Japfa Ltd - Maybank Kim Eng 2019-05-27: Chicken Bounce

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Japfa Ltd - Chicken Bounce

Poultry rebound and NDR takeaways; BUY

  • A strong rebound in Indonesia broiler prices in April should allay market concern of weak ASPs in the prior two months.
  • Separately, management indicated Vietnam possibly holds the most growth promise in the near term and, the African Swine Flu (ASF) situation, while negative, will accelerate industrialised farming share of the market.
  • We trim JAPFA LTD. (SGX:UD2)'s FY19E- 21E forecasts by 9-12% and SOTP target by 11% to SGD0.93 from margin assumption revisions given the raw material cost escalation seen in 1Q19.

Indo poultry prices rebounded c20% m-o-m in April

  • In our previous note, Japfa Ltd - Maybank Kim Eng 2019-04-02: Chicken Run - we highlighted that the c15% fall in Indonesia broiler prices during Feb/March was most likely to do with seasonal demand weakness between CNY and Lebaran periods, as suggested by similar price movements of prior years.
  • Broiler prices in Indonesia have since indeed rebounded c20% m-o-m in April to IDR19.1K levels and the YTD average of IDR17.4K is tracking slightly ahead of our full-year average expectation of c.IDR17K.

Growth outlook, African Swine Flu the key NDR talking points

  • In a recently concluded non-deal roadshow, the growth outlook by country and protein verticals was a frequently discussed topic. Weighing Japfa’s position in the various markets and considering balance sheet limitations, management thinks Vietnam swine and poultry may hold the most growth promise in the near term while dairy in China could provide another leg up on a 3-5 year view with a new farm, should raw milk prices recover.
  • African Swine Flu in Vietnam was also frequently discussed with management providing scenario analysis should their farms get affected, including a worst case that could impact operating profit by cUSD30m. On the flipside African Swine Flu is likely to increase the share of industrialised farmers, currently estimated at c35%, in the Vietnam swine market.

Key NDR talking points

  • The two main areas of discussions with investors revolved around the near-term growth potential of Japfa’s operations in its various markets and an update of the African Swine Flu situation in Vietnam.

1. Markets and proteins with best near-term potential


  • Animal protein consumption has grown in line with per capita GDP growth and rising disposable incomes over the past two and a half decades. Pork currently accounts for the largest share i.e. c55% of animal protein consumption while poultry has the second largest share at c24%. Yet despite the historical growth witnessed, per capita consumption still has a lot of headroom to rise – for example, pork consumption at around c24kg/per capita is still at almost half the 43kg/per capita levels estimated for China.
  • Vietnam’s animal protein consumption grew at 2.8% CAGR in the past five years and OECD forecasts c2.3% CAGR for the 2017-2022 period.
  • Apart from market growth, perhaps the bigger opportunity for Japfa lies in the market share gains of the industrial farming segment from hybrid and backyard farmers.
  • The growing importance placed by governments and consumers on food safety, traceability and sustainable farming practice has been a key driver of this industry trend. Rough estimates suggest that the industrial farming segment has seen some 20% market share gains over the past five years. The market share gains by industrialised farmers accelerated in 2017/2018 due to the sudden drop in demand from China banning pork imports from Vietnam, which put a lot of hybrid and backyard farms out of business given their lack of scale and relatively uncompetitive unit production costs.
  • While African Swine Flu in Vietnam poses a threat for the whole industry, it will likely further accelerate market share gains in favour of the industrialised farmers who invest far more in genetics, hygiene, processes and biosecurity.
  • We estimate Japfa to be amongst the three largest industrialised farmers in the country. Its swine operations have one Great Grandparent, 6 Grandparent farms, 22 Parent farms and over 300 company and contract fattening farms diversified geographically across the country. Its poultry operations one Grandparent, 12 Parent farms and over 300 company and contract commercial farms. Meanwhile in the feed business, the company has five feedmills for poultry and swine feed.


  • The dairy industry in China has been under pressure from imports (mainly Europe) but the market is showing signs of stabilising. Japfa farms have amongst the highest milk yields in the country, which has helped preserve profitability despite the market pressures.
  • Industrialised dairy producers with scale of over 1,000+ milking herd per farm usually have better milk quality from genetics and standardised processes as a result of which raw milk supply market share has been shifting towards them. Management cited third-party studies on the industry that indicate industrialised dairy farms gained around 8ppt market share between 2014 and 2016 to 28.2%. As close to c48% of the cattle population in China are with small-scale farmers with herd sizes of 1-100, management believes there is headroom for industrialised dairy farms to gain share from market consolidation.
  • Japfa’s dairy farms in China are currently running close to full capacity (43.8K heads of cattle across seven farms) and hence in the near term, growth will largely be driven by further productivity gains in milk yields (and a possible improvement in raw milk prices).
  • Management may look to expansion for an eighth farm in 2020 or thereafter if raw milk prices improve, which should potentially provide a growth boost 2-3 years down the road.


