Charoen Pokphand Foods

3Q14 preview: Livestock, foreign still star BUY

Charoen Pokphand Foods Plc (CPF)

65%QoQ and 307%YoY. Sales are estimated at Bt115bn, +9.6%YoY and +9.0%QoQ. Gross

margin is believed to have improved to 14.5% from 14.0% in 2Q14 and 10.8% in 3Q13,

with a better net margin of 3.1% from 2.1% in 2Q14 and 0.8% in 3Q13. Providing this

improvement is the livestock business in Thailand and overseas operations. Even so,

this is lower than we had anticipated because of higher prices for grain for feed: corn

and soybean meal prices surged from April to June. Domestic swine price stayed high

at Bt77/kg in 3Q14, -3%QoQ and domestic broiler price continued good at Bt44/kg,

+6%QoQ, despite the ten-day vegetarian festival. Broiler export volume continued to

grow, bulked by growing exports to Japan from 1Q14. Shrimp remains troubled, with

recovery slower than expected; we now expect it to be in the black after 2015, rather

than the 4Q14 earlier hoped. Overseas businesses did better, especially Vietnam, Turkey

and Russia. We estimate equity share from CPALL, CP Cambodia and CP-Meiji at

Bt1.5bn, mostly from far better profit at CPALL.

Swine and broilers sweet for the rest of 2014. Swine is doing well, both at home

and abroad, especially in Vietnam and Russia. We expect to see a strong recovery in its

Vietnam business, under CPP (Hong Kong) in which CPF holds 50% (reduced from 71%

at end-September). In Russia, the takeover of Russia Baltic Pork Invest ASA (2RBPI3)

help dilute the 1H14 losses from CPF’s swine business in Russia and we expect this area

to show a net profit of Bt200mn in 2014 after last year’s loss of Bt600mn. Turkey is also

expected to do better after reaching breakeven in 1H14 after Bt1.1bn losses in 2013;

we expect losses to shrink to Bt600mn in 2014.

Still expect some recovery in shrimp in late 2H14. Shrimp is a disappointment,

with the harvest now expected in October. We estimate a loss of Bt300mn-400mn

from its shrimp business in 3Q14, better than the loss of almost Bt2bn in 1H14, with a

gross margin of -6.9% and operating margin of -16.2%.

BUY, TP kept at Bt42. Recovery is stronger in 3Q14, with better domestic livestock

and overseas operations, mostly significantly from Vietnam. In 2014, business in China

is expected to remain strong and contribute the bulk of overseas operations. China

operations will bring even more revenue from its expansion into ready-made meals in

Qinhuangdao. In Vietnam, margin has improved and in Russia and Turkey losses will be

lower than earlier feared. All told, overseas business is expected to contribute ~Bt5.3bn

in 2014: Bt5.6bn from CPP (Hong Kong). It will book an estimated Bt4.1bn from CPALL

in 2014. In 4Q14, we expect to see interest lower expense after the loan repayment of

Bt27bn from cash gained from the sale of 20% of CPP (HK). We BUY with a target price

of Bt42 (based on 2x P/BV.).