Fufeng Group Ltd. Overweight

Transcription

1 COMPANY BACKGROUND Founded in 1999, Fufeng Group (Fufeng) is the largest manufacturer of glutamic acid (GA) (raw material for monosodium glutamate, or MSG) with a 30% market share in China, and one of the largest manufacturers of xanthan gum in the nation. Its xanthan gum (XG) is exported to over 34 countries. Chairman, LI Xuechun, and other management owns 47% and 8% of the company, respectively. Anson Chan, Sr Research Analyst , anson.wc.chan@pjc.com Piper Jaffray Asia Securities Limited Reason for Report: Change in Price Target Changes Previous Current Rating -- Overweight Price Tgt (HK$) FY10E Rev (Rmb m) 6, , FY11E Rev (Rmb m) 7, , FY10E EPS (Rmb) FY11E EPS (Rmb) Price (HK$): Week High (HK$): Week Low (HK$): Month Price Target (HK$): xFY11E EPS of HK$0.87 Shares Out (mil): 1,660.0 Market Cap. (HK$m): 9,478.6 Market Cap. (US$m): 1,222.0 Free Float Market Cap (m) 3,927.0 (HK$): Div (ann HK$): 0.25 Avg Daily Vol (000): 7069 Book Value/Share (Rmb) : 1.8 Net debt to equity : 21% Est LT EPS Growth : 15% P/E to LT EPS Growth (FY11): 0.4x Est Next Rep Date : Nov 2010 Fiscal Year End: Dec Auditor: PWC Rev (Rmb m) FY09A FY10E FY11E H1 2,055.00A 2,988.00A 3,490.00E H2 2,578.00A 3,470.00E 4,318.00E FY 4,633.00A 6,458.00E 7,808.00E EPS (Rmb) FY09A FY10E FY11E H1 0.21A 0.28A 0.28E H2 0.35A 0.33E 0.46E FY 0.56A 0.61E 0.74E FY P/E 8.7x 8.0x 6.6x Fufeng Group Overweight (546 HK - HK$5.71) Resilient to Corn Cost Hike; Reiterate OW CONCLUSION: Our recent conversation with management revealed that: (1) MSG price has risen slightly at the end of 3Q; (2) new plant construction and upward vertical integration is on schedule; and (3) corn cost has been stable in 3Q10 but management sees little chance of a significant reduction in 4Q after harvest ends. In the face of an upward corn cost trend in China, our preference increases for those corn processors who can fully pass on their cost pressure and lower corn costs, like Fufeng. Hence we raise our PT from HK$6.70 to HK$7.40 on a higher P/E target of 8.5x (from 7.6x). MSG supply/demand balanced. ASP of MSG was stable at about Rmb8,000/tonne (ex-vat) in July/August and picked up slightly by Rmb /tonne entering 4Q10. According to management, supply/demand in China remains well balanced at present. Based on plans announced by players (China Agri, Meihua and Fufeng), we estimate the total MSG capacity to increase by another 5%-10%% in 2H11E. We expect corn cost to be passed on. We forecast corn cost to increase by 7%/2% in FY11E/12E to Rmb1786/1840/tonne, respectively (previous: +3%/2% YoY). Corn accounts for 58%-63% of Fufeng's COGS in FY09-FY12E based on our model. Our sensitivity analysis shows that a further 1% increase in corn cost would result in a 1.3% downside to our earnings estimates in FY11E. That said, we believe Fufeng will most likely pass on the corn cost pressure to maintain its GPM at ~25%, given its leading position in the consolidating market. EPS estimates lowered to reflect dilution. (1) As we have raised our PT to above the CB conversion price (HK$7.03), we have re-calculated our EPS estimates on a fully-diluted basis. Our EPS for FY11E is adjusted from Rmb0.77 to Rmb 0.74 (-4%). Expansion well on track. (1) We expect Fufeng's MSG capacity to increase from 540,000tpa to 740,000tpa (+37%) by mid-fy11 upon completion of the new plant in Heilongjiang, and management aims to start commercial production in 2H11. (2) Construction of a 100,000tpa ammonia plant in Inner Mongolia is slated to be completed by 4Q10. We estimate this will enhance the MSG segment's margin by 1-2ppt at full utilization. (3) New products such as threonine and fructose are currently in trial production. We estimate them to contribute 2%-3% of revenue to our numbers over FY11E-12E. INVESTMENT RECOMMENDATION: We maintain OW on Fufeng