DBS Vickers 2015-08-18: Japfa Ltd - Moving downstream in China Dairy.


Moving downstream in China Dairy 

  • Entered into JV agreements to construct, own and operate 300k MT p.a. premium milk processing plant in Shandong, China. 
  • Subsidiary AustAsia will own 10% share of US$200m plant – funded through IPO proceeds and/or bank borrowings. 
  • Positive impact over long-term; but not visible for next few years. 
  • BUY rating and TP of S$0.46 are reiterated

A step into downstream in China Dairy business. 

  • Japfa Limited (Japfa) overnight announced that its 61.87%-owned subsidiary, AustAsia Investment Holdings Pte Ltd (AustAsia) had yesterday entered into conditional subscription and shareholder agreements with Food Union (Asia) Ltd (Food Union) and FoodUnionAustAsia Holdings Pte Ltd (JVCo) to build a premium milk processing plant in Shandong province, China. 
  • The proposed plant, scheduled for completion in 1Q17, will have an annual capacity of 300k MT p.a. and will be 5km away from AustAsia’s dairy farms in Dongying. The agreements are subject to transfer of land rights grant from AustAsia to the JVCo. 

Partnering with Food Union. 

  • According to its website, Food Union is the largest dairy company in Latvia and is a product of a 2011 merger between two biggest dairy companies in the Baltic states. AustAsia will invest US$20m in stages for 10% stake in the processing plant, which will manufacture highvalue added dairy products for both AustAsia (i.e. Greenfields), Food Union, and leading third-party international food companies. Food Union with hold the remaining 90%. 
  • Based on Japfa’s cash flow projections, The group should have no problem in funding this outlay through internal resources. 

Positive long-term impact. 

  • While we believe the plant will help to absorb a significant share of Japfa’s forecast 502k MT raw milk output in China, we believe it also serves as a launch pad for the group’s entry of branded products in China. Yet, the contribution should remain insignificant for years to come; given required investments in brand building. Hence, we are leaving our forecasts unchanged. 

BUY rating is reiterated for 46% upside. 

  • Both DOC and broiler prices in Indonesia have remained stable after Lebaran – unlike the same periods last year. DOC prices have been hovering between Rp4,000 and Rp5,000/chick (against our forecast cost of Rp4,388 and 2Q15 ASP of Rp4,600); while broiler prices have ranged between Rp20,000 and Rp25,000/kg live since Lebaran (vs. our cost forecast of Rp15,584 and 2Q15 ASP of Rp15,700). 
  • We suspect poultry breeders have already started culling of Parent Stock on their own to address the DOC oversupply – although we understand the government has not yet taken steps to instruct nationwide culling.

Ben SANTOSO | http://www.dbsvickers.com/ DBS Securities 2015-08-18
BUY Maintain BUY 0.46 Same 0.46