both msg and xanthan gum may turn...

Please read carefully the important disclosures at the end of this report

Equity Research

October 22, 2013

Meihua Holdings Group

Both MSG and xanthan gum may turn around

Initial Coverage Initiate with BUY

Investment positives

The consolidation of the monosodium glutamate (MSG) industry is nearing an end and earnings will likely double in 2014, driven by business turnaround. This round of industry consolidation began in 2011 and is nearing its end. Of China’s 11 MSG producers, ~33% of total production capacity has been suffering losses for almost two years. We expect the ongoing industry consolidation to end soon amid tightening environmental standards; and a new cycle will likely kick off in 2014. As China’s second-largest MSG producer, Meihua Holdings Group represents 20% of the country’s total MSG capacity. We expect its earnings to surge 113% YoY to Rmb0.32/sh in 2014, with 50% coming from MSG operations.

Earnings to rebound strongly, driven by growing sales and prices of amino acid as bird flu impact gradually fades. In 1H13, bird flu dealt a heavy blow to amino acid demand, with prices and profit margins of threonine and lysine sulfate hitting five-year lows. As this impact gradually fades, we expect the amino acid business to triple its net profit and contribute 20% of Meihua’s 2014 earnings driven by capacity expansion, cost advantage and rising sales & prices.

New products to further improve product mix; xanthan gum and pullulan to become earnings contributors. New high-margin products will likely boost earnings from 2014. Meihua has made a breakthrough in pullulan production technology; its 300t-facility has started trial production and will likely become a new earnings growth driver. Despite a possible price decline, xanthan gum will gradually start to post earnings thanks to its above-average profit margin.

Financials

Initiate with ACCUMULATE. We believe the MSG and amino acid markets are at cyclical bottoms and will likely turn around in 2014. We expect Meihua’s 2013/14 EPS to be Rmb0.15/Rmb0.32, implying P/E ratios of 37x/18x. We initiate our coverage of Meihua Holdings Group with an ACCUMULATE rating and TP of Rmb6.4 considering that new products will likely further improve its product mix and the turnaround of its principal businesses will give a strong boost to earnings.

Valuation and recommendation

Weaker-than-expected demand growth; industry consolidation is slower-than-expected.

Risks

风险提示的具体内容

Ticker 600873.SH

Last close Rmb5.49

52wk price range Rmb6.20~3.70

Market cap (bn) Rmb18

Daily value (mn) Rmb64.92

Shares outstanding (mn) 3,108

Free float (%) 23

Daily volume (mn sh) 12.41

Business sector Chemicals

( mn) 2011A 2012A 2013E 2014E

Revenue 6,866 7,470 8,207 9,316

(+/-) 36.9% 8.8% 9.9% 13.5%

Net profit 719 608 477 989

(+/-) -8.9% -15.5% -21.5% 107.3%

EPS 0.23 0.20 0.15 0.32

BPS 1.66 1.76 1.87 2.09

DPS 0.16 0.00 0.05 0.10

CPS 0.15 0.42 0.12 0.42

P/E 25.2 29.8 36.8 17.8

P/B 3.5 3.3 3.1 2.8

EV/EBITDA 16.2 14.7 17.6 12.8

Dividend yield 2.8% 0.0% 0.8% 1.6%

ROAA 6.2% 3.9% 2.5% 4.6%

ROAE 14.3% 11.4% 8.4% 16.1%

Source: Bloomberg, company data, CICC Research

Zheng GAO

[email protected]

SFC CE Ref: AZD599

67

78

89

100

111

122

Oct-2012 Jan-2013 Apr-2013 Jul-2013 Oct-2013

Re

lative

Va

lue

(%

) 600873.SH CSI 300

CICC Research: October 22, 2013


2

Contents

Company profile ................................................................................................................................................. 3 MSG industry consolidation nearing completion; new cycle about to start ............................................... 4

Introduction to Meihua’s MSG business .................................................................................................................. 4