and raise our PT to HK$ 7.40 from HK$ 6.70, which is based on 8.5x FY11E EPS of Rmb0.74/HK$0.87 (was 7.6x FY11E EPS of HK$0.88). Our target P/E is kept at about 10% discount to peers. RISKS TO ACHIEVEMENT OF TARGET PRICE: Major risks include: (1) a return of smaller competitors in the MSG market; (2) disappointing xanthan gum sales volumes; and (3) changing environmental and industry regulations that may affect corn or other costs. Piper Jaffray does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decisions. This report should be read in conjunction with important disclosure information, including an attestation under Regulation Analyst certification, found on pages 5-7 of this report or at the following site: This research report has been prepared in whole or part by non-us research analysts who may be associated persons of Piper Jaffray & Co. These research analysts are not registered/qualified as research analysts with FINRA, but instead have satisfied the registration/qualification requirements or other research-related standards of a non-us jurisdiction that have been recognized for these purposes by FINRA. Page 1 of 7

2 Exhibit 1: China MSG (Export) Price Trend Rmb/tonne MSG price Corn cost Spread Jan-08 Sep-08 May-09 Jan-10 Source: CEIC Aug-10 Exhibit 2: Peer Valuation Comparisons Bloomberg Mkt Cap Price PER (x) P/B(x) ROE (%) EPS growth (%) OP margin (%) code (HK$ mil) 19/10/10 FY09 FY10E FY11E FY09 FY10E FY10E FY11E FY09 FY10E FY11E FY09 FY10E FY11E Fufeng Group 546 hk HK$ 9, China Corn Processors China New Borun BORN US USD Global Sweeteners 3889 HK HK$ 1, Global Bio-chem 809 HK HK$ 4, n.a n.a. n.a. 32 n.a Xiwang Sugar 2088 HK HK$ 2, Average Sources: Bloomberg, Piper Jaffray Asia Securities Limited earnings estimates Page 2 of 7

3 Fufeng Group Limited Anson Chan Income statement (852) Last updated: 19-Oct-10 Year ending Dec (RMB mil) 1H09A 2H09A 1H10A 2H10E 1H11E 2H11E 2007A 2008A 2009A 2010E 2011E 2012E Volume ( 000 tonnes) Glutamic acid MSG Fertilizers Xanthan gum ASP (Rmb/ tonne) Glutamic acid 6,777 7,716 7,855 7,855 n.a. n.a. 5,872 6,474 7,135 7,855 n.a. n.a. MSG 6,886 8,323 7,489 8,000 7,600 8,023 5,997 6,865 7,680 7,757 7,834 7,678 Fertilizers , Xanthan gum 24,265 19,023 19,500 19,956 19,500 19,500 24,049 21,941 21,099 19,700 19,500 19,500 ASP growth (%) Glutamic acid n.a. n.a n.a. n.a. MSG Fertilizers Xanthan gum Corn consumption (K tonnes) , ,053 1,374 1,657 1,941 2,344 Corn cost (RMB / ton) 1,284 1,646 1,699 1,646 1,786 1,786 1,321 1,400 1,413 1,669 1,786 1,840 Glutamic acid ,049 1, MSG 906 1,340 1,763 2,077 2,052 2, ,004 2,245 3,840 4,740 5,643 Fertilizers Xanthan gum Others ,562 1,869 2,203 Revenue 2,055 2,578 2,988 3,470 3,490 4,318 2,446 3,585 4,633 6,458 7,808 9,257 Turnover growth (%) Cost of sales -1,478-1,755-2,246-2,504-2,619-3,131-2,196-2,941-3,233-4,750-5,750-6,877 Gross Profit , ,400 1,708 2,058 2,380 Other income Selling and marketing costs Administrative expenses Other operating expenses Operating profit ,049 1,210 1,555 1,802 Finance costs Profit before tax ,024 1,139 1,522 1,776 Taxation Profit attributable to shareholders ,013 1,309 1,439 EPS (Rmb) EPS (fully diluted) (Rmb) H09A 2H09A 1H10A 2H10E 1H10E 2H11E 2007A 2008A 2009A 2010E 2011E 2012E Revenue breakdown Glutamic acid MSG Fertilizers Xanthan gum Sweeteners Others COGS breakdown(%) Corn kernels Utilities Other raw materials Others Gross margins(%) MSG segment Xanthan gum Company's average SG&A as % of revenue Operating margin(%) Growth (%) Revenue Net profit (4) (81) Gross profit contribution (%) MSG segment Xanthan gum Effective tax rate Source: Company, Piper Jaffray Asia Securities Current disclosure information for this company can be found at Page 3 of 7

