regional industry focus animal protein - dbs group malindo feedmill (main), cj cheiljedang (097950)...

ed-CK / sa- MA, PY

An Asian consumption story Indonesian protein demand is due to double in the five

years’ time – so is the capacity needed to produce them

Indonesian integrators’ EBITDA (in USD terms) should conservatively grow 10% CAGR in 2016-2019

The industry is on better footing – as tighter regulations should work to reduce price volatility

Top picks: Japfa Ltd (JAP), Japfa Comfeed (JPFA), Malindo Feedmill (MAIN), CJ Cheiljedang (097950)

Connecting the dots. We looked at how much Indonesia’s chicken meat consumption and population would be in five years’ time; and found compelling reasons to be optimistic. By 2021, per capita consumption will almost double to 19.4kg. To meet this, 1,297 new breeding farms, 3,412 new commercial farms, and 11m MT of new feedmill capacities will need to be built. Structurally, we think top players’ current dominance should continue; with significant profit growth opportunities. Growth is in the numbers. In 2008-2015, Indonesia’s per capita chicken consumption grew 11.7% CAGR to 10 kg (vs. 21kg in Jakarta alone) – driven by population/income growth and urbanisation. Processed chicken/dairy sales expanded at a faster CAGR of 17% and 13%, respectively – albeit from a small base. In Malaysia, chicken consumption per capita grew at a slower 5% CAGR in 2005-2015; and should peak at 51 kg, in our view. This will be fuelled by value-added products, expansion in retail/distribution outlets, and exports. On better footing. Indonesian integrators continue to deleverage and reduce exposure to USD debt; given their modest capital expenditures and stronger cash flow in the past year. We believe breeding regulation will work to prevent a repeat of the 2015 oversupply situation. Meanwhile, Malaysia’s exports/ ventures overseas are focused on expanding its processed food product market, while tapping the limited availability of the international halal market. Collect for upcoming upswing. Indonesian protein demand is due to seasonally recover in 1Q17 and peak in 2Q17. We recommend exposure to JAP, JPFA, MAIN and CJ Cheiljedang. We expect rising consumption and geographical/downstream expansions to buffet USD strength, higher interest rates. Seasonally lower 4Q16 earnings in Indonesia. In 4Q16, average poultry feed, DOC and live broiler prices (based on West Java market data) moved +2%, -2% and -2% q-o-q, respectively – reflecting higher raw material costs and seasonally lower demand. At the same time, domestic corn prices surged by 37% q-o-q; principally caused by domestic supply shortage, import restrictions and the absence of government buffer stock mechanism. In the absence of low-cost feed wheat, feed margins have also sequentially moderated from a high base.

JCI : 5,396.00 KLCI: 1,691.24 STI: 3,056.91 KOSPI: 2,077.66 Analyst Ben SANTOSO +65 6682 3707 [email protected]

Indonesia Research Team

Regional Research Team

Stock coverage

Closing price as of 6 February 2017 CJ Cheiljedang closing price as of 7 February 2017 Source: DBS Bank, Bloomberg Finance L.P. Key assumptions Source: Companies, DBS Bank estimates

DBS Group Research . Equity 10 Feb 2017

Regional Industry Focus

Animal Protein

Refer to important disclosures at the end of this report

Price Mkt

Cap

12-mth Target

Price

Performance (%)

LCY US$m LCY 3 mth 12 mth Rating Rp Charoen Pokphand Indonesia 3,240 3,989 3,430 (8.2) (12.3) HOLD Japfa Comfeed Indonesia 1,780 1,525 2,025 (6.3) 135.8 BUY Malindo Feedmill 1,190 200 1,550 (26.5) (14.4) BUY Sierad Produce 695 69.9 895 (5.4) (19.2) NR S$ Japfa Ltd 1.035 1,295 1.26 13.7 125.0 BUY RM CAB Cakaran Corp Bhd 1.71 64 1.71 6.9 (2.3) NR QL Resources 4.39 1,237 4.60 (0.5) (2.9) HOLD Teo Seng Capital 1.01 92 1.38 (12.2) (24.6) NR KRW CJ Cheiljedang 364,000 4,187 530,000 1.8 (0.9) BUY

2014 2015 2016F 2017F 2018F

Charoen Pokphand Indonesia Poultry feed (Rp/kg) 6,397 6,015 6,220 6,326 6,436 DOC (Rp/chick) 3,450 4,400 5,214 5,274 5,406 Broiler (Rp/kg live) 15,088 16,150 17,226 17,424 17,641

Japfa Comfeed Indonesia Poultry feed (Rp/kg) 5,929 5,810 6,261 6,329 6,399 DOC (Rp/chick) 3,905 4,450 5,216 5,276 5,407 Broiler (Rp/kg live) 16,163 16,150 17,226 17,424 17,641

Malindo Feedmill Poultry feed (Rp/kg) 6,199 6,200 6,308 6,425 6,552 DOC (Rp/chick) 3,210 3,900 4,694 5,125 5,254 Broiler (Rp/kg live) 16,149 16,600 17,214 17,412 17,630

Sierad Produce Poultry feed (Rp/kg) 6,206 5,913 6,139 6,389 6,727 DOC (Rp/chick) 3,063 3,421 4,910 5,010 5,142 Broiler (Rp/kg live) 14,762 16,841 17,030 17,030 17,456

Raw materials cost assumptions Domestic corn (Rp/kg) 3,670 3,515 4,265 4,482 4,633 Imported corn (Rp/kg) - FOB 2,293 2,400 2,369 2,490 2,574 Imported SBM (Rp/kg) - landed 7,269 6,148 6,316 6,296 6,215

Industry Focus

Peer comparison

Source: Companies, Bloomberg Finance LP, DBS Bank, DBS Vickers Closing price as of 6 February 2017


Animal Protein

Page 2

Shr Cap Mkt Cap Price

12-mo. TP % 15-17 EPS

Animal protein B'berg code FYE (m) (US$ m) LCY (LCY) (LCY) Ups ide Rcmd 14A 15A 16F 17F 15A 16F 17F 15A 16F 17F 15A 16F 17F CAGR (%)Charoen Pokphand Indonesia CPIN IJ Equity 12/2015 16,398.0 4,003.1 IDR 3,240 3,430 5.9 HOLD 30.4 28.9 18.5 17.3 4.2 3.6 3.1 16.5 10.5 10.4 0.6% 1.0% 1.6% 29.4CAB Cakaran CABC MK Equity 09/2016 178.7 68.5 MYR 1.71 1.71 (0.2) NR 32.8 21.8 13.0 9.2 1.3 1.1 1.1 8.7 6.4 6.6 0.0% 0.6% 0.7% 54.1Japfa Comfeed Indonesia JPFA IJ Equity 12/2015 11,410.5 1,538.5 IDR 1,780 2,025 13.8 BUY 55.9 40.5 9.4 10.5 3.4 2.5 2.1 10.6 6.1 6.1 0.0% 0.4% 1.9% 96.7Japfa Limited JAP SP Equity 12/2015 1,764.7 1,280.0 SGD 1.04 1.26 21.7 BUY 0.3 0.3 0.1 0.1 0.0 0.0 0.0 8.0 5.4 5.5 0.0% 0.0% 0.0% 45.3Malindo Feedmill MAIN IJ Equity 12/2015 2,238.8 201.0 IDR 1,190 1,550 30.3 BUY nm nm 9.9 9.1 1.7 1.5 1.3 15.5 5.8 5.5 0.0% 0.0% 2.0% nmSierad Produce SIPD IJ Equity 12/2015 1,339.1 71.4 IDR 695 895 28.8 NR nm nm 133.3 63.9 0.9 0.8 0.8 nm 7.3 6.3 0.0% 0.0% 0.0% nmTeo Seng Capital TSCB MK Equity 12/2015 299.7 68.9 MYR 1.01 1.38 36.7 NR 6.1 7.2 11.2 7.2 1.5 1.4 1.2 5.6 6.9 4.9 3.6% 2.2% 3.5% 0.1Thai Union Group TU TB Equity 12/2015 4,771.8 2,792.5 THB 20.5 25.0 22.0 BUY 18.7 18.4 18.0 14.4 2.2 1.9 1.7 11.9 12.8 10.6 2.7% 2.8% 3.5% 13.0Simple average 24.0 19.5 11.4 9.7 1.9 1.6 1.4 10.9 7.6 7.0 0.9% 0.9% 1.6% 39.8


12-mo. TP % 15-17 EPS

Consumer foods B'berg code FYE (m) (US$ m) LCY (LCY) (LCY) Ups ide Rcmd 14A 15A 16F 17F 15A 16F 17F 15A 16F 17F 15A 16F 17F CAGR (%)Indofood CBP Sukses Makmur ICBP IJ Equity 12/2015 11,661.9 7,489.6 IDR 8,575 9,000 5.0 HOLD 37.8 33.3 27.3 25.9 6.5 5.8 5.2 20.5 17.4 16.0 1.5% 1.8% 1.9% 13.5Mayora Indah MYOR IJ Equity 12/2015 22,358.7 3,107.0 IDR 1,885 1,700 (9.8) HOLD 104.4 34.5 32.3 29.0 8.3 7.0 6.0 19.0 17.4 15.8 1.0% 0.9% 1.0% 9.2Tiga Pillar Sejahtera Food* AISA IJ Equity 12/2015 3,218.6 479.9 IDR 1,970 n/a n/a NR 17.8 19.6 19.6 14.4 1.9 1.5 1.3 n/a 7.5 7.9 0.0% 0.4% 0.4% (4.7)Simple average 53.3 29.2 26.4 23.1 5.6 4.8 4.2 19.8 14.1 13.2 0.8% 1.1% 1.1% 6.0


12-mo. TP % 15-17 EPS

Dairy B'berg code FYE (m) (US$ m) LCY (LCY) (LCY) Ups ide Rcmd 14A 15A 16F 17F 15A 16F 17F 15A 16F 17F 15A 16F 17F CAGR (%)China Huishan Dairy Holdings* 6863 HK Equity 03/2016 13,476.5 5,003.3 HKD 2.90 n/a n/a NR 29.0 48.3 58.0 42.0 3.0 3.0 2.9 0.1 24.9 20.8 0.0% 0.6% 0.7% 7.2Inner Mongolia Yili Industrial* 600887 CH Equity12/2015 6,064.8 16,043.5 CNY 18.15 n/a n/a NR 26.9 19.2 19.2 20.3 5.5 4.8 4.0 1.2 37.8 13.1 0.0% 2.7% 2.9% (3.0)Simple average 27.9 33.7 38.6 31.2 4.3 3.9 3.4 0.6 31.3 16.9 0.0% 1.7% 1.8% 2.1


