Japfa Ltd The Golden Land, Myanmar

Transcription

1

2 Japfa Ltd The Golden Land, Myanmar SINGAPORE CONSUMER SITE-VISIT NOTE We attended a site visit organised by Japfa Ltd ( Japfa ) to its Breeding Farm and Hatchery in Hmawbi, as well as its Myaung Dagar Feedmill in Yangon, Myanmar on Monday 17 th Oct We had the privilege of understanding Japfa s operations outside its primary market of Indonesia as the CEO, CFO and respective country and business units heads of Japfa shared with us their market insights and technical knowledge. Key takeaways from the site visit 1. Well positioned in the emerging markets (such as Indonesia, Vietnam, Myanmar, and India) to capture the strong structural growth in protein consumption. 2. Diversification strategy: three core pillars cushioning market volatility, and building the fourth Consumer Food. 3. Brief summaries of its expansion plans beyond PT Japfa Tbk. 4. Management expectations on operating margin in 3Q Antimonopoly fine has relatively insignificant financial impact on Japfa. 6. KKR s investment as a vote of confidence. Figure 1: Breeding Farm and Hatchery in Hmawbi Non-rated LAST TRADED PRICE FORECAST DIV TARGET PRICE TOTAL RETURN COMPANY DATA 26 October 2016 O/S SHARES (MN) : 1,765 M ARKET CAP (USD mn / SGD mn) : 1016 / WK HI/LO (SGD) : 0.89 / M Average Daily T/O (mn) : 2.40 MAJOR SHAREHOLDERS (%) Rangi Management Limited 52.61% Morze International Limited 16.01% Tasburgh Limited PRICE PERFORMANCE (%) SGD N/A N/A N/A 7.18% 1M T H 3 M T H 1Y R COM PANY 0.6 (5.9) STI RETURN (0.04) (0.96) (3.32) PRICE VS. STI Oct-15 Jan-16 Apr-16 Jul-16 JAP SP EQUITY FSSTI index Source: PSR Investment Actions Japfa is undervalued relative to the peer average EV/EBITDA and P/E multiples. No stock rating or price target provided, as we do not have coverage on Japfa Ltd. Figure 2: Peer Comparison Mkt Cap EV/EBITDA EV/EBITDA P/E P/E Net D/E ROA ROE P/B Company (SGD mn) TTM FY1 FY1 (%) (%) (%) JAPFA LTD 1, Indonesia CHAROEN POKPHAND INDONESIA 6, FKS MULTI AGRO TBK PT N/A 4.8 N/A MALINDO FEEDMILL TBK PT CENTRAL PROTEINAPRIMA TBK PT N/A N/A N/A SIERAD PRODUCE TBK PT N/A N/A N/A Source: Bloomberg, PSR KEY FINANCIALS Y / E D ec F Y 12 F Y 13 F Y 14 F Y 15 Revenue (USD mn) 2,322 2,697 2,947 2,787 EBITDA (USD mn) NPAT (adj.) EPS (USD) PER, x (adj.) P/BV, x DPS (USD) ROE, % 18.0% 11.4% 5.8% 9.7% Source: Bloomberg Soh Lin Sin ( ) sohls@phillip.com.sg Simple Average (Excl. JAP) Source: Bloomberg Page 1 PHILLIP SECURITIES RESEARCH (SINGAPORE) MCI (P) 118/10/2015 Ref. No.: SG2016_0215

3 Myanmar: Snapshot on the country and economy Figure 3 & 4: Growing economy and income, implying increasing spending power Myanmar: GDP 70% 70% 60% %y-y GDP %y-y GDP: Goods: Livestock & Fishery 60% 50% 50% Myanmar: GDP per Capital %y-y GDP per Capita %y-y Consumption per Capita 40% 40% 30% 30% 20% 20% 10% 10% 0% Source: CEIC, PSR 0% Source: CEIC, PSR Figure 5 & 6: Growing population, with Mandalay and Yangon accounting for a quarter of its total population Population (mn) Source: CEIC, PSR 0 Sep-91 Sep-96 Sep-01 Sep-06 Sep Population 3% 1% 3% 1% 12% 9% 14% 5% 6% 13% 11% 9% 10% 3% Source: CEIC, PSR Kachin State Kayah State Kayin State Chin State Shan State Mon State Rakhine State Sagaing Division Tanintharyi Division Bago Division Magway Division Ayeyarwady Division Mandalay Division Yangon Division Figure 7 & 8: Increasing meat production with a fairly stable retail price 100% Myanmar: Retail Price 80% %y-y 12mrs Retail Price: Meat, Poultry and Eggs: Chicken %y-y Retail Price: Meat, Poultry and Eggs: Chicken 60% 40% 20% 25% 20% 15% 10% 5% Myanmar: Livestock Production %y-y 12mrs Livestock: Production: Chicken 0% -20% Source: CEIC, PSR 0% Source: CEIC, PSR -5% Jan-13 Jan-14 Jan-15 Jan-16 Page 2 PHILLIP SECURITIES RESEARCH (SINGAPORE)

