Animal Protein. Regional Industry Focus. The Lebaran boost. DBS Group Research. Equity 27 Jul 2016 JCI : 5, STI : 2,933.44

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1 Regional Industry Focus Animal Protein Refer to important disclosures at the end of this report DBS Group Research. Equity 27 Jul 216 The Lebaran boost Integrators are due to book strong 2Q16 earnings; backed by strong Lebaran season; stable DOC pricing/ balanced supply FY16F/17F earnings revised to impute lower feed ASP on lower raw material costs and better breeding and commercial farming margins Any sharp Rupiah appreciation from Tax Amnesty law could provide further upside to earnings Top pick: MAIN. CPIN and JAP are cut to HOLD on limited upside, after recent runs Expect strong 2Q16 earnings. 2Q16 day-old-chick (DOC) and live broiler prices in Indonesia averaged Rp4,77/chick and Rp17,58/kg respectively. We expect prices to remain relatively stable for the remainder of the year. Supply has indicatively balanced, following (1) mandated PS culling last year, (2) subsequent slower breeder chick-ins by this year, (3) reduced GPS (grand parent stock) import quotas since CY15, and (4) freeze on breeding capacity expansions. Meanwhile, stronger Rupiah had been a key contributor in lowering feed costs, reduced borrowing costs and improved purchasing power. FY16F earnings revised by -6% to +36%. To date, USD/IDR exchange rate has averaged Rp13,414 2% stronger than our initial forecasts. Despite corn import restrictions, we expect corn cost to average 16% lower than our previous expectations while soybean meal cost is now forecast to average 15% lower. This translated to lower feed ASP. Breeding and commercial farming margins should improve accordingly. Together with FX gains and lower borrowing costs, we adjusted our FY16F earnings by -6% to +36% and our FY17F earnings by -18% to +36%. Boost from Tax Amnesty Law? While we currently do not impute any net USD inflow for the remainder of the year (on expectations of Federal Reserve rate hikes), we acknowledge that there may be Rupiah upside risk should the law garner significant USD repatriation interest. Our economist believes that repatriation of some US$38bn could boost USD/IDR towards Rp12,5. Based on our sensitivity analysis, every 1% Rupiah appreciation would boost JPFA, MAIN, CPIN and JAP s FY17F EBITDA by 1.6%,.2%,.4% and 1.7% respectively. Our recommendations. Our BUY call for Malindo Feedmill (MAIN) is maintained for 25% upside. We downgraded our call on Japfa Limited (JAP) to HOLD on 13% upside even though we believe the counter remains heavily discounted relative to its subsidiary s value despite subsidiary JPFA s recent share placement to KKR Jade Investments. We also cut our rating on Charoen Pokphand Indonesia (CPIN) to HOLD on rich valuations relative to our revised fair value. We are maintaining our HOLD call on Japfa Comfeed Indonesia (JPFA), as we believe improved earnings outlook and recent share placement are priced in. JCI : 5,224.4 STI : 2, Analyst Ben SANTOSO bensantoso@dbs.com Stock coverage Price Mkt Cap Target Price Performance (%) LCY US$m LCY 3 mth 12 mth Rating Rp Charoen Pokphand 3,92 4,881 3, HOLD Japfa Comfeed 1,315 1,65 1, HOLD Malindo Feedmill 1, , BUY S$ Japfa Ltd.85 1, HOLD Source: DBS Bank, Bloomberg Finance L.P. *closing price as at 26 July 216 ed-th / sa- YM Page 1

2 Industry Regional Focus Industry Focus Animal Protein Peer comparison Mkt Cap Price TP % PE (x) P/BV (x) EV/EBITDA (x) Div Yield (%) Animal protein B'berg code FYE (US$ m) LCY (LCY) (LCY) Upside Rcmd 15A 16F 17F 15A 16F 17F 15A 16F 17F 15A 16F 17F CAGR (%) Charoen Pokphand Indonesia CPIN IJ Equity 12/215 4,854.1 IDR 3,92 3,59 (8.4) HOLD %.8% 1.2% 36.6 Malindo Feedmill MAIN IJ Equity 12/ IDR 1,67 2, BUY NM %.% 1.3% nm Japfa Comfeed Indonesia JPFA IJ Equity 12/215 1,144.9 IDR 1,315 1,42 8. HOLD %.6% 1.2% 56.6 Thai Union Group TU TB Equity 12/215 2,986.7 THB BUY % 3.1% 3.5% 17. Simple average % 1.1% 1.8% 36.7 Mkt Cap Price TP % PE (x) P/BV (x) EV/EBITDA (x) Div Yield (%) Consumer foods B'berg code FYE (US$ m) LCY (LCY) (LCY) Upside Rcmd 15A 16F 17F 15A 16F 17F 15A 16F 17F 15A 16F 17F CAGR (%) Indofood CBP Sukses Makmur ICBP IJ Equity 12/215 8,1.6 IDR 8,95 7,75 (13.4) HOLD % 3.4% 3.6% 11.5 Mayora Indah MYOR IJ Equity 12/215 2,698.3 IDR 39,4 39,2 (.5) HOLD % 1.1% 1.2% 8.3 Tiga Pillar Sejahtera Food AISA IJ Equity 12/ IDR 1,945 n/a n/a n/a %.3%.5% (4.7) Simple average % 1.6% 1.8% 5. Dairy B'berg code FYE (US$ m) LCY (LCY) (LCY) Upside Rcmd 15A 16F 17F 15A 16F 17F 15A 16F 17F 15A 16F 17F CAGR (%) YuanShengTai Dairy Farm 1431 HK Equity 12/ HKD.455 n/a n/a n/a %.%.% 13.5 China Modern Dairy Holdings 1117 HK Equity 12/ HKD HOLD %.%.% (17.3) China Huishan Dairy Holdings* 6863 HK Equity 3/216 5,368.3 HKD 3.11 n/a n/a n/a %.5%.6% 8.8 Inner Mongolia Yili Industrial 6887 CH Equity 12/215 16,461.9 CNY n/a n/a n/a % 2.6% 2.9% 7.1 Simple average %.8%.9% 25.5 Mkt Cap Price TP % PE (x) P/BV (x) EV/EBITDA (x) Div Yield (%) Integrated food producers B'berg code FYE (US$ m) LCY (LCY) (LCY) Upside Rcmd 15A 16F 17F 15A 16F 17F 15A 16F 17F 15A 16F 17F CAGR (%) Charoen Pokphand Foods CPF TB Equity 12/215 6,196.3 THB BUY % 2.% 2.4% Charoen Pokphand Indonesia CPIN IJ Equity 12/215 4,854.1 IDR 3,92 3,59 (8.4) HOLD %.8% 1.2% 36.6 Indofood Sukses Makmur INDF IJ Equity 12/215 5,314.9 IDR 7,65 8, BUY % 2.7% 3.6% 27.7 Japfa Limited JAP SP Equity 12/215 1,84.7 SGD HOLD %.%.% 32.6 Simple average % 1.4% 1.8% 12.4 * FY15 & 16 forecast *closing price as at 26 July 216 Source: Companies, Bloomberg Finance LP, DBS Bank, DBS Vickers, AllianceDBS Page 2 Page 2 Page 2