12-mo. TP % 15-17 EPS

Integrated food producers B'berg code FYE (m) (US$ m) LCY (LCY) (LCY) Ups ide Rcmd 14A 15A 16F 17F 15A 16F 17F 15A 16F 17F 15A 16F 17F CAGR (%)Charoen Pokphand Foods CPF TB Equity 12/2015 7,742.9 6,299.6 THB 28.50 40 40.4 BUY 35.6 152.8 16.4 14.9 1.8 1.4 1.4 16.5 10.0 9.5 2.6% 3.0% 3.4% 220.6Indofood Sukses Makmur INDF IJ Equity 12/2015 8,780.4 5,226.8 IDR 7,950 9,100 14.5 BUY 17.7 23.5 17.8 15.4 2.6 2.4 2.2 9.5 9.1 8.4 2.1% 2.8% 3.3% 23.8QL Resources QLG MK Equity 03/2016 1,248.0 1,235.1 MYR 4.39 4.60 4.8 HOLD 34.3 29.9 28.5 26.0 3.8 3.4 3.2 18.4 16.4 14.7 1.0% 1.0% 1.2% 7.3Simple average 35.6 68.7 20.9 18.7 2.7 2.4 2.2 14.8 11.8 10.9 1.9% 2.3% 2.6% 83.9* based on Bloomberg consensus forecasts

PE (x) P/BV (x) EV/EBITDA (x) Div Y ield (%)





Animal Protein

Analyst Ben SANTOSO +65 6682 3707 [email protected] Indonesia research team Regional research team

Table of contents Peer comparison 2 Strategy and stock picks 4

No better time to collect 4 Our stock picks 4 New chicks on the block 4 Misplaced concern on USD strength 4 Attractive valuations 5 Forecast adjustments 5 Expect seasonally lower 4Q16 earnings 6 Impact from rising interest rates 7

An overlooked growth sector 9

Overlooked growth potential 9 Chicken consumption 9 Beef consumption 13 Pork consumption 15 Feedmilling 16

Current trends in the animal protein sector 18

Tighter supervision to bring price stability 18 Indonesia`s corn self-sufficiency: winners and losers 18 Addressing the corn supply shortfall in Indonesia 19 Indonesia feed outlook: normalising margins 19 Competitive landscape: intensifying 20 Consumer food trends - Indonesia 21 Expect new entrants over the next few years 21 Consumer food trends - Malaysia 22 FamilyMart venture to offer long-term synergies 22 Growing the food manufacturing segment 22 Future growth drivers for Malaysian players 22 Joint venture with Japan NH foods Limited 22

Key risks to our call 23 Appendix 1: 3QCY16 results review and remarks/outlook 25 Appendix 2: Key assumption 27 Appendix 3: Abbreviation 28 Stock profiles 29

CAB Cakaran 30 Charoen Pokphand Indonesia 38 CJ Cheiljedang 46 Japfa Comfeed 53 Japfa Limited 60 Malindo Feedmill 68 QL Resources 75 Sierad Produce 83 Teo Seng Capital 90

Disclaimer 98


Animal Protein

Strategy and stock picks No better time to collect

The share price correction since November 2016 offers an opportunity to collect Indonesian integrators at significant discounts. We expect Indonesian integrated protein producers (i.e. integrators) aggregate earnings to continue expanding this year; even after a strong rebound last year. Volume growth should more than offset margin contraction (from high base) and translation FX losses. We view the Indonesian government’s set production targets favourably. The new regulations, which also serve as legal basis for audits, sanctions and mandatory culling, should also work as barrier to entry, in our view. On the flip side, we expect stable selling prices (+0-5%), backed by resilient consumer demand (feed/DOC volumes are expected to grow 5-10%), expansion in distribution channels, and increased utilisation rates. In Malaysia, most listed players are concentrated in the layer segment, which in 2016 was adversely affected by low egg prices and rising raw feed costs (due to a weaker ringgit). In the near term, growth for these players will be driven by market share gain from closure of small layer farms and the stabilisation of egg prices. Our stock picks

In 2016 Japfa Limited (JAP) delivered 93.0% return (including 0.5% dividend yield). Japfa Comfeed Indonesia (JPFA) likewise offerred 130.0% return (including dividend yield of 0.9%); while Charoen Pokphand Indonesia (CPIN) delivered 19.8% return (including 0.9% dividend yield). In this report we reiterate our BUY call on JAP for 23% return (including dividend yield of 2%). We also maintain our BUY rating on JPFA for 15% return (including dividend yield). Our HOLD rating on CPIN is unchanged given its limited 7% return (including 2% dividend yield). Malindo Feedmill underperformed peers with 14.8% decline over the same period (no dividends were declared last year), despite strong earnings rebound. We think there may have been several reasons for Malindo’s underperformance: 1. The spike in USD/IDR rate in November and December

2016 reversed interests in smaller cap names – due to fear of weaker margins and purchasing power – even though MAIN only had US$5m debt (c.4% of total borrowings) as at 30 September 2016

2. MAIN feed and DOC ASP underperformed JPFA in 3Q16. There was also increased competition in feed, which capped the group’s feed margins

3. The market may have re-assigned lower forward multiple vis-à-vis peers due to the stock’s higher gearing ratio

We think MAIN is oversold and are reiterating our BUY call on MAIN for 30% return based on our revised TP. We are maintaining our HOLD call for QL Resources (QL). We expect QL’s core staple food businesses to remain resilient despite expectations of a slowdown in Malaysia’s private consumption and economic growth. Hence, to boost near-term growth, QL plans to ramp up its regional feedmill production, aquaculture (prawn farming) project, and the volume of frozen surimi-based products plus snack foods for export. QL’s venture with Japan’s FamilyMart Co. Ltd targets to open 300 stores in five years. The intention to focus on ready-to-eat F&B will bring synergies to QL’s surimi-based products, snack foods, and processed poultry product businesses. New chicks on the block

In this report, we also attached non-rated notes on Sierad Produce (SIPD) and CAB Cakaran (CABC): SIPD is Indonesia’s fourth-largest listed poultry integrator

with market shares of 3%, 5%, 17% for DOC, poultry feed and frozen consumer foods, respectively. Having reported net core loss since 2015 and undergone corporate restructuring following a rights issue this year, we expect SIPD’s core earnings to return to profitability in 2016. We assigned Rp895/share valuation on SIPD; based on a forward EV/EBITDA multiple of 7.5x (based on the historical average from January 2010 and June 2013).

CABC is one of largest broiler farmers in Malaysia with a

production capacity of 5m birds/month in FY16. According to the Department of Statistics Malaysia, the total local broiler livestock production in 2015 was 308m birds with an additional c.11m imported birds. Based on CABC’s estimated broiler production of 50m birds in FY15, we estimate CABC to have c.16% of the local market share. In the near term, CABC targets to increase this production capacity to 7m birds/month after the purchase completion of assets from Sinmah Breeders Sdn Bhd (SBSB), a subsidiary of Farm’s Best Berhad. At current levels, a +/-1% shift in broiler production volume will affect revenue by +/-0.86% and earnings by +/-1.2%.

Misplaced concern on USD strength

Indonesian integrators’ share prices have – since November 2016 – declined faster than their revised estimated fair values suggest. We attribute this selloff to a spike in USD and new government policies’ potential adverse impact on earnings (i.e. higher local corn costs), although we believe the share price drops were excessive.

Page 4


Animal Protein

We believe there should be less negative correlation between USD strength and share price performance, as: 1. Integrators have reduced USD debt exposure and improve

their balance sheet strength since-end 2015 (asset revaluation on government tax incentive before end-2016 will also help to reduce net gearing ratios). The shift to local corn procurement should also work to reduce the required USD working capital borrowings.

2. The rupiah has remained resilient – relative to other regional currencies. This should reduce volatility in feed costs and maintain stability in consumer purchasing power

3. Despite elevated DOC and broiler prices following Lebaran 2016, consumer demand remained robust. Demand is due to seasonally pick up in 1H17 due to Eid festival.

Attractive valuations

The valuations for Indonesian integrators are based on historical average forward EV/EBITDA multiple (FY17F base year) – to strip out translation/revaluation gains (losses) in

integrators’ reported earnings. Based on our revised estimates, IDX- and SGX-listed integrators currently trade at forward EV/EBITDA multiple of 7.4 (below the historical average). At current levels, we believe they are trading at a discount – given the decent projected 3-year EBITDA growth of 10% (in USD terms). Malaysia’s integrators prices have performed negatively in 2016, with most of the layer players share prices declining by more than 20%. QL’s share price plateaued in the RM4.30-4.45 range throughout the year. Although we continue to like QL for its diversified business model, we believe near-term growth initiatives are priced in and unlocking the long-term earnings potential of its expansion plans is a key re-rating catalyst. At current levels, only QL and Lay Hong are trading at above 20x PE due to their more diversified business model and larger institutional shareholdings, whereas others are lingering at c.13x PE. We expect local integrators’ share prices to improve this year, due to better earnings from the stabilisation of egg prices.

Sector EV/EBITDA charts: IDX- & SGX-listed vs. Bursa-listed

Source: Bloomberg Finance LP, DBS Bank estimates Forecast adjustments

For Indonesian integrators, we made adjustments in our forecasts to account for: 1. Stronger USD 2. Higher local corn costs 3. Higher borrowing costs 4. Feed, DOC, broiler ASP adjustments Recent developments have shifted our view towards stronger a US dollar and higher borrowing costs over the next three years.

Developments in the regulatory environment also shifted our expectations towards higher local corn costs (Indonesian government targets self-sufficiency in corn by 2018) as well as higher spending on slaughter houses/processing facilities. These would be offset by slower growth in commercial farms to accommodate expanding share of DOC sales to independent farmers (subject to payment terms). Having imputed changes in our key assumptions, we cut Indonesian integrators’ FY17F earnings by up to 11%. The higher costs are mitigated by continued recovery in volume growths in all segments: feed, DOC, broiler and processed food.

6.0

7.0

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

16.0

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Jul-1

6

Jan-

17

Avg: 11.1x

+1sd: 12.8x

+2sd: 14.5x

-1sd: 9.4x

X Malaysia sector forward EV/EBITDA

0.0

5.0

10.0

15.0

20.0

25.0

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Jul-1

6

Jan-

17

Avg: 8.9x

+1sd:

+2sd: 17.8x

-1sd: 4.5x

X Indonesia sector forward EV/EBITDA

Page 5


Changes to our forecasts and TP Source: DBS Bank estimates Expect seasonally lower 4Q16 earnings

Both DOC and broiler prices in Indonesia eased in November 2016 (from unusually high levels in October); but recovered in December. For the quarter, DOC prices in West Java averaged Rp4,836/chick (+13% y-o-y; -2% q-o-q); while live broiler prices averaged Rp17,139/kg (-4% y-o-y; -2% q-o-q). We estimate 4Q16 feed prices to average Rp6,300-6,350/kg – representing a slight 2-3% sequential growth. Compared to

the same period in 2015, 4Q16 DOC prices averaged higher; as we believe parent stock (PS) culling in 4Q15 and reduced grand-parent stock (GPS) import quota over the past two years had worked to restore DOC demand/supply balance. A summary of our 4Q16 earnings projections is provided in Appendix 1 at the end of this report. As was the case in previous years, we expect integrators’ earnings to sequentially recover in 1Q17, followed by peak earnings in 2Q17.

