Regional Plantation - UOB Kay Hian 2017-06-29: Soybean Demand Hinges On China’s Consumption

Plantation – Regional - UOB Kay Hian 2017-06-29: Soybean Demand Hinges On China’s Consumption Plantation Sector Soybeans BUMITAMA AGRI LTD. P8Z.SI FIRST RESOURCES LIMITED EB5.SI GOLDEN AGRI-RESOURCES LTD E5H.SI WILMAR INTERNATIONAL LIMITED F34.SI

Plantation – Regional - Soybean Demand Hinges On China’s Consumption

  • Soybean planting is expected to continue increasing to meet growing demand from China as meat consumption soars. 
  • The ample soybean supply is negative to palm oil companies as it puts a lid on soybean and soybean oil prices, in turn capping palm oil prices. But this could be positive for Wilmar, one of the top soybean crushers in China in terms of supplying soymeal to the feed industry and expanding capacities following the lifting of control on foreign entities. 
  • Maintain MARKET WEIGHT.



WHAT’S NEW

  • We recently came across an interesting article by the Financial Times which discusses the topic “why soybeans are the crop of the century”. Key points highlighted in the article include: 
    1. As an emerging Asia eats more chicken and pork, the soybeans that put muscle on birds and swine have spread across global farms at a faster rate than any other field crop.
    2. In the next decade, soybean will drive total cropland to above 1b ha worldwide, expanding more than barley, corn, cotton, rice, sorghum or wheat, the US Department of Agriculture (USDA) has forecasted.
    3. World demand for staples such as wheat has been rising in line with population growth at about 1% p.a. Soybean consumption has been accelerating at 5% p.a. – even more than corn.
    4. The triumph of the soybean hinges on incomes in China. A dietary transition in China has been the main driver growth. The average person in China ate about 20kg of meat in 1989. After almost three decades of income gains, annual per-capita meat consumption has surpassed 50kg. The USDA projects China will import 121m tonnes of soybeans in a decade, up by more than 30% from today.
    5. Cargill, along with China’s New Hope Group and another local partner, opened a US$100m soybean crushing plant in a port city near Beijing in April. Across the Pacific, United Grain recently spent US$80m to move more soybeans and corn through its wheat export terminal on the Columbia River in Washington.


ESSENTIALS


Ample soybean supply is negative to palm oil prices. 

  • Soybean has recorded five consecutive years of good production. With farmers in the US and Brazil in a race to meet soybean demand from China as meat consumption soars, we understand that farmers are planting more soybean than other field crop. 
  • Coupled with the improving yields, soybean production and stock levels are expected to stay high. Thus, this is a long-term negative to the plantation sector as the ample soybean supplies are putting a lid on soybean and soybean oil prices, in turn capping the performance of palm oil prices.

Increasing soybean demand from China. 

  • More than 80% of China’s soybean imports are crushed for soymeal, which is the animal feed for chicken and hogs. The change in lifestyle and increase in disposal income has been the main driver for meat consumption growth. 
  • With higher soybean crushing volume, supply of soybean oil (by-product from crushing soybean) will increase as well. Thus, this could lead to higher soybean oil supply and keep soybean oil very competitive against palm oil prices in China. 
  • China’s demand for palm oil has been stagnant for the past 10 years at the level of 5.0m to 6.6m tonnes.

Expanding soybean crushing capacity to cater to increasing soymeal demand.

  • According to the article, Cargill together with its local partners opened a US$100m soybean crushing plant in a port city near Beijing in Apr 17. 
  • Meanwhile, Wilmar International (WIL) is also planning to expand soybean crushing capacity in China to cater to increasing demand. We are positive on this decision as it is expected to positively contribute to WIL’s earnings in future.

But negative soybean crushing margin is expected in 2Q17 due to massive soybean imports by China in the last few months. 

  • Average soybean crushing margin for the industry was negative at Rmb199/tonne for the period of 1 Apr 17-9 Jun 17. 2Q17 crushing margin could be lower qoq and yoy, but is expected to remain marginally positive for WIL, thanks to its timely purchase of raw materials.


ACTION 


Reiterate MARKET WEIGHT. 

  • We reiterate MARKET WEIGHT for the Singapore plantations sector and UNDERWEIGHT for the Malaysia plantations sector. The ample soybean supply in the market is likely to pressure soybean prices, in turn capping palm oil prices. 
  • Moreover, the recovery of FFB production and the stagnant demand for palm oil will lead to significant CPO price weakness going into 2018. 
  • We have SELL calls on Genting Plantations, IJM Plantations, IOI Corporation, Sime Darby, Sarawak Oil Palms and TH Plantations. 

However, we are positive on Wilmar International (WIL), reiterate BUY and SOTP-based target price of S$4.40

  • Rising meat consumption which will lead to higher soybean crushing volume is positive to WIL. Moreover, WIL is targeting to accelerate its expansion plan for the grains (for flour and rice) and consumer pack operations in China. The expansion plan comes in time to ride on rising consumer demand for quality food. China consumers are now more conscious about the quality of food products due to the increase in disposable income and change in lifestyle. WIL also plans to list its China operations and the potential listing could enhance WIL’s brand reputation in the Chinese market and benefit its future earnings.
  • Meanwhile, Golden Agri (GGR) also has a soybean crushing plant in China. However, its contribution is small compared to that of the palm oil division. The oilseeds and grains segment contributed only 1.8% of group EBITDA in 2016 and this operation is highly volatile for GGR due to its small capacity (soybean crushing business is a volume game).
  • The overall operating environment in China is challenging especially for small players like GGR. All in all, we do not expect the increasing soymeal demand will have a positive impact on GGR and we believe GGR could loop in a larger JV partner or dispose of this business.


ASSUMPTION CHANGES 

  • We maintain CPO price assumptions of RM2,600/tonne for 2017 and RM2,400/tonne for 2018.


SECTOR CATALYSTS 

  • Higher biodiesel consumption.
  • Potential development of El Nino in 2H17.
  • Worse-than-expected labour shortage.


RISKS 

  • Backtracking of biodiesel mandates in Indonesia and Malaysia.







Regional Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2017-06-29
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.030 Same 1.030
HOLD Maintain HOLD 1.950 Same 1.950
HOLD Maintain HOLD 0.340 Same 0.340
BUY Maintain BUY 4.400 Same 4.400



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