3 Industry Focus Animal Protein Analyst Ben SANTOSO Table of contents Peer comparison 2 Strategy and stock picks 4 Tweaking our numbers and earnings 4 Expect 2Q16 earnings to spike on strong Lebaran demand 4 Corn import monopoly side effects 4 More culling ahead? 5 Favourable view, but expect hiccups 6 Close-ended integration explored 6 Key risks to our call 8 Appendix: 2QCY16 results review/preview 9 Stock profiles 11 Charoen Pokphand Indonesia 12 Japfa Comfeed 18 Japfa Limited 24 Malindo Feedmill 3 Disclaimer 36 Page 3 Page 3

4 Indonesia Industry Focus Animal Protein Strategy and stock picks Tweaking our numbers and ratings In this report we cut our rating on Charoen Pokphand Indonesia (CPIN) to HOLD on 9% downside to our revised TP. We also cut our rating on Japfa Limited (JAP) to HOLD for 13% upside to our revised TP. Our HOLD call on Japfa Comfeed Indonesia (JPFA) is maintained for limited 7% upside to our revised TP. Despite 36%/36% revisions to JPFA s FY16F/ FY17F earnings (i.e. above consensus), we believe the market has largely priced in the improved outlook and equity injection from recent placement to KKR Jade Investments. Our sole BUY rating is maintained on Malindo Feedmill (MAIN). We believe their current traded EV/EBITDA multiples remain significantly below its historical and average-peer multiples even though day-old-chick (DOC) ASPs in Indonesia have normalised to reflect a more balanced supply. Overall, we made changes to our forecasts (vis-a-vis our earlier expectations) to impute: (1) stronger Rupiah; (2) lower landed soybean meal/corn (blended) costs; (3) lower feed ASP; (4) faster debt repayments; (5) rollover of valuation base year to FY17F for MAIN; as well as (6) private placement for JPFA and its corresponding impact to JAP. Based on our revised forecasts, the sector should see aggregate net gearing declining towards 51% by end-cy16f and to 4% by end-cy17f from 7% at the end of CY15. Likewise, aggregate EBITDA of companies in our coverage is forecast to expand by 16% y-o-y this year and a further 15% in CY17F. Based on our revised assumptions, TPs on counters under our coverage were revised by between -13% and +55%. Changes to our forecasts and TPs Prev. CY16F EPS Prev. CY17F EPS New CY16F EPS New CY17F EPS CY16F EPS rev. CY17F EPS rev. Prev. TP New TP TP rev. implied FY17F EV/EBITDA R Basis Indonesia (EPS/TP) Charoen Pokphand Indonesia (Rp) H % -11% 3,93 3,59-9% Avg. hist. EV/EBITDA 1.5 Japfa Comfeed Indonesia (Rp)* H % 27% 91 1,41 55% Avg. hist. EV/EBITDA 6.5 Malindo Feedmill (Rp) B % -8% 1,975 2,75 5% Avg. hist. EV/EBITDA 8. Singapore (EPS/TP) Japfa Limited (US /S$) H % -18% % SOP 6.4 *fully diluted Source: DBS Bank estimates Expect 2Q16 earnings spike on strong Lebaran demand DOC prices in West Java (i.e. as proxy to consumer demand) averaged of Rp4,77/chick in 2QCY16 (+19% y-o-y; +9% q- o-q); while live broiler prices averaged Rp17,58/kg (+1% y- o-y; +5% q-o-q). On average, we understand poultry feed prices over the same period came in at Rp6,2/kg (flat y-o-y; -4% q-o-q). According to Arboge.com, both DOC and broiler prices have indeed recovered since end Mar-16; and are currently hovering at Rp5,1-5,5/chick for DOC; and around Rp18,5/kg for live broilers. Compared y-o-y, we expect prices to remain higher through Jun-16, as Ramadan demand kicks in. With a shift in Lebaran season almost two weeks earlier this year, we expect 2Q16 earnings to represent the highest quarterly contribution vs. the previous two years. Moreover, should mass PS culling resume post-lebaran, any seasonal drop in DOC/broiler prices should be shallow or even none. Compared to our initial expectations, the lower feed and higher DOC prices have re-distributed the projected segment contributions from feed to breeding and commercial farm segments; with notable earnings revisions in JPFA. However we adjusted JAP s FY17F earnings lower as we imputed lower contribution from other segments (i.e. Dairy and Animal Protein outside Indonesia); as well as dilution from JPFA s 75m share placement and a further 3.87% sell-down to KKR Jade Investments Pte Ltd (KKR). Corn import monopoly side effects Since 24 Mar-16, Bulog (state-owned Logistics Bureau) was appointed as sole importer for corn intended for feed production. Despite this, we estimate landed corn and soybean meal prices to average lower y-o-y this year in part due to stronger Rupiah. While feed producers have progressively substituted part of their carbohydrate requirements from corn to feed wheat to avoid under-supply squeeze; we understand the government may be in the midst of formulating tighter regulation against importation of feed wheat to prop up domestic corn prices. While constant interventions against market mechanism may eventually prove counterproductive, we believe the net impact to feed producers cost have been insignificant partly given global grains oversupply and generally stronger Rupiah exchange rate. Page 4 Page 4

