Tianli also began retail operations in which they sell branded pork products in 50 major supermarkets around Wuhan City, including Wal-Mart Stores (WMT), Zon 100, and RT Mart. In 2011, the company also entered into exclusivity agreements with 7 local cooperatives in the Enshi Autonomous Prefecture to breed and sell Black Hogs.
Competitive Advantages
A competitive advantage, or what Warren Buffett calls a "moat," is something that gives a company a clear advantage over others and protects it against incursions from the competition. Now breeding, raising, and selling hogs is a commoditized business in China, so you may wonder if Tianli has a competitive advantage at all. However, I believe there are 3 distinct competitive advantages that Tianli has relative to other hog farmers: the exclusivity agreements to breed and raise Black Hogs, economies of scale, and OINK's vertically integrated platform.
Exclusive Black Hog Program - this competitive advantage is one of Tianli's greatest assets, and one that I believe most investors don't seem to appreciate. Under this program, Tianli has the exclusive right over 10 years to breed and sell Enshi black hogs in the Enshi Autonomous Prefecture in Hubei. Based on Company estimates, black hog meat commands a price premium of about 35% relative to typical lean pork meat. The Company is targeting a black hog production capacity of 100,000 by the end of 2012 and a long run capacity of 1 million. Though I admit that the 1 million capacity may be a stretch, I can easily see Tianli being able to reach a production capacity of 200,000 black hogs by the end of 2013. The beauty of this program is that participating farmers are obligated to purchase feed, vaccines, and other supplies from Tianli and also sell the hogs back to Tianli at production costs. Tianli will be the only provider of black hogs in that region for the next 10 years.
