solid fundamentals priced in, no excess return ——2h09 investment strategy for hk listed chinese...

Solid Fundamentals Priced in, No excess return——2H09 Investment strategy for HK listed Chinese Staple Sector

Tingting Jia

May 2009

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申万研究 2

1. Favorable implications from Central China Development

2. Solid sector fundamentals extend into 2H09

3. Investment view on staple sector- Top picks

Contents

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申万研究 3

1.1 What is happening in Central China

Source: CEIC, SWS Research

The investment in Central China exceed other regions.

Consumption in Central China started to catch up.

Investment in Central China outpaces other regions since 2005

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Consumption in Central China catches up since 2007

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申万研究 4

1.2 Urbanization in Central China will pick up


Urbanization rate in Central China is below nation average.

According to our macro economist, urbanization progress will accelerate in Central China.

Urbanization in Central China will catch up

Urbanization rate (%)

88.784.5

76.31

57.2

44.94 44.3 44.03 40.45 39.8 38.734.34

SHA BJ TJ ZJ Nation HuB SX HuN JX Ah HeN

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申万研究 5

1.3 Per capita income and consumption in Central are rising


As a result, average wage and consumption per capita are increasing.

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Average wage in SHA (CNY,LHS)

Growth rate: Average wage in Central China （%，RHS）Growth rate: Average wage in SHA （%，RHS）

Average wage in Central China picks up Rising per capita consumption

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Per Consumption in Central Area (CNY, LHS)

Per Consumption in SHA (CNY, LHS)

Growth rate:Per Consumption in Central Area (%, RHS)

Growth rate: Per Consumption in SHA (%, RHS)

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申万研究 6

1.4 Implications – incremental demand for mass market staples


Central China Development will provide incremental demands for consumer staples, especially those mass market staples, like milk, dairy, and meat.

Sales values of wholesales and retail trades by products category

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Growth rate for tabacco & liquor

Growth rate for Meat, Poultry and Eggs

Growth rate for Beverage

Inland China Drivers

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申万研究 7

1.5 Implications: booming prospect for leisure food

Source: Euromonitor, SWS Research

Leisure food includes: snacks, confectionery, milk and flavored beverage

Underpinned by accumulated wealth, demand for leisure food is rising

Growth prospects for Chinese snacks market

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申万研究 8

1.6 Implications: Milk beverage market will restore growth profile

Source: Euromonitor, SWS Research

Milk beverage includes: Dairy only flavored milk drinks, flavored milk drinks with fruit juice.

The Melamine scandal seriously hit milk beverage sector, however, we believe growth profile is restoring.

Growth prospects for Chinese milk beverage market

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Growth rate for dairy only flavorerd milk drinks (%, RHS)

Growth rate for flavored milk drinks with fruit juice (%, RHS)

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申万研究 9

1.7 Low per capita consumptions base- secular growth story

Source: Euromonitor, NBS, SWS Research

Chinese per capita consumptions in terms of various product categories are below global average.

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Snacks (kg) Confectionery (kg) Milk beverage (liter)

Per capita consumption on leisure food

US, 12

UK, 22

Argentina, 38

China, 0.4World, 4.5Japan, 2.2

China, 20

HK, 43 Taiwan, 44 Japan, 45

South Korea,80

Per capita consumption on wine (liter)

Per capita consumption on instant noodles (by packet)

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申万研究 10

1.8 Conclusion: booming landscape for staples

Source: SWS Research

Mass marketconsumer staples

Staples withdiscretionaryfeatures

Milk, meat, softdrinks, low-endwine and spirit,low-price leisurefood

High-end leisurefood,Beer,High-end wine andspirit

Central ChinaDevelopment

Consumptiontrading up inEastern China

Mass market consumer staples benefit from Central China Development.

Staples with discretionary features benefit from consumption trading up in Eastern China.

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申万研究 11




Contents

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申万研究 12

2.1 Improving production and sales momentum- food

Dairy products sector: before Melamine scandal, growth rate of dairy products was above 25%; we project 8% growth for 2009E, 13% for 2010E.