Stable low growth in demand for MSG industry ...................................................................................................... 4

Third round of MSG industry consolidation nears end ............................................................................................ 5

Drivers of industry consolidation .............................................................................................................................. 6

Strong earnings rebound driven by growing sales & prices of amino acids as bird flu’s impact fades . 9

Threonine……………............................................................................................................................................... 9

Lysine sulfate………. ............................................................................................................................................. 10

New products to further improve product mix and become earnings contributors in 2014 .................... 11

Xanthan gum………............................................................................................................................................... 11

Pullulan……………. ............................................................................................................................................... 11

Initiate with ACCUMULATE ............................................................................................................................. 12

Figures

Figure 1: Shareholding structure of Meihua ......................................................................................................... 3 Figure 2: Operating revenue by segment (left); gross profit by segment (center); gross margin movement

(right) .................................................................................................................................................................... 3 Figure 3: Global MSG demand (left); China MSG demand (center); MSG demand structure, 2013 (right) ....... 4 Figure 4: Historical prices in MSG industry .......................................................................................................... 5 Figure 5: Distribution of domestic MSG production capacity ............................................................................... 6 Figure 6: Environmental policies and MSG industry consolidation policies over 2007~2013 ............................. 6 Figure 7: Combined market share of top five MSG companies by production capacity ..................................... 7 Figure 8: Global MSG production capacity distribution (left) and MSG production cost breakdown (right)........ 7 Figure 9: Cost curve of China’s MSG industry ..................................................................................................... 8 Figure 10: Earnings sensitivity to MSG prices ..................................................................................................... 8 Figure 11: Distribution of Meihua’s amino acid production capacity .................................................................... 9 Figure 12: Gross margins of amino acid business (left); threonine price movements (center); lysine sulfate

price movements (right) ....................................................................................................................................... 9 Figure 13: Global threonine production capacity by producer in 2013 (left); global lysine sulfate production

capacity by producer in 2013 (right) ................................................................................................................... 10 Figure 14: Gross margin movements of xanthan gum business in 2013 (left); Xanthan gum demand by

downstream sector (center); Xanthan gum price movements (right) ................................................................. 11 Figure 15: Meihua’s earnings sensitivity to product price changes ................................................................... 12 Figure 16: Historical P/E and P/B bands............................................................................................................ 12 Figure 17: Historical and forecasted financial data ............................................................................................ 13



3

0

500

1,000

1,500

2,000

2,500Gross Margin 2010-2014E

Others

Aminoacid

MSG

0

0.1

0.2

0.3

0.4

2010 2011 2012 1H2013 2013E 2014E

MSG Amino acid Others

0

2,000

4,000

6,000

8,000

10,000Revenue 2010-2014E

Others

Aminoacid

MSG

Company profile

Meihua Holdings Group Co., Ltd is principally engaged in the manufacture and

distribution of biologically fermented products. These products are primarily food

additives, pharmaceutical intermediates, feed additives and seasonings, which are distributed

in over 50 countries and regions. Meihua has established strategic cooperative relationships

with a number of renowned domestic and international food, feed and pharmaceutical

companies.

Meihua was listed on the Shanghai Stock Exchange in 2010, although is currently still

controlled by natural persons. Together with persons acting in concert, Meng Qingshan, the

largest shareholder with 25.48% equity, holds a 35.41% equity stake in Meihua.

Figure 1: Shareholding structure of Meihua

Source: Company data, CICC Research

In 1H13, Meihua reported sales revenue of Rmb3.896bn, Rmb1.86bn of which was from the

MSG segment (48% of total; 16% gross margin) and Rmb1.1bn from the amino acid segment

(28%). The gross margin of amino acid business dropped from 25% in 2012 to 18% in 1H13

due to the negative impact from bird flu.

