Fufeng Group Limited (HKG:0546) New Plant Construction On Track
We visited Fufeng's Northeast China plant on 18 September 2010. Construction work is on track and management expects the new plant to begin operations in 2Q11, earlier than previously guided (June 2011). We maintain our Buy rating, and keep our earnings forecasts for FY10-12 and target price unchanged.
NE China plant may be completed ahead of schedule
Fufeng's NE China plant is located in the economic development zone of Zhalantun, a county-level city in Inner Mongolia and close to Heilongjiang. Management expects the new plant to bring cost advantages from:
1) lower corn prices, given plentiful supply of corn locally;
2) lower coal costs in a location close to the coal mines in Hulunbeier; and,
3) 100% self-supplied synthetic ammonia. The construction of the new plant, started in May 2010, is on track. Management believes Phase I of the new plant may be completed in 2Q11, earlier than its previous guidance of June 2011, if the cold weather in NE China does not stall construction progress.
Phase I to add 200,000t/year of MSG production capacity Phase I of the plant includes production capacity of 200,000t for MSG, 160,000t for glutamic acid, 200,000t for fertilisers and 100,000t for synthetic ammonia, with capex of Rmb1bn.
The plant is also equipped with thermal power generation and company-owned railway. After Phase I is completed, Fufeng's MSG production capacity will reach 740,000t (+37%).
Management said it might add another 260,000t of MSG capacity in Phase II in 2012-13 (+35%), achieving total MSG production capacity of 1mt. We believe the new plant will further strengthen Fufeng's leading position in the MSG market.
Gross margin sustainable in 2H10
Management expects a good corn harvest this October and, thus, lower corn prices in 4Q10.
Corn prices were stable in July-August at an average of Rmb1,686/t, rising 1.3% qoq and 13.6% yoy. In July-August, the market price of MSG increased 3.4% qoq and 17.9% yoy to about Rmb9,640/t. Management said it increased the ASP of MSG in August and that this is currently around 9,800/t. It may further raise MSG ASP in 4Q10 to meet higher demand in the traditional peak season. We expect Fufeng's gross margin to be stable at 25% in 2H10.
New plant construction on track
We keep our earnings forecasts and target price unchanged Fufeng is trading at 8.2x FY10F PE and 7.4x FY11F PE, which we think is inexpensive compared with corn-processing peers listed in Hong Kong, which are trading at an average of 13.6x FY10F PE and 11.6x FY11F PE, based on Bloomberg consensus and our estimates. Our DCF-based target price of HK$7.10 implies 34% potential upside and a target FY11F PE of 9.9x. We reiterate our Buy recommendation.
Management said that Fufeng's major competitor, Meihua, recently announced it would add new MSG capacity of 70,000t in Inner Mongolia in 2H11, lower than previous guidance of 150,000t.
Besides Meihua, new MSG capacities include 70,000t from Yi Ping in Ningxia (to be completed in 2H11) and 100,000t from Cofco Group in Northeast China (to be completed in 2H11-1H12).
However, management expects MSG supply and demand in China to remain in balance in FY11, as in July 2010 the government announced a shutdown of 200,000t in inefficient MSG capacities.
Key downside risks to our target price would be:
1) higher-than-expected corn and coal prices;
2) lower MSG ASP due to overcapacity in the market;
3) more stringent environmental controls and policies by the government; and
4) exercise of share options by senior management.
For the complete Fufeng Group research report including figures and tables, please refer to the following link:
About Fufeng Group Limited
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
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Fufeng Group Limited