Instant noodles sector: we project 8.6% growth for 2009E, 9% growth for 2010E.

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YoY growth %

Source: ACMR, SWS Research

Dairy products: growth profile has restored Instant noodles: growth profile slightly improved in1Q09

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申万研究 13

2.2 Improving production and sales momentum- food (con’d)


Production of meat and cookie hold up well in FY08.

Mass market defensiveness and niche market position help.

Meat: product volume relatively stable Cookie: hold up well in FY08

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Production volume for cookie(10,000ton) Growth rate (%)

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申万研究 14

2.3 Improving production and sales momentum- beverage


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Beer sector: growth rate dropped in FY08, pick up in 1Q09; we project 8% growth for 2009E, 8.5% growth for 2010E

Wine sector: growth rate dropped from high level in FY08, now slightly turnaround; we project 10% growth for 2009E, 15% growth for 2010E

Beer: growth rate picks up Wine: no significantly improvement

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申万研究 15

2.4 Trend of raw material price- rebound from trough

Most raw materials price retreated in 2H08.

Raw material price has rebounded since 1Q09, which will lay pressure on margins in the future.

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Source: Thomson Reuters, SWS Research

Import Price for milk power (Yuan per ton)

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Import price for milk Nan Ning Sugar Price

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申万研究 16

2.5 Gross margin v.s input costs retreat & rebound


1H09 GPM will benefit from 2H08’s raw material price retreat

Due to raw material price rebound, there will be pressure on 2H09 GPM

GPM is relatively staple compared with volatile raw material price, however, they change in the opposite direction

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Palm oil Flour PET Resin GPM of Tingyi

Cost structures for products categories GPM moves opposite against inputs cost

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申万研究 17




Contents

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申万研究 18

3.1 A snapshot of staple sector performance

Performance: most of the staple stocks beat the market in 2008, and YTD09

2008 Performance of staple players vs HSCEI 2009 YTD Performance of staple players vs HSCEI

Source: Bloomberg, SWS Research

18.8%

8.6%

-28.1%

-29.8%

-64.8%

-67.3%

-38.2%

-51.10%

-80.0% -60.0% -40.0% -20.0% 0.0% 20.0% 40.0%

Huiyuan

Wantwant

Tingyi

Yurun Food

Tsingtao Brewery

HSCEI Index

Mengniu Dairy

UPC

66.51%

26.82%

19.87%

19.07%

15.55%

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-42.68%

18.49%

-50.00% 0.00% 50.00% 100.00%

UPC

Tsingtao Brewery

Wantwant

Mengniu Dairy

Tingyi

HSCEI Index

Yurun Food

Huiyuan

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申万研究 19

3.2 Long-term investment value – from perspective of Financial analysis


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Sales-5 yr CAGR % Operating earnings 3-5yrCAGR %

Global F&B stocks HK-listed F&B stocks

Peers comparison regarding growth capability

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GP Margin % EBIT Margin % NP Margin %


Peers comparison regarding margins

Peers comparison regarding ROE

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ROA % ROE %


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Profit margin % Asset turnover Equity multiplier


DuPont breakdown

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申万研究 20

3.3 Investment strategy- Neutral on sector

Source: SYWG Research

Industry view: We’re bullish on long-term investment value for HK-listed Chinese consumer staples, however, we hold neutral view on the sector in short-term horizon due to demanding valuation.

How we differ from the Street: The market does not foresee possible threat to margin due to rebound of raw material cost. We believe the price of most inputs cost for staples is on upward trend due to rich liquidity in the global.

Catalyst: Upside catalyst comes from governments polices to enhance residents’ income; downside catalyst comes from further declining CPI.

How we pick up stocks: we are optimistic on mass market staples with strong control over channels, also we take valuation into consideration.

Yurun (01068.hk)- Top pick!