5 Industry Focus Animal Protein DOC and live broiler prices vs. cost of production 22, 22, 2, Live broiler prices Rp/kg (LHS) 2, 18, 18, 16, 16, 14, 14, 12, 12, 1, 8, 6, Average unit cost of production BroilerDOC prices Rp/chick (RHS) 1, 8, 6, 4, 4, 2, 2, May-9 Jul-9 Sep-9 Nov-9 Jan-1 Mar-1 May-1 Jul-1 Sep-1 Nov-1 Jan-11 Mar-11 May-11 Jul-11 Sep-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Source: Companies, DBS Bank estimates Poultry groups USD debt exposure/net gearing USD debts as of 31 Dec14 (US$ m) USD debts as of 31 Dec15 (US$ m) Forecast USD debts as of 31 Dec16 (US$ m) Forecast USD debts as of 31 Dec17 (US$ m) Total debts as of 31 Dec14 (US$ m) Total debts as of 31 Dec15 (US$ m) Total debts as of 31 Dec16 (US$ m) Total debts as of 31 Dec17 (US$ m) FY16F realised and unrealised FX impact on P&L (LCY m) FY17F realised and unrealised FX impact on P&L (LCY m) FY15 net gearing FY16F net gearing Charoen Pokphand I'sia ,2-86,329 52% 24% 9% share of total debt 56% 3% 36% 55% J apfa Comfeed I'sia ,944-12,196 93% 59% 46% share of total debt 4% 4% 44% 45% Malindo Feedmil % 66% 62% share of total debt 38% 1% 1% 1% Japfa Limited % 64% 59% share of total debt 41% 44% 45% 42% Total (US$ m)** ,68 1, ,416. 1, % 51% 4% share of total debt 46% 35% 53% 57% **ex. J apfa Comfeed, which is consolidated in J apfa Ltd. Source: DBS Bank estimates FY17F net gearing More culling ahead? As a follow through from the 21 March 216 MOU between Indonesian poultry industry s stakeholders, the Agriculture Ministry on 3 June 216 issued regulation no.26/216 which pertains to provision and circulation of broilers, supervision and penalties. Salient points of the new regulation are as follows: 1. To guarantee supply of DOC for independent commercial broiler farmers, partnership and integrated farms; as well as to protect farmers from unhealthy competition. 2. Breeders are obliged to manage supply and demand balance for GGPS (great grand parent stock), GPS (grand parent stock), and PS (parent stock) throughout their productive life-cycles. 3. Supply and demand estimates shall be undertaken by Analysis Team, to be formed by the Ministry, comprising representatives from the government, academics, experts, breeders, and commercial farmers with price stability as the main consideration. Page 5 Page 5

6 Indonesia Industry Focus Animal Protein 4. The required number of genetic materials (GGPS, GPS, PS) shall be determined based on estimated consumption of chicken carcasses and eggs by the Analysis Team with priority of supply given to micro, small and medium-sized independent commercial farmers. 5. Internal consumption for DOC shall be intended for integration with downstream industry (including slaughterhouses, blast freezers and cold storage) with the goal of developing export markets. 6. Breeding business meant for public sale shall follow certain pre-order estimates. Commercial farmers shall inform their requirement to PS breeders six months in advance (or through mutual agreements); while PS breeders shall inform their required amount to GPS breeders one year in advance (or through mutual agreements). 7. Breeders are obliged to electronically report monthly inventories, type, location of production, and distribution to the Ministry. 8. Monitoring of production, chick-in and distribution shall be undertaken by the Minister, Governor, Regent/Mayor according to their relevant authorities. Violators shall face a maximum penalty of business licence revocation. In the new regulation, there was no mention of a moratorium of the development of closed-house farms for integrators. Neither was there any mention of mandatory culling as a tool to control oversupply. However, breeders are obliged to manage supply and demand balance for GGP, GPS and PS. Hence, indirectly, the Analysis Team (to be formed by a separate Ministerial Decree) would have the legal basis to recommend mandatory culling in the event of oversupply. Favourable view; but expect hiccups We view the new regulation favourably as it addresses price stability as a goal. However, we foresee a few potential hiccups in implementation: 1. Long-range pre-order estimates particularly for commercial farmers. Historically, farmers demand has been short term. 2. While formation of the Analysis Team can improve visibility, we believe actual demand remains subject to various externalities beyond their control, such as exchange rate movements, commodity price volatility, as well as other factors affecting purchasing power. Hence, a stable buffer of frozen carcasses and mandatory culling as a policy tool would remain necessary to ensure price stability, in our view. 3. Frequent changes in the Ministry s policy-makers would make policy consistency and quality of monitoring questionable. Close-ended integration explored The new regulations would also have repercussions on the integrators business models. Previously, integrators sell its DOC to independent/contract farmers as well as internal farms, while live broilers produced through contract farmers and internal farms are sold through distributors and compete with live broilers produced by independent farmers. The new regulation is pushing for integrators to employ internal DOC sales for closed-ended integration to avoid competition in sales of live broilers with independent farmers. While Indonesian consumers preference is for live broilers, this gradual shift is intended to develop export markets for processed chicken. In consequence, counters under our coverage would have different impacts: 1. Charoen Pokphand Indonesia (CPIN) In consequence to the government s planned strict supervision of GGPS and GPS imports, CPIN may come under closer scrutiny. With 34% market share in DOC, CPIN may also see a proportional impact in restoring the supply-demand balance. However, following the 3m PS culling last year, we believe supply has nearly balanced. Based on our estimation on the culled PS thus far, the group should at least maintain its DOC sales volume flat this year. Yet, the historical structure of its DOC sales (mostly external) and processed chicken means that the group would have to increasingly procure external broilers for its downstream (Processed Chicken) segment. Assuming live broiler prices would stabilise (i.e. above independent farmers cost of production), the group may well expand its commercial farm business to capture the additional margin. We understand the group already has adequate slaughter house/processing/blast freezer capacities for its recently expanded live broiler capacity. While the government s push for integrators to focus on export markets (i.e. on processed chicken) may not have significant near-term boost on CPIN, we believe there is room for improvement. Indonesia s significant untapped opportunity may prove too slow to absorb the group s live broiler output now that it has acquired a significant number of commercial farms. Cash flow-wise, CPIN would not need to spend significant capex to comply with proposed regulations (unless it undertakes aggressive expansions in commercial farms). Page 6 Page 6

