Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF)

Recap of 1Q13A: First quarter was the second consecutive quarter of operating losses
with a loss of Bt738mn. Despite the help given from CPALL (31% holding) of Bt1.4bn
plus Bt1.8bn in extraordinary items, the company posted net profit of only Bt1bn, a
plunge of 92%YoY but at least far better than 4Q12. In 2012, Thailand’s livestock
business was already troubled, but 2012 then became a disastrous year when a new
shrimp disease, EMS hit around midyear. Operations in Thailand, Vietnam and in other
countries faced surging raw material costs plus the shrimp disease. CPF’s operations in
China were better than some, with the feed business comparatively better. CP now
holds 74% in C.P. Pokhand Co., Ltd. (CPP), a Hong Kong listed company, so is now
consolidating its performance. CPF’s gross margin in 1Q13 was an anemic 9%, a far cry
from 1Q12’s 13.6%, but CCP’s gross margin was a healthier 12.3% vs. 15.6% in 1Q12.
Beating EMS at beginning 2H13: The shrimp disease “EMS” generated a loss of
~Bt2bn in 1Q13. This dried up shrimp ponds, affecting supply and hence the whole
feed-farm-food chain in Thailand. EMS led CPF to run at below breakeven in its feed
and farm operations. The EMS crisis started in mid-2012 with a death rate of 30-40%; a
cure is on the way and death rate has been reduced to 8.5%, still above the 5% used as
a rule of thumb. We expect shrimp operations to return to normal in 3Q13, leading to
a turnaround for CPF’s business chain in Thailand, Vietnam (under CCP), and Malaysia
for both shrimp farm and feed businesses.
Livestock farm business recovered from unprofitable 4Q12. Swine price climbed
back up to Bt63/kg (from Bt53/kg in 4Q12) and broiler price is at Bt39/kg (stable from
4Q12) - both above cost breakeven. Raw material price is also likely to drop from the
mid-2012 peak. This leads us to expect a strong turnaround from 2H13.
Growth drivers from Thailand, China and Vietnam: Thailand operations
contribute less than half of revenues and net profit at 45%, with 27% from China, 13%
from Vietnam and 15% from other countries. Proportionately, feed supplies 55%, farm
32% and food 13%. CPF’s revenue in 2012 grew 83% from 2011, and we expect 2014
revenue to be twice 2011’s.
Upgrade to Buy from Neutral with unchanged TP of Bt35/sh. We base our target
price on PER of 14x in 2014 to factor in its larger business operations and the onset of a
turnaround cycle. Livestock prices are climbing back up while raw material prices (corn,
soybean meal) are dropping from last year’s peak, underwriting the turnaround.