Fufeng Group Ltd. Overweight

Transcription

1 22 March 211 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 3% 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 Recommendation Changes Previous Current Rating Neutral Overweight Price Tgt (HK$) FY11E Rev (Rmb m) 7,971. 7,972. FY12E Rev (Rmb m) -- 9,98. FY11E EPS (Rmb) FY12E EPS (Rmb) Price (HK$): Week High (HK$): Week Low (HK$): Month Price Target (HK$): x FY11E EPS of HK$.72 Shares Out (mil): 1,714. Market Cap. (HK$m): 8,998.5 Market Cap. (US$m): 1,153.6 Free Float Market Cap (m) 3,735. (HK$): Div (ann HK$):.3 Avg Daily Vol (): 5276 Book Value/Share (Rmb) : 2.3 Net debt to equity : 4% Est LT EPS Growth : 14% P/E to LT EPS Growth (FY11):.5x Est Next Rep Date : Aug 211 Fiscal Year End: Dec Auditor: PWC Rev (Rmb m) FY1A FY11E FY12E H1 2,988.A 3,633.E 4,447.E H2 3,428.A 4,339.E 4,652.E FY 6,416.A 7,972.E 9,98.E EPS (Rmb) FY1A FY11E FY12E H1.28A.26E.3E H2.3A.36E.44E FY.58A.62E.74E FY P/E 7.6x 7.1x 6.x Fufeng Group Overweight (546 HK - HK$5.25) Upgrade to OW on Justified Risk/Reward; Sustainable Recovery of 4Q1 GPM CONCLUSION: We upgrade Fufeng from Neutral to OW as the stock, trading at 7.1x FY11E P/E, should have fully priced in the cost-induced profit margin risk. With our 16%/25% profit growth forecast for FY11E/12E, this implies 25% upside from our new PT of HK$6.6 (9.3x FY11E P/E). The slightly below-consensus FY1 earnings was in line with our expectation, and we see the recovery of GPM in 4Q1 as sustainable, as ASP is still trending up above the corn cost hike. While the share price has dropped ~3% YTD, we believe the market has overplayed the margin risk due to cost pressure and competitors' expansion, both of which could be offset by robust volume growth and vertical integration. 4Q gross margin recovered: Fufeng's FY1 earnings was Rmb955mil, 3% above our estimate but 5% below the Street's. The good news is GPM recovered to 24.4% in 4Q1 (+4ppt from 3Q1), and we believe this margin is sustainable in FY11 on the back of an ASP hike. MSG ASP has gone up by 4% YoY in FY1 (4Q1: up 6% QoQ, - 7% YoY). Revenue: up 38% in FY1 thanks to: (1) a 68% YoY increase in MSG sales volume; (2) an 8% increase in xanthan gum's sales volume; and (3) increased contribution from new products such as corn oil, threonine and others (2% of revenue contribution). As of FY1, net gearing was 2%, including a CB liability amounting to Rmb981mil. Final DPS was 15 HK cents, making the full-year payout ratio ~4%. Overexpansion concerns overplayed. Three competitors, China-Agri (66.HK, NR), Meihua (6873.CH, NR) and Yiping have announced capacity expansion plans (details on p. 2). We believe that even if fully expanded, most of China Agri and Meihua's capacities will not start operation before the end of FY11; therefore, severe oversupply is unlikely to happen in FY11. We believe Fufeng's margin risk in FY12E will be further cushioned by: (1) the introduction of in-house produced ammonia (~8% of COGS) in 3Q11 that will raise MSG's GPM by 2-3ppt in FY12E based on our estimates; (2) volume expansion (+26%/+15% in FY11E/12E) with better economies of scale; and (3) ASP hike potential as the market consolidates. All in all, we expect OPM at 16.6% in FY11E (-.8ppt) YoY on the back of a 6% corn cost increase and flat ASP. We see revenue (+24% YoY) as the key profit driver (continued on page 2). INVESTMENT RECOMMENDATION: We upgrade Fufeng from Neutral to OW and lower our PT from HK$7.5 to HK$6.6 based on the peer average of 9.3x FY11E EPS of HK$.72 (down from prior peer average of 9.6x HK$.79). We believe the recent share price correction due to increasing corn cost pressure and competition was overdone, and has not reflected Fufeng's earnings growth potential through capacity expansion and vertical integration. RISKS TO ACHIEVEMENT OF TARGET PRICE: (1) A return of smaller competitors in the MSG market; (2) disappointing xanthan gum sales; and (3) changing environmental and industry regulations. 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 7-9 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 9

