LUOHE, China As a child in the Chinese city of Qingdao, Wu Qionglin would curl up on a sofa watching television before dinner and munch on her favorite snack: a red plastic-wrapped sausage called wangzhongwang, or "king of the king," a processed-pork stick.
Today, as a graduate student of nutrition in the U.K., Wu has given up the snack and its food additives and starch. "I only eat it occasionally now to get a taste of childhood," the 26-year-old Wu said. "I'll never give it to my children, though. I would rather cook fresh meat."
Many Chinese are abandoning the sausage stick as they grow wealthier and pursue healthier lifestyles. And that shift in diet has posed challenges to WH Group, the maker of the sausages.
WH Group, formerly known as Shuanghui International and based in Luohe in China's Henan Province, built a fortune selling these sausages.
The once small state-owned slaughterhouse has become the world's largest pork manufacturer, following its $4.7 billion acquisition of Smithfield of the U.S. in 2013. It logged an annual revenue of $22 billion in 2016.
The company, however, can no longer rely on sausage sales. Sales of what WH Group calls "high-temperature sterilized meat products" -- which have a longer shelf life, but less nutritional value -- had been a drag on its revenue in China, falling three consecutive years from 2014 to 2016. The first six months of 2017 saw revenue of those products dip 0.37% on the year to 6.8 billion yuan ($1.05 billion).
WH Group's chairman, Wan Long, has initiated a bold transformation plan to diversify the business.
BACK TO BASICS Before the company became known as Shuanghui thanks to its popular sausage sticks, its key profit generators were slaughtering and the sale of fresh meat. It was founded in 1958 as Luohe Cold Storage and renamed Shuanghui Group in 1994. It changed its name again to WH Group in 2014.
Wan joined the then-state-owned factory after his discharge from the People's Liberation Army in 1968. He started as an office clerk and by the time he was 44, in 1984, he was elected by co-workers as general manager.
Wan took over a factory that owed creditors 5 million yuan. By the following year, according to reports, it was generating a profit of 5 million yuan.
In the era of China's planned economy and during the early stage of reform and opening up, Wan was able to secure a stable supply of pigs from farms by offering slightly higher prices than what the government set. The company also expanded to cows, goats, chickens and rabbits, eventually becoming the dominant player in Henan Province and earning Wan the moniker "China's chief butcher."
WH Group now plans to remedy China's volatile pig prices by dominating the slaughtering business.
China eats half of the world's pork, with per capita consumption of 30.8kg in 2016, according to the Organization for Economic Cooperation and Development. Pork makes up 60% of the meat consumed in China.
In November, Wan told a group of investors and reporters at a roadshow at its Luohe headquarters that WH Group's eventual goal is to slaughter 100 million pigs annually -- almost seven times the current level. That means the company would be processing roughly 10% of the world's hogs. In the medium term, the company plans to double its current production to 30 million pigs annually by 2025.
Wan's ambitions were fueled by Beijing's ongoing crackdown on smaller slaughterhouses and farms to modernize the country's agricultural industry.
"It is a historic opportunity for us to grow our slaughtering business," Wan said.
Beijing has shut down 6,929 private slaughterhouses since the end of 2013, according to the state news agency Xinhua in October. The number of pig slaughterhouses fell 23.78% to 11,219.
New regulations ban livestock production near water resources or populated areas. Farms in other regions are also required to equip plants with prohibitively expensive manure-management facilities.
"WH Group will have more bargaining power in the market with its larger hog production," said Barney Wu, a consumer analyst at Chinese brokerage Guotai Junan Securities.
Most hogs in China are raised by individual farmers and processed at small slaughterhouses with an annual production of under 5,000 heads each. Lured by better profits when the market price is high, they rush to increase production, causing sharp increases in market supply.
WH Group's management has blamed high hog prices for its lackluster results over the past three years. However, following a three-year surge that saw hog prices reach more than 20 yuan a kilogram, prices started cooling last year. Wan expects the average price of hogs to see a double-digit decline this year from last year's average, stabilizing at 13 to 14 yuan per kilogram.