4 Fufeng Group Limited (00546.HK) Piper Jaffray Asia Securities Limited (852) Anson Chan Balance sheet Cash flow Statement 10/19/2010 As of 31 December (RMB mil) 2008A 2009A 2010E 2011E 2012E Jun-10 Year ending Dec (RMB mil) 2008A 2009A 2010E 2011E 2012E Current assets Operating Inventories ,093 1, EBIT 368 1,049 1,210 1,555 1,802 Trade and other receivables ,159 1, Depreciation Amounts due from related parties Amortization Restricted bank deposits Decrease/(increase) in working capital Cash & equivalent ,615 1,087 Total operating cashflow 599 1,171 1,363 1,805 2,096 1,175 1,608 2,273 3,160 4,285 2,413 Non-current assets Investing Property, plant and equipment 1,955 2,508 3,469 3,784 3,973 2,879 Capex , Leasehold payments Total investing , Others 0 5, Financing 2,088 2,653 3,608 3,923 4,110 3,049 Interest charges Total assets 3,262 4,261 5,881 7,082 8,395 5,462 Share issues/exercise of warrants Current liabilities Dividends received/(paid) Trade and other payables 888 1,140 1,675 2,028 2,426 1,225 Tax paid Tax payable Others Current portion of deferred income Total financing Borrowings Net cash flow Derivative financial instruments Net cash/(debt) at beginning ,170 1,572 1,689 2,042 2,440 1,618 Net cash/(debt) at end Non current liabilities Ratio analysis Bank loans A 2009A 2010E 2011E 2012E CB 0 0 1,000 1,000 1, P/B (x) Deferred income tax liabilities ROE (%) Deferred income Inventory days Amounts due to related parties Receivable days ,165 1,115 1,115 1,165 Payable days Shareholders' funds 1,742 2,394 3,027 3,925 4,840 2,679 Current ratio (x) Total liabilities and equity 3,262 4,261 5,881 7,082 8,395 5,462 Quick ratio (x) Net cash Asset equity(x) Net debt to equity (%) net cash 12 EBITDA/interest expense(x) BVPS (Rmb) Source: Company, Piper Jaffray Asia Securities Current disclosure information for this company can be found at Page 4 of 7

5 Important Research Disclosures Rating and Price Target History for: as of /28/08 S: HK$ /25/08 H: HK$ /15/08 H: HK$ /17/09 NR: HK$NA 07/20/09 B: HK$ /19/09 B: HK$ /02/09 OW:HK$4.1 10/28/09 OW:HK$4.5 11/04/09 OW:HK$5 02/02/10 OW:HK$6 03/24/10 OW:HK$ Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q Created by BlueMatrix Notes: The boxes on the Rating and Price Target History chart above indicate the date of the Research Note, the rating, and the price target. Each box represents a date on which an analyst made a change to a rating or price target, except for the first box, which may only represent the first Note written during the past three years. Legend: I: Initiating Coverage R: Resuming Coverage T: Transferring Coverage D: Discontinuing Coverage S: Suspending Coverage OW: Overweight N: Neutral UW: Underweight B: Buy (Piper Jaffray discontinued use of the B, N, and S ratings on June 30, 2009) N: Neutral S: Sell OP: Outperform (Piper Jaffray discontinued use of the OP, MP and UP ratings on November 15, 2007) MP: Market Perform UP: Underperform AL On/AL Off: Placed on/removed from the Alpha List maintained by Piper Jaffray (AL use discontinued March 2010) NA: Not Available UR: Under Review Distribution of Ratings/IB Services Piper Jaffray IB Serv./Past 12 Mos. Rating Count Percent Count Percent BUY [OW] HOLD [N] SELL [UW] Note: Distribution of Ratings/IB Services shows the number of companies currently in each rating category from which Piper Jaffray and its affiliates received compensation for investment banking services within the past 12 months. FINRA rules require disclosure of which ratings most closely correspond with "buy," "hold," and "sell" recommendations. Piper Jaffray ratings are not the equivalent of buy, hold or sell, but instead represent recommended relative weightings. Nevertheless, Overweight corresponds most closely with buy, Neutral with hold and Underweight with sell. See Stock Rating definitions below. Page 5 of 7