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申万研究 21

3.4 Top pick is Yurun (01068.hk)


Demanding valuation for staple sector

Solid fundamentals largely priced in, limited absolute return

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Mengniu Yurun Huiyuan Tingyi

UPC Tsingtao Wantw ant China Food

ROE(09,%)

PER (09,x)

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Leading PER Leading PBR (RHS)

Staples

Valuation of staples Peers comparison regarding ROE and 09PE

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申万研究 22

3.5 Traded at unjustified discount: Yurun （ 01068.hk）


Wise market positioning and good control of inventories

Margin expansion through softening raw material and adjusting product mix

In 2009, Yurun plans to invest HKD1.5 bln to enlarge the slaughtering capacity by 6 mln heads, or representing 26% YoY. As for the financial resources, we believe the funds mainly come from cash deposits (~HKD1.8bln) and CFO (~HKD1.4 bln). Share price fell due to H1N1 induce Buy opportunity.

Catalyst: rally in hog price

Earnings forecast ： EPS HKD0.90, HKD1.09, HKD1.33 for 09, 10,11 respectively.

Growth profile for Yurun

Margin profile for Yurun

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1H072H0707A1H082H0808A 09E 10E 11E 12E

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GPM (%) NPM (%)

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申万研究 23

Appendix Ⅰ: valuation comparison


Global F&B stocks BB CodePER(09,x)

PER(10x)

EPSCAGR(%)

PEG(09,x)

PEG(10,x)

ROE(09,%)

ROE(10,%)

PBR(09,x)

PBR(10,x)

EV/EBITDA 09

EV/EBITDA 10

Div.Yield %

Nestle S.A. NESN VX Equity 13.7 12.5 7.6 1.8 1.7 20.2 21.0 2.8 2.5 9.1 8.7 3.6Kraft Foods Inc KFT US Equity 13.0 12.1 7.2 1.8 1.7 12.6 13.1 1.6 1.6 8.9 8.4 4.6General Mills GIS US Equity 13.5 12.7 7.7 1.8 1.6 22.2 23.8 3.0 3.0 8.8 8.3 3.3COCA-COLA KO US Equity 14.8 13.5 8.1 1.8 1.7 32.9 33.8 4.8 4.5 10.8 10.0 3.8PEPSICO INC PEP US Equity 13.7 12.6 9.6 1.4 1.3 45.5 48.5 6.2 6.2 9.0 8.5 3.6Associated British Food ABF LN Equity 13.5 12.4 6.9 1.9 1.8 8.6 9.4 1.2 1.2 7.7 6.8 3.1ASAHI Breweries 2502 JP Equity 12.1 12.4 1.5 8.2 8.4 8.9 8.5 1.0 1.0 6.5 6.4 1.6Nissin Food 2897 JP Equity 18.6 19.1 15.4 1.9 1.5 6.2 6.0 1.2 1.1 8.1 6.5 1.9MEIJI SEIKA 2202 JP Equity - - - - - - - - - - - 2.0BROWN-FORMAN BF/B US Equity 16.5 16.5 4.8 3.4 3.4 24.0 20.4 3.7 3.4 11.0 11.0 2.4Heineken Holding HEIO NA Equity 9.1 7.7 - - - 10.0 10.4 2.0 1.7 6.2 5.8 3.2Average 13.8 13.2 7.7 2.7 2.6 19.1 19.5 2.8 2.6 8.6 8.1 3.0

HK-listed F&B stocks BB CodePER(09,x)

PER(10x)

EPSCAGR(%)

PEG(09,x)

PEG(10,x)

ROE(09,%)

ROE(10,%)

PBR(09,x)

PBR(10,x)