The downward trend has benefited WH Group, which saw solid volume growth of fresh pork sales, which were up 26% in the second quarter of 2017 and 38% in the third quarter.
For WH Group, growing its slaughter business could mediate risks brought by volatile hog prices, but it is not likely to be a growth engine. The profit margin for its fresh pork business was 2.3% in the first three quarters of last year, compared with a 21.2% profit margin for packaged meats.
BEYOND PORK Packaged meats still contributed 75% to the company's profits during the period. This has inspired WH Group to invest heavily in new product development of packaged meats with a focus on frozen products and snack foods. In the past year, it set up seven more research and development centers across China, adding to the one it already had.
In Wan's words, WH Group will become an "integrated animal protein provider," signaling it will go beyond the traditional pork business.
Among the company's more than 100 products recently launched are a variety of flavors from different regions in China, such as ready-to-eat Sichuan spicy chicken and Cantonese braised duck neck.
These new products are expected to contribute 10% of WH Group's sales this year, Wan said.
Analysts who attended the roadshow have been positive about the company's strategy of introducing new products. "Management continues to address its product upgrading strategy in low-temperature categories, which will be a long-term growth driver," Macquarie Research wrote in a report. Goldman Sachs analysts maintained its "buy" rating for the company, despite signaling risks of slower-than-expected packaged-meat growth.
The company expects more than half of its processed meat sales to come from low-temperature products in the coming years from less than 40% currently, with double-digit growth this year. Frozen packaged meat is considered to have higher nutritional value compared with heat-processed meat. But these products tend to have a shorter shelf life and need to be kept in freezers.
This means WH Group would have to put more effort into logistics and retail channels, said Wu of Guotai Junan.
BUYING THE COMPETITION The deal with Smithfield marked the company's first and probably most important step in the international market, followed by a series of other acquisitions in the U.S and Europe through the Smithfield subsidiary.
In September, WH Group agreed to buy two packaged-meat producers in Romania, for an undisclosed sum, not long after it bought three companies from Poland's Pini Group. Also last year, the company completed its acquisition of Clougherty Packing, California's largest pork processor, along with several brands it owned, including Farmer John.
In the first three quarters of last year, WH Group's U.S. business, which accounted for 59.1% of its revenue, saw its profit grow 9.1% to $670 million from the same period a year earlier. The profit for its Europe businesses surged 157% to $108 million, contributing 7.4% of group revenue.
By contrast, profit from its businesses in China was down 4% to $601 million during the period, dragged down by sluggish packaged meat sales, whose profit dipped 4.2%.
WH Group's Hong Kong-listed shares closed at HK$9.12 on Jan. 11, up 47% from HK$6.22 at the beginning of last year. As of the end of June, the company was sitting on a cash pile of $500 million. Chief Financial Officer Guo Lijun said the company has ample capital for future overseas acquisitions.
And WH Group is looking beyond meat with its acquisitions. Pan Guanghui, general manager at the company's Zhengzhou plant in Henan, said it is considering developing some bread-based products to go along with its Western-style pork products.
It has invested 800 million yuan on a production line in its Zhengzhou plant, manufacturing 23 meat products under the Smithfield brand. But consumers have hesitated to accept Western tastes.
"Customers said the products were too salty, but when you eat them with bread, lettuce and tomatoes, you don't feel that way," Pan said. "We are also discussing with the R&D team at Smithfield to see if it is possible to alter the recipe in China to cater to local tastes."
THE NEXT GENERATION But who will succeed the 77-year-old Wan? "I do have a plan to retire, but I don't have a timetable," Wan said in November. "The matter needs to be discussed internally before we make any announcement."
Responding to a question about a successor, Wan said: "All the management here today look good to me. They have worked in the company for more than 20 years, and they are the leaders of the industry."
One possible candidate is his son, Wan Hongjian, who is group vice president overseeing its international trading business. The elder Wan said his son's future role would depend on whether he has the ability and the support of employees.
Wan does make one thing clear: The group's headquarters will remain in Luohe, the city in which he was born and raised, no matter how far its future global ambitions take the company.