Fufeng Group (HKG:0546) Expansion Into Consumer Pack MSG, A Royal Bank of Scotland (RBS)(LON:RBS) Research Report
Fufeng Group (HKG:0546) Expansion Into Consumer Pack MSG, A Royal Bank of Scotland (RBS)(LON:RBS) Research Report
Hong Kong, Aug 18, 2010 AEST (ABN Newswire) - Fufeng Group Limited (HKG:0546) (PINK:FFNGY) earnings grew 30% yoy in 1H10 to Rmb460m, in line with both our forecasts and Bloomberg consensus. We have fine-tuned our earnings forecasts for FY10-12. Maintain Buy, HK$7.10 target price.

MSG margin likely to improve hoh in 2H10

Total revenue grew 45.4% yoy in 1H10 to Rmb2,988m, slightly better than our estimate. The ASP of MSG was Rmb7,821/tonne in 2Q10, up 9.5% from Rmb7,140/tonne in 1Q, leading to a gross margin of 23.8% for the MSG segment, vs 21.6% in 1Q. The corn price was up 6.6% qoq to Rmb1,753/tonne in 2Q, and remained at this level in July. Management is guiding for a mom increase of 2-5% in the MSG selling price in August. We expect the segment's gross margin to rise hoh in 2H, owing to the rising ASP and a high corn cost base in 2H09.

Good performance in the xanthan gum segment

Fufeng gained market share in the xanthan gum segment, with revenue growth of 105.2% yoy in 1H10. Gross margin also improved to 42.1% in 2Q from 35.4% in 1Q and 36.5% in FY09, driven by improved economies of scale and a low cost base for the company's new xanthan gum project in Inner Mongolia (that was completed in April this year). Fufeng should continue to gain market share in the segment, with the new capacity reaching full utilisation in 2H10.

Expansion into branded MSG

In 1H10, Fufeng successfully expanded its own brand (Uo Fresh) of MSG consumer packs and chicken powder products (both launched at end-2009), having entered more than 2,000 supermarkets and retail stores. Consumer pack MSG sales volume in 1H10 was 10,000 tonnes, or 4% of the company's total MSG volume. Fufeng is targeting sales of 100,000 tonnes, or 14% of its guided total MSG volume by FY12.

We maintain our Buy rating and our HK$7.10 DCF-based target price

We maintain Buy for improving market shares of both MSG and xanthan gum and the apparently cheap valuation: PEs of 8.5x FY10F and 7.7x FY11F, with dividend yield of 5.2% in FY10F and 5.7% in FY11F. Our target price implies 30% potential upside and an FY11F PE of 9.9x.

1H10 revenue was slightly better than our estimate

Fufeng's reported net profit for 1H10 increased 30% yoy to Rmb460m. This was in line with both our estimates and Bloomberg consensus. Basic EPS and diluted EPS were Rmb0.28/share and Rmb0.26/share, respectively. Headline earnings accounted for 44.7% of our earnings forecast for the full year.

Revenue in 1H10 rose 45.4% yoy to Rmb2,988m, which was slightly better than our estimate mainly due to better volume growth for xanthan gum (up 127.5% yoy). Revenue from xanthan gum increased 105.2% yoy to Rmb381m, accounting for 12.8% of total revenue in 1H10 (vs 9.0% in 1H09 and 8.8% in FY09). The strong sales were backed by rising demand as the global economy recovered.

In the MSG segment, revenue rose 94.7% yoy to Rmb1,763m, accounting for 59.0% of total revenue in 1H10 (vs 44.1% in 1H09 and 48.5% in FY09), largely driven by capacity expansion in December 2009. Sales of fertilisers decreased 18.5% yoy to Rmb152m, mainly due to overcapacity in China's fertiliser industry. Fertiliser capacity utilisation fell 12.4ppt yoy to 81.6% in 1H10 and the ASP also dropped 11.6% yoy to Rmb762/tonne.

Gross margin was slightly below our expectation in 1H10

Fufeng's overall gross margin contracted 3.2ppt yoy to 24.8%, which was slightly below our estimate mainly because of surging corn costs. The average corn price rose 32.5% yoy in 1H10, resulting in a drop in the gross margin for the MSG segment of 4.7pp yoy to 22.7%. The ASP for MSG increased by just 8.8% yoy in 1H10, as Fufeng wants to squeeze out the smaller players from the market and gain market share. Management is guiding for an increase in the MSG selling price of 2-5% mom in August. We expect MSG gross margin to improve hoh in 2H10, because of the increasing ASP and a high corn cost base in 2H09. Margin for xanthan gum improved 4.1ppt yoy to 39.2% in 1H10, as a result of low costs at the Inner Mongolia plant (that was completed in December 2009).

