Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF)
An influx of supply has pulled swine prices down 11% and broiler prices 9% over the past two weeks. This is forcing producers to sell at a loss of Bt5-7/kg (vs. breakeven in 3Q12). Also hitting profits is the rise in raw material prices - although down from last month’s peak, the price of soybean meal is still up 55% YTD to Bt20.5/kg. The unfavorable industry outlook leads us to expect CPF’s farm business to remain unprofitable for at least another quarter. Our preliminary preview for 3Q12F points to
another weak quarter - meat prices both overseas and locally declined further QoQ -with downside risk to our full-year profit forecast. We maintain Neutral.

Key price Indicators:
Farm-gate swine price declined 11% over last two weeks to Bt50/kg. Based on our estimate this implies a loss of Bt7/kg vs. close to breakeven in 3Q12; farm-gate broiler price fell 9% over the last two weeks to Bt32/kg. Based on our estimate this implies a loss of Bt5/kg vs. the close to breakeven price in 3Q12. Key to softening the severity of the oversupply in the broiler market will be Japan’s lifting of its import ban on frozen chicken – a decision expected in Nov-Dec. Raw material prices: The price of soybean meal has come down 14% from peak of Bt24/kg last month to Bt20.5/kg, but this is still +55% YTD. Corn price has also risen but to much less of an extent: up only 5% YTD, down 13% from its peak of Bt11.8/kg in August to Bt10.3/kg - as expected, since it is the harvest season for corn.

Preliminary preview for 3Q12:
Swine price for 3Q12 averaged Bt57/kg: this is down 24% YoY and 7% QoQ and comes from oversupply. Based on our estimate, CPF sold at breakeven in 3Q12 vs. profit of Bt5.3/kg in 2Q12 and Bt15.7/kg in 3Q11.
Broiler price for 3Q12 averaged Bt36/kg, down 9% YoY and 4% QoQ, also from oversupply. Our workout indicates CPF sold at breakeven in 3Q12 vs. profit of Bt1.7/kg in 2Q12 and Bt4.3/kg in 3Q11.Our preliminary preview for 3Q12 (CPF has not arranged a preview meeting yet) points to core profit in the range of Bt3.6-4.2bn (depending on degree of weakness in overseas operations). This compares to core profit of Bt3.0bn in 2Q12. No strong earnings recovery QoQ though 3Q is usually the strongest quarter of the year. This arises from: 1) lower local meat prices QoQ, 2) weaker Vietnam operations QoQ due to falls in prices for both swine and broilers, also from oversupply, which began in 2Q12, and 3) mediocre improvement in other overseas operations.Core profit estimate for 3Q12F of Bt3.6-4.2bn implies profit for 4Q12F of Bt3.8-3.3bn which looks on the high side given the recent further decline in local meat prices. Our full-year core profit forecast of Bt12.8bn is in line with Bloomberg consensus for CPF.