Figure 2: Operating revenue by segment (left); gross profit by segment (center); gross margin movement (right)


Meng Qinshan and other person acting in oncert

Meihua Holding Group

35.41%

100%

Longliao Meihua Biological Technology Co.,Ltd

Tongliao Lvnong Bio-Chemical Co.,Ltd

Langfang Lvnong Bio-Chemical Co.,Ltd

Langfang Meihua Biological Technology Co.,Ltd

Xinjiang Meihua Amino Acid Co.,Ltd

Langfang Meihua Compound Seasoning Co.,Ltd

Meihua International trading (Hong kong)

Meihua Amino Acid (Hulunbeier)



4

Food Processing

50%

Food Service

30%

Microsales 20%

0%

10%

20%

30%

0

800

1,600

2,400

3,200

4,000

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13E

20

14E

Global MSG demand (k tonnes)

Global YoY

Before 11Y CAGR=9%

11-14Y CAGR=5%

0%

10%

20%

30%

0

400

800

1,200

1,600

2,000

China's MSG demand （k tonnes）China

Before 11YCAGR=7%

11-14Y CAGR=5.%

MSG industry consolidation nearing completion; new cycle about to start

Introduction to Meihua’s MSG business

With a production capacity of 520,000t, Meihua is the world’s second largest MSG producer,

behind only Fufeng Group. Meihua exports 100,000~150,000t of MSG p.a., representing ~50%

of the MSG industry’s total. At present, Meihua has a 420,000t capacity production facility in

Tongliao and 100,000t in Xinjiang. As corn and coal are the key raw resources, Meihua’s

Tongliao production facility enjoys cost advantages thanks to the lower corn and coal prices

in Inner Mongolia.

Stable low growth in demand for MSG industry

MSG is a common flavor enhancer. Ajinomoto estimates global MSG demand totals 2.93mt

and China’s demand reaches 1.55mt. At present 50% of MSG is sold to food processing

companies for the production of food flavoring agents, 30% is used by restaurants, with the

remaining 20% going to households and supermarkets. MSG demand is relatively unaffected

by the economy’s cyclical fluctuations. MSG demand has shown a steady growth trend along

with the development of the food processing and restaurant industries. Global MSG demand

grew at a CAGR of 9% over 2001~10 and is expected to grow at a CAGR of 5% over

2011~14.

Publicly available data shows that China’s MSG production began to take off in the 1980s

and the country became the world’s largest MSG producer in 1992. China’s MSG demand

grew at a CAGR of 7% over 2001~10 and is expected to grow at a CAGR of 5% over

2011~14 as the industry is likely to maintain a growth rate of 8~10% driven by economic

development and seasoning upgrading. Our preliminary estimates show that the domestic

market for flavor enhancers reaches >Rmb30bn, accounting for nearly 25% of the seasoning

industry. The MSG market reaches ~Rmb21bn or 70% of the flavor enhancer market. MSG

remains one of the most important flavor enhancers in the Chinese mainland.

Figure 3: Global MSG demand (left); China MSG demand (center); MSG demand structure, 2013 (right)

Source: Ajinomoto, China Fermentation Industry Association, CICC Research

Food Processing

50%

Food Service

30%

Microsales 20%



5

4,000

5,000

6,000

7,000

8,000

9,000

10,000

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

1Q

11

2Q

11

3Q

11

4Q

11

1Q

12

2Q

12

3Q

12

4Q

12

1Q

13

2Q

13

Second condolidation from 2007 ~2009

Third consolidation

Began in 2011 and nearing completion

Third round of MSG industry consolidation nears end

Since 2003, the MSG industry has experienced three rounds of consolidation: 2003~04;

2007~09; and, 2011 to date.

The first round of industry consolidation took place in 2003~04: It saw most of the MSG

plants in the Pearl River basin go out of business, while companies in the Yangtze River basin,

Henan and Shandong all grew bigger. This round of industry consolidation saw the total

number of MSG companies drop from >100 to 65.

