Nov. 10 (Bloomberg) -- China Yurun Food Group Ltd., the country's biggest hog processor, will spend HK$4 billion ($513 million) to expand and acquire rivals, seeking to benefit from tighter regulations and a government stimulus plan.

The company plans to double capacity and has enough cash and loans to fund the expansion over the next two years, Chief Operating Officer Zhang Yuanfei said yesterday in an interview in Harbin city, northeast China, during a plant visit.

China last night announced a 4 trillion yuan ($586 billion) stimulus plan to revive growth in the world's fourth-largest economy amid the global financial crisis. Rising incomes in China has spurred consumption of meats and the government has introduced laws to reduce the number of hog processors.

``In longer term, it's sensible and essential for China Yurun to seek a bigger market share because the market is so fragmented and when the government policy is in favor of industry consolidation,'' said Renee Tai, a Hong Kong-based analyst at CIMB-GK Securities Pte Ltd. ``The aggressive capital expenditure may put pressure on China Yurun's cash flow and balance sheet in the next two years.''

China Yurun, based in Nanjing, rose 6.9 percent to close at HK$9.95 at 4:10 p.m. in Hong Kong trading, beating a 3.5 percent gain in the benchmark Hang Seng Index. China Yurun is partly owned by Goldman Sachs Group Inc. and JPMorgan & Chase Co., according to an exchange filing in August.

Economic Growth

China's economy grew at its slowest pace in five years in the third quarter. The government plans to spend 100 billion yuan this quarter from the stimulus package, boosting investment in housing, roads, railways and airports. It will also allow tax deductions for purchases of assets such as machinery.

``Household income is expected to continue to rise, though economic growth is slowing,'' Zhang said. ``China is less affected than other western countries in this financial turmoil.''

China Yurun buys pigs from farmers, kills the animals and processes the meat into chilled and frozen pork, and makes sausages and ham. In April, it announced plans to double its hog-slaughtering capacity to 30 million heads, and meat- processing capacity to 400,000 metric tons.

China tightened licensing rules for its 20,000 hog processors in August to enhance food safety. There may be 7,000 plants left in the next three to five years, China Yurun Chairman Zhu Yicai has said.

Expansion Plans

The proposed expansion will lift China Yurun's market share in hog-slaughtering to as much as 6 percent from about 1 percent, and in meat-processing to 20 percent from 15 percent, said Zhang. Pork accounts for 70 percent of meat consumption in China.

``We're not going to scale back our expansion,'' said Zhang. ``We don't want to miss this chance to do so when the newly introduced licensing rule is expected to accelerate the elimination of smaller players.''

China Yurun doesn't need to raise funds from banks or the market for its expansion, said Zhang. The company has HK$1.7 billion of cash as of June, and in August secured loans of HK$450 million. It also has annual cash flow of between HK$700 million and HK$800 million, Zhang said.

The company's gearing ratio may increase to 28 percent in 2010 from 10 percent this year, CIMB-GK Securities Tai said.

China Yurun is also benefiting from the lower costs of pork, which has boosted profit margins in the second half from a year ago, Zhang said. Prices will remain ``low'' next year, he said.

Wholesale pork prices in China have dropped 16 percent this year as farmers rebuild stock after diseases and snowstorms decimated herds.

Credit Suisse Group AG upgraded its stock rating on China Yurun to ``neutral'' from ``underperform,'' because of ``resilience in earnings,'' analyst Catherine Lim said in a research report today. The broker expects China Yurun's 2008 profit to increase 22 percent to HK$929 million.

To contact the reporter on this story: Theresa Tang in Hong Kong at ttang3@bloomberg.net

Last Updated: November 10, 2008 03:52 EST