China’s chicken farming business is also subject to its own ups and downs. When chicken prices pick up, farmers tend to increase output. But that increased supply ultimately pushes prices back down, leading farmers to cut their output and bring prices back up, in a repeating cycle. What’s more, pork and chicken prices also influence each other. When pork prices go up, chicken prices tend to follow. 

According to industry statistics, the output of broilers in China rose 3% year-on-year in the first half of this year, with white-feathered broiler output jumping by a faster rate of 9.4%. The ample supply caused profits to drop sharply for makers of chicken products. 

The average price of white-feathered broilers across China in the first half of the year was 3.79 yuan per kilogram, down 19.4% year-on-year. As falling prices squeezed producers, profits across the white-feathered broiler industry came in at a razor-thin 0.04 yuan per chicken in the six-month period, down 1.84 yuan year-on-year, according to China Animal Husbandry Association. The industry lost money in three of the six months and was only within its normal range in February.

So, Shandong Fengxiang certainly wasn’t alone in seeing its profits clipped in the first half of the year. Industry leaders Fujian Sunner (002299.SZ) and Shandong Xiantan (002746.SZ) also saw their profits fall by 70% or more in the first half of this year. Xiantan estimated its profit attributable to its parent was between 26 million yuan and 34 million yuan in the first half, down as much as 87% year-on-year. Fujian Sunner’s profit on a similar basis was between 80 million yuan and 120 million yuan, down up to 81.2% year-on-year.

Fujian Sunner pinned the blame for its profit decline squarely on falling prices, saying that decline set its profit back by over 1 billion yuan.

Processing Food Expansion 

To minimize the impact of such frequent downturns in the chicken cycle and diversify their business, many chicken farmers have shifted their focus to processed foods and ready-to-cook meals that are less prone to such ups and downs. Shandong Fengxiang is also developing these two areas, which already accounted for over a half of its revenue in 2021.  

The company has developed several brands under its processed chicken business, including Fovo Foods, iShape and Wu Genglu. Its processed chicken includes cooked products that are ready to eat, semi-cooked, which require further preparation before consumption, and seasoned chicken products.

iShape is focused on healthy and low-fat products, and its popular offerings so far include low-fat chicken breast meatballs and bouncy MIX chicken breasts. It currently collaborates with popular grocery membership chain Costco, with Fengxiang creating customized iShape products for Costco’s stores throughout China.

In the first half of the year, sales of the company’s processed chicken products increased by 20.1% year-on-year, generating 1.41 billion yuan in revenue, accounting for 53.4% of its total.

Its export business has also produced some solid results. The company currently sells its products in countries including Japan, Malaysia, Mongolia and Singapore, and in Europe and the Middle East. Its revenue from exports reached 770 million yuan in the first half of the year, up 20.1% year-on-year, as exports rose by 2.7 percentage points to 28.9% of its total in the latest six-month period.

Chicken Recovery On The Horizon 

Shandong Fengxiang’s own shareholding structure has also gone through its own cycle of change lately. In 2022, its parent, Fengxiang Holdings, lost control of the company through a forced auction of its shares after another of the parent’s subsidiaries, Shangdong Xiangguang Copper, defaulted on its debt. Fengxiang Holdings’ founder Liu Xuejing was kicked out of Shandong Fengxian by new owner, Pacific Alliance Group, which immediately set about restoring the chicken company to financial health, partly by providing loans to support its development. The chicken company’s stock perked up after that, and soon investors from the Middle East came calling.

In August 2023, Platinum Peony B 2023 RSC Ltd., a subsidiary of the Middle Eastern sovereign wealth fund Abu Dhabi Investment Authority, agreed to buy 9.9% of the company for about HK$240 million ($30.8 million), becoming its second-largest shareholder.

We expect China’s chicken-farming industry to turn around in the second half of this year. The country stopped importing chicken and other poultry products from Brazil in mid-July after the South American country experienced an avian-influenza outbreak. That gave domestic chicken prices a small shot in the arm. At the same time, capacity growth in China’s domestic industry has slowed, and experts expect it to actually decline in the fourth quarter, further supporting prices. 

Shandong Fengxiang’s ability to keep growing across its business segments, even as it goes through chicken cycles and leadership changes, testifies to its operational resilience. Its price-to-earnings (P/E) ratio currently stands at around 8.2 times, well behind Fujian Sunner’s 29 times and Shandong Xiantan’s 33 times, suggesting the company is being undervalued. That could create a buying opportunity for imaginative investors who might want to sample the company’s strong growth in its processed food and export businesses.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.