(Yicai Global) March 17 -- Muyuan Foods gained nearly 8 percent today after the country’s leading pig breeder responded to queries raised by the Shenzhen Stock Exchange about its unusually high fixed asset to sales revenue ratio and other financial figures.

Neixiang, central Henan province-based Muyuan Food’s stock price [SHE:002714] shot up 7.92 percent to close at CNY109.51 (USD16.85) today.

Many pig breeders use a ‘contract breeding model’, which outsources the rearing of pigs to farmers and is asset light. However, Muyuan Foods adopts a ‘complete self-raising’ model for its hogs which means it needs to invest in more fixed assets, such as pig farms, it said. Thanks to this model, Muyuan Foods has a much high fixed asset to sales revenue ratio than other firms in the industry.

The Shenzhen bourse also queried the 30-time leap in the firm’s construction projects and the five-fold rise in fixed assets between 2017 and September 2020 in its letter sent on March 15. The company spent CNY56 billion (USD8.6 billion) buying or building fixed assets over this period, more than one and a half times its net profit, it pointed out.

Muyuan, which has just built the world’s biggest hog farm, responded that this is due to its rapid expansion in recent years to take advantage of soaring pork prices resulting from earlier outbreaks of African swine fever that decimated the country’s hog herds.

It set up Henan Muyuan Construction Engineering to handle its construction work, it said. As a result, 80 percent of Muyuan Construction’s revenue comes from the parent firm. The unit undertook CNY11 billion (USD1.7 billion) worth of projects over those three years, which is not an unreasonable amount, it said.

The company’s construction costs are no higher than other firms, Muyuan Foods added. Profit was low at around 1 percent as it has invested heavily in upgrading the technological hardware at its facilities, such as installing thermal imaging cameras, air filters and sterilization equipment to prevent any further outbreaks of African Swine Fever.

The value added tax rate for the construction industry was hiked to 11 percent from 3 percent in 2016, adding to its burden, it added.

Editor: Kim Taylor