EV/EBITDA 09

EV/EBITDA 10

DivYield %

China Mengniu Dairy 2319 HK Equity 29.0 22.1 50.7 0.6 0.4 13.6 16.4 4.1 3.6 14.1 10.9 0.0China Yurun Food 1068 HK Equity 12.8 10.8 23.1 0.6 0.5 21.4 22.2 2.5 2.1 10.8 8.4 1.9Huiyuan 1886 HK Equity 31.0 25.9 19.4 1.6 1.3 5.2 6.2 1.6 1.5 14.5 12.9 0.3Tingyi 322 HK Equity 24.5 20.2 22.7 1.1 0.9 25.8 29.5 5.8 5.0 11.0 9.4 1.8Uni-President 220 HK Equity 14.3 13.6 32.9 0.4 0.4 12.0 12.3 1.8 1.6 6.8 6.0 0.8Tsingtao Brewery 168 HK Equity 27.2 22.6 20.9 1.3 1.1 14.1 15.5 3.6 3.3 14.1 12.5 1.1Tsingtao Brewery- A 600600 CH Equity 33.5 27.1 30.1 1.1 0.9 14.6 16.2 4.9 4.3 13.2 11.2 0.8Wantwant 151 HK Equity 20.4 16.3 23.4 0.9 0.7 31.9 32.4 5.7 4.9 14.2 11.6 2.6China Food 506 HK Equity 17.4 14.5 8.1 2.1 1.8 12.6 13.7 2.0 1.9 9.4 8.1 1.5China Agri 606 HK Equity 8.6 7.5 25.5 0.3 0.3 14.2 15.0 1.1 1.0 6.9 5.8 3.1China Yurun Food 1068 HK Equity 12.8 10.8 23.1 0.6 0.5 21.4 22.2 2.5 2.1 10.8 8.4 1.9Yantai Changyu-B 200869 CH Equity 19.1 15.9 33.6 0.6 0.5 35.2 35.6 6.2 5.6 15.8 12.8 3.9Yantai Changyu-A 000869 CH Equity 24.8 20.9 25.8 1.0 0.8 35.5 36.8 8.5 8.1 15.5 12.9 2.5Henan Shuanhui 000895 CH Equity 23.9 20.3 23.2 1.0 0.9 30.5 31.2 7.7 6.7 13.5 11.3 1.8Average 21.4 17.7 25.9 0.9 0.8 20.6 21.8 4.2 3.7 12.2 10.2 1.7

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申万研究 24

Appendix : financial analysisⅡ

Source: Bloomberg, SYWG Research

Company Ticker

Sales-5y cagr

GP MEBITM

NP M ROA ROENetdebt/Equity

Asset/Equtiy

AssetTurnover

Inventory days

Receivable days

Payabledays

Cashconversion cycle

Nestle S.A. NESN VX Equity 4.4 56.9 13.6 16.4 10.9 20.5 26.6 1.9 1.0 72.0 37.6 103.4 6.1Kraft Foods Inc KFT US Equity 5.7 33.2 11.7 6.9 4.5 12.1 85.6 2.8 0.6 50.8 42.9 48.9 44.8General Mills GIS US Equity 5.6 35.7 16.5 9.5 7.3 22.8 98.1 2.9 0.7 52.7 27.1 34.8 45.0 ASSOCIATED BRITISH FOODS PLCABF LN Equity 12.2 23.7 7.5 4.3 5.5 8.9 16.5 1.7 1.1 56.5 32.1 29.8 58.8ASAHI Breweries2502 JP Equity 1.0 34.8 6.5 3.1 3.9 9.2 54.1 2.4 1.1 36.0 66.4 38.2 64.2Nissin Food 2897 JP Equity 3.0 49.2 7.2 3.5 5.2 6.4 -31.7 1.4 1.0 27.3 44.6 76.0 -4.2MEIJI SEIKA 2202 JP Equity 2.2 42.1 3.1 1.5 2.2 3.2 55.5 2.2 1.2 71.0 73.8 50.7 94.1BROWN-FORMANBF/B US Equity 4.1 65.6 26.5 17.0 12.9 25.2 51.4 2.0 0.7 284.5 60.8 51.5 293.8Heineken HoldingHEIO NA Equity 8.4 - 8.3 0.7 - 7.8 196.6 4.3 0.9 - 40.7 - -Average 5.2 42.7 11.2 7.0 6.5 12.9 61.4 2.4 0.9 81.3 47.3 54.2 75.3

