Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF) 
Investment thesis
We visited CP Meiji Co Ltd’s plant in Saraburi Province yesterday. CPF’s acquisition of CP Meiji represents a new step in the diversification of its downstream food business. We have a TRADING BUY rating on the stock, premised on an upturn in livestock meat sales.
Solid demand growth for pasteurized milk and yoghurt
The firm estimates industrywide pasteurized milk sales at Bt5.9bn in 2013, up 7% YoY, with a 12% five-year CAGR, 2009-13. CP Meiji currently has a 53% share of the Thai pasteurized milk market, up from 47% in 2010. The market value of “cup yoghurt” is estimated at Bt4.4bn this year, up 11%, with a 10% five-year CAGR, 2009-13. CP Meiji’s market share is 8%, up from 6% in 2010.
We expect further market growth of both product categories over the next five years. CP Meiji’s 2012 sales comprised 80% pasteurized milk, 13% drinking yoghurt and 7% cup yoghurt. The firm says that 33% of its sales were through convenience stores, 21% through other modern trade, 19% through sales agents, 11% through food services and 16% were exports.
CP Meiji entered Hong Kong in 4Q12 and plans to enter Malaysia (4Q13), Myanmar (1Q14) and Indonesia (2Q14). The firm guides that the proportion of exports in the sales mix will rise to 20% in 2013 and 30% by YE16. Its overseas margin is double its domestic margin. CP Meiji has had a longstanding presence in Singapore, where its market share of pasteurized milk rose from 29% in 2008 to 39% as of now. 
Strong 2013 sales and profit growth outlook
The firm posted Bt5.2bn in sales and a Bt206m net profit for 2012 (a NM of 4%). We estimate a 20% YoY rise in sales and a 10% YoY rise in net profit this year, led by the launch of Meiji Bulgaria cup yoghurt, expansion in Hong Kong and Malaysia and more sales through 7-Eleven stores. The 2014 growth profile is driven by a new production line, which is expected to start up in August 2014, adding 160k tonnes to its current milk and yoghurt capacity of 140k tonnes/year, and entry to two new overseas markets. Meiji Bulgaria yoghurt production is currently 200k cups/day against demand of about 400k cups/day.
A small contribution but a good diversification strategy for CPF
Assuming Bt9bn in sales and a 5% NM for 2015, we estimate that CP Meiji’s net profit would add 2.3% to CPF’s consolidated net profit (based on CPF’s 60% indirect stake in CP Meiji through its wholly-owned subsidiary, CP Merchandising Co Ltd). The financial contribution to CPF is modest, but the acquisition represents a diversification of the conglomerate’s downstream food business.