2 Expansion on track. For the core product MSG, the new plant in the Heilongjiang province, with 2K tpa of MSG capacity and related by-product facilities, is scheduled to be completed in 2Q11E. Management aims to raise the utilization rate to 5%-7% in 3Q11 and 9%+ in 4Q11. We also estimate that corn cost in Heilongjiang is approximately 7%-1% lower than the national average, and as such, would help lower Fufeng's cost pressure vs. peers. For the existing plant in Inner Mongolia, Fufeng plans to expand its capacity of threonine from 1K tons/year in 212E to 1K tons/year by 214E, and further increase its sales to the international market and China through cooperation with market leaders such as Ajinomoto. Expansion of key competitors Yiping +12, tons/year in FY11E China Agriculture +1, tons/year by the end of 211E Meihua + 2, tons/year in 2H11E Source: Piper Jaffray Asia estimates FY1 Results Highlights (Rmb mil) FY1 FY9 YoY (%) Our Est. Deviation (%) 2H1 2H9 YoY (%) Our Est. Deviation (%) Revenue 6,416 4, , ,428 2, , Gross profit 1,565 1,4 12 1, Operating profit 1,14 1,49 5 1, (13) Net profit (12) EPS (Rmb) (13) Margins and ratio (%) FY1 FY9 YoY (ppt) Our Est. Deviation (ppt) 2H1 2H9 YoY (ppt) Deviation (ppt) Gross margin Operating margin Net margin Effective tax rate SG&A /Rev Sources: Company data, Piper Jaffray Asia Securities estimates Segment Results Highlights FY1 FY9 YoY (%) Our Est. Deviation (%) 2H1 2H9 YoY (%) Our Est. Deviation (%) (1) MSG segment MSG sales volume (k tonnes) (2) (5) Sales Revenue (Rmb mil) 5,735 4, ,6 (5) 3,119 2, ,391 (8) GPM (%) ppt ppt ppt ppt OPM (%) ppt n.a. n.a ppt n.a. n.a. EBIT (Rmb mil) (1) n.a. n.a (12) n.a. n.a. (2) Xanthan gum Sales volume (k tonnes) Sales (Rmb mil) GPM (%) ppt ppt ppt ppt OPM (%) ppt n.a. n.a ppt n.a. n.a. EBIT (Rmb mil) n.a. n.a n.a. n.a. Sources: Company data, Piper Jaffray Asia Securities estimates Quarterly Margin Trends (%) 4Q1 4Q9 YoY (ppt) 3Q1 QoQ (ppt) 2Q1 1Q1 4Q9 3Q9 2Q9 MSG segment XG segment Average Source: Company data Key Products Revenue and Volume Growth Revenue (Rmb mil) Volume ( tonnes) 4Q1 4Q9 YoY (%) 3Q1 QoQ (%) 4Q1 4Q9 YoY (%) 3Q1 QoQ (%) MSG 1, Fertilizers (6) (23) 16 (24) Xanthan Gum Source: Company data Company Note 22 March 211 Page 2 of 9

3 22 March 211 Valuation Comparisons Bloomberg Mkt. Cap. Price PER (x) P/B(x) ROE (%) EPS Growth (%) OP Margin (%) Name Code (LC mil) 21/3/211 FY1E FY11E FY12E FY1E FY11E FY11E FY12E FY1E FY11E FY12E FY1E FY11E FY12E China Corn Processors Fufeng 546 HK HK$ 9, Borun BORN US USD Global Bio-Chem Tech. 89 HK HK$ 3, N/A Global Sweeteners 3889 HK HK$ 1, Xiwang Sugar 288 HK HK$ 1, China Corn Oil 16 HK HK$ 2, (16) Average (excl. Fufeng) International Corn Processors Archer-Daniels-Midland ADM US USD 22, Bunge BG US USD 9, (64) Corn Products International CPO US USD 3, Tate & Lyle TATE LN GBp 2, (77) Average Sources: Bloomberg, Company data, Piper Jaffray Asia Securities estimates Sensitivity Analysis As% of Gross margin (%) Net profit (Rmb mil) COGS/revenue FY11E FY12E FY11E FY12E Base case ,117 1,352 Cost % Impact of 1% increase on Corn cost Ammonia ASP % Impact of 1% increase on MSG Xanthan gum Volume % Impact of 1% increase on MSG n.a Xanthan gum n.a Source: Piper Jaffray Asia Securities estimates Page 3 of 9