DOC and live broiler prices vs. cost of production Source: Companies, DBS Bank estimates

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

May

-09

Jul-0

9

Sep-

09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep-

10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

Sep-

11

Nov

-11

Jan-

12

Mar

-12

May

-12

Jul-1

2

Sep-

12

Nov

-12

Jan-

13

Mar

-13

May

-13

Jul-1

3

Sep-

13

Nov

-13

Jan-

14

Mar

-14

May

-14

Jul-1

4

Sep-

14

Nov

-14

Jan-

15

Mar

-15

May

-15

Jul-1

5

Sep-

15

Nov

-15

Jan-

16

Mar

-16

May

-16

Jul-1

6

Sep-

16

Nov

-16

Live broiler prices Rp/kg (LHS)

Broiler DOC prices Rp/chick (RHS)

Average unit cost of production

R

Prev.

CY16F

EPS

Prev.

CY17F

EPS

New

CY16F

EPS

New

CY17F

EPS

CY16F

EPS

rev.

CY17F

EPS

rev.

Prev.

12-mo.

TP

New

12-mo.

TP

TP

rev. Basis

implied

FY17F

EV/EBITDA

implied

FY17F

PE

Indonesia (EPS/TP)

Charoen Pokphand I'sia (Rp) H 160 207 175 188 10% -10% 3,580 3,430 -4% Avg. hist. EV/EBITDA 11.0 18.3

Japfa Comfeed Indonesia (Rp) B 195 172 190 170 -3% -1% 2,100 2,025 -4% Avg. hist. EV/EBITDA 6.5 11.9

Malindo Feedmill (Rp) B 134 146 121 130 -10% -11% 2,150 1,550 -28% Avg. hist. EV/EBITDA 6.5 11.9

Sierad Produce (Rp) NR - - 4 8 n/a n/a - 895 n/a Avg. hist. EV/EBITDA 7.5 108.2

Singapore (EPS/TP)

Japfa Limited (US₵/S$) B 8.6 9.3 8.7 8.4 2% -9% 1.18 1.26 7% SOP 6.3 7.4

Malaysia (EPS/TP)

CAB Cakaran Corp NR - - 16.1 18.6 n/a n/a - 1.71 n/a PE 6.6 11.0

QL Resources H 16.9 19.9 16.9 19.9 0% 0% 4.60 4.60 0% PE 15.4 24.0

Teo Seng Capital NR - - 9.0 14.1 n/a n/a - 1.38 n/a PE 6.3 11.0

Korea (EPS/TP)

CJ Cheiljedang (KRW '000) B 27.4 33.1 22.7 29.3 -17% -12% 530 530 0% SOP 7.5 8.3

Page 6


Animal Protein

Impact from rising interest rates

Thanks to deleveraging, capital raising exercises, and capex rationalisation undertaken in 2016; Indonesian integrators’ aggregate net gearing ratio should drop from 71% at the end of CY15 to 44% by end-CY16F and to 31% by end-CY17F. Likewise, the aggregate FY16 EBITDA of Indonesian integrators (in USD terms) is forecast to jump 47% y-o-y and a further 2% in CY17F.

Notwithstanding improvements in balance sheet strength; we suspect the deleveraging exercise will continue through 2018 (primarily on USD borrowings). Sensitivity analysis of our in-house estimates suggests that a 100bps increase in interest rate would cost Indonesian integrators Rp10bn in extra borrowing costs per annum in FY17F – excluding repayments.

Interest rate sensitivity analysis Source: Companies, DBS Bank estimates Poultry groups’ USD debt exposure/net gearing Source: Companies, DBS Bank estimates

F Y16F interest expense

F Y17F interest expense

F Y16F PA TMI

F Y17F PA T MI

F Y16F interest expense % chg

F Y17F interest expense % chg

F Y16F PA TMI % chg

F Y17F PA T MI % chg

Base case Base case Base case Base case +100 bps +100 bps +100 bps +100 bps

Charoen Pokphand I'sia (US$ m) 42.5 25.6 216.6 226.0 47.4 11.4% 28.6 11.7% 214.4 -1.0% 225.1 -0.4%

share of total 32% 21% 55% 57% 32% 22% 56% 57%

Japfa Comfeed I'sia (US$ m) 41.8 37.0 163.9 142.5 43.5 4.3% 38.4 3.9% 163.3 -0.4% 142.5 0.0%

Malindo Feedmil (US$ m) 14.9 14.4 20.4 21.4 16.1 8.7% 15.6 8.1% 19.7 -3.5% 20.7 -3.4%

share of total 11% 12% 5% 5% 11% 12% 5% 5%

Japfa Limited (US$ m) 67.8 70.1 153.4 148.4 73.3 8.1% 75.9 8.3% 151.2 -1.5% 146.4 -1.4%

share of total 50% 59% 39% 37% 50% 58% 39% 37%

Sierad Produce (US$ m) 9.6 9.7 0.4 0.8 9.6 0.0% 9.7 0.0% 0.4 0.0% 0.8 0.0%

share of total 7% 8% 0% 0% 7% 7% 0% 0%

Total (US$ m)** 134.8 119.8 390.8 396.6 146.4 8.6% 129.8 8.3% 385.7 -1.3% 393.0 -0.9%

share of total 100% 100% 100% 100% 100% 100% 100% 100%

**ex. Japfa Comfeed, which is consolidated in Japfa Ltd.

USD debts as of31

Dec14 (US$ m)

USD debt s as of31

Dec15 (US$ m)

F orecast USD

debts as of31

Dec16 (US$ m)

F orecast USD

debts as of31

Dec17 (US$ m)

Total debts as of31

Dec14 (US$ m)

T otal debt s as of31

Dec15 (US$ m)

T otal debts as of31

Dec16 (US$ m)

Total debts as of31

Dec17 (US$ m)

F Y16F realised

and unrealised F X impact

on P&L (LCY m)

F Y17F realised

and unrealised F X impact

on P&L (LCY m)

F Y15 net

gearing

F Y16F net

gearing

F Y17F net

gearing

Charoen Pokphand I'sia 299.4 184.2 165.5 146.7 535.0 617.8 471.3 269.9 69,859 -67,764 52% 21% 9%

share of total debt 56% 30% 35% 54%

Japfa Comfeed I'sia 233.1 215.1 207.1 207.1 587.8 536.6 475.0 431.0 84,819 -98,485 93% 47% 29%


Malindo Feedmil 58.1 0.9 0.9 0.9 151.6 141.5 128.6 124.6 329 -403 79% 81% 73%


Japfa Limited 378.7 360.7 402.7 492.7 921.5 855.7 847.7 889.3 12.1 -8.7 69% 50% 38%


Sierad Produce 11.4 6.0 7.2 7.2 76.3 64.9 64.7 62.9 -10.0 -12.7 119% 43% 42%


T otal (US$ m)** 747.7 551.9 576.3 647.6 1,684 1,680 1,512 1,347 71% 44% 31%


**ex. J apfa Comfeed, which is consolidated in J apfa Ltd.

Page 7


Sector EBITDA Source: Companies, DBS Bank estimates SWOT Analysis

Source: DBS Bank

F Y14F EBITDA F Y15F EBITDA F Y16F EBITDA F Y17F EBITDA F Y18F EBITDA F Y19F EBITDA

Charoen Pokphand I'sia (US$ m) 259.9 301.0 378.9 386.4 433.4 500.2

Japfa Comfeed I'sia (US$ m) 147.5 165.6 306.3 285.3 319.0 349.3

Malindo Feedmil (US$ m) 12.0 27.4 53.5 56.0 62.3 72.7

Japfa Limited (US$ m) 270.7 292.0 444.2 448.5 536.7 588.7

Sierad Produce (US$ m) 9.3 -14.3 14.4 16.3 18.8 20.3

Total (US$ m)** 551.9 606.1 890.9 907.1 1,051.2 1,181.8

growth -23.9% 9.8% 47.0% 1.8% 15.9% 12.4%

**ex. Japfa Comfeed, which is consolidated in Japfa Ltd.

CPIN JPFA MAIN SIPD

Stre ngth

Expertise in breeding, large economies of scale,

geographically well networked, strong balance sheet, regional

presence

Expertise in breeding, large economies of scale,

geographically well networked, regional presence

Expertise in breeding, regional presence, third largest player

with significant growth opportunities

Recognised brands in processed food

We a kne ssRaw materials cost/selling price

volatilitiesRaw materials cost/selling price

volatilitiesHigh financial leverage

High operating leverage, high financial leverage

Opportuni tyHigh-margin branded consumer processed food, beverage/dairy,

exports

High-margin consumer products, exports

Geographical expansion, processed food

Product adjacencies, ready-to-eat meals

Thre a tCompetitors' price undercutting,

government interventionCompetitors' price undercutting,



government intervention

Page 8


Animal Protein

An overlooked growth sector Overlooked growth potential

We believe the market underestimates the sector’s earnings growth potential – based on where the required capacity will be over the next five years. In this section, we explore protein consumption in detail; together with the associated investments required to meet growing population and income per capita across key markets in Southeast Asia. A summary of our assumptions are provided in Appendix 2 at the end of this report. CHICKEN CONSUMPTION Per capita demand in Indonesia

Between 2008 and 2015, Indonesia’s per capita chicken meat consumption grew 11.7% CAGR (based on Frost & Sullivan data through 2013 and Malindo Feedmill presentation September 2016) to 10kg (vs. 21 kg in Jakarta alone – source: Federation of Indonesian Poultry Society 2014) – faster than Indonesia’s GDP expansion. By 2021, we expect Indonesia’s chicken consumption per capita to reach 19.4 kg. To meet this projection, we estimate 1,279 new breeding farms, 3,365 new commercial farms, and 11 million MT p.a. of new feedmill capacities would need to be added. Indonesia’s chicken consumption per capita Source: Frost & Sullivan, 2014, companies, DBS Bank estimates

Indonesia’s chicken demand

Indonesia is due to have a total population of 258.5m in 2016 (according to Central Bureau of Statistics or BPS). Employing BPS’ annual population growth rate of 1.2%; we project this to reach 274.3m by 2021. Indonesia’s average chicken meat consumption per capita – driven by income growth – is also forecast to expand to 19.4 kg p.a. by 2021, based on constant historical growth rate of 11.7%. In the long run, we expect the country’s chicken consumption per capita to follow that of Jakarta – assuming similar consumption pattern. Hence, over the next five years, Indonesia will consume 2.4bn kg more chicken meat. GDP per capita vs. chicken consumption per capita

Source: World Bank, DBS Bank estimates Increasing breeding capacity in Indonesia

For our calculations, we assume average live broiler weight of 1.8kg, with carcass yield at 70% and meat yield at 60% – thus providing c.0.76 chicken meat for every live bird produced. So 2.4bn kg of additional chicken meat will roughly equal 3.5bn DOC (assume 7% mortality rate). Likewise, assuming 1 PS produces 135 DOC, the country would need c.26m more PS. In our estimation, an additional 3.4k commercial farms (each with 1.0m live bird/year capacity), and 1,279 breeding farms (each with 2.7m DOC/year) are therefore needed by 2021.