7 Industry Focus Animal Protein Charoen Pokphand Indonesia s segment FY16F EBIT Japfa Comfeed Indonesia s segment FY16F EBIT Others 1% Live birds 1% DOC 6% Cow feedlot 3% Others -11% Aquaculture 2% DOC 5% Commercial farms 1% Processed chicken 18% Poultry feed 65% Poultry feed 67% estimates estimates 2. Japfa Comfeed Indonesia (JPFA) While JPFA absorbs some of its own broiler output internally for JAP s Consumer division, this is estimated to account for less than half of the group s combined broiler output. Hence, additional investment in slaughter houses/cold storage may be needed to comply with the proposal. We do not see much impact from the new regulation, as the group is already in the process of expanding its slaughterhouse capacity and has voluntarily reduced PS chick-in to control oversupply. We understand the group is intending to invest c.rp2bn in slaughterhouses/cold storage to help absorb live-broiler oversupply and increase value add contribution. JPFA should see insignificant impact from culling of the remaining 3m PS oversupply. Prior to initial culling in 4Q15, the group had already undertaken efforts to reduce its non-performing PS, cull unhatched DOC eggs, and reduce chick-in to stem losses. As it stands, all integrators, including JPFA, submit their egg production data to the Agriculture Ministry. So in the event of oversupply, the ministry is theoretically able to intervene. 3. Malindo Feedmill (MAIN) MAIN does not have its own slaughter houses, it may need to ramp up capex to comply with the proposal. As the smallest of the three largest integrators, MAIN may need to spend more capex if the government s proposed regulations were to be implemented. We understand the group would seek clarification on the implementation time frame prior to concluding its capex requirements for the slaughterhouse (including blast freezer and cold storage). The earliest Malindo would be able to comply is 2H17. Last year, the group produced 25.6k MT of live broilers of which less than c.6% was consumed internally for processed chicken through third-party slaughter houses. If Malindo were to internally absorb half of live broilers it produces, the group would have to spend roughly Rp12-15bn to add slaughterhouse capacity (i.e. for capacity of 6, heads/hour together with cold storage and blast freezer). We understand this is already budgeted for completion in FY18. The group currently sells all of its processed chicken products domestically. Hence, government s call for full integration and development of export market remain subject to opportunities. Page 7 Page 7

8 Indonesia Industry Focus Animal Protein Malindo Feedmill s segment FY16F EBIT Processed food -1% Broilers % DOC 12% Key risks to our call Outbreak of diseases affecting livestock would have a material effect on animal protein producers operations and financial positions. While all companies have instituted strict bio-security measures to reduce the risk of these events occurring, there can be no assurance that they are immune. Additionally, an outbreak (such as bird flu) would likely have an adverse impact on demand. Poultry feed 78% Intense competition. Excess capacity and intense competition in Indonesia may continue to result in DOC oversupply and slower-than expected increase in ASP. estimates 4. Japfa Limited (JAP SP) Aside from having a 51% stake in JPFA, the impact on potential changes in government regulations would be limited to the group s Consumer segment in Indonesia. Like CPIN, we believe JAP would increasingly seek export opportunities to absorb its consumer products output. To this end, we expect the group to leverage on its regional presence to expand its export markets Japfa Limited s segment FY16F EBIT Movements in raw material costs and currencies. All companies under our coverage are exposed to volatile movements in raw material costs and currencies. For example, weakness in Rupiah and consumer purchasing power caused delays in passing on raw material costs. While we currently do not impute any net USD inflow for the remainder of the year (on expectations of Federal Reserve rate hikes), we acknowledge that there may be Rupiah upside risk should the law garner significant USD repatriation interest. Our economist believes that repatriation of some US$38bn (half of government s estimate) may boost USD/IDR towards Rp12,5 (assuming no intervention from Bank Indonesia). Based on our sensitivity analysis, every 1% Rupiah appreciation would boost JPFA, MAIN, CPIN and JAP s FY17F EBITDA by 1.6%,.2%,.4% and 1.7% respectively Dairy 18% Consumer 2% Changes in government regulations, licensing as well as other interventions, price/volume controls across various jurisdictions may adversely affect animal protein producers profitability. For example, required reduction in DOC supply to control post-eid oversupply would temporarily affect financial performance. Also, a reduction in quota and/or restrictions in importation of live cattle could adversely affect beef feedlot operations. Animal protein 8% Vulnerable to liquidity and credit risks. Animal protein companies may require further funding to expand and are hence vulnerable to liquidity and credit risks. Any plans for more equity funding would dilute existing shareholders' stakes. estimates Page 8 Page 8

9 Industry Focus Animal Protein Appendix 1QCY16 results review and remarks/outlook Company Results vs forecasts 1QCY16 results highlights Realised DOC vol. Realised DOC ASP Remarks/outlook Charoen Pokphand Indonesia In line CPIN reported 1Q16 earnings of Rp762bn (+76% y-o-y; +3% q-o-q). The group s 1Q16 gross margin from the feed segment came in at 15.% - easing from 15.8% achieved in 4Q15 and 17.8% achieved in 1Q15 on sequentially lower ASP. The breeding segment gross margin had also eased q-o-q to 1.7% from 5.7% in 4Q15 as DOC (day-old-chick) prices moderated following halt to government culling programme in Dec-15. CPIN had since this quarter reported a new Live Bird segment, which was previously lumped together in the Processed Chicken segment. For the quarter, Live Bird segment reported a gross margin of 2.5% - comparatively better than the loss reported by Japfa Comfeed. The Processed Chicken segment's gross margin also declined to 29.2% from 25.% reported in 1Q m chicks Rp5,513/ chick We expect Charoen Pokphand Indonesia to book 2QCY16 earnings of between Rp874bn and Rp896bn which would bring its 1H16 earnings to between Rp1,636bn and Rp1,658bn. This would represent between 63% and 64% of our revised full-year earnings expectations. CPIN is due to release its 2Q16 financial results on Friday, 29 Jul-16. Japfa Comfeed Indonesia Above Japfa Comfeed (JPFA) delivered 1Q16 earnings of Rp277.2bn vs. Rp615.5bn in 4Q15 and a Rp221.7bn loss in 1Q15. The group recognised higher G&A expense on bonus payments; offset by Rp8.6bn gains from US$4m principal repurchase of its USD bonds. EBITDA margin for the group s feed business sequentially eased to 14% in 1Q16 from 16% in 4Q15 as ASP were lowered by 2%. Likewise, 1Q16 DOC EBITDA margin eased slightly to 12% from 13% in 4Q15, given higher feed cost (1Q16 DOC ASP increased 4% q-o-q). The group s commercial farm swung back to a loss in 1Q16; as live broiler ASP (+1% q-o-q) lagged those of DOC. Seasonally, The group s cattle segment s operating profit also saw lower top line due to lower import quota; which caused prices to increase 5% q-o-q and hence demand to weaken. 138m chicks c.rp4,9 /chick We expect Japfa Comfeed Indonesia to book 2QCY16 earnings of between Rp41bn and Rp437bn which would bring its 1H16 earnings of between Rp679bn and Rp714bn. This would represent between 68% and 72% of our revised full-year earnings expectations. The group is due to release its 2Q16 financial results on Friday, 12 Aug-16. Japfa Limited Above Reported 1Q16 earnings came in at US$23.4m (+234% y-o-y; -5% q-o-q). Excluding gains from changes in fair value of biological assets (net of tax) but including recurring translation FX gains (losses) the group posted 1Q16 net earnings of US$24.4m (-28% q-o-q; up from US$1.6m in 1Q15). The strong performance was driven primarily by higher EBITDA contribution from Animal Protein outside Indonesia which contributed US$11.7m (+36% q-o-q; +8% y-o-y); and 1% y-o-y expansion in Dairy segment's EBITDA to US$18.1m (+3% q-o-q). These were partly offset by a 25% y-o-y increase in G&A (+25% q-o-q) on bonus payments, which last year were booked in 2Q15. The group s Feed, DOC and live broiler volumes In Myanmar all grew in excess of 2% y-o-y. However in Vietnam, strong growth (6% y- o-y) swine fattening volume was offset by lower DOC volumes and broiler ASP. 153m chicks Rp4,9 /chick We expect the company to book 2QCY16 earnings of between US$43.8m and US$44.2m which would bring 1H16 earnings of between US$67.2m and US$68.5m. This would represent between 67% and 68% of our revised full-year earnings expectations. The group is due to release its 2Q16 financial results on Friday, 12 Aug-16. Page 9 Page 9