Company TickerSales-5y cagr

GP MEBITM

NP M ROA ROENetdebt/Equity

Asset/Equtiy

AssetTurnover

Inventory days

Receivable days

Payabledays

Cashconversion cycle

China Mengniu Dairy2319 HK Equity - 22.5 5.1 4.4 -3.2 -6.9 -28.3 1.7 2.4 21.5 5.9 26.3 1.2China Yurun Food1068 HK Equity - 14.1 9.6 10.0 16.7 24.4 -16.1 1.5 1.8 29.4 17.4 27.3 19.6Huiyuan 1886 HK Equity - 35.7 9.7 24.1 6.5 7.0 3.6 1.5 0.5 135.2 30.5 55.2 110.5Tingyi 322 HK Equity 28.4 31.6 10.0 6.1 11.1 22.9 10.7 1.8 1.5 22.2 11.8 48.1 -14.1Uni-President 220 HK Equity - 33.7 6.1 4.9 6.6 8.8 -60.0 1.3 1.5 34.0 10.7 29.2 15.5Tsingtao Brewery168 HK Equity 17.9 31.9 8.6 4.0 5.9 12.2 1.4 1.9 1.3 75.8 3.7 35.1 44.5Wantwant 151 HK Equity - 39.9 19.6 16.1 19.7 31.0 -12.6 1.6 0.9 141.1 20.4 52.2 109.2China Food 506 HK Equity 19.2 24.9 5.8 8.1 5.7 10.3 -18.1 1.6 0.6 171.0 48.2 90.9 128.2Average 21.8 29.3 9.3 9.7 8.6 13.7 -14.9 1.6 1.3 78.8 18.6 45.5 51.8

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申万研究 25

The views expressed in this report accurately reflect the personal views of the analyst. The analyst declares that neither he/she nor his/her associate serves as an officer of nor has any financial interests in relation to the listed corporation reviewed by the analyst. None of the listed corporations reviewed or any third party has provided or agreed to provide any compensation or other benefits in connection with this report to any of the analyst, the Company or the group company(ies). A group company(ies) of the Company confirm that they, whether individually or as a group (i) are not involved in any market making activities for any of the listed corporation reviewed; or (ii) do not have any individual employed by or associated with any group company(ies) of the Company serving as an officer of any of the listed corporation reviewed; or (iii) do not have any financial interest in relation to the listed corporation reviewed or (iv) do not, presently or within the last 12 months, have any investment banking relationship with the listed corporation reviewed.

Undertakings of the AnalystTingting Jia, Haitao WangI am conferred the Professional Quality of Securities Investment Consulting Industry by the Securities Association of China or have equivalent professional competence. I issue this report independently and objectively with due diligence. This report distinctly and accurately reflects my research opinions. I have never been, am not, and will not be compensated directly or indirectly in any form for the specific recommendations or opinions herein. Information Disclosure with respect to the CompanyThe Company fulfills its duty of disclosure within its sphere of knowledge. The clients may contact [email protected] for the relevant disclosure materials.

Introduction of Share Investment RatingSecurity Investment Rating ：When measuring the difference between the markup of the security and that of the market’s benchmark within six months after the release of this report, we define the terms as follows: Buy ： with a markup more than 20% better than that of the market ；Outperform ： With a markup 5% to 20% better than that of the market ；Neutral ： with a markup less than 5% better or worse than that of the market ；Underperform ： with a markup more than 5% worse than that of the market.Industry Investment Rating:When measuring the difference between the markup of the industry index and that of the market’s benchmark within six months after the release of the report, we define the terms as follows: Overweight ： Industry performs better than that of the whole market ；Neutral ： Industry performs about the same as that of the whole market ；Underweight ： Industry performs worse than that of the whole market.

We would like to remind you that different security research institutions adopt different rating terminologies and rating standards. We adopt the relative rating method to recommend the relative weightings of investment. The clients’ decisions to buy or sell securities shall be based on their actual situation, such as their portfolio structures and other necessary factors. The clients shall read through the whole report so as to obtain the complete opinions and information and shall not rely solely on the investment ratings to reach a conclusion. The Company employs its own industry classification system. The industry classification are available at our sales personnel if you are interested.CSI300 is the benchmark employed in this report for A-share listed firms and FXI/SYWG Triple-C Index is the benchmark employed in this report for HK-listed firms.

