Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CFP)
2Q13F: 2Q13 revenues are expected to reach Bt95bn, +8.5% QoQ,+2.8% YoY with a gross
margin of ~11% and net margin of 1.5%. 2Q13 core profit is estimated at Bt1.4bn with
~Bt1.4bn from CPALL. This means that without CPALL, CPF would at best break even in
2Q13. We forecast 2013 net profit of Bt2.4bn. Broiler and swine supply reduction has
helped push up product prices materially: Average selling price (ASP) for chicken in
2Q13 was Bt46/kg, +14% QoQ, with swine ASP at Bt67/kg, +6.3% QoQ. Feed raw material
prices were stable at Bt18.1/kg for soybean meal and Bt10.2/kg for corn. Livestock
production in Thailand (45% of sales) and Vietnam (13% of sales) recovered, while
shrimp farming is gradually getting back on its feet, with a rapid recovery projected for
3Q13. We expect CPP Hong Kong (74% held by CPF) to report a net profit of US$30-
50mn in 2Q13, stable from 1Q13.
Two new acquisitions: CPF is making two new acquisitions in 3Q13. The first is a 59%
stake in CP-Meiji Company Limited (CP-Meiji) from CP Group valued at Bt1.2bn. CP-Meiji
manufactures and distributes milk products locally under the “Meiji” and “Meiji-Paigen”
brands. 2012 revenue was Bt5.2bn +21% YoY, while net profit was Bt206mn +3% YoY. It
has Bt4.2bn in total assets, equal to 2.6% of net tangible assets of CPF and its
subsidiaries. Thai dairy market is expected to grow approximately 5-8% p.a. It will also
benefit CPF in terms of an increase in cattle feed sales. The second is in Russia Baltic
Pork Invest ASA (“RBPI”) through subsidiary CPF Investment Limited (CPFI), for a value
of Bt2.963bn through ordinary shares and a convertible loan. RBPI plans to triple its
herd of sows and increase fattening pigs to over 500,000 pigs per year by 2016,
boosting revenue significantly. CPF believes that collaboration between CPF and RBPI
can further improve pig production efficiency and enhance growth potential in the
swine business in Russia, where there is a huge undersupply. 2012 revenue was Bt1.4bn
+84% YoY, with net profit of Bt343mn +133% YoY. Total assets were Bt4.1bn, equal to
3.5% of net profit from business operations after tax for CPF and its subsidiaries.
Buy with target price of Bt35/share. After we upgraded CPF to Buy, the stock price
has increased by 15%, which is up 35% from bottom, encouraged by the broiler supply
cut brought by the absence of Saha Farms in the market – it is the second largest local
broiler producer following CPF, with a market share of ~20%. We expect the demandsupply
equilibrium to last for ~9 months (period to grow chicks into broilers). We base
our target price on a 2014 PER of 14x 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. We also expect to see more improvement in gross margin in 2H13.
Though the new businesses will contribute only little this year, for the longer horizon
both, especially CP-Meiji, which has a very strong brand recognition, are expected to
contribute handsomely.