10 Indonesia Industry Focus Animal Protein 1QCY16 results review and remarks/changes to forecasts (continued) Company Results vs forecasts 1QCY16 results highlights Realised DOC vol. Realised DOC ASP Remarks/outlook Malindo Feedmill Above MAIN delivered 1Q16 reported earnings of Rp52bn vs. Rp8bn in 4Q15 and a loss of Rp6bn in 1Q15. The stronger-thanexpected 1Q16 performance was driven largely by its top-two segments, namely Feed and Breeding, both of which showed continued sequential top-line growth, driven by better ASP. Unlike peers, the group was able to increase its feed ASP by 3% (+6% y-o-y); while its day-old-chick (DOC) ASP increased by 2% q-o-q (+19% y-o-y). Sales volumes for both segments were less stellar however; with feed moderating to -1% q-o-q (+1% y-o-y) to 132, MT; while DOC expanded 1% q-oq (+9% y-o-y) to 54.2m chicks, despite 4Q15 PS culling thus indicating lower external sales of parent stock (PS). Betterthan-expected top line fed into MAIN s 1Q16 Feed segment EBIT which jumped 225% y-o-y to Rp147bn (+77% q-o-q) and boosted Breeding segment's EBIT to breakeven. MAIN continued to suffer losses in Broiler and Processed Food segments; which reported EBIT losses of Rp12bn and Rp14bn from Rp5bn loss and Rp1bn loss in 1Q15 respectively. 54.2m chicks Rp4,3 /chick We expect Malindo Feedmill to book 2QCY16 earnings of between Rp73bn and Rp77bn which would bring its 1H16 earnings of between Rp125bn and Rp129bn. This would represent between 53% and 54% of our revised full year earnings expectations. MAIN is due to release its 2Q16 financial results on Monday, 1 Aug-16. Page 1 Page 1

11 Industry Focus Animal Protein COMPANY GUIDES Page 11 Page 11

12 Indonesia Company Guide Charoen Pokphand Indonesia Version 4 Bloomberg: CPIN IJ Reuters: CPIN.JK Refer to important disclosures at the end of this report DBS Group Research. Equity 27 Jul 216 HOLD (downgraded from BUY) Last Traded Price: Rp3,92 (JCI : 5,224.4) Price Target : Rp3,59 (-8% downside) (Prev Rp3,93) Where we differ: Higher than consensus earnings in FY17F Analyst Ben SANTOSO bensantoso@dbs.com Price Relative Rp 218 5, ,26. 4, , , , , , , , Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Charoen Pokphand Indonesia (LHS) Forecasts and Valuation FY Dec (Rp m) 215A 216F 217F 218F Revenue 3,18 31,137 35,3 38,673 EBITDA 3,587 4,87 5,713 6,49 Pre-tax Profit 2,282 3,449 4,563 5,396 Net Profit 1,837 2,589 3,426 4,51 Net Pft (Pre Ex.) 1,837 2,589 3,426 4,51 Net Pft Gth (Pre-ex) (%) EPS (Rp) EPS Pre Ex. (Rp) EPS Gth Pre Ex (%) Diluted EPS (Rp) Net DPS (Rp) BV Per Share (Rp) ,54 1,24 PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) CASH ROAE (%) Earnings Rev (%): (3) (11) (1) Consensus EPS (Rp): Other Broker Recs: B: 8 S: 3 H: 1 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P Relative Index Relative JCI INDEX (RHS) Strong fundamentals priced in Staying on top. We expect Charoen Pokphand Indonesia (CPIN) to book 16% EBITDA CAGR over the next three years, driven mainly by recovery in breeding margins and to some extent, maiden contribution from its Live Bird segment and new product launches at its Processed Chicken segment. However, we believe this is more than reflected in the current share price, which has risen in expectations that 2Q16 earnings will be strong. With feed ASP expected to head lower, we think there is little scope for positive earnings surprises this year. FY16F/17F earnings adjusted down by 3%/11%. Adjustments to our forecasts reflect primarily lower corn/soybean meal landed costs, stronger Rupiah and slightly higher day-old-chick (DOC) prices. These resulted in lower assumptions for feed ASP (vis-à-vis previous expectations). With the bulk (i.e. 66%) of CPIN gross profit coming from poultry feed, we expect the group s profit base to shrink partly offset by higher margin from DOC segment vs. our previous forecasts. Compared to last year, earnings should continue to expand by 41% y-o-y (slower than 45% we forecast previously) on lower raw material costs and recovery in DOC prices. Downgrade to HOLD. With industry-wide restrictions placed to avoid a repeat of the oversupply situation in CY14 and CY15, we believe CPIN s DOC output growth will remain moderate. Hence, growth should be driven by smaller segments such as Processed Chicken and Live Bird. Valuation: We value the counter at Rp3,59/share adjusted lower from Rp3,93/share previously based on average forward EV/EBITDA multiple of 1.5x (based on the average between CY9 and CY13. We excluded CY14 and CY15 multiples to avoid distortions from DOC oversupply. Key Risks to Our View: Outbreak of diseases affecting livestock at the group s poultry farms would have a material effect on the group s business and financial position. Additionally, an outbreak (such as bird flu) would likely have an adverse impact on demand. Regulatory risks also feature prominently in this industry. At A Glance Issued Capital (m shrs) 16,398 Mkt. Cap (Rpbn/US$m) 64,28 / 4,881 Major Shareholders (%) Central Agromina PT 55.5 Free Float (%) m Avg. Daily Val (US$m) 1.7 ICB Industry : Consumer Goods / Food Producers ed: JS / sa:ym Page 12