4 22 March 211 Exhibit 1. PE Band Chart - 3 Years Exhibit 2. Corn Price (HK$) x 9.5x (Rmb/tonne) Ave. Price (LHS) y/y (RHS) m/m (RHS) 2,5 2, (%) x 1, x.5x 1, YTD (5) Average 1,674 1,962 2,115 (1) % y/y (15) M-8 J-8 S-8 N-8 J-9 M-9 M-9 J-9 S-9 N-9 J-1 M-1 M-1 J-1 S-1 N-1 J-11 M-11 M-4 J-4 N-4 M-5 J-5 N-5 M-6 J-6 N-6 M-7 J-7 N-7 M-8 J-8 N-8 M-9 J-9 N-9 M-1 J-1 N-1 M-11 Source: Bloomberg, Piper Jaffray Asia Securities estimates Source: Bloomberg Exhibit 3. Corn Starch Price Exhibit 4. Sugar Price (Rmb/tonne) Ave. Price (LHS) y/y (RHS) m/m (RHS) 3, YTD 3, Average 2,13 2,711 2,97 2,5 % y/y , 1,5 1, (%) (1) (Rmb/tonne) Ave. Price (LHS) y/y (RHS) m/m (RHS) 8, YTD 7, Average 3,848 5,652 7,169 6, % y/y , 4, 3, 2, 1, (%) (.7) (2) (4) A-8 O-8 D-8 F-9 A-9 J-9 A-9 O-9 D-9 F-1 A-1 J-1 A-1 O-1 D-1 F-11 M-4 J-4 N-4 M-5 J-5 N-5 M-6 J-6 N-6 M-7 J-7 N-7 M-8 J-8 N-8 M-9 J-9 N-9 M-1 J-1 N-1 M-11 Source: Bloomberg Source: Bloomberg Exhibit 5. Quarterly MSG and Corn Cost Spreads (Rmb/tonne) 1, 9,193 9, 8, 7, 6, 5, 4, 3, 2, 1, ,179 1,668 1,594 1,287 1, , ,425 2,911 3,171 2,298 2,475 2,66 2, ,821 8,38 8,247 7,14 3,11 2,387 2,51 2,76 2, ,519 1,538 1,645 1,753 1,786 1,772 1,77 1Q7 2Q7 3Q7 4Q7 1Q8 2Q8 3Q8 4Q8 1Q9 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11E ASP Spread Corn Source: Company data, Piper Jaffray Asia Securities estimates Page 4 of 9

5 Fufeng Group Limited Anson Chan Income statement (852) Last updated: 2-Mar-11 Year ending Dec (RMB mil) 1H1A 2H1A 1H11E 2H11E 1H12E 2H12E 27A 28A 29A 21A 211E 212E Volume ( tonnes) Glutamic acid MSG Fertilizers Xanthan gum Sales (RMB mil) MSG 1,763 2,13 2,187 2,733 2,765 2, ,4 2,245 3,893 4,92 5,519 Fertilizers Xanthan gum ASP (Rmb/ tonne) Glutamic acid 7,855 7,855 n.a. n.a. n.a. n.a. 5,872 6,474 7,135 8,113 n.a. n.a. MSG 7,489 8,282 8,1 7,752 7,9 7,595 5,997 6,865 7,68 7,93 7,93 7,745 Fertilizers , Xanthan gum 19,5 19,675 19,5 18,545 18,5 19,5 24,49 21,941 21,99 19,579 19, 19, ASP growth (%) Glutamic acid 16 2 n.a. n.a. n.a. n.a n.a. n.a. MSG Fertilizers Xanthan gum Corn consumption (K tonnes) ,19 1,97 1, ,53 1,314 1,626 1,958 2,234 Corn cost (RMB / ton) 1,699 1,598 1,841 1,841 1,933 1,933 1,321 1,4 1,413 1,741 1,841 1,933 Glutamic acid ,49 1, MSG 1,763 2,13 2,187 2,733 2,765 2, ,4 2,245 3,893 4,92 5,519 Fertilizers Xanthan gum Others ,11 1, ,319 1,93 2,331 Revenue 2,988 3,428 3,633 4,339 4,447 4,652 2,446 3,585 4,633 6,416 7,972 9,98 Turnover growth (%) Cost of sales -2,246-2,65-2,782-3,614-3,447-3,82-2,196-2,941-3,233-4,851-6,395-7,267 Gross Profit ,32 1, 1, ,4 1,565 1,883 2,285 Other income Selling and marketing costs Administrative expenses Other operating expenses Operating profit ,49 1,14 1,327 1,641 Finance costs Profit before tax ,24 1,71 1,27 1,591 Taxation Profit attributable to shareholders ,117 1,352 EPS (fully diluted) (Rmb) H1A 2H1A 1H11E 2H11E 1H1E 2H12E 27A 28A 29A 21A 211E 212E Revenue breakdown Glutamic acid MSG Fertilizers Xanthan gum Sweeteners Others Total 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 3 (12) (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 5 of 9