The second round of industry consolidation ran from 2H07~2009: In 2007, the State

Council issued the Comprehensive Work Plan for Energy Saving & Emission Reduction as

part of its bid to eliminate obsolete production capacity. According to the Plan, MSG

companies with annual output of <30,000t would be eliminated. The NDRC and SEPA then

proposed eliminating 200,000t of obsolete MSG production capacity during the 11th

FYP

period. In 2009, the State Council issued the Light Industry Restructuring & Revitalization

Plan, proposing again to eliminate MSG companies with annual output of <30,000t and

eliminate 120,000t of obsolete MSG production capacity. In this context, a large number of

small and medium MSG producers – especially low-margin, high-polluting companies that

relied on purchased glutamate for production – quickly went out of business. This round of

industry consolidation saw the number of MSG companies fall from 65 to ~35 with 30~40%

of total MSG production capacity eliminated.

The third round of industry consolidation began in 2011 and is currently nearing

completion. Since 2011, the MSG industry has been facing overcapacity problems, rising

raw material prices and diminishing profits. Some high-polluting, high-cost small and

medium enterprises were forced out of business. At present there are only 11 MSG producers

left in China and ~33% of their total production capacity has been in the red for almost two

years.

Figure 4: Historical prices in MSG industry


The current distribution of domestic MSG production capacity is shown in the figure below.

Fufeng Group leads the industry with annual production capacity of 1.05mt, followed by

Meihua Holdings Group with 500,000t. Excess capacity and thin profit have left many small

and medium enterprises operating at <30% of capacity or even suspending production.

Second consolidation

(2007~2009)



6

YearPolicy for environmental

protectionIssuer Policy for MSG industry Meaning

2007

"Comprehensive w orking plan for

energy conservation and emissions

reduction"

The State Council

Reinforce the elimination of outdated industrial production capacity,

eliminate MSG manufacturers w ith less than 30,000 tonnes of

production capacity

Eliminate outdated production capacity, adjust industry, protect the

environment and public health

2007

"Announcement about eliminating

outdated production of paper,

alcohol, MSG and citric acid"

National Development and

Reform Commission;

State Environmental Protection

Administration

In the MSG industry, eliminate the MSG companies w ith less than

30,000 tonnes of production capacity (in accordance w ith GB19431-

2004 "Emission standards for industrial w aste in the MSG

industry"); During the 11th f ive-year plan period, eliminate 200,000

tonnes of outdated MSG production capacity, realize the elimination

of 100,000 tonnes COD

Promote the industry structure adjustments, promote industry

upgrading, reduce environmental pollution, realize emission reduction

goals

2007

"Announcement about printing and

distributing guidance for promoting

the healthy development of the corn

deep processing industry"

National Development and

Reform Commission

Control the development of products w ith domestically balanced

supply and demand and products w ith more supply than demand,

publish technical indicators such as MSG energy consumption,

w ater consumption, main pollutant emissions, etc.

Reduce resource consumption and pollutant emissions

2009"Plan for adjustment and

revitalization of light industry"The State Council

In the food industry, eliminate MSG production and equipment for

manufactureres w ith less than 30,000 tonnes outputSpeed up structural adjustments, promote industrial upgrading

2010

"Issuing the task of eliminating

outdated production capacity of 18

industries in 2010"

The Ministry of Industry and

Information

Eliminate 189,000 tonnes of outdated production capacity in the

MSG industry

2011



industries in 2011"


Information

Eliminate 83,800 tonnes of outdated production capacity in the MSG

industry

2012



industries in 2012"


Information


MSG industry

2013



industries in 2013"


Information


MSG industry

Figure 5: Distribution of domestic MSG production capacity


Drivers of industry consolidation

The three rounds of industry consolidation were driven by environmental policies,

environmental pressures, and cost differences.

Environmental policies: The government introduced policies to eliminate obsolete

production capacity in 2007 and 2009. These measures prompted a large number of small and

medium MSG producers – especially low-margin, high-polluting ones that relied on

purchased glutamate for production – to quickly go out of business and the total number of

MSG producers declined rapidly from >100 to >20. The 2009 policy to restrict companies

with annual production capacity of <100,000t and close small plants led to a shortage of

glutamate and caused large companies to reduce glutamate supply, dealing a heavy blow to

small and medium companies. In 2013, the MIIT plans to eliminate 285,000t of obsolete

MSG production capacity, doubling the 2012 figure of 143,000t.

