Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF)

Cut 2012F core profit by 37%, 2013F by 22% largely on poorer gross margins.
Gross margin at both Thailand and overseas weakened QoQ: in Vietnam, India,
Malaysia and the Philippines operations – and Turkey continued in the red. While
domestically, meat prices have rebounded strongly over the last ten days, further
strengthening in prices is necessary in order to cover the significantly higher cost of its
primary raw material, soybean meal. Though recovery will come in 2013, true recovery
will not be seen until second half. Our key assumptions (higher meat price and lower
raw material price) will be confirmed by a clearer trend in Jan-Feb. We will maintain
our Neutral rating until we see confirmation that the farm business has turned
profitable, both at home and abroad.

Highlights from analyst meeting:
Overseas operations much weaker than expected: Operating margin for
overseas operations (excluding China’s CPP) was at 2% vs. 4% in 2Q12 – opposite to
the improvement QoQ we had expected. Operating margin for CPP was 6% vs. 7% in
the previous quarter, with operations in Vietnam hit by oversupply in the swine
industry.
Locally broiler and swine prices are back up, but spread is at Bt2-4/kg vs. at
least Bt5-8/kg needed for healthy gross margin for farm business. Over the
last ten days broiler price has risen markedly to Bt41/kg from Bt35/kg and swine
price to Bt60/kg from Bt50/kg. However, with soybean meal up 52% YTD and higher
priced new stock to kick in from January 2013, the rise in meat prices this time
around will have to be sustainable (last time they were not) and rise even further
to cover the higher cost.
4Q12 core profit still down YoY and QoQ. We estimate profit of Bt1.1bn, -31%
QoQ and 25% YoY. The drop QoQ is due to seasonality and expectation of continued
weak overseas operations. The fall YoY is due to lower gross margin and higher
interest.
Cut profit by 37% for 2012F and 22% for 2013F. We now expect core profit to
plunge 49% YoY to Bt8.1bn this year before more than doubling to Bt17.4bn in
2013F based on our assumption of a profitable farm business (healthy gross
margin of 10%) at both overseas and local operations next year after losses this
year.
Limited upside to yearend 2013 TP of Bt35/sh. Our rollover of valuation to
end-2013 from mid-2013 results in a rise in our TP to Bt35/sh from Bt34/sh, despite
the cut in forecasts. Our TP is based on 14x (average regional peers) PER on 2013F
core profit.