  • Indonesia remains its largest key pillar of profitability. Japfa is the largest indigenous and second largest integrated poultry player in the market.
  • However, given its scale (Japfa, along with CF Foods Indonesia have almost 50% poultry feed production capacity in the market), unlike Vietnam, significant market share gains in Indonesia will be tough unless it decides to disrupt the market.
  • Hence the growth profile for Indonesia will be likely driven largely by organic per capita consumption growth of around mid-single digit levels. That said, we do note that over the long term, the overall market size potential is significant – it is the most populous country in ASEAN with c260m people and a per capita animal protein consumption of just around 14kg, of which poultry accounts for the lion’s share at c10kg – in comparison neighbouring Malaysia has a per capita consumption of 47.5kg in poultry alone.
  • In dairy, Japfa’s ‘Greenfields’ branded downstream dairy products (UHT milk and yoghurt etc) have strong market recognition, which management plans to leverage with more new product launches. However, the dairy and consumer food segments in Indonesia are relatively small (combined sub-20 % of Indonesia operations) and unlikely to move the needle significantly at group level for the next few years, in our view.

Others (India, Myanmar)

  • Both India and Myanmar country operations are very small at this stage but the markets have long term growth potential with their population bases of c1.4b and 54m respectively and per capita protein consumption levels amongst the lowest in the Asia-Pacific region.
  • In India, operations are mainly poultry feed production, which has been registering strong double-digit growth for the past couple of years. The company plans to develop DOC production capabilities in the near future.
  • In Myanmar, Japfa has the second largest poultry feed production capacity (estimated 31% market share) and the second largest DOC production capacity (estimated 21% market share). It also has commercial poultry farms. The broiler market has been very competitive for the past 12-18 months due to the entry of a new local player.

2. African Swine Flu in Vietnam and potential impact

  • African Swine Flu has spread rapidly through the country. The first reported cases of African Swine Flu in Vietnam happened in late Feb-2019 and within a span of three months the disease has rapidly spread across the country with industry reports stating that around 23 of the 58 provinces had been affected since. Around 0.3% of the country’s c30m hog population has reportedly been culled since the outbreak of African Swine Flu. There is currently no vaccine treatment for African Swine Flu and biosecurity practices is the only way to control its spread at the moment.
  • Japfa management confirmed that none of their farms had been affected so far. They illustrated a couple of financial impact scenarios should their farms be affected, underpinned by the Chinese experience where the disease has been widespread for around 18 odd months.
  • Based on the China case study where the worst affected provinces have seen around 25% of stocks get culled, management estimates the negative impact to operating profit could be to the tune of USD30m if pork ASP stays low throughout the year.
  • In a more moderate impact scenario which involved 25% of stock getting culled but an ASP recovery in the 2H19, the estimated operating profit impact would be cUSD15m.
  • There are three potential offset’s to these scenarios.
    • Firstly, as an industrialised farming company, the impact to Japfa’s stock is arguably lower than that posed to hybrid and backyard operations;
    • secondly, pork prices could potentially offset the loss of stock like in China where shortages have resulted in pork prices spiking sharply in some provinces and;
    • thirdly, Japfa’s poultry operations in Vietnam would possibly benefit from some consumption substitution from pork to poultry.
  • We note that pork prices have dropped since the outbreak of African Swine Flu, which industry observers largely attribute to short-term oversupply arising from small-scale farmers rushing to liquidate stock due to African Swine Flu fears. But the processing and supply chain in Vietnam is not as advanced as China with some 90% of produce being sold in wet markets – hence the ASP rebound could take place sooner than in the case of China where it took 1-2 quarters as frozen stocks were wound down.
  • Of note is that poultry prices have stayed slightly firmer during this African Swine Flu outbreak period compared to prior years.

Forecasts and target price trimmed

1Q19 fell short mainly due to higher costs

  • We have made some cost assumption adjustments to our FY19E-FY21 profit forecasts following Japfa's 1Q19 results. Revenue for the quarter was actually better than expected achieving c24% of our pre-revision forecast (typically at 20-22% of full-year estimate in a normal year).
  • The 1Q19 PATMI fell around USD4m short of our expectation because of a combination of higher-than-expected raw material costs and higher working capital requirements.
  • Management indicated that Indonesian corn prices have gone up due to the La Nina-related harvest disruption and the company also therefore needs to stock up on supply given its large volume needs driving up its working capital requirements.
  • The other raw material cost escalation has been in its China dairy operations where the US-China trade war has raised import tariffs for alfalfa, one of the components for its cattle feed.
  • Our revenue forecasts are unchanged but we have imputed a 100-150bps reduction in operating margins to incorporate these higher operating costs, which results in a 9-12% cut to FY19E-21E PATMI estimates.

Price target revised to SGD0.93 from SGD1.05

  • On the back of our forecast revisions, our FY19E EBITDA multiple based SOTP target price has also been trimmed 11% to SGD0.93 from SGD1.05.
  • Japfa continues to be one of the cheapest upstream food stock on a P/E basis in the APAC region trading at 8.2x versus much higher multiples for its upstream APAC protein producers and Chinese dairy farm peers.

Neel Sinha Maybank Kim Eng Research | https://www.maybank-ke.com.sg/ 2019-05-27
SGX Stock Analyst Report BUY MAINTAIN BUY 0.93 DOWN 1.050