Figure 6: Environmental policies and MSG industry consolidation policies over 2007~2013

Source: CICC Research

Company Location

Production

Capacity

（k tonnes）

Output

（k tonnes）

Operating

Rate

Fufeng Group Inner Mongolia 1,050 750 71%

Meihua Group Inner Mongolia 520 400 77%

Ningxia Eppen Ningxia 200 140 70%

Shandong Shenghua Haerbin,Ningxia 150 120 80%

Linghua Shandong 100 20 20%

Lotus Henan 160 80 50%

China Agri Heilingjiang' 100 0 0%

Xinle Shandong 50 0 0%

Sanjiu Shandong 90 40 44%

Fujian Wuyi Fujian 80 0 0%

Qilu Xuehua Shandong 120 20 17%

Total 2,620 1,570 60%



7

Environmental pressures: The MSG industry value chain consists of corn processing to

produce corn starch; corn starch processing to produce starch sugar; starch sugar fermentation

to produce glutamate; and, glutamate conversion to produce MSG. Corn processing to

produce glutamate uses fermentation technology and the fermentation process produces large

quantities of waste water and gas, which requires environmental investment. Treatment of

100,000t of waste water requires Rmb50~60mn of investment, which represents 15% of total

production costs. High environmental expenditure constitutes a barrier to entry. Thus small

plants directly purchase glutamate from other companies to produce MSG. The top five

companies in the MSG industry account for 60% of total production capacity. Past experience

suggests that when the top five companies account for 30~60% of total production capacity

and the total number of companies is ~100, leading companies with good environmental

performance are likely to benefit from the shutdown of small plants.

Figure 7: Combined market share of top five MSG companies by production capacity


Cost differences. Glutamate is the main raw material for production of MSG. Producing 1t of

MSG needs 0.8t of glutamate, 2.0~2.5t of coal and 400kg of synthetic ammonia. Producing 1t

of glutamate needs 2.9~3.0t of corn; and producing 1t of synthetic ammonia needs 1.53t of

coal. Therefore, producing 1t of MSG needs to consume 2.4t of corn and 2.6~3.1t of coal.

China is at a cost advantage in MSG production by leveraging on the country’s large corn and

coal production capacity. China accounts for 77% of global MSG production capacity,

followed by Vietnam, which accounts for 9%. With commodity prices rising in recent years,

Ajinomoto has moved production to Indonesia and Vedan International has moved production

to Vietnam. Companies have also begun to shift to the higher margin compound seasoning.

Figure 8: Global MSG production capacity distribution (left) and MSG production cost breakdown (right)


Corn Kernels

54%

Coal16%

Sulphuric acid2%

Water2%

Employee benefit

4%

Depreciation1%

Environment20%

Others1%

China77%

Vietnam9%

Japan4%

Brazil4%

Thailand3%

Indonesia2%

Others1%

100%

94%

76%

72%

67%

65%

60%

60%

45%

44%

35%

33%

33%

31%

31%

25%

19%

15%

15%

5%

0 0.2 0.4 0.6 0.8 1

MDI

TDI

BDO

DMF

Adipic acid

Epoxy propane

Dye

MSG

Glyphosate

Spandex

Phosphatic fertilizer

Titanium dioxide

Printing ink

PVC

Rayon

Polyester

Urea

Pigment

Soda

Architectural coating



8

2014e MSG ASP

(Rmb/tonne including tax)

EPS (Rmb) P/E

8,300 0.29 19.5 8,400 0.31 18.3 8,500 0.32 17.8 8,600 0.33 17.2 8,700 0.34 16.6 8,800 0.35 16.2 8,900 0.37 15.3

Meihua Group

Figure 9: Cost curve of China’s MSG industry


An Rmb100/t increase of MSG prices will enhance Meihua’s EPS by Rmb0.01/sh.

