Fufeng Group (HKG:0546) Releases A Research Report - Average Selling Price Sustains Well At High Level
Hong Kong, May 13, 2010 AEST (ABN Newswire) - We (PiperJaffray - (
NYSE:PJC)) reiterate our Overweight rating on Fufeng Group (HKG:0546) (PINK:FFNGY) after its release of 1Q10 operation updates. Thanks to healthy Average Selling Price (ASP) trends and capacity expansion, Fufeng's profit margin and revenue growth are on track to deliver our earnings estimates (+11%/30% in FY10E/11E). Fufeng further raised its ASP on April 10 to pass on the continuously rising corn cost. Our PT of HK$6.70 (9.4x FY10E) is still below the initial conversion price of the CB issued recently (HK$7.03).
- 1Q10 margin and ASP trends on track. (1) Revenue +42% YoY to Rmb1,431 million, representing ~43% of our 1H10E estimates. (2) GPM stood at 24%, largely in line with our 1H10E estimates. It was down 3.9ppt YoY and 11.9ppt QoQ, widely anticipated as a result of ASP normalization, but still remaining at a high level. MSG and XG segments reported a gross margin of 21.8% (-6.3ppt YoY) and 40.1% (+9.2ppt), respectively. (3) In 1Q10, Fufeng's unit corn cost reached Rmb1,645/tonne, (+34% YoY/7%QoQ). Admittedly, this put pressure on Fufeng's GPM in 1Q, but was offset by an ASP hike. We estimate the ASPs of MSG and XG were up approximately 11% and down -7% YoY, respectively, in line with our estimates.
- Cost surges demonstrated Fufeng's resilience. (1) Corn price has increased by more than 10% YTD and 18% YoY in the Inner Mongolian spot market. The MSG price has gone up further (~4%-5% in April); hence we believe our GPM and earnings estimates for FY10E-11E are well intact. We have slightly raised our revenue estimates for FY10E-11E and are assuming the corn cost to rise 8% YoY for FY10E to reflect the latest changes. (2) According to management, some competitors had halted production in 1Q10 due to the surge in cost while Fufeng's GPM had once fallen below 20% for a month. We believe this demonstrated the superiority of Fufeng's cost-saving technology and measures. We also believe the increasing corn cost will cushion the MSG price and boost our confidence in Fufeng's ability to sustain its GPM at ~25% in FY10E.
- New initiatives to diversify revenue sources. (1) Production of new products, such as fructose, threonine and other amino acids, is scheduled to commence in 2Q-3Q10. We have not included them in our model but expect from them less than 1% accretion in revenue for FY10E. (2) Fufeng is gradually building up its consumer brand for its retail chicken powder and MSG products, and related marketing expenses are to remain below 1% of its revenue.
INVESTMENT RECOMMENDATION:
We maintain OW on Fufeng and our PT of HK$6.70 (9.4x FY10E EPS of Rmb0.63/HK$0.72). Our target P/E represents a 7% discount to peers (previous: 15%), which reflects the lower near-term refinancing risk after the CB issue.
RISKS TO ACHIEVEMENT OF TARGET PRICE:
Major risks include:
(1) a return of smaller competitors in the MSG market;
(2) disappointing xanthan gum sales volumes; and
(3) changing environmental and industry regulations that may affect corn or other costs.
For the complete Fufeng Group Research Report, please refer to the following link:
http://www.abnnewswire.net/media/en/docs/62854-HKG-0546-20100513.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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