SBI E2-Capital Research Report For Fufeng Group (HKG:0546)
Hong Kong, Mar 29, 2010 AEST (ABN Newswire) - SBI E2-Capital provide a research report for Fufeng Group (
HKG:0546) (OTC:FFNGY).
Net profit over tripled in FY12/09A to RMB928.3m with extra fuel from skyrocketed MSG price in 4Q and 250,000 tonne cheap corn procured from government.
MSG market is anticipated to stay in balance in 2010 with additional ~140,000 tonnes supply solely from Fufeng.
Both Fufeng and Eppen's expansion will test MSG market in 2011.
New synthetic ammonia plant and production base in North East China will fortify the company's cost advantage.
The management targets at 40%+ domestic MSG market share. We reckon this target will be realised by 2015, accompanied by continuous market consolidation.
Expected three-year average dividend yield at 4.37%. BUY unchanged with target price revised up to HK$7.08.
Supreme profit advance in FY12/09A. Revenue went up 29.2% to RMB4,632.9m. Gross margin improved substantially by 12.2pcp to 30.2%. Consequently, net profit soared 215.0% to hit RMB928.3m. We contribute this strong growth to:
Favorable market environment witnessed by rising MSG price during the period as well as softened raw materials costs (coal, liquid ammonia, sulphuric acid and soy bean).
MSG market to remain balanced in 2010. MSG price corrected violently in 1Q, diving from peak RMB11,100/tonne in Dec 09 to below RMB7,000/tonne in Feb and, then, rebounded to RMB7,600/tonne in Mar. According to the management, such extreme fluctuation should be mainly due to speculation. Supply-demand wise, we see major capacity expansion within the sector still comes from Fufeng in 2010, which will add 110,000 tonnes glutamic acid effective capacity, resulting in ~140,000 tonne net increase in MSG supply. We reckon the market can accommodate ~150,000 extra MSG capacity each year, comprising ~100,000 tonnes from organic growth (~5% p.a.) and ~50,000 tonnes from Inefficient capacities, which are continuously ruled out by cost competition and tightening environmental regulations. Therefore, the market supply-demand is likely to remain balanced in 2010. Accordingly, we assume the industry will maintain its normal profitability and expect MSG price to further pick up (average at RMB7,713/tonne for the full 2010) backed by increased raw materials costs post the financial crisis and general inflation expectation.
Over-supply is possible in 2011. For 2011, we smelled over-supply possibility. Fufeng's new plant in North East China will contribute ~80,000 tonnes glutamic acid effective capacity (equivalent to ~100,000 tonnes MSG). Meanwhile, Eppen () is building a comprehensive processing centre (including 120,000 tonnes MSG 120,000 tonnes glutamic acid), which should launch operation by the end-10. In order to absorb these incremental supplies, we expect MSG price will be pushed down to completely eliminate small players' profitability and drive them out of the market.
Market share expansion at cost of short-term profitability. Fufeng intends to capture 40%+ domestic MSG market share. In view of the company's cost advantage, we reckon this target is feasible and estimate it can be achieved by 2015 based on the company's historical expansion speed (~100,000 tonne MSG capacity each year). During the process, other players, especially leading ones, will certainly make their response. Thus, the whole market will probably stay in over-supply situation, depressing MSG price continuously. Market concentration will largely improve after 2015 and we reckon the top three players will occupy ~90% market share. MSG market will move into oligopoly stage and the industry's profitability will recover.
Fufeng's attempt to further bring down production cost. We estimate Fufeng's MSG production cost is ~10% lower than tier-two players (mainly located in Shandong), which constitute the company's core competitiveness. Fufeng plans to steepen this advantage by:
- building in-house ammonia production capacity - a 80,000 tonnes synthetic ammonia production line will launch operation in 2011 in Inner Mongolia. We estimate this will reduce the IM plant's ammonia cost by ~18% or overall MSG production cost by ~RMB140/tonne.
- establishing a new base (in North East China at the junction of Inner Mongolia and Heilongjiang - this new NE plant will contain capacities of 160,000 tonnes glutamic acid, 200,000 tonnes MSG, 200,000 tonnes fertilizer and 100,000 tonnes synthetic ammonia. Construction will start in May and operation is expected to commence in 2H 11. According to the management, corn locally is ~RMB200/tonne cheaper than which of the IM plant. Together with integrated ammonia capacity, the NE plant's MSG production cost could be ~8.0% lower than the IM plant.
Target price revised to HK$7.08 with extra support from generous dividend. Following the adjustment in our industry assumptions, we revised our estimates. FY12/10F and FY12/11F earnings were penciled down by 7.3% and 20.9%, respectively, to reflect: 1) faster-than-expected correction of MSG price after it skyrocketed in 4Q 09; 2) additional capacities of 110,000 tonnes glutamic acid and 40,000 tonnes MSG from re-engineering existing facilities; 3) Eppen's expansion (started in Dec 09), which is anticipated to break market equilibrium in 2011. Nevertheless, we highly credit the company's move to establish in-house ammonia capacity and construct the NE plant, which will provide a solid ground in terms of production cost, underpinning future growth and market expansion. Meanwhile, the expected market consolidation will reward Fufeng in long run with larger market occupancy. We maintain our BUY call on the stock. Our new target price is HK$7.08, which is also the fair value derived from our DDM model. Given the company's generous dividend policy (40.0% payout ratio), which allow an arithmetic average yield of 4.37% (or 3.61% based on the target price), versus Hang Seng Utilities Index's 3.37%, we believe downside risk is limited.
For the complete Research Report for Fufeng Group including Tables, please click the link below:
http://www.abnnewswire.net/media/en/docs/62528-E2Capital-fufeng.pdf
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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