Feeding Indonesia’ population – chicken Source: Companies, BPS, Frost & Sullivan, 2014, DBS Bank estimates

259MILLIONPEOPLE

274MILLIONPEOPLE

2016 2021

Indonesia population (2016E) 258,509,000 personIndonesia population (2021F) 274,300,000 personCAGR chicken consumption 11.7%Average chicken consumption (2016) 11.2 kg/person/yearAverage chicken consumption (2021) 19.4 kg/person/yearAdditional chicken consumption 2,440,216,842 kg/yearCarcass yield 70%Fillet yield 60%Broiler weight 1.8 kgMortality rate 7%Additional DOC demand 3,452,192,573 birdAdditional PS 25,571,797 PSFCR 1.8 Feed needed per PS 3.20 kg/birdFeed needed per broiler 3.24 kg/birdAdditional feed needed 11,266,934 MT/year

Page 9


Additional breeding capacity needed by 2021

Source: Companies, DBS Bank estimates Forecast expansion per integrator in Indonesia

CPIN is the market leader for both poultry feed and breeding farm business with 34% and 38% market shares, respectively. In terms of value generated by the potential demand over the next five years, we believe CPIN will reap the most benefits. Indonesia DOC production capacity share (2015) Source: Malindo Feedmill presentation September 2016 Breeding capacity in Indonesia

Assuming that CPIN strives to maintain its current market share, we estimate that it would need to build more additional breeding farms than peers. To meet the projected chicken consumption by 2021; CPIN would need to build 293 new breeding farms (each has 2.7m DOC/year capacity). JPFA, MAIN, and SIPD are likewise projected to add 275, 69, and 31 additional breeding farms over the same period. We believe regulations put in place since 2016 will promote price stability; and thus work in favour of breeding investment (through better price visibility) – subject to volatility in raw material costs. In our view, the so-called National Production Plan also works as a barrier to entry in the breeding business in our view, as new entrants would find the new structure more constricting.

Additional breeding capacity required by 2021 Source: Companies, DBS Bank estimates Grow out capacity in Indonesia

Assuming integrators consume half of total DOC produced internally (i.e. in accordance to new government regulation), CPIN, JPFA, MAIN, and SIPD would still need to build 640, 370, 118, and 51 new commercial farms (each with 1.0m live bird capacity p.a.), respectively, over the next five years. This excludes additional capacities to be added by independent farmers. Capital expenditures needed in Indonesia

Capital expenditure needed to construct the additional feedmills, breeding farms and commercial farms over the next five years are correspondingly hefty. In our estimation, the additional feedmilling, breeding farm and commercial farm capacities would cost US$1.1bn, US$2.7bn, and US$6.2bn, respectively, to satisfy the incoming demand (or c. US$10.0bn in total). Please note that our calculations imputed future inflation and exchange rates; but exclude current excess capacity (we assumed all the additional demand will be supplied by new facilities). To maintain its market share until 2021, CPIN would need US$2.0bn (20% of total) capital to capture the additional demands. While JPFA, MAIN, and SIPD would need US$1.4bn (14%), US$361m (4%), and US$183m (2%) of capital, respectively, if they intend to keep their existing market shares. Integrators’ forecast capital expenditure by 2021

Source: DBS Bank estimates

CPIN38%

JPFA22%

MAIN7%

SIPD3%

Others30%

Feedmill Breeding CommercialCPIN 10 293 640 2.031JPFA 7 275 370 1.424MAIN 0 69 118 0.361SIPD 1 31 51 0.183

Capex (US$ bn)

AdditionalGroup

Additional DOC demand 3,452,192,573 DOC/year

Capacity 2,700,000 DOC/year

Additional facility needed 1,279 units

Capex per facility (2016) 25,000,000,000 Rp

Capex per facility (2021) 2,089,306 US$

Total capex 2,672,222,197 US$

Pla ye rs CPIN JPFA MAIN SIPD Tota l Uni tsMarket Share

% 38% 22% 7% 3% 70%Volume 1,312 759 242 104 2,417 m chicks

CurrentProduction 854 613 222 73 1,762 m chicksCapacity 1,375 630 280 95 2,380 m chicksExcess capacity 521 17 58 22 618 m chicks

Additional capacity 791 742 184 82 1,799 m chicksAdditonal farm 293 275 69 31 668 farmsAdditional capex 612 575 144 65 1,396 US$ m

Page 10


Animal Protein

Malaysia’s chicken demand

In Malaysia, chicken consumption per capita has grown at a slower pace of 5% CAGR between 2005 and 2015. We believe consumption per capita will plateau at 51 kg/year. Organically, growth for local players will be through acquisitions to gain market share and minimise the import dependency ratio. Malaysia also imports frozen carcasses for local processors from Thailand and China. We understand that import prices are c.10% lower than local market prices. However, the strengthening of the Thai baht and Chinese yuan against the ringgit towards end-2016 has narrowed the parity of price difference. Moving forward, we believe local food producers will be inclined to source their raw materials locally. As such, large broiler farmers such as CABC are well positioned to benefit from the reduction in import volume with its timely capacity expansion. Malaysia’s chicken meat consumption

Source: Department of Statistics, Malaysia Vietnam’s chicken demand

Vietnam is due to have a total population of 92.7m in 2016 (according to the World Bank). Assuming population growth rate of 1.1%; we project this to reach 97.8m by 2021. Vietnam’s average chicken consumption per capita – driven by income growth and urbanisation – is forecast to expand to 16.6 kg p.a. by 2021, based on the average historical growth rate of 8.6% (source: Frost & Sullivan, 2014). To meet this projection, we estimate that 264 new breeding farms and 694 new commercial farms will need to be added.

Vietnam’s chicken consumption per capita

Source: Frost & Sullivan, 2014, DBS Bank estimates The Vietnamese prefer larger live broilers; hence the flock is typically raised to c.2kg there – compared to c.1.6-1.8kg in Indonesia. Based on this assumption, we estimate Vietnam will consume 606m kg more chicken meat over the next five years – for which integrators in Vietnam will need to provide 712m additional DOCs. GDP per capita vs. chicken consumption per capita

Source: World Bank, DBS Bank estimates

Feeding Vietnam’ population – chicken Source: Companies, BPS, Frost & Sullivan, 2014, DBS Bank estimates

92.7MILLIONPEOPLE

97.8MILLIONPEOPLE

2016 2021

Vietnam population (2016E) 92,689,000 personVietnam population (2021F) 97,776,000 personCAGR chicken consumption 8.6%Average chicken consumption (2016) 11.0 kg/person/year

Average chicken consumption (2021) 16.6 kg/person/year

Additional chicken consumption 605,954,306 kg/yearDomestic production (2021) 87%

Carcass yield 70%

Fillet yield 60%Broiler weight 2.0 kg

Mortality rate 12%

Additional DOC demand 711,559,559 bird

Additional PS 5,270,812 PS

2011 2012 2013 2014 2015Total utilisation (k MT) 1,331.6 1,416.8 1,504.4 1,621.4 1,670.2Exports (k MT) 57.3 45.2 23.2 24.3 31.7Processing (k MT) 96.4106 83.7562 90.4437 74.3382 76.2634Food (k MT) 1177.92 1287.87 1390.7 1522.81 1562.25Population (k) 29,062.0 29,510.0 30,213.7 30,708.5 31,186.1Consumption/capita (kg) 40.5 43.6 46.0 49.6 50.1

Page 11


Breeding capacity in Vietnam

Historically, chicken meat production in Vietnam cannot fully satisfy its domestic consumption. According to BMI (Business Monitor International), domestic production accounts for c.89% of chicken consumption in 2013. We expect chicken consumption growth to continue outpacing chicken production growth, although not in a big scale. By 2021, we expect only 87% of chicken consumption would be produced domestically. In our estimation, an additional 694 commercial farms (1.0m live bird/year capacity) and 264 breeding farms (2.7m DOC/year) are needed by 2021. Additional breeding capacity needed by 2021 Source: Companies, DBS Bank estimates Forecast expansion per integrator in Vietnam

Although not as big as in Indonesia, Charoen Popkhand (CP) also dominates the Vietnamese market through its 30% market share in breeding segment. Japfa, on the other hand, controls 18% market share. Assuming this share is maintained, CP would continue to reap the most benefits in Vietnam’s animal protein sector. In our estimation, CP would need to produce additional 210m DOC by 2021; while Japfa’s share is to produce 126m. Vietnam DOC production capacity share (2014)

Source: Japfa Ltd, October 2015 Capturing additional long-run demand

To maintain its market share in Vietnam, CP would need to build more new breeding farms than peers. By 2021; we estimate that CP would need to build 78 new breeding farms (each has 2.7m/year capacity); while JPFA is projected to add 47 additional breeding farms.

