Meat products produced by Yurun on sale at a market in Beijing. The company blamed continued negative reports for its dip in profit during the past few months. Keith Bedford / Bloomberg

China Yurun Food Group Limited, the country's second-largest meat processor, expects operating conditions to remain difficult for the remainder of the year after reporting that its third-quarter profit fell about 25 percent from the same period a year ago.

According to a statement filed to the Hong Kong Stock Exchange on Tuesday, the Nanjing-based hog processor said that the volume slaughtered in the third quarter decreased about 4 percent from a year ago, while sales of processed meat products decreased around 18 percent during the same period.

The company said that the dip in profit was due to continued negative media reports in the past few months that damped consumer confidence, a "substantial" increase in raw material costs - particularly the hog price - and increasing difficulty in passing on costs to consumers.

"The board expects that the business environment for the group will continue to be difficult in the fourth quarter and the group's profitability will remain challenging," Yurun said in a statement.

Shares of Yurun closed at HK$13.04 in Tuesday trading, down 5.64 percent from a day ago. Its share price plunged 47 percent so far this year, while the benchmark Hang Seng Index retreated 15 percent during the same period.

Local media reported in September that a unit of Yurun based in Henan province had sold pork products that contained clenbuterol, an illegal additive in hog feed to keep the meat lean.

The stream of news on food safety sent Yurun's shares to a near three-year low of HK$7.51.

Yurun later issued a statement saying that one live hog from a supplier tested positive for clenbuterol and was destroyed.

Garry Lau, an industry analyst at BOCOM International, estimated that Yurun's full-year sales volume will drop 30 percent, mainly due to weak consumer confidence.

As for hog prices, Lau thinks that tight supply will sustain the high price until the beginning of next year. At the same time, the mainland's corn and soybean prices have gone up 24 percent and 32 percent year-to-date, keeping hog feed costs high, according to Lau's research note.

According to figures from the Ministry of Commerce, the average pork price was 25.21 yuan per kilogram in the week to October 28, up 20 percent since May.

Wang Haitao, an industry analyst with SWS Research, meanwhile thinks that the market has overreacted to the earnings warnings and the bad news has already been factored in, leaving limited room for Yurun's shares to decline any further.

Tight hog supply saw signs of easing in the third quarter on the mainland and a significant increase on the market is likely around February of next year, which means the fundamentals of both the slaughtering industry and Yurun will gradually bottom out, according to Wang.

In the company's interim report for the first six months of 2011, net profit was HK$1,609 million, up 22 percent from the same period in 2010.

The net profit margin was 9.78 percent, down from 15.06 percent the previous year.

joyli@chinadailyhk.com

China Daily

(HK Edition 11/02/2011 page2)