4 Key takeaways from the site visit 1. Well positioned to capture the strong structural growth in protein consumption Growing protein consumption underpinned by strong projected growth in GDP per capita in the countries which it operates in, namely, Indonesia, India, Vietnam, and Myanmar. These countries are amongst the lowest poultry consumption per capita in Asia. Figure 9: 2. Three core pillars and building the fourth Currently, its 51%-owned subsidiary, PT Japfa Comfeed Indonesia Tbk (PT Japfa Tbk), Animal Protein Other, and Dairy form the Group s three core pillars, contributing 50%, 30% and 20% of the Group s 1H2016 Core PATMI without Forex, respectively. The Group targets to have all three core pillars to contribute equally in near term. Its fourth business segment, the Consumer Food segment, has been profitable in Indonesia but dragged by its relatively new set up in Vietnam. The Group will continue to build its Consumer Food business, such that all four segments can contribute equally. Figure 10: Page 3 PHILLIP SECURITIES RESEARCH (SINGAPORE)

5 3. Looking beyond PT Japfa Tbk (a) Vietnam: Swine business building up, fast and furious Japfa Comfeed Vietnam only commenced its swine breeding operations in Compared to C.P. Vietnam ( CP ), the dominant market player who had been in the Vietnam swine business for more than 20 years, Japfa managed to gain c.11% market share in 2015, securing its position as the second largest player. Figure 11: In 2Q2016, Vietnam operations contributed more than 60% of Animal Protein Other segment s revenue and more than 70% of operating profit. And its swine business contributed to c.45% of its 1H2016 profit from Japfa Comfeed Vietnam, up from c.25% last year. (b) Myanmar: The next Vietnam in making (i) Feedmills The lease for its current feedmill facility will be ending in a few months' time and the commissioning of its new feedmill in Myo Thar Industrial Zone, Mandalay, had begun in Oct Operations from the leased feedmill have substantially been transferred to the new feedmill. The new feedmill is now operating at c.60% capacity. Following the lease termination, Japfa Comfeed Myanmar will be shifting the machineries which it owns from the leased feedmill to its new feedmill. The new Mandalay feedmill currently only consist of one line, adding an additional 35% capacity or 7,000 MT/month to its current production capacity in Myanmar. The new Mandalay facility can be expanded up to three lines, with 20,000 MT/month, the same as its Yangon feedmill. Japfa Comfeed Myanmar owns another feedmill facility, which is located in Myaung Dagar Industrial Zone, Yangon. The Yangon feedmill started operations in Aug 2014 and currently has three lines providing a total capacity of 20,000 MT/month. (ii) DOC and broilers production Growing demand for Day-old chicks ( DOC ) and broilers but short in supply. Japfa Comfeed Myanmar imports 0.5 million DOC per month to support its feed business. Management expects the short supply trend to persist in near term, but margins should normalise as high margins attract new players while existing players increase their capacity. Growing market share. Its existing feed customers serve as a potential pool for its DOC. With 31% market share in broiler feed and only 21% market share in DOC, its DOC business has the potential to grow. Therefore, to meet the higher DOC demand and to tap into the short supply Page 4 PHILLIP SECURITIES RESEARCH (SINGAPORE)

6 market, Japfa Comfeed Myanmar is increasing its production capacity for DOC. Its two breeding farms and two hatcheries in Yangon currently produce c.20mn DOC per day. Management plans to increase that by c.10 million annually in the next two years. It has also acquired land in both Yangon and Mandalay to prepare for its third and fourth breeding farms and hatcheries. These new farms are expected to commence operations in late 2018 or early Figure 12: (c) India: Huge potential and growing strong Three projects have been carried out in : (i) New feedmill in Bihar Commenced operation in April 2016 with 7,500 MT/month and utilisation rate has currently crossed 70%. Japfa Comfeed India targets to reach c.80% by end Following which, it plans to add an additional line, thus expanding its capacity to 15,000 MT/month. (ii) New Hatchery in Maharastra, equipped with animal lab Commenced operations in 3Q2016 and has the same capacity as per its first Hatchery in Maharastra. Both Hatcheries has combined capacity of 2 million eggs per day. (iii) New feedmill in Uttar Pradesh The 7 th feedmill is currently under construction and should be ready by Dec 2017 with a capacity of 5,000 MT/month. More than 50% of its demand is secured. Management made it a conscious decision to focus on its business on feedmill (85%) instead of poultry (15%) due to the challenging livestock s breeding environment. Nonetheless, it intends to expand its Parent Stock Breeding Farm in Maharastra and continue its effort in broiler genetic improvements. Management also shared that it expects business to perform better this year, due to higher broiler prices. (d) Dairy: The Group s cash cow (i) Dairy China Farm 7 in Chifeng, Inner Mongolia is expected to complete by Dec 2016, and to be fully milking by end It has recently entered into a joint venture with Food Union to build local processing facility in China for downstream business, targeted for Greater China. Page 5 PHILLIP SECURITIES RESEARCH (SINGAPORE)

