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October 25, 2021

Shuanghui family dispute attracts regulatory attention

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Shuanghui Development is the largest meat processing company in China. Its main business is slaughtering and meat processing. The main products are fresh products and packaged meat products. The company has 30 modern meat processing bases equipped with supporting facilities, boasting a total slaughtering capacity of over 23 million pigs and processing capability of over two million tonnes of meat products per year.

In 2020, due to the African swine fever (ASF) outbreak swine prices surged, boosting the revenue of swine breeding companies.  The net profits of Muyuan and Zhengbang, for instance, increased a whopping 379 and 248% respectively year-on-year.

However, Shuanghui Development, as a meat slaughter and processing company with no swine farms, saw cost pressure increase tremendously amid soaring swine prices. 

In addition, the company's packaged meat products account for a relatively large share of the main business, and the increase in swine prices had a very large impact on it. According to the company's annual report, Shuanghui Development's total sales of fresh meat in 2020 was 1.38 million tonnes (in 2020, the domestic production of fresh products was 860,000 tonnes, a decrease of 44.52% over the same period), and the total sales of packaged meat products was 1.58 million tonnes.

Shuanghui's sister company in the United States, Smithfield Food, helped it to secure its swine supply, and hence its profits, during the ASF period. Both companies are subsidiaries of WH Group headquartered and listed in Hong Kong .

With the pork supplies from Smithfield, Shuanghui's revenue increased 22.51% to 73.9 billion yuan (~US$11.6 billion; 1 yuan = US$0.16) in 2020 despite a sharp drop of 46.3% to 7.092 million head in slaughter volume. The company achieved a net profit of 6.3 billion yuan (~US$0.99 billion) attributable to shareholders of the parent company, a year-on-year increase of 15.04%. Through Rotary Vortex, an indirect wholly-owned subsidiary of WH Group, Shuanghui purchased a total of 12.09 billion yuan (~US$1.89 billion) of pork in 2020.

In 2021, the price of China's live swine tumbled relentlessly from 36 yuan/kg (~US$5.64) in early January to about 10 yuan/kg (~US$1.57) by mid-October. The swine breeding companies that have had glorious reports in the past two years started seeing losses.

Shuanghui Development's 2021 interim report released in August reported an operating income of approximately 34.842 billion yuan (~US$5.45 billion), down 4.14% year-on-year in the first half of the year. The net profit attributable to shareholders of listed companies was approximately 2.537 billion yuan (~US$0.4 billion), down 16.57% year-on-year. Shuanghui Development stated that the decline in revenue was mainly due to the significant decline in the price of swine and meat in the current period. The main reason for the decline in profit was the high profit base of frozen products in 2020, and the decline in profitability of imported meat in the current period due to the narrowing of the price difference between China and foreign countries.

The company's operating profit fell by 32.0% even though falling swine prices in China will help to boost slaughter volume. The main reason was Shuanghui continued to import from Smithfield this year even with domestic supplies in excess and the prices of US pork surging since February this year. As of July, the average price of pork in the US was US$4.089/lb (equivalent to about 27 yuan/jin), significantly higher than the current domestic market price.

The family dispute between Wan Long, the founder of Shuanghui, and his son Wan Hongjian, shed some light on the situation.

On June 17, Shuanghui's parent company, WH Group issued an announcement to remove the founder Wan Long's eldest son Wan Hongjian from the position of executive director and vice president of WH Group. On August 12, Bandung resigned as the CEO of the Group, succeeded by the executive director Guo Lijun, and Wan Long's second son Wan Hongwei would serve as the executive director and vice chairman of the board of directors.

On August 17, Wan Hongjian published an article "My Father and Wan Long in my eyes" on his WeChat public account "New Meat Industry", that "WH (Group) has no actual production and operation. It is actually a combination of Shuanghui and Smithfield. Its role is to use various dazzling financial means and complex structures to siphon the assets of Shuanghui overseas discreetly, (and it) has never been reversed"

Wan Hongjian also accused WH Group of "fattening the US and harming China." WH led Shuanghui to import frozen meat from the United States at high prices and used and then transferred the money in Shuanghui abroad, causing more than 800 million yuan (~US125 million) in losses to the company.

It remains unclear whether Shuanghui Development's procurement of high-priced pork from the United States, was a misjudgement or had some other underlying reasons, but Wang Hongjian's article ushered in regulatory attention.

Shenzhen Stock Exchange issued a mid-year report inquiry letter to Shuanghui Development, requesting the company to explain whether the company's purchase price from Smithfield through Rotary Vortex and other related parties during the reporting period is similar to the purchase price from other foreign suppliers , and to explain the rationale of the company's choice to purchase through Rote.

In addition, the inquiry letter also requires Shuanghui Development to explain the internal decision-making procedures related to matters such as the signing and adjustment of related procurement contracts or the adjustment of related procurement prices stipulated by the company's internal system, and whether the company's reporting period involves the adjustment or adjustment of related procurement prices, as well as reasons and internal decision-making procedures performed; and combined with the impact of related purchase price adjustments on net profit, and explain whether there is any transfer of benefits to related parties through related transactions.

Another issue of concern to the Shenzhen Stock Exchange is that in 2020, Shuanghui Development issued dividends while raising funds for capital.

In 2020, Shuanghui Development's cash dividends amounted to 8.038 billion yuan (~US$1.26 billion), which was 128.49%  of the company's annual net profit of 6.256 billion yuan (~US$0.98 billion). Rotary Vortex received 5.653 billion yuan (~US$0.88 billion) in dividend, which was held 70.33% the total issued.

Prior to the distribution of dividends, in February 2021, Shuanghui Development issued approximately 145 million new shares to 22 investors at a price of 48.15 yuan (~US$7.54) per share, raising nearly 7 billion yuan (~US$1.1 billion).

Those who are sceptical could say that Shuanghui Development imports pork from the United States at low prices, boosting its performance in 2020 to help lift its share prices to raise funds, and then fatten the pockets of controlling shareholders through high dividends.

As of the time this article is written, Shuanghui Development's stock price is 27.35 yuan (~US$4.28), and the lowest point on August 31 was 23.6 yuan (~US$3.69), which means that the institutions that participated in the additional stock issuance at high prices earlier this year has a book loss of almost 50%.

- written by David LIN, translated by Seng Keong NGOH

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