Fufeng Group Limited (HKG:0546) In-line 1H10 With Net Profit Increased By 30%, A Piper Jaffray (NYSE:PJC) Research Report
Hong Kong, Aug 18, 2010 AEST (ABN Newswire) - Fufeng Group Limited (
HKG:0546) (PINK:FFNGY) 1H10 net profit increased by 30% YoY to Rmb460mil, in line with our estimate. Profit margin was largely in line with our estimate, and a higher subsidy income has offset the impact of lower-than-expected fertilizer sales. Moreover, robust volume growth in core products (xanthan gum + 127%, MSG + 80%) have boosted our confidence in Fufeng's strategy in gaining market share. We reiterate OW and maintain our PT of HK$ 6.7 (7.5X FY11E EPS of HK$0.9) on an undemanding valuation of 6.2x FY11 P/E (27% discount to peers).
1H10 net profit up 30% YoY.
(1) Revenue was up 45% on strong sales volume growth in MSG and other by-products. Management estimates Fufeng's current global MSG market share at ~25%. (2) Due to higher corn cost (+32% YoY in 1H10), OPM dropped 1.4ppt to 18.1% (vs. our estimate of 17%). That said, ASP hikes and improvement in efficiency in 2Q10 have helped lift profit margins QoQ (GPM for 1Q/2Q10: 24%/25.6%). (3) Other income increased 161% YoY to Rmb63mil (12% of before-tax-profit) mainly thanks to a non-recurring subsidy income of Rmb25mil as a result of purchasing corn from government reserves. (4) A DPS of HK$0.11 was declared for 1H10, representing ~35% payout ratio.
MSG price trending up.
Mainly cost-driven, MSG ASP was up 5% QoQ to ~Rmb7,500 in 2Q after a sluggish 1Q. We believe the supply/demand will continue to stay balanced for at least FY10E and 1H11E as inefficient competitors are being shut down. According to Central Government's recent announcement, another 190,000 tpa (~8% of current capacity in China) of polluting MSG capacities will be shut down or forced to upgrade by Sep-10.
Encouraging growth from xanthan gum (XG).
XG sales volume increased by 127% YoY to 19.1K tonnes, attributable to the global recovery of the oil-drilling market and promotions in both industrial and F&B markets. GPM/OPM also improved 4.1ppt/7.6ppt YoY to 39.2% and 35.3%, respectively, due to lower coal costs at the Inner Mongolian plant. We forecast sales volume to grow 81%/14% in FY10E/11E as utilization rate picks up and market gains continue on competitive pricing, with GPM remaining at 40% as an efficiency gain offsets cost and pricing pressures.
Growth drivers beyond FY10E.
(1) Construction of a new plant with 200K MSG capacity commenced in May 2010. We believe this should increase the company's MSG capacity by 37% when it is due to be completed in 2H11. (2) In-house ammonia plant is expected be completed in 1Q11 and this should enhance MSG profit margins by 1-2ppt if fully utilized, based on our estimates. (3) New products, such as threonine (10K tpa capacity) and fructose (5K tpa) are currently in trial production and not considered in our current model. They may provide upside (+2%-3% to revenue) to our numbers.
INVESTMENT RECOMMENDATION:
We maintain OW on Fufeng and our PT of HK$ 6.7 (unchanged), which is based on 7.6x FY11E EPS of Rmb0.77/HK$0.88 (previous: 9.4x FY10 EPS of HK$ 0.72) after rolling forward our valuation to FY11E. Our target P/E is kept at a 7% discount to peers.
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.
Exhibit 1: 1H10 Results Highlights----------------------------------------------------------- Our 1H10Rmb mil 1H10A 1H09A YoY estimates Deviation------------------------------------------------------------Revenue 2,988 2,055 45 3,253 -8Gross profit 742 577 29 800 -7Operating profit 541 401 35 553 -2Net profit 460 354 30 461 0EPS (Rmb) 0.277 0.213 30 0.278 0------------------------------------------------------------Margins and Our 1H10 ratio(%) 1H10A 1H09A YoY estimates Deviation------------------------------------------------------------Gross margin 24.8 28.1 -3.2 24.6 0.3Operating margin 18.1 19.5 -1.4 17.0 1.1Net margin 15.4 17.2 -1.8 14.2 1.2Effective tax rate 10.3 8.7 1.5 11.0 -0.7SG&A /Rev 8.8 9.7 -0.9 8.0 0.8------------------------------------------------------------Sources: Company, Piper Jaffray Asia estimatesExhibit 2: 1H10 Results by Segments-------------------------------------------------------------- 1H10A 1H09A YoY 2H09 HoH 2009A--------------------------------------------------------------MSG segment--------------------------------------------------------------Glutamic acidsales (000 tonnes) 12 62 -81% 39 -69% 101MSG sales(000 tonnes) 235 131 80% 162 46% 292Sales (Rmb mil) 2,607 1,869 39% 2,355 11% 4,225GPM (%) 22.7 27.4 -4.7ppt 28.5 -5.7ppt 28.0OPM (%) 16.2 19.5 -3.2ppt 24.2 -8ppt 22.1EBIT (Rmb mil) 423 365 16% 570 -26% 934--------------------------------------------------------------Xanthan gum--------------------------------------------------------------Sales volume(000 tonnes) 19.1 8.4 127% 11.7 63% 19.3Sales (Rmb mil) 381 186 105% 222 72% 408GPM (%) 39.2 35.1 -4.1ppt 37.6 +1.6ppt 36.5OPM (%) 35.3 27.7 +7.6ppt 38.0 -2.7ppt 33.3EBIT (Rmb mil) 135 51 162% 85 60% 136--------------------------------------------------------------Source: Company
For the complete Fufeng Group Research Report produced by Piper Jaffray (NYSE:PJC), please refer to the following link below:
http://www.abnnewswire.net/media/en/docs/63546-PJ-Aug-10-100817.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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