Over the long run, we also believe traditional farms would remain stagnant. Most of the local farmers have limited investment capacity and more vulnerable to disease leading to low productivity and growth potential. So we expect integrators to build more facilities to capture rising demand – while at the same time increase the quality of the products. Processed chicken might not grow as fast, however, as we understand the Vietnamese preference is for fresh meat. Additional breeding capacity required by 2021 Source: Companies, DBS Bank estimates

Grow out capacity in Vietnam

Assuming integrators would only consume half of total DOC produced internally, we expect integrators’ commercial farm facilities to expand in line with breeding farms facilities. In our estimation, CP and Japfa would each need to build 103 and 62 commercial farms (each with 1.0m live bird capacity p.a.) respectively. Nationwide, the additional breeding farms, commercial farm, and feed milling capacities would cost US$552m, US$1.3bn, and US$208m, respectively – needed to satisfy the incoming demand (or c. US$2.0bn in total). Our calculations considered future inflation and exchange rate but excluded current excess capacity (we assume all the additional demand will be supplied by new facilities). For CP to maintain its market share until 2021, it would need to spend US$449m (22% of total) capital to capture the additional demand. Likewise, JPFA would need US$236m or c.12% of total capital. Integrators’ forecast capital expenditure by 2021 Source: DBS Bank estimates

CP30%

Emivest23%

Japfa18%

Others53%

Additional DOC demand 711,559,559 chicks/yearCapacity 2,700,000 chicks/yearAdditional facility needed 264 farmsCapex per facility (2016) 42,300,000,000 VNDCapex per facility (2021) 2,089,330 US$Total capex 551,583,003 US$

Players CP Japfa Tota l UnitsMarket Share

% 30% 18% 47%Volume 210 126 336 m chicks

CurrentProduction - - - m chicksCapacity - - - m chicksExcess capacity - - - m chicks

Additional capacity 210 126 336 m chicksAdditonal farm 78 47 125 farmsAdditional capex 163 98 261 US$ m

Feedmill Breeding Com. farmsCP 4 78 103 449.2

Japfa 1 47 62 236.4

Capex (US$ m)

Addit ionalGroup

Page 12


Animal Protein

BEEF CONSUMPTION

Rising consumption pattern

Indonesia is the fourth largest population in the world and is growing at a rate of 1.2% p.a. By 2021, Indonesia is expected to have a total population of 274.3m (according to the Central Bureau of Statistics or BPS). Rising discretionary spending due to economic growth have helped beef consumption to grow. Although beef has enjoyed high growth; Indonesia per capita beef consumption is still far below its neighbouring countries. Between 2008 and 2014, Indonesia’s per capita beef consumption grew 8.0% CAGR (source: Frost &Sullivan, 2014) to 3.1 kg. By 2021, we expect this to reach 4.6 kg. To meet this projection, we estimate that 90 new cattle fattening farms need to be built by 2021. Indonesia` beef consumption per capita

Source: Frost & Sullivan, 2014, DBS Bank estimates Demand projections

Beef is considered as an expensive protein source in Indonesia. Compared to other sources of protein, beef has one of the highest price-to-protein content ratios. Poultry, on the other hand, has the cheapest after soybeans and tofu. Price per gram of protein (Rp)

Source: DBS Bank estimates The high price is the reason for low beef consumption per capita in Indonesia. Beef price often exceeds Rp120,000/kg – considerably above Rp80,000/kg reference price set by the government. To help lower the price, the government has

opened buffalo meat imports and diversify origination to include Mexico; and planned to change the maximum weight of imported cows from 350kg to a range of 250kg-500kg. Meanwhile, import quotas will also be set yearly (from every four months previously). Despite these efforts, beef prices continue to remain high in Indonesia; as there was little feedlotters’ interest to import 500kg feeders due to their low fattening rate. A new maximum weight of 400kg has been proposed; but no regulation has yet been issued. Indonesia beef import (MT)

Source: BPS, DBS Bank estimates Feeding Indonesia` population - beef Source: BPS, DBS Bank estimates Increasing fattening capacity

To produce additional 455m kg of beef, Indonesia would need to produce 2.4m cows with average weight 500kg. A farm with 8k head capacity can fatten up to 24k heads (3 cycles of 4 months each). Therefore, we expect 102 fattening farms need to be built to meet the projected demand (excluding breeding farms). Fattening capacity

Japfa is the second biggest players in term of beef production with 10.8% market share, slightly below Adji Soko Group with 11.4% market share. In the third place is PT Great Giant

-

50,000

100,000

150,000

200,000

250,000

300,000

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Indonesia population (2016E) 258,509,000 personIndonesia population (2021F) 274,300,000 personCAGR beef consumption 8.0%Average beef consumption (2016) 3.1 kg/person/yearAverage beef consumption (2021) 4.6 kg/person/year

Additional beef consumption 455,158,168 kg/year

Domestic production (2021) 100%

Carcass yield 63%

Meat yield 70%Cattle weight 500 kg

Mortality rate 15%Additional Cattle demand 2,428,482 Cattle

Page 13


Livestock, a related party of Sierad Produce, which is owned by PT Great Giant Pineapple. To meet projected demand, we calculated that Japfa need to build 11 fattening farms with 8,000 cattle capacity while GGL need to build 9 farms –assuming they maintain their market share. The government has intention to be self-sufficient in beef production. It has recently imposed 1:5 ratio for cow importation. This ratio means that for every 5 feeders imported there should be 1 breeder imported as well. Yet, recent development indicates that the government has also relaxed the implementation of this regulation; after the protests by Indonesian feedlooters. The government will reportedly start auditing the implementation of the 1:5 rule only at the end of 2018. Indonesia beef production capacity share (2014)

Source: Frost & Sullivan, 2014 Additional fattening capacity required by 2021

Source: Companies, DBS Bank estimates

Adji Soko Group11%

PT Japfa Comfeed Indonesia

11%

PT Great Giant

Livestock8%

PT Widodo Makmur Perkasa

8%

Others62%

Players Japfa GGL Total UnitsMarket Share

% 11% 8% 19%Units 262,000 202,000 464,000 m heads

CurrentProduction - - - m headsCapacity - - - m headsExcess capacity - - - m heads

Additional capacity 262,000 202,000 464,000 m heads

Page 14


Animal Protein

PORK CONSUMPTION

Rising consumption pattern

Pork is the main source of animal protein in Vietnam. Its production is more than two third of meat production in Vietnam. According to Cirad, Vietnam is the 5th largest producer of pigs in the world. Vietnam has average consumption per capita at 25.7kg in 2016. It has been growing at slower pace than poultry consumption at 2.2% CAGR; given the high base. By 2021, we expect Vietnamese pork consumption per capita to reach 28.7kg. Production of Vietnam’s animal protein products (2011)

Source: Frost & Sullivan, 2014, DBS Bank estimates Vietnam’s pork consumption per capita

Source: Frost & Sullivan, 2014, DBS Bank estimates Feeding Vietnam` population - pork

Source: Frost & Sullivan, 2014, DBS Bank estimates

Increasing breeding capacity

In Vietnam`s swine industry, its pork consumption has been self-sufficient; thus no import is needed. However, unlike poultry, most swine production is produced by small-scale farmers. In 2010, about 75% of the swine farms had capacity of only 100-200 swine. To meet the projected consumption, we expect Vietnam would need to produce 7.1m swine and provide 3.8bn kg of additional swine feed – of which 2.6bn kg (70%) will be supplied by industrial feed producers. The rest will be supplied by self-made feed and imported feed. In our estimation, additional 1,430 swine farms (5,000 swine/year capacity) are needed by 2021 Number of swine fattening farms

Source: Frost & Sullivan, 2014, DBS Bank estimates

Pork74.0%

Poultry17.0%

Others9.0%

Vietnam population (2016E) 92,689,000 personVietnam population (2021F) 97,776,000 personCAGR pork consumption 2.2%Average pork consumption (2016) 25.7 kg/person/yearAverage pork consumption (2021) 28.7 kg/person/year

Additional pork consumption 420,003,364 kg/yearDomestic production (2021) 100%

Carcass yield 72%Meat yield 80%

Swine weight 120 kgMortality rate 15%Additional swine demand 7,148,750 pigs

Page 15


FEEDMILLING

Feedmilling capacity in Indonesia

We employed FCR of 1.8x for broiler breeding. Therefore, for every broiler raised, it needs 3.2kg of feed. The additional feed requirement would likewise expand in line with the number of DOC (c.3.5bn chicks) and PS (c.26m birds) (i.e. 11m MT). In our estimates, 47 feed mills (each 240k MT p.a. capacity) would be needed to satisfy Indonesia’s growing protein requirement from chicken meat. To maintain its current 34% market share, CPIN would need to produce additional 3.8m MT of feed p.a. Netting off current excess capacity of 1.5m MT, this means CPIN will need to build an additional 2.3m MT feed Hence, assuming a typical mill has 240k MT p.a. capacity, CPIN would need to construct 10 new feed mills by 2021. Using the same methodology, JPFA and SIPD would also need to add 7 and 1 feed mills respectively over the same period. While MAIN’s market share is bigger than SIPD; we expect the group not to add another feedmill – given the group’s excess capacity currently. It is unclear, however, whether current government corn self-sufficiency goal can be sustained over the next five years – in view of ever increasing requirements for animal feed. As it stands, the government had intended to promote expansion of corn planted area by 724k ha in 2016 and another 300k ha in 2017. Yet, only half of this target was realised in 2016 (according to Kontan, a newspaper). The lack of expertise and theft have generally prevented feedmillers from cultivating corn themselves. Additional feed milling capacity needed by 2021 Source: Companies, DBS Bank estimates Additional feed milling capacity needed by 2021 Source: Companies, DBS Bank estimates

Indonesia’s poultry feed capacity share (2015)

Source: Malindo Feedmill, September 2016 Feedmilling in Vietnam

In Vietnam, medium- to large-scale farmers often use industrial feed to raise their livestock (swine and poultry). Small farmers on the other hand use self-made feed to raise their livestock. However, small farmers still use industrial feed during critical phases (i.e. early age and reproduction) of livestock development. Their preference to use self-made feed can save them some money but in turn will produce lower yield and more prone to disease. The sector is dominated by large foreign companies, with strong knowledge of the industry and high investment capacity. Foreign-owned companies were controlling 40% market share in 2011 and this increased to 60% in 2013. We expect foreign-owned companies to continue to dominate the animal feed segment in Vietnam. As big as those feed millers are, they still cannot fully supply the needs of domestic consumption as demand keeps growing. But we expect exports to go down, followed by self-made feed in exchange of more industrial feed used in livestock farming. Vietnam’s animal feed production share

Source: Cirad, DBS Bank estimates

56%67% 70%

14%

13% 12%30%

20% 18%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2010 2015 2020Import Sel-made Industrial feed

CPIN34%

JPFA25%

MAIN8%

SIPD5%

Others28%

Additional feed needed 11,266,934 MT/yearCapacity 240,000 MT/yearAdditional facility needed 47 unitsCapex per facility (2016) 290,000,000,000 RpCapex per facility (2021) 24,235,948 US$Total capex 1,137,770,079 US$

Pla ye rs CPIN JPFA MAIN SIPD Tota l Uni tsMarket Share

% 34% 25% 8% 5% 72%Volume 3,831 2,817 901 563 8,112 m kg

CurrentProduction 3,840 2,743 774 239 7,596 m kgCapacity 5,400 4,093 1,740 564 11,797 m kgExcess capacity 1,560 1,349 966 326 4,201 m kg

Additional capacity 2,271 1,468 - 237 3,976 m kgAdditonal feedmil 10 7 0 1 18 millsAdditional capex 242 170 - 24 436 US$ m