6 Important Research Disclosures Company Note Analyst Certification Anson Chan, Sr Research Analyst The views expressed in this report accurately reflect my personal views about the subject company and the subject security. In addition, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Research Disclosures Piper Jaffray expects to receive or intends to seek compensation for investment banking services from in the next 3 months. Piper Jaffray has received compensation for investment banking services from or has had a client relationship with within the past 12 months. Piper Jaffray Asia Limited, an affiliate of Piper Jaffray Asia Securities Limited, is the retained compliance advisor or financial advisor to Affiliate Disclosures: This report has been prepared by Piper Jaffray & Co. and/or its affiliates Piper Jaffray Ltd. and Piper Jaffray Asia Securities Limited, all of which are subsidiaries of Piper Jaffray Companies (collectively Piper Jaffray). Piper Jaffray & Co. is regulated by FINRA, NYSE, and the United States Securities and Exchange Commission, and its headquarters is located at 800 Nicollet Mall, Minneapolis, MN Piper Jaffray Ltd. is registered in England, no , and its registered office is One South Place, London, EC2M 2RB. Piper Jaffray Ltd. is authorised and regulated by the UK Financial Services Authority ("FSA"), entered on the FSA's register, no and is a member of the London Stock Exchange. Piper Jaffray Asia Securities Limited is a licensed corporation regulated by the Securities and Futures Commission of Hong Kong ("SFC"), entered on the SFC's register, no. ABO154, and is an exchange participant of The Stock Exchange of Hong Kong Limited. Its headquarters is located at 39/F Tower 1 Lippo Centre, 89 Queensway, Hong Kong. Disclosures in this section and in the Other Important Information section referencing Piper Jaffray include all affiliated entities unless otherwise specified. Piper Jaffray research analysts receive compensation that is based, in part, on overall firm revenues, which include investment banking revenues. Rating Definitions Stock Ratings: Piper Jaffray ratings are indicators of expected total return (price appreciation plus dividend) within the next 12 months. At times analysts may specify a different investment horizon or may include additional investment time horizons for specific stocks. Stock performance is measured relative to the group of stocks covered by each analyst. Lists of the stocks covered by each are available at Stock ratings and/or stock coverage may be suspended from time to time in the event that there is no active analyst opinion or analyst coverage, but the opinion or coverage is expected to resume. Research reports and ratings should not be relied upon as individual investment advice. As always, an investor's decision to buy or sell a security must depend on individual circumstances, including existing holdings, time horizons and risk tolerance. Piper Jaffray sales and trading personnel may provide written or oral commentary, trade ideas, or other information about a particular stock to clients or internal trading desks reflecting different opinions than those expressed by the research analyst. In addition, Piper Jaffray technical research products are based on different methodologies and may contradict the opinions contained in fundamental research reports. Overweight (OW): Anticipated to outperform relative to the median of the group of stocks covered by the analyst. Neutral (N): Anticipated to perform in line relative to the median of the group of stocks covered by the analyst. Underweight (UW): Anticipated to underperform relative to the median of the group of stocks covered by the analyst. An industry outlook represents the analyst's view of the industry represented by the stocks in the analyst's coverage group. A Favorable industry outlook generally means that the analyst expects the fundamentals and/or valuations of the industry to improve over the investment time horizon. A Neutral industry outlook generally means that the analyst does not expect the fundamentals and/or valuations of the industry to either improve or deteriorate meaningfully from its current state. An Unfavorable industry outlook generally means that the analyst expects the fundamentals and/or valuations of the industry to deteriorate meaningfully over the investment time horizon. Page 6 of 7