Figure 10: Earnings sensitivity to MSG prices


4,000

6,000

8,000

10,000

0 400 800 1200 1600 2000 2400

RMB/tonne

Accumulated Production Capacity

(k tonnes)

Fufeng Inner Mongolia

Fufeng Northeast

Meihua Tongliao

Fufeng Shanxi

NIngxia Eppen

Lotus

Wuyi

ChinaAgri

Linhua

Xinle

Sanjiu

MeihuaHebei

2014 China MSG Demand

Shenhua

Qilu Xuehua



9

Product Capacity (K tonnes) Capacity description

MSG 520

MSG capacity is 520,000 tonnes, less than Fufeng Group; 420,000 tonnes of capacity

are located in Tongliao, 100,000 tonnes of capacity are located in Xinjiang.

Xanthan gum 10 Trial production of Xanthan gum began in May 2013.

Threonine 80

Both the capacities of threonine and ajinomoto rank f irst globally; capacity w ill reach

150,000 tonnes as fund-raising projects start production this year.

Lysine 260

Trial production of a fund-raising project and 200,000 tonnes of self-f inanced projects

began operations in January 2013.

I+G 13 Capacity at Tongliao is 3,000 tonnes, capacity in Xinjiang is 10,000 tonnes.

Tryptophan The fund-raising project has on-going capacity of 5,000 tonnes.

Proline The fund-raising project has on-going capacity of 1,000 tonnes.

Glutamine 6

The original capacity w as 1,000 tonnes; a fund-raising project w ith 5,000 tonnes

capacity has already began operations.

Nucleotide 13 Trial production of a fund-raising project w ith 10,000 tonnes has already began.

Isoleucine The fund-raising project w ith 1,000 tonnes of capacity is in progress.

Strong earnings rebound driven by growing sales & prices of amino acids as bird flu’s impact fades

Meihua principally manufactures threonine, lysine sulfate, nucleotide, I+G and other types of

amino acids. In 1H13, bird flu dealt a heavy blow to amino acid demand, with the prices and

profit margins of feed additives, threonine and lysine sulfate, all hitting five-year lows. As

this impact gradually fades, we expect the amino acid business to triple its net profit and

contribute 25% of Meihua’s total 2014 earnings, driven by capacity expansion, cost

advantages, and rising sales and prices.

Figure 11: Distribution of Meihua’s amino acid production capacity


Figure 12: Gross margins of amino acid business (left); threonine price movements (center); lysine sulfate price

movements (right)


Threonine

Threonine is a widely-used feed additive that also has applications in the pharmaceutical,

cosmetics and health care product industries.

Company data indicates that 70% of global threonine products are sold to Europe. In 2012,

China produced 174,000t of threonine, of which it exported 90,000t, while domestic demand

was 75,000t (+15% YoY). We expect domestic demand to expand to 130,000t in 2015, while

China’s exports will also continue to increase. Over the coming 5~10 years, threonine

demand is likely to grow at a CAGR of >20%, and global demand will likely expand from

300,000t to 500,000~600,000t p.a. over the next three years.

5

55

105

155

205

255

2010-10-08 2011-10-08 2012-10-08 2013-10-08

China lysine (98.5%) historical price

k Rmb/tonne

50

100

150

200

2010-10-08 2011-10-08 2012-10-08 2013-10-08

China Threoine historical price

k Rmb/tonne

0%

10%

20%

30%

40%

2010 2011 2012 1H2013 2013E 2014E

Amino acid GPM



10

Global threonine production capacity currently stands at 340,000t, with Meihua and

Ajinomoto tied for first place, each with 80,000t capacity. Meihua has a 30% share of the

global market (the second largest), and almost 50% in China. It will expand its production

capacity from 80,000t to 150,000t (the world’s largest) after non-public offering-funded

projects reach their design capacity.

