May 6, 2012 4:40 pm

Genus looks to ride China wave

When Chinese premier Wen Jiabao identified securing domestic food production as one of the Asian powerhouse’s top priorities, Karim Bitar saw an opportunity.

As chief executive of Genus, the supplier of breeding pigs and bull semen, Mr Bitar knows that the country that accounts for almost half the world’s pork production is crucial to the FTSE 250 company’s expansion plans.

With China’s increasing urbanisation comes higher demand for plentiful, low-cost pork through more industrialised farming techniques.

In 2009, fewer than one-quarter of China’s pigs were raised in industrialised farms of more than 500 pigs, with backyard farming making up the majority of the country’s output.

On the back of Mr Wen’s priorities, Genus expects this to rise to 50 per cent by 2015, prompting the genetics company to refocus its strategy towards the country, as well as double its operational expenditure over the next two years to £20m annually.

“If you’re going to be big in our business you need to nail China,” Mr Bitar tells the Financial Times.

“Today, the Chinese consumer spends less about 30-40 per cent of their disposable income on food – that’s a big deal, as well as an opportunity for us if we can bring prices down.”

China’s starring role in Genus’s plans was outlined to 120 analysts and investors by Mr Bitar on Thursday.

Genus has set itself a target of deriving 40 per cent of group profits from Asia and Latin America by 2017, up from 31 per cent now.

The group’s new strategy, which took six months of intensive consultation with staff, will more closely link research and development to the requirements of a particular marketplace.

For example, US consumers prefer thin layers of fat in their bacon, Spaniards favour heavily muscled pigs for hams, and Chinese pork eaters enjoy thicker portions of fat to enhance the flavour of various dishes.

“We play with the genetics of a pig to ensure that the level of leanness is exactly what our customers demand,” says Mr Bitar. “One size doesn’t fit all. We need to tailor our products to our markets.”

Since coming to market in 2000, Genus has built itself up to become a leading provider of bovine semen needed for milk production and beef farming, as well as tailored pig breeding stock for commercial pork farmers.

The group’s market capitalisation now tops £850m – its shares are up 45 per cent over the past 12 months – and Genus supplies more than two-thirds of the pork production stock in North America.

Recent soaring prices in the UK for meat have encouraged farmers to invest in improving their animals’ bloodlines, while higher feed prices have sent them seeking out what Mr Bitar calls “more fuel efficient” animals that consume less.

The strategic rethink follows last September’s appointment of Mr Bitar, who left pharmaceutical group Eli Lilly to replace the long-serving Richard Wood as chief executive of the Hampshire-based genetics group.

Last year, Genus reported pre-tax profit of £40.8m from turnover up 9 per cent year on year to £309.9m.

Graham Jones, analyst at Panmure Gordon, believes that Genus’s new strategy is “evolutionary rather than revolutionary”, and underlines his confidence in the group’s promises to boost operating profit growth from high single to low double-digits.

Another aspect of the switch of focus towards Asia is a series of potential joint ventures in China that would provide Genus with a constant revenue stream by taking a royalty payment from each pig produced.

While no deals have yet been announced, analysts expect Genus to sign two to three joint ventures each year, at an initial cost of £3m.

“This model represents a good balance between introducing an element of Genus’s royalty model, while protecting its intellectual property,” says Mr Jones of Panmure Gordon.

Other aspects of the new strategy include hiring new vets, animal nutritionists and farm experts, as well as improving its European operations, which Mr Bitar says have been struggling.

“We are not pleased with our performance to date in Europe. We’re not providing the right products, and that will change,” he says. “A lot will change.”

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