Charoen Pokphand Foods

Investment thesis

Following the preview analyst meeting, we remain fully confident that CPF’s 2H14 profit will jump HoH and YoY, led by fatter domestic livestock margin, broadly improved overseas bottom-lines and smaller losses at the Thai shrimp unit. The stock remains our top pick in Food space, premised on FY15 core earnings growth, driven by Thai shrimp sales, a sharply lower SBM price (feedmeal costs) and further improvements at overseas units. There may be scope for upside in FY15 from the acquisition of foreign downstream food firms. 

Insights into 3Q14—a YoY core profit jump  

We estimate a Bt4.0bn net profit for 3Q14, up by 51% YoY and 13% QoQ. Stripping out extra items, we assume a Bt3.52bn core profit, up by 106% YoY and 22% QoQ. The expected YoY core profit growth is due to a smaller Thai shrimp unit loss, fatter domestic livestock margin and improved bottom-lines for offshore units (except in India, the Philippines and China). The modeled QoQ core profit rise was led by high season, better bottom-lines at overseas units (except Turkey, India and China) and smaller loss at the Thai shrimp unit. Vietnam and Russia will post the strongest results among its overseas units.

Shallower loss for Thai shrimp unit in 3Q14 

We assume that the Thai shrimp unit will post a Bt700m operating loss for 3Q14, shallower by 55% YoY and 37% QoQ, led by a gradual rise in industry-wide shrimp output and greater export volume in July-Aug. We assume a Thai livestock operating margin of 9% in 3Q14, close to the 9.4% posted for 2Q14 and fatter than 3Q13’s 6.5%. The YoY pork price surge would have offset the effect of a modest YoY chicken price decline and higher corn and SBM prices. The mean price changes for products and raw materials in 3Q14 were as follow—chicken (down 2% YoY but up 7% QoQ), pork (up 11% YoY but down 3% QoQ), corn (up by 4% YoY and 1% QoQ) and SBM (up 17% YoY but down 5% QoQ). 

Vietnam and Russia—the best overseas performers in 3Q14

The Turkish unit will post a Bt120m net loss for 3Q14, shallower by 54% YoY (but deeper by 100% QoQ, due to broad sales decline). The Vietnam profit will report a bounce of 122% YoY and 25% QoQ, thanks to a higher pork price and a fast shrimp recovery. The Russian unit will post a Bt350m net profit, up 75% QoQ and a reversal from a Bt130m loss in 3Q13, led by a pork price surge that was probably exacerbated by the Russia-Ukraine crisis. The Indian net loss will balloon by 100% YoY and 140% QoQ, due to a chicken price slump.

The Malaysian loss will be posted shallower by 77% YoY and 40% QoQ, supported by a gradual shrimp recovery. Reported feed business numbers for China will be weaker for 3Q14.