Lysine sulfate

Lysine sulfate is mainly used as a feed additive. In 2011, the global lysine sulfate demand

totaled 1.5mt, and this figure is expected to reach 2.5mt by 2020. In 2012, China’s lysine

sulfate demand increased 15% YoY to 600,000t, with domestic production estimated at

976,000t, imports at 11,000t and exports at 226,100t. We expect China’s lysine sulfate

demand to grow at a CAGR of 8.5% over the next five years, and total demand to reach

550,000t as of 2015.

Global lysine sulfate production capacity currently stands at 1.7~1.8mt. Dacheng Group is the

largest producer with capacity of 600,000t; Meihua plans to expand its lysine sulfate

production capacity from 60,000t to 260,000t after non-public offering-funded projects reach

their design capacity.

Figure 13: Global threonine production capacity by producer in 2013 (left); global lysine sulfate production capacity

by producer in 2013 (right)


Company Capacity(K tonnes) Note

Meihua 80 Will reach 150 K tonnes in the end of 2013

Ajinomoto 80

Eppen 50

Xijie 50

Fufeng 40

Xinghu 30 Overhaul

Others 10

Total 340

Company Capacity(K tonnes)

Dacheng 600

Xijie 320

Meihua 260

Eppen 250

Others 270～370

Total 170～180



11

New products to further improve product mix and become earnings contributors in 2014

High-margin new products likely to boost earnings starting from 2014. Meihua has made

a breakthrough in pullulan production technology; its 300t-facility has started trial production

and will likely become a new earnings growth driver. In spite of a possible price decline,

xanthan gum will gradually start to post earnings thanks to its above-average profit margin.

Xanthan gum

Xanthan gum is a polysaccharide widely used in the oilfield services, food and cosmetics

sectors. At present, 50% of xanthan gum is sold to the oil & shale gas exploration industry

40% to food companies with the remaining 10% is used in the pharmaceutical and cosmetics

sectors. Global xanthan gum demand has expanded over the past few years; but its supply

tightened in 2012 as overseas oil & gas developers’ demand for polymeric additives

exploded.

Meihua has 10,000t of xanthan gum production capacity, with an ASP of Rmb23,000/t. The

market is worried about possible declines in xanthan gum prices and new entrants. In our

opinion, in spite of any possible price declines, xanthan gum is still likely to serve as a new

earnings contributor thanks to its capacity expansion and above-average profit margin.

Figure 14: Gross margin movements of xanthan gum business in 2013 (left); Xanthan gum demand by

downstream sector (center); Xanthan gum price movements (right)


Pullulan

Pullulan is a polysaccharide polymer consisting of maltotriose units, and is widely used

across the pharmaceutical, food, light industry, chemical and petroleum sectors. In the food

industry, pullulan is used as a food packaging material, low calorie viscosity enhancer, binder

and quality improver. In the pharmaceutical industry, pullulan is also widely used as an

encapsulating agent for capsules.

Meihua announced that it has made a breakthrough in pullulan production technology. The

company invested Rmb101.6mn to build a 1,000t-pullulan production facility and

1.5bn-pullulan vegetable capsule production line. So far, a 300t p.a. pullulan production line

has started trial production.

After reaching design capacity, this project can enhance net profit by Rmb100mn a year, with

a payback period of one year and annual return on investment of ~100%.

Oil51%

Food41%

Pharma &

Cosmetics

8%

0

5,000

10,000

15,000

20,000

25,000

30,000

1H08 2H08 1H09 2H09 1H10 2H10 1H11 2H11 1H12 2H12 1H13

Xanthan Gum ASP (RMB/tonne)

CompanyProduction Capacity

(k tonnes)

Fufeng 74

Zhongxuan 40

Cpkelco 30

Others 16

Total 160

http://en.wikipedia.org/wiki/Polysaccharide

http://en.wikipedia.org/wiki/Polymer

http://en.wikipedia.org/wiki/Maltotriose



12

Initiate with ACCUMULATE

We believe that the MSG and amino acid markets are at cyclical bottoms and likely to

turn around in 2014. We expect Meihua’s 2013/14 EPS to be Rmb0.15/Rmb0.32, implying

P/E ratios of 37x/18x. We initiate our coverage of Meihua Holdings Group with an

ACCUMULATE rating and a target price of Rmb6.4, considering new products will

likely further improve its product mix and the turnaround of its principal businesses will give

a strong boost to earnings. Our target price of Rmb6.4 implies 20x 2014e EPS.

