SATS (SATS SP) - UOB Kay Hian 2017-06-12: Unfolding The Pieces Of The China Puzzle

SATS (SATS SP) - UOB Kay Hian 2017-06-12: Unfolding The Pieces Of The China Puzzle SATS LTD. S58.SI

SATS (SATS SP) - Unfolding The Pieces Of The China Puzzle

  • The restructuring of SATS’ China-based JV, Jilin JVCo, will see the entry of new partners – CP and Singbridge. 
  • While SATS’ effective stake will be diluted to 21% from 30%, we view the entry of CP positively as it has extensive upstream and downstream food processing capabilities. This will allow SATS to control the supply chain and manage its own supply to provide safe and high quality food in China via its JV with Wilmar
  • While still in the early stages, SATS’ strategic investments in China have the potential to grow and expand into other markets. 
  • Maintain HOLD with target price of S$5.05. Suggested entry price: S$4.75.



WHAT’S NEW


SATS announced the restructuring of a China-based JV, Jilin JVCo, on 9 June. 

  • The details are as follows: The restructuring of Jilin JVCo will bring in two strategic investors – Charoen Pokphand Group (CP) and Singbridge. Prior to the restructuring, SATS owned 30% of a pig-farming JV in China, Jilin JVCo, via its wholly-owned subsidiary SATS Food Services (SFS). 
  • Post restructuring, SATS’ stake in the JV will be diluted to an effective 21% (previously 30%), while CP will own 65% and Singbridge 14%. All three parties will contribute additional capital to the JV. SATS’ additional investment in the JV is expected to rise to S$23.3m, consisting of the S$4.5m initial net investment during the restructuring and an additional S$18.8m (60% share of SGIP’s capital commitments to Jilin JVCo).
  • We view the entry of CP and Singbridge positively, given the former’s expertise in food processing and distribution and the latter’s experience in China projects.
  • Singbridge is a Temasek-linked company and invests in and develops integrated cities with a focus on China, as well as projects in the Jilin Food Zone, a premium disease-free food zone with an integrated system to ensure integrity and safety of food supply.
  • Meanwhile, CP is a major shareholder of CP Foods which has expertise in the livestock business and an extensive distribution network with exports to over 30 countries. CP Food’s vertically integrated businesses include the manufacturing of animal feed, meat processing and manufacturing of ready-meal products, as well as food retailer and restaurant businesses.


STOCK IMPACT


China investment puzzle unfolding. 

  • We believe SATS’ additional investments in Jilin JVCo is part of an effort to strengthen its upstream livestock farming and to tap on CP’s food processing capabilities. The latter is a major shareholder of CP Foods, which in turn has extensive upstream and downstream food processing capabilities. 
  • SATS, via its stake in Jilin JVCo, will be able to provide its own food supply via its JV with Wilmar. This will enable SATS to have control over the entire supply chain and enable the JV to provide safe and high quality food in China. The JV with Wilmar has commenced operations, with a kitchen at Kunshan. While the initial investment is relatively minor, there is scope for further investments, given the size of the market. 
  • We are of the view that the provision of safe and high quality food will see high demand given persistent concerns over food quality.


EARNINGS REVISION/RISK

  • No change to our earnings estimate for FY18, but we raise our forecast for FY19 income from associates and JVs by 5%. 
  • Key risk is lower aviation food solutions revenue in FY18.


VALUATION/RECOMMENDATION


Maintain HOLD and target price of S$5.05. 

  • While in early stages, SATS’ strategic investments in China and other regional markets have the potential to grow and expand into other markets such as the Philippines where SATS has recently increased its stake in in-flight caterer, MacroAsia. 
  • Suggested entry price is S$4.75.


SHARE PRICE CATALYST

  • Stronger associate and JV profits, higher flights handled growth.




K Ajith UOB Kay Hian | Sophie Leong UOB Kay Hian | http://research.uobkayhian.com/ 2017-06-12
UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 5.050 Same 5.050



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