Agri-Food

Agri-Food
Strong swine-broiler business in 2H13, on industry turnaround, soft baht 
GFPT again best turnaround story in 2H13   
Tuna and shrimp exports still sickly
Prefer export-based to domestic-based: picks are GFPT and CPF   
Swine-broiler good in 2H13. Recovery began after 1Q13, to rise through rest of year.
Swine: Supply is balanced and prices up to Bt72/kg. Issue is US demand for Thailand to open its markets to the US in exchange for extension of GSP, which expired on July 31, 2013. This would be negative for CPF, a swine producer, accounting for 10% of Thai production and supplying up to 52% of the swine feed in the country.
Broiler: Local oversupply eased on supply cut by Saha Farms (~10-15% of domestic market share) by 26mn/week to 24mn; price now at Bt47/kg from a low of Bt33/kg. Support also from a sharp rise in price of broiler byproducts to Bt20-25kg from Bt8/kg. Without Saha Farms there is no worry of oversupply.
Saha Farms still not out of the woods. Newspapers report that Korean money may help Saha Farms out and take over subsidiary "Food for the World”. It will handle the production and also purchase the meat for export to Korea and to Europe. We consider this as a temporary solution, with full recovery taking at least nine months, giving CPF and GFPT more breathing room.
Benefits from soft baht. TUF and GFPT do best off a soft baht; CPF is more focused on the domestic market. Around half of TUF’s revenues are in dollars and 60% of GFPT’s. A softer baht through year’s end means better margins.
Japan gets 2020 Olympics. The Games will boost its economy and food imports. As one of Thailand’s primary markets for boiled chicken, this is good news. Thailand’s chicken industry will also benefit from a return to exporting frozen chicken to Japan.
Food industry trends. The Thailand Management Association (TMA) held a seminar on 11-12 September 2013, with a portion of the seminar dealing with the agri-food business. Presenters noted that the global challenge is feed the rise in global population to 9bn in 2050 from 7bn in 2012, by which time 70% of the world’s population will live in cities. Feeding them will require innovation. Thailand has big food brands - CPF, TUF, Betagro, Oishi, etc. - putting it at the forefront of food security in ASEAN. Thailand ranks #1 in the affordability due to local price controls on many items of food and #2 in quality and safety, following Malaysia, and #3 in availability. Thailand ranks #2 in ASEAN and #45 the world for overall food security index scores, behind Malaysia (#1 in ASEAN and #33 in the world). This implies Malaysia will be Thailand’s chief competitor in the AEC.
Recommendation. The high for exports in 2H13, baht depreciation, plus the supply cut in the broiler industry will push GFPT into the front as best cash flow and earnings producer, followed by CPF (best in swine-broiler arena). The tuna and shrimp areas continue to face a gross margin meltdown from the OEM business. We BUY GFPT with a TP of Bt12 and CPF with a TP of Bt35. We downgrade the industry from Overweight to Neutral because the light is shining only for exports, with domestic food facing a slowdown in consumption in 3Q.