Wilmar International - DBS Research 2019-09-12: Deep Dive Into Wilmar's China Operations


Wilmar International - Deep Dive Into Wilmar's China Operations

  • Taking a deep dive into WILMAR INTERNATIONAL LIMITED (SGX:F34)'s China operations.
  • Exposure to world’s largest consumer food market.
  • Our target price implies Yihai Kerry Arawana (YKA) to be listed at 17x-18x FY20F PE.
  • Maintain BUY with Target Price S$4.25.

Right platform in the right market.

  • We are taking a deeper look into Yihai Kerry Arawana (YKA) which runs Wilmar’s China operations and generates 60% of group earnings. Wilmar has built a strong platform in China, the world’s largest consumer food market with bright prospects. There are plans to list YKA 4Q19 at earliest.

Deep dive into China operations

Diversification into Consumer Products; more stable earnings.

  • Wilmar has been articulating its strategy of diversification into Consumer Products as it seeks to build a more stable earnings profile as it evolves from being a pure plantation company which is typically affected by fluctuations in commodity prices. Over the years, Wilmar has invested significant capex into Asia and Africa, building agri processing plants, consumer brands and distribution networks as it focuses on expanding its Consumer Products arm on the back of strong demand for food products in Asia and Africa. Aside from India and Vietnam, where Wilmar is seeing good profits, Wilmar’s China business contributes substantially to Wilmar’s bottom line.

Market-leading agribusiness and food processing company in China.

  • Wilmar’s subsidiary, Yihai Kerry Arawana Holdings (YKA), generated NPAT of RMB5.5bn in FY2018, which accounted for c.60% of Wilmar’s core net profit. YKA has been in China for more than 30 years, since investing in its first edible oils and fats plant in China in 1988, and subsequently the launch of the first bottle of Arawana small package oil in 1991. Today, YKA has evolved to be the market leader across various food product categories with clear market segmentation for premium, mid-end, and mass market brands, on top of its flagship Arawana edible oil products.

China is the world’s largest consumer food market.

  • China has surpassed the US to be the world’s largest consumer food market, with high production of edible vegetable oil, rice and flour as well as crushed soybeans. Wilmar continues to position itself deeper into China’s growing food sector, leveraging on its strong suite of brands and quality products.

Food products, feed ingredients and oleochemicals are YKA’s core segments.

  • YKA derives a substantial portion of its revenues and gross profit through its food products segment, where it sells oil, rice, flour, dried noodles, and seasonings in consumer and bulk packs. Food products also enjoy higher margins of c. 12%, which is > 3x that of the margin of feed ingredients & oleochemicals division.

Vast manufacturing, marketing and distribution networks across China.

  • Over the years, YKA has expanded its manufacturing, marketing and distribution networks across China. Today, YKA has manufacturing bases at strategic locations across 24 provinces, autonomous regions and municipalities across China. Some manufacturing complexes, for instance in Taizhou, are integrated complexes which can realise cost efficiencies and manpower synergies. In marketing and distributing its products, YKA makes use of distributors as well as having a direct sales model, with the former accounting for c.30% of its sales. YKA continues to leverage on its distribution platform to market its wide range of products.

COFCO is a strong peer.

  • In FY2018, COFCO processed 15.9m tons of soybeans, similar to Wilmar. COFCO’s portfolio of companies includes China Agri-Industries Holdings Limited (“China Agri”) whose business scope includes oilseeds processing, rice processing and trading, wheat processing and brewing materials among others, including its flagship edible product, Fortune oil.
  • In FY2018, China Agri recorded gross profit margins of c.8.3% as it increase marketing activities to drive sales volumes of its existing products.

IPO rationale.

  • Besides raising proceeds to fund YKA’s capex in the next few years as Wilmar continues to grow YKA’s positioning and market leadership, the listing will also enhance public awareness of YKA’s products and operations to further entrench YKA’s China operations.

Planning investments across 10 provinces and 12 cities; continued focus on R&D.

  • According to the preliminary prospectus, YKA is planning up to RMB17.9bn of investments in consumer products production facilities (i.e. integrated manufacturing complexes) across 10 provinces and 12 cities in China, of which c.77% of investments will come from IPO proceeds. As YKA continues to target growth, a R&D center will be established to continuously expand and improve YKA’s product portfolio.

Unlocking value from IPO listing; possible special dividends.

  • Yihai Kerry Arawana (YKA) is set to offer 542m shares, representing c.10% of its enlarged share capital, in a 100% primary offering. Assuming YKA lists at 18x FY20F PE on ChiNext (raising approximately US$1.2bn), we believe it is possible for Wilmar to declare special dividends for existing shareholders, since the IPO will help YKA to be self-funded going forward, thus freeing up some cash at the Wilmar level. Note that the majority of its 2015-2019 capex was allocated to expand its China business.

Where we differ: Wilmar’s potential is far greater than market expectations.

  • As we obtain more information on Wilmar’s China operations, we are increasingly convinced that Wilmar’s potential is far greater than what the market perceives. As the market leader in each segment, Wilmar’s presence makes it difficult for competitors to operate meaningfully in each region. This gives Wilmar a solid footing to further grow its market share and earnings ahead.
  • Also, Wilmar is heading towards having a more stable business model and earnings profile with higher contribution from consumer branded products.

William Simadiputra DBS Group Research | Rui Wen LIM DBS Research | https://www.dbsvickers.com/ 2019-09-12
SGX Stock Analyst Report BUY MAINTAIN BUY 4.250 SAME 4.250