7 Consistent operating margin and maintained profitability despite lower prices in the past two years, were mainly due to: Higher productivity as new farms mature alongside its continuous expansion efforts; Improving milk yields due to efficient farm management; and c.25% lower total production costs due to better operating efficiency, as well as lower feed costs. Figure 13: (ii) Dairy SEA Expansion of Farm 1 in Malang, East Java is completed and currently has 3,800 milking capacity. The new Farm 2 in Wlingi, East Java has completed its earthworks. It will start construction in Nov 2016 and targets to start milking in Mar Similar to Farm 1, the new Farm 2 is designed for 4,000 heads of milking cows and a population of 9,850 heads. Figure 14: Page 6 PHILLIP SECURITIES RESEARCH (SINGAPORE)

8 Riding on Indonesia market trend in favour of chilled milk Demand for liquid milk experienced higher growth rate compared to milk powder. Hence, the Group s strategy of downstream business for next five years is to focus on Liquid Milk, Yoghurt and Fresh Cheeses and capitalise on Greenfield premium brand positioning. Greenfield s clear dominant position in strategically important Fresh Milk category in Indonesia enables it to command for price premium. Figure 15: Constructing a new Dairy Processing facility in Palaan, East Java, and is expected to complete by Dec 2016 and commissioning by 1Q17. The new Dairy Processing facility will cater to (i) milk production from the new Farm 2, and (ii) production of the two additional new product pillars in addition to Liquid Milk. Capacity of the new processing facility is expandable to process for three farms output, thus is expected to run more cost efficiently. (e) Consumer Food: Strong foothold in Indonesia (i) Strong brand equity in Indonesia So Nice is its biggest brand in Indonesia, commanding more than 80% market share in ready-to eat sausages. Real Good is the first mover and market leader in the pillow pack liquid milk category. So Good targets the premium segment of consumers. It is the second largest market player in frozen processed products. (ii) Extensive distribution network but more room to grow Direct distribution channel includes 7 distribution branches, 58 sales offices, and more than 44,000 points-of-sale in supermarkets, modern convenience stores and traditional grocery outlets across Indonesia. The combined strength of its distribution network covers a total of 1.5million retail outlets, which implied about 46% to 50% of total retail outlets universe in Indonesia are covered. This also indicates that it has more room for distribution penetration. Page 7 PHILLIP SECURITIES RESEARCH (SINGAPORE)

9 (iii) Recent joint venture with PT Cargill Food Investment Indonesia for poultry products in Indonesia Management noted that Cargill is one of the major global suppliers of processed foods to Japanese supermarkets and major quick service restaurants ( QSR ). Hence, the strategic partnership with Cargill will essentially focus on processed foods, while its existing operation for ready-toeat sausages will continue. By leveraging on Cargill s broad industry expertise, PT So Good Food could enhance its capabilities in consumer food processing technologies, product innovation and quality assurance. In addition, by leveraging on Cargill s brand equity, PT So Good Food could level its playing field for its processed food products. It could expand its client base, to major QSRs in Indonesia and potentially export overseas. (iv) Substantial investment into brand building and distribution infrastructures We expect marginal bottom-line for the next five years as the Group continues to plough back to advertisement and promotion (which could be up to 20%-25% of revenue), and distribution infrastructures (e.g. freezers) to boost demand. 4. 2Q16 operating margin may not be sustainable The improved profitability in 2Q16 was mainly due to higher operating margin in feed operations, which was led by lower costs of raw materials. However due to its accounting policy and inventory management, Management noted that the 13.8% operating margin seen in 2Q16 may not continue in 3Q16 as average selling price ( ASP ) for feed has been progressively adjusted downwards. Having said the above, its feed operations should continue to provide a stable base of profits and contribute to the bulk of its operating profit. Its ability to pass on increasing raw materials costs to customers and flexibility in switching to cheaper raw materials with same nutritional value (e.g. replace soy with cheaper groundnuts as protein source) should provide a floor to its feed margin. 5. Antimonopoly fine has relatively insignificant financial impact on Japfa The Business Competition Supervisory Commission (KPPU) of Indonesia has ordered 12 companies to pay a total of Rp billion (US$9.16 million) in fines for the premature culling of 2 million parent stock chickens following an oversupply of DOC in September last year. The KPPU stated that the instruction from the Agriculture Ministry s livestock and animal health directorate general to perform the mass cull, which was the first of three stages in the cull of a total of 6 million parent stock chickens, was actually an order from the 12 companies in an effort to control market prices. Among the 12 companies are publicly listed poultry giants Charoen Pokphand Indonesia and PT Japfa Tbk, each fined Rp25 billion, and Malindo Feedmill, which was fined Rp10.83 billion. Management shared that, it has been in touch with the KPPU to clarify on the allegations made. Nonetheless, should the Indonesian government proceed to charge the company guilty of cartel practices, the fine is expected to have relatively insignificant financial impact on Japfa. In 1H2016, PT Japfa Tbk has recorded profits of Rp1.03 trillion (or US$41.3 million, which is equivalent to 60% of Japfa s 1H16 PATMI). Page 8 PHILLIP SECURITIES RESEARCH (SINGAPORE)