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申万研究 26

This report is to be used solely by the clients of Shenyin & Wanguo Securities Research Institute Co, Ltd. (hereinafter referred to as the “Company”). The Company will not deem any other person as its client notwithstanding his receipt of this report.This report is based on published information which the Company believes to be reliable, however, the authenticity, accuracy or completeness of such information is not warranted by the Company. The materials, tools, opinions and speculations contained herein are for the clients’ reference only, and are not to be regarded or deemed as an invitation for the sale or purchase of any security or other investment instruments. The clients understand that the text message reminder and telephone recommendation are no more than a brief communication of the research opinions, which are subject to the complete report released on the Company’s website (http://www.sw108.com). The clients may ask for follow-up explanations if they so wish.The materials, opinions and estimates contained herein only reflect the judgment of the Company on the day this report is released. The prices, values and investment returns of the securities or investment instruments referred to herein may fluctuate. At different periods, the Company may release reports which are inconsistent with the materials, opinions and estimates contained herein. The clients shall consider the Company’s possible conflict of interests which may affect the objectivity of this report, and shall not base their investment decisions solely on this report. The investment and services referred to herein may not be suitable for certain clients and shall not constitute personal advice for individual clients. The Company does not ensure that this report fully takes into consideration of the particular investment objectives, financial situations or needs of individual clients. The Company strongly suggests the clients to consider themselves whether the opinions or suggestions herein are suitable for the clients’ particular situations; and to consult an independent investment consultant if necessary.Under no circumstances shall the information contained herein or the opinions expressed herein forms an investment recommendation to anyone. Under no circumstances shall the Company be held responsible for any loss caused by the use of any contents herein by anyone.Independent investment consultant should be consulted before any investment decision is rendered based on this report or at any request of explanation for this report where the receiver of this report is not a client of the Company.

The Company possesses all copyrights of this report. The Company reserves all rights related to this report. Unless otherwise indicated in writing, all the copyrights of all the materials herein belong to the Company. In the absence of any prior authorization by the Company in writing, no part of this report shall be copied, photocopied, replicated or redistributed to any other person in any form by any means, or be used in any other ways which will infringe upon the copyrights of the Company. All the trademarks, service marks and marks used herein are trademarks, service marks or marks of the Company, and no one shall have the right to use them at any circumstances without the prior consent of the Company.This report may be translated into different languages. The Company does not warrant that the translations are free from errors or discrepancies.This report is for distribution in Hong Kong only to persons who fall within the definition of professional investors whether under the Securities and Futures Ordinance (Chapter 571 of the laws of Hong Kong) (the “SFO”) or the Securities and Futures (Professional Investor) Rules (Chapter 571D of the laws of the Hong Kong under the SFO).This report is for distribution in the United Kingdom only to persons who (i) have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) order 2001 (as amended) (the “Order”) or (ii) are persons falling within Article 49(2)(a) to (d) (“High Net Worth Companies, Unincorporated Associations, etc”) of the Order (All such persons together being referred to as “Relevant Persons”). This document is directed only at Relevant Persons. Other Persons who are not Relevant Persons must not act or rely upon this document or any of its contents.Neither this report nor any copy of it may be taken or transmitted into the United States of America, its territories or possessions or distributed, directly or indirectly, in the United States of America, its territories or possessions or to any U.S. person (Within the meaning of Regulation S under the U.S. Securities Act of 1933, as amended). Any failure to comply with this restriction may constitute a violation of U.S. securities laws. Neither this report nor any copy of it may be taken or transmitted into Canada. The distribution of this report in other jurisdictions may be restricted by law and persons into whose possession this report comes should inform themselves about, and observe, any such restrictions. By accepting this report the clients agree to be bound by the foregoing limitations.

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申万研究 27

Shanghai SWS Research & Consulting Co., Ltd.

Joyce Jia

[email protected]

申万研究 • 拓展您的价值SYWG Research • CHINA Value Revealed

solid fundamentals priced in, no excess return ——2h09 investment strategy for hk listed chinese...

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