Page 16


Animal Protein

Feed demand projection in Vietnam

Industrial feed is getting more popular in livestock farming due to its balanced nutrient, coupled with its better yield and reduced vulnerability to disease. We expect industrial animal feed to grow in line with the poultry and swine industry, and boosted by the increasing popularity of industrial feed. We projected that 4.4bn kg animal feed are needed by 2021. To produce 712m additional DOC Vietnam would need to produce 5.3m parent stock and provide 2.6bn kg of additional poultry feed – of which 1.8bn kg will be supplied by industrial feed producers. The rest will be supplied by self-made feed and imported feed. Swine on the other hand will need additional 2.6bn kg of feed. Feeding Vietnam` livestock Source: Frost & Sullivan, 2014, DBS Bank estimates Feedmilling capacity in Vietnam

Charoen Pokphand also leading the animal feed business in Vietnam with 18% market share. We estimate that CPIN would need to construct 4 new feed mills (assumed 210k MT p.a. capacity each) – assuming the group maintains its leading position. Japfa need to add only 1 feed mill, with similar capacity, by 2021 because it has c.4% market share in the animal feed industry. For the country as a whole, we estimate an additional 9 feedmills are needed by 2021. Typically the most critical issue concerning animal feed is its raw materials. Faced with limited land expansion capacity, Vietnam does not have enough capability to be self-sufficient in animal feed raw materials, such as corn, soya bean meal, and wheat. Similar to Indonesia, Vietnam also faced problems in its inefficient supply chain of agricultural products. In 2010, about 1m MT of corn was lost due to the lack of post-harvest facilities, and at the same time the corn import on the same year was approximately 1m MT. It is also interesting to note that large feed millers in Vietnam also using the same strategy as in Indonesia – that is building more silos and dryers near the harvest area. It is the large feed miller who can afford to do so; as the harvest seasons only take place a few months in a year.

Vietnam’s animal feed production capacity share (2014) Source: Japfa Ltd, October 2015 Soybean meal supply and consumption

Source: Vietnam General Customs Department, DBS Bank estimates Additional feed milling capacity needed by 2021 Source: Companies, DBS Bank estimates

CP18%

Proconco8%

Cargill7%

Greenfeed5%

Japfa4%

Others58%

0

1,000

2,000

3,000

4,000

5,000

6,000

2014 2015 2016 2017Total Consumption Total Local Production Total Imports

k MTAdditional DOC demand 711,559,559 birdAdditional PS 5,270,812 PSAdditional swine demand 7,148,750 swineFCR (poultry) 1.8 FCR (swine) 4.4

Broiler weight 2.0 kgSwine weight 120.0 kg

Feed needed per PS 3.2 kg/birdFeed needed per broiler 3.6 kg/bird

Feed needed per swine 528.0 kg/swineIndustrial contribution 70%Additional feed needed 4,447,115 MT/year

Players CP Japfa Total UnitsMarket Share

% 18% 4% 22%Volume 809 178 987 k MT

CurrentProduction - - - k MTCapacity - - - k MTExcess capacity - - - k MT

Additional capacity 809 178 987 k MTAdditonal feedmil 4 1 5 millsAdditional capex 97 24 121 US$ m

Page 17


Current trends in the animal protein sector Tighter supervision to bring price stability

We think the Indonesian government’s response to the 2014/15 oversupply period will work in the integrators’ favour. To recap, after consultations with industry stakeholders, new regulations to tighten supervision and to reduce price volatility were issued. The focus areas of the new regulations include: 1. National Production Plan shall be established at the latest

by each December of each previous year (subject to review in the event of epidemic, and/or force majeure), based on estimated annual chicken meat/egg consumption per capita. The National Production Plan is set by the Ministry of Agriculture based on input by Analysis Team (to be formed by the Ministry). Supply and demand estimates shall be undertaken by Analysis Team, to be formed by the Ministry – with price stability as the main goal

2. In the event of unbalanced supply and demand; the number of PS (parent stock) and/or DOC (day-old chicks) may be adjusted. This will serve as legal basis for any future mandatory culling

3. Breeders are obliged to electronically report monthly inventories, type, location of production, and distribution of PS to the Ministry. Integrators shall submit live broiler supply and distribution reports online at least once a month. In the event of an epidemic, force majeure and/or unbalanced supply-demand, the Ministry of Agriculture may demand reports and to undertake population/ production audits at any time

4. Breeding business meant for public sale shall follow certain pre-order estimates. Independent/commercial farmers shall inform their requirements to integrators 6 months, 1 month, and 3 months in advance for PS, broiler DOC, and layer DOC, respectively, through written agreements

5. Internal consumption of DOC shall be intended for integration with downstream industry. All farms producing at least 300k live broilers per week are required to have their own slaughterhouses, equipped with cold-chain facilities (effective from 6 December 2017)

6. To guarantee supply of DOC for independent commercial broiler farmers, partnership and integrated farms; as well to protect farmers from unhealthy competition; Integrators shall allocate half of their DOC production for independent/commercial farmers. Breeders shall also apply SNI (Indonesian National Standard) to ensure DOC quality

7. The government shall supervise the supply and distribution at least once every three months or anytime in the event

of suspected irregularities. Monitoring of production, chick-in and distribution shall be undertaken by the Minister, Governor, Regent/Mayor according to their relevant authorities. The government shall impose penalties such as termination of business activities and/or revocation of licences and/or fine for non-compliance

While the required 50% DOC sales allocation to independent famers would address fairness in commercial farming; we believe its implementation would be gradual; as integrators scale down construction of new commercial farms. We believe a few issues would still need to be addressed in its implementation: 1. This requirement is subject to the number of available

independent farmers to absorb the increased supply

2. External sales are subject to payment terms, as we believe integrators should not be burdened with receivables in selling its DOC to independent farmers

3. Over the years, integrators have spent capex to build their own commercial farms, which may be under-utilised if this requirement is implemented immediately

4. Because mortality rate is typically higher amongst independent farmers, this requirement may result in higher prices on the consumer level

Within the Indonesian integrators under our coverage, the proposed amendments mean that they need to curb market share gains in the live broiler market. However, the regulation does not address minority stakes in commercial farms; which may well be pursued. We believe this should help reduce a potentially higher mortality rate among independent farmers, lower distribution costs and improve efficiency. Indonesia’s corn self-sufficiency: winners and losers

According to USDA, Indonesia typically has three corn crop cycles (i.e. from planting to harvesting) per annum: Nov-Feb (49%) Mar-Jun (37%) Jul-Sep (14%) USDA estimated Indonesia’s corn production at 10.2m MT for marketing year 16/17F (Oct/Sep) – from 10.5m MT in MY15/16F and 9.0m MT in MY14/15. Of this amount, feed millers consume approximately 8m MT p.a. and are forecast to expand to 8.5m MT in MY16/17F – thus including 4.0m MT of corn for human consumption, import requirement is forecast at c.2m MT.

Page 18


Animal Protein

According to the Feed Millers association (GPMT), Indonesia imported on average 3m MT of corn p.a. in 2014/15. While local corn is generally preferred (better quality due to freshness) vs. imported corn; higher local corn price (in consequence to import restrictions) would affect feed margins before being passed on as higher prices. Since 24 March 2016, Bulog (state-owned Logistics Bureau) was appointed as the sole importer for corn intended for feed production in Indonesia. On 9 September 2016, the government set floor and ceiling prices for domestic corn – at which Bulog should theoretically intervene to buy and sell corn, respectively. Yet, raw materials availability continued to be an issue due to subsequent ban on feed wheat (corn substitute) imports; despite the lack of buffer stock mechanism to administer the corn reference prices. Corn procured from local farmers typically has moisture content of c.30%. Agents/wholesalers with corn dryers purchase local corn crops (typically in advance of harvests) at a discount and bring the moisture content down to 15%. Agents/wholesalers can theoretically influence prices by withholding corn purchases from local farmers – in turn pressuring farmers to sell at low prices due to the high moisture-content. The corn is subsequently resold to feed millers at a margin. Corn farmers hence may not necessarily benefit from the government’s self-sufficiency policy; while small feed millers that do not have corn dryers are the most disadvantaged.

Large feed millers, on the other hand, would have already installed and/or are investing in more corn drying equipment/storage close to corn belts. This would ensure better access to domestic corn at reasonable cost. Addressing the corn supply shortfall in Indonesia

Responding to the corn supply shortfall in 2016, Kontan newspaper reported in September 2016 that Ministry of Agriculture had facilitated an MOU between 29 regional governments and GPMT in an effort to boost local corn production by adding cultivated areas. Under this programme, the government would identify additional land for cultivation to members of GPMT who would have otherwise need to import corn. In lieu of imports, GPMT members would be obliged to purchase corn from the proposed areas. According to the article, the government will also subsidise fertiliser and seed to corn farmers. We understand the additional land needed under the new programme could reach 724k ha (on top of c.3.2m ha currently under cultivation) – each yielding 4.2 MT/ha. So far not all required land has been identified. It is also unclear whether the government also offers any solution to bottleneck in corn drying capacity (in an effort to shorten the distribution chain). We believe Bulog would eventually need to import c.2m MT of corn this year. This should provide some cost relief to Indonesian integrators in 2H17.