Capacity expansion on track

Fufeng completed a 40,000 tonne sweetener project (a 30% increase from the company's effective end-FY09 capacity), a 12,000 tonne xanthan gum project (a 19% increase), and a new 5,000 tonne fructose project on time in 1H10. The company plans to raise its effective MSG capacity by 77% in FY10 and 19% in FY11, as its new factories in Inner Mongolia (completed in December 2009) and northeast China (due to be completed in June 2011) start to contribute. In 2H10, Fufeng also plans to build a new fructose project with a capacity of 5,000 tonnes.
Table 2 : Projects under development in 2010-11
Project                             Capacity     Completion/expected
Technical transformation of
starch sweeteners                 40,000 tonnes         1Q10
Threonine                          5,000 tonnes        Mar-10
Fructose                           5,000 tonnes        Jun-10
Branched chain amino acid Proline:   500 tonnes        Jun-10
Valine:                              400 tonnes
Isoleuticine:                        200 tonnes
Phase III of xanthan gum          12,000 tonnes        Jun-10
Threonine                          5,000 tonnes         2H10
Synthetic ammonia project at
Inner Mongolia plant             100,000 tonnes         2H10
Northeast plant MSG:             200,000 tonnes         2H11
Source: Company data
Maintaining Buy with a HK$7.10 target price

We maintain Buy for Fufeng's improving market shares in both MSG and xanthan gum and the stock's apparently cheap valuation. We now expect Fufeng's earnings to grow 11% yoy in both FY10 and FY11. Our DCF-based target price of HK$7.10 implies 30% potential upside and a target FY11 PE of 9.9x. The current PEs of 8.5x FY10F and 7.7x FY11F, with dividend yield of 5.2% in FY10F and 5.7% in FY11F, seem undemanding to us.

Our FY10 earnings estimates are in line with Bloomberg consensus, while our FY11 and FY12 earnings forecasts are 12.3% and 8.0% lower. We think this is mainly due to our more conservative assumption on gross margins, as we assume that new capacities in FY11 may temporarily weigh down on gross margins. However, we expect Fufeng's margin to revert to its normal level in FY12.
Key forecasts
                                 FY08A  FY09A  FY10F  FY11F  FY12F
Revenue (Rmbm)                   3,585  4,633  6,608  8,286  10,457 
EBITDA (Rmbm)                    520.7  1,241  1,450  1,701  2,259 
Reported net profit (Rmbm)       294.7  928.3  1,030  1,141  1,499 
Normalised net profit (Rmbm)(1)  294.7  928.3  1,030  1,141  1,499 
Normalised EPS                    0.18   0.56   0.56   0.63   0.82 
Dividend per share                0.01   0.22   0.25   0.27   0.36 
Dividend yield (%)                0.21   4.59   5.17   5.73   7.53 
Normalised PE (x)                27.00   8.58   8.50   7.67   5.84 
EV/EBITDA (x)                    16.00   6.62   6.03   4.98   3.48 
Price/book value (x)              4.57   3.33   2.86   2.31   1.81 
ROIC (%)                         14.80  37.30  33.60  26.60  32.70
1. Post-goodwill amortisation and        year to Dec, fully diluted
pre-exceptional items Accounting
standard: Local GAAP
Source: Company data, RBS forecasts
For the complete Fufeng Group Research report produced by The Royal Bank of Scotland's (LON:RBS) (NYSE:RBS), Hong Kong Branch, please refer to the following link below:

About Fufeng Group Limited

Fufeng Group (HKG:0546)Fufeng Group (HKG:0546) is the world's largest producer of MSG, xanthan gum and a major supplier for a series of bio-fermentation products. The main products of the Group are food additives, animal nutrition, colloid and high-end amino acids. In fiscal 2016, Fufeng generated sales of approximately RMB11.2 billion and profit attributable to shareholders of about RMB1.09 billion. For more information, please visit our website www.fufeng-group.com



Investors and media enquiries
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Vision Asia Consulting Group Limited
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Email: fufeng@visionasia.com.hk

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