13 Charoen Pokphand Indonesia CRITICAL DATA POINTS TO WATCH Earnings Drivers: Cost of raw materials On our estimates, corn and soybean meal account for roughly c.64-67% of CPIN s poultry feed raw material costs. The prices for both commodities declined by c.3% and c.29% in FY15, respectively, due to global oversupply. We project that both corn and soybean prices will remain weak over the next two years, as favourable weather as well as depreciation of the Brazilian real and Argentine peso are expected to boost planted acreage amid record inventory levels. At the same time, we expect the release of China s strategic reserves and Argentine stockpile to continue to cap prices. Our sensitivity analysis shows that for every 5% drop in corn prices, gross margins will improve by.1%. USD/IDR movements influence margins Historically, CPIN imports 1% of its soybean meal and c.3% of corn requirements, thereby directly linking the group s cost structure to USD/IDR movements. While the poultry feed segment s cost-plus model should enable it to maintain margins, DOC breeding operation is exposed to a currency mismatch. Hence, the volatility in USD/IDR exchange rates would have a significant influence on the group s DOC margins. Likewise, USD debts (primarily working capital) would also cause swings in FX translation gains (losses) below the line. A sharp Rupiah depreciation amid DOC oversupply over the past two years had substantially offset the group s stable poultry feed margins, while significant translation FX losses had further weighed on overall profitability. Subsequent adjustments in domestic prices as supply was reduced and the recent recovery in USD/IDR exchange rate has helped to restore margins. We expect the USD/IDR exchange rate to settle at Rp13,973 by end-cy16. Based on our sensitivity analysis, every 5% drop in the USD/IDR rate would reduce its gross margins by.4%. 5,899 4,916 3,933 2,95 1, ,42 3,234 2,425 1, ,456 4,842 3,228 1,614 4,892 3,914 2,935 1,957 Poultry feed prices (Rp/kg) 6,618 6,815 6,397 6,15 6,179 Corn prices (Rp/kg) 3,837 3,732 3,82 3,963 3,46 Soybean meal prices (Rp/kg) 7,911 6,425 5,54 5,64 5,718 DOC prices (Rp/chick) 4,73 4,844 4,4 4,5 3,45 Beware of DOC price volatility In FY14, CPIN s DOC breeding revenue declined by 16% y-o-y, as DOC ASP weakened significantly. DOC price volatility continued to persist in FY15, as oversupply issues lingered on till Sep-15. Following an independent survey, the government called for a nationwide culling of 6m parent stock (PS) in Oct-15 to address the oversupply (only 3m were culled due to stoppage at the request of the Anti-Trust Commission in Dec-15). The government had also cut grand parent stock (GPS) import quota by 7.6% at the beginning of CY15 and gain by 9.8% at the beginning of CY16. Based on the data collated by Arboge.com, DOC prices currently range between Rp5,1 and Rp5,5/chick from below Rp1, in 4Q Broiler prices (Rp/kg live) 17,71 14,21 1,657 7,15 3, F 217F 218F Page 2 Page 13

14 Charoen Pokphand Indonesia Balance Sheet: Deleveraging The group has made efforts to cut borrowings, especially its USD-denominated debt. On our estimates, CPIN s net gearing should shrink to 24% by end FY16F vis-à-vis 52% in FY15, as the group repays its borrowings, reduces capex and lowers its USD debt exposure. We expect CPIN to be in a net cash position by end-fy18f. Slower capex ahead In view of the recent DOC oversupply, the group reduced its capital spending on new capacities in FY15, and is expected to maintain this at a conservative level of Rp1tr p.a. in FY16F and FY17F. ROA is likewise expected to improve to 15% by FY18F from 8% FY15. Share Price Drivers: Better-than-expected DOC/broiler prices. A higher-thanexpected recovery in DOC/broiler prices could act as a positive catalyst for the stock, as DOC prices affect the group s earnings significantly. Key Risks: Outbreak of diseases affecting livestock at the group s poultry farms would have a material effect on the group s business and financial status. While the group has instituted strict biosecurity measures to reduce the risk of these events happening, there is no assurance that CPIN would be immune to them. Additionally, an outbreak (such as bird flu) would likely have an adverse impact on demand. Changes in government regulation, licensing, change in raw material import policy (as demonstrated by the corn import restriction in Aug 15) and price/volume controls across various jurisdictions may adversely affect CPIN s profitability. For example, the requirement to reduce DOC supply post-eid given the oversupply situation would temporarily affect the group s financial performance. The group is also exposed to volatile movements in raw material costs and currencies across its key markets. For example, the recent drop in Rupiah and weakness in consumer purchasing power in Indonesia had resulted in delays in passing on higher raw material costs. Company Background Charoen Pokphand Indonesia (CPIN) is the market leader in all its business segments, such as poultry feed, day-old-chicks (DOC), and processed chickens with strong established brands. CPIN listed its shares on the IDX in CPIN was established in 1972 as the first high-volume feedmill in Jakarta, Indonesia. Today, the group has operations throughout Indonesia, supported by an extensive distribution network and integrated strategy. Leverage & Asset Turnover (x) Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure Rpm 4,. 3,5. 3,. 2,5. 2,. 1,5. 1,. 5.. Capital Expenditure (-) ROE (%) 2.% 15.% 1.% 5.%.% Forward PE Band (x) (x) sd: 43.4x sd: 35.5x Avg: 27.7x sd: 19.8x sd: 12x 8.8 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 PB Band (x) (x) sd: 9.7x sd: 7.44x Avg: 5.81x 4.7 1sd: 4.19x sd: 2.56x 1.7 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Page 14 Page 3

