Charoen Pokphand Foods

Charoen Pokphand Foods Plc (CPF)

2013: a nightmare. 2013 sales were Bt389bn, +9% YoY, but net profit plunged 62% YoY
to Bt7.0bn, despite the large amount of extras from divestment and dividends. Gross
margin slimmed to 10.0% from 2012’s 11.6%. Operating margin sank to 1.9% from
2012’s 4.0% and net margin to 1.8% from 2012’s 5.3% because of the steep losses from
Thai shrimp business, and poor overseas operations (except for China).
Broad-spread contribution. The majority of 2013 sales (42%) came from operations
in Thailand, with 29% from China under CPP (Hong Kong), 14% from Vietnam, also
under CPP, and 15% from other international operations. The gross margin on Thai
operations was the worst because of the shrimp business. CPP (Hong Kong) was the
year’s star compared to its other businesses, despite the drag presented by Vietnam
operations – though these began to show recovery in 2H13. CPP (Hong Kong) 2013 net
profit was US$186mn, down 8.8% YoY but greatly improved from the 23% YoY fall in
9M13 and 44% YoY fall in 6M13, thanks largely to recovery of sales volume for the swine
business. We are very disappointed by the international operations, most of which
contributed losses.
Shrimp breakeven in mid-2014 after EMS is controlled. CPF says it has passed
bottom, with this year’s production expected to grow 50% to 50,000 tons after EMS
(Early Mortality Syndrome) slashed 2013 Thai production by 50% YoY from 550,000 tons
per annum to only 250,000 tons; CPF provides 10-15% of the country’s production.
Livestock biz may be hit by feed raw material price hike. 2013 was a good year
for the broiler and swine businesses – with higher prices for the meat but lower prices
for feed - and this lasted until February 2014. However, prices for feed ingredients are
likely to rise, with droughts in major growing areas that will push up corn prices.
Hooray for broiler exports to Japan. Japan has opened its doors to imports of fresh
broilers for the first time since the avian influenza in 2004, with the first shipments in
1Q14. Japan had been importing from Brazil, but Thailand is closer and thus beats in
terms of inventory days, slashing inventory days to only 10 from 90. Thailand plans to
export 100,000 tons of fresh broilers to Japan in 2014 and double that next year. CPF
expects a 25% share of this market.
BUY with TP of BT35/share. Drivers this and next year include the recovery of
Thailand’s shrimp industry, strong growth in the feed business in China and continuing
recovery of its businesses overseas, notably Vietnam, India and Russia. We base our
target price on 2014 PBV of 2.0x (7-year average PBV +1SD), and keep it unchanged at
Bt35. DPS in 2014, after recovery, is estimated at Bt1.1 or yield of 4%.