7 Other Important Information The material regarding the subject company is based on data obtained from sources we deem to be reliable; it is not guaranteed as to accuracy and does not purport to be complete. This report is solely for informational purposes and is not intended to be used as the primary basis of investment decisions. Piper Jaffray has not assessed the suitability of the subject company for any person. Because of individual client requirements, it is not, and it should not be construed as, advice designed to meet the particular investment needs of any investor. This report is not an offer or the solicitation of an offer to sell or buy any security. Unless otherwise noted, the price of a security mentioned in this report is the market closing price as of the end of the prior business day. Piper Jaffray does not maintain a predetermined schedule for publication of research and will not necessarily update this report. Piper Jaffray policy generally prohibits research analysts from sending draft research reports to subject companies; however, it should be presumed that the analyst(s) who authored this report has had discussions with the subject company to ensure factual accuracy prior to publication, and has had assistance from the company in conducting diligence, including visits to company sites and meetings with company management and other representatives. This report is published in accordance with a conflicts management policy, which is available at Notice to customers: This material is not directed to, or intended for distribution to or use by, any person or entity if Piper Jaffray is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to such person or entity. Customers in any of the jurisdictions where Piper Jaffray and its affiliates do business who wish to effect a transaction in the securities discussed in this report should contact their local Piper Jaffray representative. Europe: This material is for the use of intended recipients only and only for distribution to professional and institutional investors, i.e. persons who are authorised persons or exempted persons within the meaning of the Financial Services and Markets Act 2000 of the United Kingdom, or persons who have been categorised by Piper Jaffray Ltd. as professional clients under the rules of the Financial Services Authority. Asia: This report is distributed in Hong Kong by Piper Jaffray Asia Securities Limited, which is regulated by the Hong Kong SFC. This report is intended only for distribution to professional investors as defined in the Hong Kong Securities and Futures Ordinance and is for the use of intended recipients only. United States: This report is distributed in the United States by Piper Jaffray & Co., member SIPC, FINRA and NYSE, Inc., which accepts responsibility for its contents. The securities described in this report may not have been registered under the U.S. Securities Act of 1933 and, in such case, may not be offered or sold in the United States or to U.S. persons unless they have been so registered, or an exemption from the registration requirements is available. This report is produced for the use of Piper Jaffray customers and may not be reproduced, re-distributed or passed to any other person or published in whole or in part for any purpose without the prior consent of Piper Jaffray & Co. Additional information is available upon request. Copyright 2010 Piper Jaffray. All rights reserved. Page 7 of 7