15 Charoen Pokphand Indonesia Key Assumptions FY Dec Poultry feed prices (Rp/kg) 6,397 6,15 6,179 6,618 6,815 Corn prices (Rp/kg) 3,837 3,732 3,46 3,83 3,963 Soybean meal prices 7,912 6,425 5,54 5,64 5,718 DOC prices (Rp/chick) 3,45 4,4 4,5 4,73 4,844 Broiler prices (Rp/kg live) 17,71 17,327 17,587 Segmental Breakdown FY Dec Revenues (Rpbn) Poultry feed 22,262 21,979 19,767 22,44 24,494 DOC 3,273 3,91 3,292 3,71 3,986 Live birds.. 3,338 3,423 3,24 Processed chicken 2,857 3,121 3,691 4,562 5,639 Others 758 1,18 1,48 1,174 1,315 Total 29,15 3,18 31,137 35,3 38,673 Gross profit (Rpbn) Poultry feed 3,688 3,982 3,876 4,4 4,83 DOC (438) (2.9) 638 1,22 1,155 Live birds Processed chicken 88 1,67 1,237 1,598 1,975 Others (461) (485) (587) Total 4,134 5,14 5,89 6,986 7,741 Gross profit Margins (%) Poultry feed DOC (13.4) (.1) Live birds N/A N/A Processed chicken Others (44.) (41.4) (44.7) Total Income Statement (Rpbn) FY Dec Revenue 29,15 3,18 31,137 35,3 38,673 Cost of Goods Sold (25,16) (24,968) (25,247) (28,313) (3,932) Gross Profit 4,134 5,14 5,89 6,986 7,741 Other Opng (Exp)/Inc (1,57) (1,698) (1,882) (2,8) (2,255) Operating Profit 2,627 3,443 4,8 4,96 5,486 Other Non Opg (Exp)/Inc (26) (541) 23. (35.5) 27.7 Associates & JV Inc..... Net Interest (Exp)/Inc (261) (62) (582) (38) (118) Exceptional Gain/(Loss)..... Pre-tax Profit 2,16 2,282 3,449 4,563 5,396 Tax (36) (449) (862) (1,141) (1,349) Minority Interest Preference Dividend..... Net Profit 1,746 1,837 2,589 3,426 4,51 Net Profit before Except. 1,746 1,837 2,589 3,426 4,51 EBITDA 2,828 3,587 4,87 5,713 6,49 Growth Revenue Gth (%) EBITDA Gth (%) (27.7) Opg Profit Gth (%) (32.7) Net Profit Gth (Pre-ex) (%) (31.) Margins & Ratio Gross Margins (%) Opg Profit Margin (%) Net Profit Margin (%) ROAE (%) ROA (%) ROCE (%) Div Payout Ratio (%) Net Interest Cover (x) Page 4 Page 15

16 Charoen Pokphand Indonesia Quarterly / Interim Income Statement (Rpbn) FY Dec 1Q215 2Q215 3Q215 4Q215 1Q216 Revenue 7,533 7,721 7,262 7,592 9,244 Cost of Goods Sold (6,233) (6,466) (5,996) (6,273) (7,838) Gross Profit 1,31 1,255 1,266 1,319 1,46 Other Oper. (Exp)/Inc (374) (46) (41) (516) (442) Operating Profit Other Non Opg (Exp)/Inc (293) (66.6) (36) Associates & JV Inc..... Net Interest (Exp)/Inc (117) (146) (16) (198) (179) Exceptional Gain/(Loss)..... Pre-tax Profit Tax (85.) (18) (55.3) (21) (153) Minority Interest.8 (.7) (2.3) Net Profit Net profit bef Except EBITDA ,97 Growth Revenue Gth (%) (5.9) EBITDA Gth (%) (35.4) Opg Profit Gth (%) (8.4) 2. (7.2) 2.2 Net Profit Gth (Pre-ex) (%) 1, (44.8) Margins Gross Margins (%) Opg Profit Margins (%) Net Profit Margins (%) Balance Sheet (Rpbn) FY Dec Net Fixed Assets 9,58 11,124 11,463 11,767 12,18 Invts in Associates & JVs..... Other LT Assets 1,774 1,548 1,287 1,319 1,352 Cash & ST Invts 885 1,679 2,932 2,334 4,317 Inventory 4,321 5,454 4,222 4,734 5,172 Debtors 3,159 2,998 3,24 3,429 3,756 Other Current Assets 1,645 1,882 1,591 1,66 1,755 Total Assets 2,842 24,685 24,518 25,188 28,461 ST Debt 1,487 1,71 1,71 1,71 1,71 Creditor 1,591 2,464 1,529 1,715 1,873 Other Current Liab 1,389 1,53 4,84 2,39 2,37 LT Debt 4,723 5,881 2,5 1,857 1,64 Other LT Liabilities Shareholder s Equity 1,987 12,547 14,64 17,278 2,336 Minority Interests Total Cap. & Liab. 2,842 24,685 24,518 25,188 28,461 Non-Cash Wkg. Capital 6,145 6,34 3,223 6,15 6,53 Net Cash/(Debt) (5,325) (5,911) (828) (1,233) 1,3 Debtors Turn (avg days) Creditors Turn (avg days) Inventory Turn (avg days) Asset Turnover (x) Current Ratio (x) Quick Ratio (x) Net Debt/Equity (X) CASH Net Debt/Equity ex MI (X) CASH Capex to Debt (%) Z-Score (X) Page 16 Page 5

17 Charoen Pokphand Indonesia Cash Flow Statement (Rpbn) FY Dec Pre-Tax Profit 2,16 2,282 3,449 4,563 5,396 Dep. & Amort Tax Paid (36) (449) (862) (1,141) (1,349) Assoc. & JV Inc/(loss)..... Chg in Wkg.Cap. (1,59) (482) 1,128 (41) (492) Other Operating CF (685) (329) (1.9) (11.1) (11.4) Net Operating CF 463 1,77 4,481 3,852 4,439 Capital Exp.(net) (3,72) (2,1) (1,17) (1,148) (1,238) Other Invts.(net)..... Invts in Assoc. & JV..... Div from Assoc & JV..... Other Investing CF (34.7) (19.2) (19.6) Net Investing CF (3,736) (1,869) (833) (1,167) (1,257) Div Paid (754) (295) (533) (751) (993) Chg in Gross Debt 3,77 1,667 (1,842) (2,583) (249) Capital Issues..... Other Financing CF 58.9 (416) (2.5) Net Financing CF 3, (2,395) (3,283) (1,199) Currency Adjustments..... Chg in Cash (262) 794 1,253 (598) 1,983 Opg CFPS (Rp) Free CFPS (Rp) (198) (18.5) Target Price & Ratings History Rp S.No. Date Closing Price Target Price Rating 1: 1 Dec BUY 2: 25 Jan BUY 3: 1 Apr HOLD 4: 22 Apr HOLD 5: 2 May HOLD 6: 31 May BUY Jul-15 Nov-15 Mar-16 Jul-16 Note : Share price and Target price are adjusted for corporate actions. Source: DBS Bank Page 6 Page 17