6 Fufeng Group Limited (546.HK) Piper Jaffray Asia Securities Limited (852) Anson Chan Balance sheet Cash flow Statement 21/3/211 As of 31 December (RMB mil) 28A 29A 21A 211E 212E Jun-1 Year ending Dec (RMB mil) 28A 29A 21A 211E 212E Current assets Operating Inventories ,159 1, EBIT 368 1,49 1,14 1,327 1,641 Trade and other receivables ,54 1, Depreciation Amounts due from related parties 3 Amortization Restricted bank deposits Decrease/(increase) in working capital Cash & equivalent ,23 2,46 1,87 Total operating cashflow 599 1,171 1,784 1,541 1,968 1,175 1,68 2,443 3,59 4,746 2,413 Non-current assets Investing Property, plant and equipment 1,955 2,58 4,88 4,276 4,342 2,879 Capex , Leasehold payments Total investing , Others Financing 2,88 2,653 4,278 4,444 4,59 3,49 Interest charges Total assets 3,262 4,261 6,72 8,35 9,255 5,462 Share issues/exercise of warrants 121 Current liabilities Dividends received/(paid) Trade and other payables 888 1,14 1,839 2,424 2,755 1,225 Tax paid Tax payable Others Current portion of deferred income 7 Total financing Borrowings Net cash flow Derivative financial instruments Net cash/(debt) at beginning ,17 1,572 2,425 3,1 3,34 1,618 Net cash/(debt) at end Non current liabilities Ratio analysis Bank loans A 29A 21A 211E 212E CB P/B (x) Deferred income tax liabilities ROE (%) Deferred income Inventory days Amounts due to related parties Receivable days ,15 1,15 1,15 1,165 Payable days Shareholders' funds 1,742 2,394 3,145 3,874 4,765 2,679 Current ratio (x) Total liabilities and equity 3,262 4,261 6,72 8,35 9,255 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 6 of 9

7 22 March 211 Important Research Disclosures Rating and Price Target History for: as of /25/8 H: HK$.54 8/15/8 H: HK$.73 3/17/9 NR: HK$NA 7/2/9 B: HK$3.7 8/19/9 B: HK$4.1 1/2/9 OW:HK$4.1 1/28/9 OW:HK$4.5 11/4/9 OW:HK$5 2/2/1 OW:HK$6 3/24/1 OW:HK$6.7 1/2/1 OW:HK$ Q1 Q2 Q3 Q1 Q2 Q3 Q1 Q2 Q3 Q /23/1 N:HK$8.5 1/13/11 N:HK$7.5 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 3, 29) N: Neutral S: Sell AL On/AL Off: Placed on/removed from the Alpha List maintained by Piper Jaffray (AL use discontinued March 21) 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 7 of 9

8 Important Research Disclosures Company Note 22 March 211 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 has received compensation for investment banking services from or has had a client relationship with within the past 12 months. Affiliate Disclosures: This report has been prepared by Piper Jaffray & Co. and/or its affiliate Piper Jaffray Asia Securities Limited, both 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 8 Nicollet Mall, Minneapolis, MN 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 Suite 138, 13/F Two Pacific Place, 88 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 8 of 9

9 22 March 211 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 2 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 211 Piper Jaffray. All rights reserved. Page 9 of 9