Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF)

Investment thesis

CPF’s recent share price rebound was triggered by bounces in domestic meat prices in early Nov—short-term positive for the stock. But we are skeptical that the chicken or pork price rises will be sustained for very long, given prevailing domestic meat oversupplies. Regardless, anticipation of weaker 2H12 numbers has been priced in. Our BUY rating stands. We have rolled over our investment horizon from YE12 to YE13 and arrived at a new target price at Bt44.

Weaker 3Q12 core profit expected

We estimate a Bt2.75bn net profit for 3Q12, down by 46% YoY and 32% QoQ. Stripping extra gain items, core profit would be Bt2.23bn, down by 54% YoY and 25% QoQ. The new estimate is lower than our previous Bt3bn core profit number, due to weaker domestic meat and overseas assumptions. The YoY deterioration is due to poorer domestic meat and overseas unit numbers (except for India). CPF will post net losses for both its chicken and pork operations in 3Q12, based on mean prices of Bt36/kg for chicken (down by 13% YoY and 5% QoQ) and Bt57/kg for pork (down by 24% YoY and 7% QoQ). India will be the only overseas unit to report a stronger YoY profit. The Turkish unit will post another loss, due to a meat oversupply. The Vietnamese profit will tumble QoQ, we believe, led by a jump in raw material prices (only two months of raw material stockpiles) and drops in meat prices (oversupply). Malaysia will report a YoY and QoQ profit decline, due to an ongoing outbreak of Early Mortality Syndrome (EMS) disease in shrimp. CPP’s feed operation in China will post softer QoQ numbers because of higher raw material prices.

Weaker 4Q12 core profit likely

We forecast a Bt1-1.2bn core profit for 4Q12, down 9-24% YoY and 47-56% QoQ. The expected YoY weakness is attributable to sustained high raw material prices (even though meat prices rose in Nov). The QoQ tumble is due to low season and higher SG&A. We will revise down our FY12 core and net profit numbers after 3Q12 results are released.

A bounce in domestic meat prices in Nov to be sustained?
The domestic chicken price had bounced to Bt39/kg as of Nov 6, up by 8% in a week and 22% from the recent low in mid Oct. The pork price had recovered to Bt60.5/kg, up 4% in a week and 14% from the recent low in Oct. We believe that the price rebounds were triggered by the end of the vegetarian festival in late Oct and a rise in demand for meat products with the start of the new school term in Nov. We are skeptical that the meat price rebounds are sustainable, given prevailing domestic oversupplies.