18 Indonesia Company Guide Japfa Comfeed Indonesia Version 4 Bloomberg: JPFA IJ Reuters: JPFA.JK Refer to important disclosures at the end of this report DBS Group Research. Equity 27 Jul 216 HOLD Last Traded Price: Rp1,315 (JCI : 5,224.4) Price Target : Rp1,42 (8% upside) (Prev Rp91) Where we differ: Higher than consensus earnings in FY16F and FY17F Analyst Ben SANTOSO bensantoso@dbs.com Price Relative Rp 2, , , Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Japfa Comfeed Indonesia (LHS) Forecasts and Valuation FY Dec (Rp m) 215A 216F 217F 218F Revenue 25,23 24,742 27,819 3,671 EBITDA 1,94 2,678 3,22 3,624 Pre-tax Profit 698 1,514 1,863 2,496 Net Profit ,229 1,647 Net Pft (Pre Ex.) ,229 1,647 Net Pft Gth (Pre-ex) (%) EPS (Rp) EPS Pre Ex. (Rp) EPS Gth Pre Ex (%) Diluted EPS (Rp) Net DPS (Rp) BV Per Share (Rp) PE (X) PE Pre Ex. (X) P/Cash Flow (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) ROAE (%) Earnings Rev (%): Consensus EPS (Rp): Other Broker Recs: B: 9 S: H: 1 Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P Relative Index Relative JCI INDEX (RHS) High expectations Too much too soon. Notwithstanding expectations of strong 2Q16 earnings and lower forward net gearing ratio (thanks to proceeds from placement to KKR Jade Investments), we believe the strong fundamentals are more or less reflected in Japfa Comfeed Indonesia (JPFA) s current share price. The group is Indonesia s second largest poultry producer and one of the largest cow feedlot operators; and we expect JPFA to capitalise on Indonesia s demographic dividend and growing protein consumption over the next three years. FY16F/17F earnings adjusted by 36% each. The adjustments to our forecasts reflect primarily lower corn/soybean meal costs, a stronger Rupiah and slightly higher DOC prices. These resulted in lower assumptions for feed ASP (vis-à-vis previous forecasts); and in turn leads to higher EBIT margins and contributions from its DOC and commercial farm segments vs. our previous forecasts. Higher earnings expectations this year also reflects reduced borrowing costs on anticipated debt repayments following the recent placement. Rationalising capital expenditure, cutting leverage. JPFA had borne the brunt of the Rupiah s depreciation over the past two years, given its exposure to USD notes due in CY18. While the group had now repurchased US$26m of principal, we continue to expect a higher share of borrowing costs relative to peers until maturity (we expect JPFA to refinance the notes with Rupiah-denominated debts). Given expectations of higher EBITDA and cuts in domestic interest rates this year, we believe there is room for further deleveraging and/or reduction in borrowing costs. Our revised forecast suggests that JPFA s net gearing ratio will head lower to 59% by the end of this year vs. 92% in our previous forecast. Valuation: We lifted our TP to Rp1,42/share as we raised FY17F EBITDA by 23%. Our TP is based on forward EV/EBITDA multiple of 6.5x, based on the average between CY9 and CY13 to avoid distortions from declines in CY14/15 EBITDA. However, given recent share price surge, the market has already priced in the improved fundamentals. Key Risks to Our View: Changes in government regulations, licensing, raw material import policy (as demonstrated in the recent restriction of corn imports), and price/volume controls across various jurisdictions may adversely affect JPFA s profitability. At A Glance Issued Capital (m shrs) 1,661 Mkt. Cap (Rpbn/US$m) 14,19 / 1,65 Major Shareholders (%) Japfa Pte Ltd 57.8 Free Float (%) m Avg. Daily Val (US$m).8 ICB Industry : Consumer Goods / Food Producers ed: JS / sa:ym Page 18

19 Japfa Comfeed Indonesia Poultry feed prices (Rp/kg) CRITICAL DATA POINTS TO WATCH Earnings Drivers: Cost of raw materials Historically, corn and soybean meal account for c.63-65% of JPFA s poultry feed cost. 6,682 5,727 4,773 3,818 2,864 1,99 5,929 5,81 6,1 6,421 6,616 We expect both corn and soybean prices to remain weak over the next two years, as favourable weather and depreciation in the Brazilian real and Argentine peso are expected to boost planted acreage amid record inventory. At the same time, the release of China s strategic oilseed reserves and Argentine stockpile should continue to cap prices. Our sensitivity analysis shows that every 5% drop in corn prices will boost JPFA s gross margins by.2% 955 4,181 3,345 2,59 1,673 Corn prices (Rp/kg) 4,99 3,929 3,61 3,327 3,353 Weak IDR offsets lower cost Around 8% of the group s costs are linked to USD. JPFA imports 1% of its soybean meal requirements and about 3-4% of its corn requirements. Therefore, a weaker IDR substantially offsets any savings from lower international raw material costs. Based on our sensitivity analysis, every 5% fall IDR vs the USD would reduce gross margins by.4ppt ,458 4,94 2,729 Soybean meal prices (Rp/kg) 6,689 5,628 5,54 5,64 5,718 Impact of DOC price volatility Following a 9% y-o-y drop in FY14 due to DOC oversupply, JPFA s FY15 DOC revenue jumped by 25% y-o-y, as ASP gained a firmer footing after the government mandated Parent Stock (PS) culling in Oct15 and Dec15. Through the government mandate to cull 6m PS from Oct15 (only 3m were culled due to stoppage at the request of the Anti-Trust Commission in Dec-15), we expect DOC ASP to remain stable this year. This should be supported by an earlier government decision to cut GPS import quota by 7.6% from the beginning of CY15 and again by 9.8% at the beginning of CY16, which have had a positive impact since 4Q15. 1,365 4,893 3,914 2,936 1, DOC prices (Rp/chick) 4,73 4,844 4,45 4,51 3,942 Broiler prices (Rp/kg live) 18,291 14,633 15,88 16,15 17,71 17,583 18,11 1,975 7,316 3,658 Page 2 Page 19