Corn supply and consumption (k Ha; k MT)

Source: USDA DBS Bank estimates Indonesian feed outlook: normalising margins

Quarterly feed segment EBIT between 3Q15 and 2Q16 revealed that margins had improved steadily on reduced raw material costs and steady ASP. However, higher raw material costs in 3Q16 and 4Q16 (in the absence of cheaper feed wheat and spike in local corn costs) were also accompanied by lower ASP on seasonally lower volumes. The drop in feed sales volumes only partly reflects limitation on the number of DOC sold (due to government-mandated

culling programme in 4Q15); but also reflects increased competition (discussed in next section below). We expect feed raw material costs to remain steady over the next 12 months. US soybean bumper crop, a stable USD/IDR exchange rate and anticipated expansion in domestic corn planted areas should help to keep costs stable. So far, large integrators have not voiced concerns over the lack of domestic corn supplies, given their extensive procurement networks and planned investments in additional corn drying/storage facilities throughout Indonesia’s corn belts. Smaller feed-millers, on the

Oct/Sept 2014/2015 2015/2016 2016/2017Area harvested 3,100 3,300 3,200 Beginning stocks 1,741 1,666 2,041 Production 9,000 10,500 10,200 MY imports 3,381 2,000 2,000 Total supply 14,122 14,166 14,241 MY exports 256 25 20 TY exports 256 25 20 Feed and residual 8,000 8,000 8,500 FSI consumption 4,200 4,100 4,000 Total consumption 12,200 12,100 12,500 Ending stocks 1,666 2,041 1,721 Total distribution 14,122 14,166 14,241

Page 19


other hand, may need to turn to Bulog to fill any gap – unless they invest in corn dryers and expand their domestic procurement network. We also expect lysine prices to remain stable; following the spike in November 2016. According to KTB Investment & Securities, lysine spot prices in China had spiked due to higher transportation costs (i.e. caused by the crackdown on overloaded trucks and heavy snow); while spot prices in Europe also climbed amid higher export demand from China (i.e. driven by the CNY’s depreciation). By December 2016, average lysine spot price in China stood at RMB13,223/MT (source: CJ Cheiljedang) and EUR1,386/MT in Europe. In KTB’s estimates, global lysine production capacity is estimated to reach 3.05m MT (utilisation rate at 93%) this year; while demand is due to reach 2.85m MT (+5.5% y-o-y). Approximately 70% of global lysine demand comes from North America/Europe (where the proportion of farming enterprises is high); while c.30% comes from China (backed by growing consumption of meat). KTB believes that previous lysine excess supply issue is being resolved, given CJ Cheiljedang’s factory capacity reductions in China (for repurposing) and shutdowns (due to relocations). The lysine industry’s situation has therefore improved (i.e. reduced capacity and demand recovery); as high spot prices from 4Q16 should boost lysine producers’ earnings in 1Q17. There remains some risk of renewed weakness in prices if China’s supply glut (due to expansions in local lysine companies since 2013) persists. Competitive landscape: intensifying

Over the last decade integrators in Indonesia have been able to keep their market shares without significant threats. Yet, given Indonesia’s significant demand growth potential, relatively smaller players such as CJ Cheiljedang, Cargill, and New Hope have continued to expand their presence in Indonesia; primarily in feedmilling. For example, New Hope, we understand, would have expanded their capacity in excess of 1.7m MT p.a. (surpassing Malindo Feedmill), when its

feedmill in Lampung completed. We understand price under-cutting has been employed to increase penetration; causing overall feed margins to moderate. Still, we argue that pure feedmilling operations may also have its limits: 1. Lack of breeding business to complement penetration

among independent farmers. There are economic reasons behind this hurdle. Integrators typically distribute their DOC as packaged sales; so any higher mortality rate would offset any savings offered by price-under-cutting

2. Government corn import restrictions. Established feedmillers generally have a wider domestic procurement network; so additional investments in corn dryers and storage facilities would still deliver economies of scale vis-à-vis smaller feedmillers who have relied more on imports. So, larger feed millers could end up expanding market shares, in our view. Some form of carbohydrate substitution in feed formulas may continue to be pursued; albeit on a smaller scale. This may provide some relief to cost pressure; although this could be at the expense of the feed conversion ratio (FCR).

Another potential challenge might come from PT Berdikari, a state-owned enterprise, which reportedly will go all-out to become an integrator. Our view is neutral. We do not see significant impact for the following rationale: 1. If PT Berdikari were to grow by acquiring existing players;

it would not have any competitive impact

2. If PT Berdikari were to grow organically, it would take some time (at least two years) before they can start operation. However, successful positioning also depends on economies of scale, competency in feed formula/ breeding technology and a high degree of efficiency

Existing players do not seem concerned; although we understand they continue to be on guard. We do not expect significant consolidation in the near term, mainly given the deleveraging efforts underway and overlap in operating areas.

Feed EBIT comparison between Indonesian integrators


F eed EBIT (US$m) F Y12 F Y13 F Y14 F Y15 F Y16F F Y17FCharoen Pokphand I'sia 303.1 258.2 253.7 236.0 246.2 209.7 EBIT margin 16.1% 13.4% 11.9% 12.9% 13.6% 11.2%Japfa Comfeed I'sia 160.2 128.8 160.8 120.6 165.0 161.0 EBIT margin 12.5% 9.7% 11.6% 10.9% 12.7% 12.0%Malindo Feedmill 34.6 20.4 18.9 23.2 39.1 34.0 EBIT margin 11.6% 5.9% 5.4% 7.4% 10.9% 9.1%Sierad Produce 22.5 26.8 10.8 -6.2 12.7 18.6 EBIT margin 7.8% 10.9% 6.8% -5.7% 9.6% 11.2%

Page 20


Animal Protein

Impact on regulations

Source: DBS Bank Consumer food trends - Indonesia

In Indonesia, integrators also participate in supply chain for quick service restaurants (such as KFC and McDonald’s), horeca (hotels, restaurants, catering services), as well as branded frozen processed food markets (distributed mostly through modern trade, such as convenient stores). The pricing mechanism of semi processed chicken meat for quick service restaurants differs from one integrator to the other. For example, KFC is priced on a weekly basis; while others such as McDonald’s is based on yearly pricing. Integrators prefer to sell branded frozen food products; although distribution through convenient stores also has its own issues such as late payments. Expect new entrants over the next few years

The branded frozen processed food segment commands significantly higher margins (vis-à-vis feedmilling, breeding and commercial farming) and has grown 20-30% per annum (with exception of 2015) – albeit from a small base. The branded frozen food products continue to show strong growth potential with aggressive pipelines of new product launches (for CPIN, SIPD and MAIN) as well as JV (i.e. JAP with Cargill) – not only in chicken meat, but also in dairy products (e.g. CP and Meiji). Given the high margin and strong growth potential, a number of new entrants have also sprung up:

1. Salim Group (through JV with CAB Cakaran of Malaysia) 2. Triputra Group (through JV with Bounty Fresh Food of

the Philippines) Brazil Food (BRF) has also teamed up with PPB (Perlis Plantation Berhad) through 70:30 JV (BRF owning 70%) to expand PPB’s food processing business to produce processed meat products such as nuggets, sausages burgers, etc. We understand BRF paid US$16m for the 70% stake in existing operations which has around 10k MT p.a. capacity from two lines. Longer-term, the goal was to increase this capacity to 80k MT p.a., including launching its own Sadia brand (while current brand names are maintained). We expect BRL to export its products into Southeast Asia, including Indonesia. We do not expect the new entrants to erode existing players’ margins significantly because: 1. The established players have significant headway in

distribution network and branding

2. New entrants would still need to secure raw materials from existing integrators; as we do not expect them to build upstream capabilities yet. Typically, we believe new entrants to be loss-making in the first five years of operation

3. The Indonesian market is big enough

Consumer food EBIT comparison between Indonesian integrators


CPIN JPFA MAIN SIPD

To have own processing facilities

No impact, already in compliance


Capex, impact on cash flowNo impact, already in

complianceMinimum 50% external DOC sales

No impact, selling more than required


No impact, selling more than required


Develop export marketsHas direct access to export market, though insignificant

Has direct access to export market, though insignificant

100% sold domestically, export subject to opportunity

100% sold domestically, export subject to opportunity

National production plan Has the largest share Has the second largest shareLimited upside but less risk from

new entrantsLimited upside but less risk from

new entrants

Corn/feed wheat import banLess impacted, as the group is in strong cash position to invest in

corn dryers/silos

Less impacted, as the group is in strong cash position to invest in

corn dryers/silos

Impacted by higher corn price, but cost increase can be passed

on

Impacted by higher corn price, but cost increase can be passed

on

Ove ra l l impa c t

Limi te d growth in comme rc ia l fa rming, due to la rge s i z e . Ca n e xp lore JVs wi th inde pe nde nt fa rme rs

Limite d growth in comme rc ia l fa rming, due to la rge s i z e . Ca n e xp lore JVs with inde pe nde nt fa rme rs

Growth opportun ity de pe nds on ca sh flow

a va i la b i l i ty on c a pa c i ty/ge ogra phica l

e xpa ns ion

Lowe r e conomic of sc a le posse s ri sk on h ighe r ra w

ma te ria l costs

Consumer food EBIT (US$ m) F Y12 F Y13 F Y14 F Y15 F Y16F F Y17FCharoen Pokphand I'sia 38.7 39.1 39.5 45.0 44.0 56.8 EBIT margin 19% 18% 16% 20% 16% 17%Japfa Limited 10.8 6.0 4.0 4.0 5.0 5.4 EBIT margin 5% 3% 2% 2% 2% 2%Malindo Feedmill n.a. (2.0) (3.9) (3.3) (3.7) (4.2) EBIT margin -244% -82% -74% -58% -37%Sierad Produce (5.7) (0.3) (0.8) (3.3) (1.6) 1.2 EBIT margin -12% -1% -2% -11% -6% 3%

Page 21


Consumer food trends - Malaysia

In Malaysia, growth will be inorganically driven through joint-ventures; focusing on food processing and ready-to-eat meals. Some of the larger integrated players such as QL Resources (QL), CAB Cakaran (CABC) and Lay Hong have signed agreements with overseas counterparts. FamilyMart venture to offer long-term synergies

QL has signed an area franchise agreement with Japan’s FamilyMart Co. Ltd to open 300 convenience stores within five years. We anticipate capex outlay for this venture to make up a small proportion of QL’s total capex, as the requirement per-store of c.RM200k is small in comparison to the group’s expected annual capex of RM200-300m. The intention to focus on ready-to-eat F&B will bring synergies to QL’s surimi-based products, snack foods, and processed poultry product businesses. However, the earnings impact in the near term is negligible given the prerequisite 2-3 years’ gestation period. In the mid to long term, positive accretion from this venture will depend a lot on FamilyMart’s ability to differentiate itself from its competitors such as 7-11 Malaysia and Bison. Growing the food manufacturing segment

Post-acquisition of assets from Sinmah Breeders Sdn Bhd (SBSB), a subsidiary of Farm’s Best Berhad, CABC plans to expand its production capacity for processed food by 600MT/month, with another 500MT/month in the near term. The current production capacity is at 500MT/month. We believe this is a value-added area the group aims to grow in the next few years. The export segment contributed c.16% of revenue in FY16, with Singapore being the largest market. We expect this to grow exponentially from FY19 onwards as the group is placing ample focus on expanding its processed food product market. CABC plans to tap into the international halal market as the availability of the global halal food is limited. The first market of interest will be Japan as its product

offerings and variety of product distribution are at the forefront of processed food innovation. Future growth drivers for Malaysian players

CABC has signed an MOU with Salim Group to form a joint-venture agreement. The JV targets to have a production capacity of 5m birds/month in three years to be used internally by Salim Group for the production of processed food. CABC will provide the know-how in setting up integrated poultry farms in Indonesia and oversee the operations, whereas Salim Group will oversee the food manufacturing and distribution side. We view this positively as Salim Group has a large presence in Indonesia with >11,000 Indomaret convenient stores and operates >500 KFC outlets. Possible collaborations include the supply of poultry to the KFC outlets and selling value-added frozen food at the convenience store chain. We expect CABC’s export revenue contribution to increase to 50% once the venture is in full swing with the joint venture revenue target of RM1bn p.a. We have not imputed this into our forecast as we believe it will take some time for the full execution of the joint-venture. Joint venture with Japan NH Foods Limited

Lay Hong has entered into a joint venture agreement with Japan’s NH Foods Ltd to manufacture, market, distribute and sell processed food product under the brand name Nippon Nutriplus. It targets to be the manufacturing hub of NH Foods for halal products. Lay Hong will oversee the operational matters in Malaysia and the domestic product marketing. NH Foods will lend its R&D and manufacturing expertise. Lay Hong has a right of first refusal to supply all raw materials required in respect of the production of the further processed foods of the joint venture. NH Foods will also be responsible for the sales and export of further processed foods to the overseas markets, including Singapore and Japan.

