Charoen Pokphand Foods

+Charoen Pokphand Foods Plc (CPF)

What’s new? We visited the livestock feedmill of CP Vietnam Corp (CPV) in Binh Duong, southern Vietnam, during Aug 20-21. CPF effectively holds 81.7% of CPV. Its 1H12 revenue breakdown was feed 53%, farm 44% (pork 25%; chicken 15%; aquaculture 4%) and food 3%. CPV’s sales for FY11 and 1H12 were US$1.4bn and $739m, respectively. The 2Q12 net profit (based on 81.7% stake) was Bt250m—6% of CPF’s earnings.
Four livestock feedmills: CPF has feedmills in Dong Nai, Ha Noi, Tien Hiang and Binh Duong provinces with the fifth to open Pa Yueng by YE12. Its 3m tonnes/annum production capacity (four plants) comprises about 15% of Vietnamese feed output of 20m tonnes/annum. CPV is the biggest feedmeal player in the country. The mean run rate is 85-90%. CPV’s competitive advantages are higher raw material quality and a lower unit cost/conversion ratio than peers, due to superior production technology and processes. Pork feedmeal sales comprised 50% of its 1H12 feed revenue and chicken feed 24%.      
Softer HoH feed margin in 2H12: CPV imports half its corn and all its soybean meal (SBM). Its feed sales prices are adjusted in line with raw material price movements, subject to govt approval. The firm has stockpiled both corn and SBM sufficient for two months of production. In 2H12, management expects a softer feed margin (due to sharply higher raw material prices) and a seasonal rise in feed sales volume (10% feed sale volume growth for FY12).
Weaker HoH meat operations in 2H12: Chicken is incurring a net loss at a farmgate price of Bt25/kg (Bt40/kg cost of production), due to an oversupply. The govt allowed chicken imports a few years ago; Brazilian operators are currently dumping. The pork operation is running a very slim profit at a Bt60/kg farmgate price (Bt58/kg production cost), due to a plunge in price triggered by an outbreak of Blue Ear Disease among pigs. As the govt didn’t allow culling, it will take time for demand and supply to adjust. We expect CPV’s meat operations to weaken HoH in 2H12.  
Action: We think the market has already factored in anticipation of weak 2H12 CPF earnings, squeezed in part by the CPV operation. Our BUY rating stands.