An Rmb100/t increase in MSG prices will enhance Meihua’s EPS by Rmb0.01/sh.

Figure 15: Meihua’s earnings sensitivity to product price changes

Source: CICC Research

Figure 16: Historical P/E and P/B bands

Source: Wind, Company data, CICC Research

-

5

10

15

20

Oct-10 Oct-11 Oct-12 Oct-13

Px_Last 10X 15X 20X 25X

-

5

10

15

20

Oct-10 Oct-11 Oct-12 Oct-13

Px_Last 1X 2X 3X 4X

2014e

MSG ASP

（Rmb/tonne）

including tax

MSG

EPS(Rmb)

Xanthan

gum

EPS(Rmb)

Others

EPS(Rmb)EPS(Rmb) P/E

8,300 0.13 0.08 0.08 0.29 19.5

8,400 0.15 0.08 0.08 0.31 18.3

8,500 0.16 0.08 0.08 0.32 17.8

8,600 0.17 0.08 0.08 0.33 17.2

8,700 0.18 0.08 0.08 0.34 16.6

8,800 0.19 0.08 0.08 0.35 16.2

8,900 0.21 0.08 0.08 0.37 15.3

Meihua Group



13

Figure 17: Historical and forecasted financial data

Source: Wind, Company data, CICC Research

2010A 2011A 2012A 2013E 2014E

P&L (RMB mn)

Revenue 5,015 6,866 7,470 8,207 9,316

Gross profit 1,462 1,647 1,678 1,545 2,280

Selling expenses 305 316 331 364 413

G&A 252 347 333 366 415

Financial expenses 67 238 312 254 289

Operating profit 836 742 696 561 1,163

Tax -179 -165 -184 -84 -175

Net income 790 719 608 477 989

Cash Flow

Operating Cashflow 494 466 1,310 375 1,294

Investing cashflow -1,806 -3,290 -3,149 -2,000 -2,000

Financing cashflow 1,418 3,471 765 2,457 503

Cash and cash equivalents change 104 647 -1,073 829 -202

Balance Sheet

Current Assets 3,357 5,279 3,308 5,518 5,832

Fixed Assets 5,233 7,574 12,387 13,754 15,121

Current liabilities 3,153 5,348 8,277 9,903 11,071

Long-term liabilities 1,320 3,349 3,340 4,940 4,740

Shareholder's equity 4,929 5,144 5,481 5,815 6,507

Total assets 9,402 13,841 17,098 20,657 22,318

Financial Ratio

Gross margin 29.2% 24.0% 22.5% 18.8% 24.5%

EBIT margin 18.0% 14.3% 13.6% 9.9% 15.6%

Net margin 15.8% 10.5% 8.1% 5.8% 10.6%

ROE 16.0% 14.0% 11.1% 8.2% 15.2%

ROA 8.4% 5.2% 3.6% 2.3% 4.4%

Debt ratio 47.6% 62.8% 67.9% 71.8% 70.8%

Debt to equity 90.8% 169.1% 211.9% 255.2% 243.0%

Current ratio 1.1 1.0 0.4 0.6 0.5

Quick ratio 0.8 0.8 0.3 0.4 0.4

AR turnover days 103 114 72 93 93

Inventory turnover days 50 65 46 75 75

Dividend payout ratio 63.8% 0.0% 95.7% 30.0% 30.0%


14

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both msg and xanthan gum may turn...

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