10 6. KKR s investment, a vote of confidence KKR Jade Investments Pte. Ltd. ( KKR Jade ) acquired c.12% stake in PT Japfa Tbk through a combination of primary and secondary share purchase. The initial 10.44% shares purchased is subjected to a one-year lock-up period. The primary proceeds of Rp702 billion have been used to pare down debt, which increases debt headroom for existing facilities. The remaining will be used for investment and/or repay working capital facilities. These strengthened the balance sheets of PT Japfa Tbk and Japfa. Gearing ratio as at 30 June 2016 for PT Japfa Tbk and Japfa are at 0.79x and 0.6x, respectively, down from 1.55x and 0.7x a year ago. Page 9 PHILLIP SECURITIES RESEARCH (SINGAPORE)

11 Contact Information of Hong Kong Representatives Research Benny WANG Dealing Director (852) ZHANG Jing Research Analyst Transportation and Automobiles (86) FAN Guohe Research Analyst Pharmaceutical, Health Care, TMT (86) Sales Aric AU Matthew WONG Manager, Corporate & Institutional Sales Manager, International Sales (852) (852) Yoshikazu SHIKITA Manager, International Sales (Japan Team) (852)

12 PHILLIP RESEARCH STOCK SELECTION SYSTEMS Total Return Recommendation Rating Remarks > +20% Buy 1 >20% upside from the current price +5% to +20% Accumulate 2 +5% to +20% upside from the current price -5% to +5% Neutral 3 Trade within +/- 5% from the current price -5% to -20% Reduce 4-5% to -20% downside from the current price < -20% Sell 5-20% downside from the current price We do not base our recommendations entirely on the above quantitative return bands. We consider qualitative factors like (but not limited to) a stock s risk reward profile, market sentiment, recent rate of share price appreciation, presence or absence of stock price catalysts, and speculative undertones surrounding the stock, before making our final recommendation GENERAL DISCLAIMER This publication is distributed in Hong Kong by Phillip Securities (Hong Kong) Limited ( PSHK ), which is licensed in Hong Kong by the Securities and Futures Commission for regulated activities, including Type 4 regulated activity (advising on securities). This publication was originally prepared by analysts from our overseas affiliates. The information contained herein is based on sources that PSHK and its affiliates believe to be accurate and any analysis, forecasts, projections, expectations and opinions contained in this publication are based on such information and are expressions of belief only. This material is prepared for general circulation to clients and is not intended to provide tailored investment advice and does not take into account the individual financial situation and objectives of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of any investments or securities discussed or recommended in this report. This report is not (and should not be construed as) a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on such business in that jurisdiction. This research report may not be redistributed, retransmitted or disclosed, in whole or in part or and any form or manner, without the express written consent of PSHK. Please direct any enquiries to foreignstock@phillip.com.hk. Investment involves risks. For details of product risks, please view the Risk Disclosures Statement on

13 PhillipCapital's Global Presence SINGAPORE Phillip Securities Pte Ltd HONG KONG Phillip Securities (HK) Ltd INDONESIA PT Phillip Securities Indonesia THAILAND Phillip Securities (Thailand) Public Company Limited UNITED KINGDOM King & Shaxson Capital Ltd AUSTRALIA Phillip Capital Australia MALAYSIA Phillip Capital Management Sdn Bhd JAPAN PhillipCapital Japan K.K. CHINA Phillip Financial Advisory (Shanghai) Co. Ltd FRANCE King & Shaxson Capital Ltd UNITED STATES Phillip Futures Inc.