Page 22


Animal Protein

Key risks to our call Outbreak of diseases affecting livestock would have a material effect on animal protein producers’ operations and financial positions. While all companies have instituted strict bio-security measures to reduce the risk of these events occurring, there can be no assurance that they are immune. Additionally, an outbreak (such as bird flu) would likely have an adverse impact on demand. Intense competition. Excess capacity and intense competition in Indonesia may continue to result in DOC oversupply and slower-than-expected increase in ASP. Movements in raw material costs and currencies. All companies under our coverage are exposed to volatile movements in raw material costs and currencies. For example, rupiah weakness and consumer purchasing power caused delays in passing on higher raw material costs. While we currently do not impute any net USD inflow for the remainder of the year (on expectations of Federal Reserve rate hikes), we acknowledge that there may be rupiah upside risk – should the law garner significant USD repatriation interest. Our economist believes that repatriation of some US$38bn could boost USD/IDR towards Rp12,500. Based on our sensitivity analysis, every 1% rupiah appreciation would boost JPFA, MAIN, CPIN and JAP’s FY17F EBITDA by 1.6%, 0.2%, 0.4% and 1.7%, respectively Changes in government regulations, licensing as well as other interventions, price/volume controls across various jurisdictions may adversely affect animal protein producers’ profitability. For example, the required reduction in DOC supply to control post-Eid oversupply would temporarily affect financial performance. Also, a reduction in quota and/or restrictions in importation of live cattle could adversely affect beef feedlot operations. Vulnerable to liquidity and credit risks. Animal protein companies may require further funding to expand; are hence vulnerable to liquidity and credit risks. Any plans for more equity funding would dilute existing shareholders’ stakes. Limited availability of clean water. Water is one of the most critical factors in the animal protein industry, but often overlooked. Clean water plays an important part in animal metabolism as well as its sanitary system. Ensuring the quality and quantity of clean water are crucial to accommodate growing demand of animal protein sources. In our estimation, Indonesia`s poultry and beef sector will need c.221m litre per day water consumption (equivalent to 21% of Jakarta’s water

consumption at c.1bn litre) to be provided by 2021. For Vietnam, we estimate the clean water needed by 2021 is c.60m litre per day. In the numbers, we exclude poultry, cattle, and swine breeding farms’ water consumption. To supply the fast-growing demand, the availability of such massive amount of clean water presents risk to integrators. The lack of clean drinking water could lead to the deterioration of animal growth and quality of animal produced. The lack of clean water for sanitary will also adversely impact animal health (i.e. increase mortality rate). Foreign competition (WTO ruling) may affect the profitability of downstream operations; although the impact may not be as threatening as thought. Indonesia currently faces WTO complaints – the outcome of which may alter the competitive landscape among consumer food producers.

There are currently 18 measures challenged in the complaints – of which nine are related to the import licensing regime for horticultural products; while none others concern the import licensing regime for animals and animal products. They are listed as follows: Measure 1: Limited application windows and validity

periods Measure 2: Periodic and fixed import terms Measure 3: 80% realisation requirement Measure 4: Harvest period requirement Measure 5: Storage ownership and capacity

requirements Measure 6: Use, sale and distribution requirements for

horticultural products Measure 7: Reference prices for chilies and fresh shallots

for consumption Measure 8: Six-month harvest requirement Measure 9: Import licensing regime for horticultural

products as a whole Measure 10: Import prohibition of certain animals and

animal products, except in "emergency circumstances" Measure 11: Limited application windows and validity periods

Measure 12: Periodic and fixed import terms Measure 13: 80% realisation requirement Measure 14: Use, sale and distribution of imported

bovine meat and offal Measure 15: Domestic purchase requirement for beef

Measure 16: Beef reference price Measure 17: Import licensing regime for animals and

animal products as a whole Measure 18: Sufficiency of domestic production to fulfil

domestic demand

Page 23


The case essentially refers to effective import restrictions on frozen-dressed chicken/parts into Indonesia. Even if the imports were eventually allowed, we doubt there would be significant competitive threat to local producers due to the following rationale: 1. Fresh meat is still more preferable than frozen carcass in

Indonesia; as live birds are substantially sold in wet markets

2. Live broiler prices in Indonesia are low enough to dismiss arbitrage opportunities. Imported frozen chicken carcasses/parts may not necessarily end up cheaper vs.

locally produced brands when the shipping, processing, and distribution costs throughout Indonesia are imputed

3. Halal labelling in Indonesia is in itself a barrier for overseas entrants; as food manufacturers must ensure that all raw materials involved in the production are certified. This affects food producers’ branding

4. New entrants may not have the brand recognition and the necessary supply chain distribution vs. established players.

Page 24


Animal Protein

Appendix 1

3QCY16 results review and remarks/outlook

Company Results vs forecasts

3QCY16 results highlights Realised DOC vol.

Realised DOC ASP

Remarks/outlook

Charoen Pokphand Indonesia

In line CPIN reported 3Q16 earnings of Rp763bn (+29% y-o-y; -22% q-o-q). 3Q16 gross margin from feed came in at 16.7% - dropping from 22.1% in 2Q16 and 18.0% in 3Q15 – on high raw materials cost and sequentially lower ASP. Yet, breeding gross margin increased significantly q-o-q to 32.4% from 22.8% in 2Q16 as DOC prices continue to expand (despite seasonally lower demand quarter) while feed ASP moderated. CPIN’s new Live Bird segment returned to positive gross margin of 3.2%, from a negative 4.0% in 2Q16, indicating sequentially better ASP. Processed Chicken gross margin also declined to 30.5% from 33.1% in 2Q16 as we suspect higher live bird prices and A&P expense may have eroded profitability for the quarter

242m chicks

Rp4,960/ chick

We expect Charoen Pokphand Indonesia to book 4QCY16 earnings of between Rp579.8bn – which would bring its FY16 earnings to Rp2,867bn.

Japfa Comfeed Indonesia

Above Japfa Comfeed (JPFA) delivered 3Q16 earnings of Rp761bn vs. Rp687bn in 2Q16 (+11% q-o-q) and Rp125bn in 3Q15 (six-fold y-o-y). The strong results were driven by higher DOC, live bird ASP, complemented by lower raw material costs and lower financing cost due to debt repayments. JPFA also booked a one-time gain (US$13m) from selling its Australian cattle farm. EBITDA for the group’s Feed business expanded 6% y-o-y; -27% q-o-q on account of seasonally lower volume. Its 3Q16 DOC EBITDA improved 23% q-o-q thanks to resilient ASP. Commercial Farm booked 37% q-o-q higher EBITDA (-16% y-o-y) on account of y-o-y higher DOC cost, stable live bird ASP.

151m chicks

c.Rp5,600 /chick

We expect Japfa Comfeed Indonesia to book 4QCY16 earnings of Rp444.9bn – which would bring its FY16 earnings to Rp2,169.8bn. The group is due to release its 4Q16 financial results on 1 March 2017

Japfa Limited Above 3Q16 earnings came in at US$44.6m. Excluding gains from changes in fair value of biological assets (net of tax) – and translation FX gains (losses) – the group posted 3Q16 net earnings of US$42.0m (+51% y-o-y; -13% q-o-q). The strong performance was driven by higher EBITDA contribution from Japfa Comfeed Indonesia (JPFA) which delivered US$94.7m (+7% q-o-q; +44% y-o-y); and higher contribution from Animal Protein outside Indonesia (38% y-o-y at US$13.5m; as well as higher Dairy segment contribution (45% y-o-y at US$16.4m). Consumer Food segment contribution was also exceptionally strong at US$4.9m (+172% y-o-y; +158% q-o-q) due to higher sales volume.

167m chicks

Rp5,600 /chick

We expect the company to book 4QCY16 earnings of US$37.4m – which would bring its FY16 earnings to US$153.4m. The group is due to release its 4Q16 financial results on 1 March 2017

Page 25


3QCY16 results review and remarks/changes to forecasts (continued)

Company Results vs forecasts

3QCY16 results highlights Realised DOC vol.

Realised DOC ASP

Remarks/outlook

Malindo Feedmill Above MAIN delivered 3Q16 reported earnings of

Rp76bn vs. Rp105bn in 2Q16 and Rp14bn in 3Q15. Excluding FX losses, 3Q16 underlying earnings would have come in at Rp91bn. The stronger-than-expected 3Q16 performance was driven largely by its DOC Breeding and Broiler segment EBIT – backed by stronger ASPs for both DOC and broiler. Its feed ASP eased 1.4% q-o-q; combined with higher soybean meal cost, which peaked in June 2016. This resulted in lower Feed segment EBIT at Rp95bn (-15% y-o-y). Processed Food continue to report EBIT losses at Rp13bn in 3Q16 from Rp10bn losses in 2Q16 – as ASP declined 7% q-o-q due to higher product mix sold through general trade.

49.2m chicks

Rp5,000 /chick

We expect Malindo Feedmill to book 4QCY16 earnings of Rp36.7bn – which would bring its FY16 earnings to Rp270.0bn.

QL Resources 2QFY17 core earnings of RM50.5m (-8% y-

o-y), with improvement in the integrated livestock farming (ILF) segment’s earnings being dragged by the decline in other segments. The ILF division saw PBT grew by 17% y-o-y to RM29m, due to the increase in volume of raw feed trade and also the increase in farm-produced prices; particularly the improvement in egg price of 31 sen in 2Q17 compared to 30 sen in 2Q16. QL’s marine products manufacturing (MPM) segment PBT contracted by 8% y-o-y to RM39m, making up 55% of 2QFY17 group PBT (2QFY16: 60%). This was due to the lower number of fish catch in 2QFY17 driving up production costs and a stronger ringgit in the quarter. Consequently, MPM’s profitability has deteriorated with a PBT margin of 18% in 2QFY17 (2QFY16: 21%)

n.a. n.a. We had adjusted our earnings on the back of lower-than-expected marine product manufacturing (MPM) PBT margins in 1HFY17 at 17% against the historical/forecast PBT margins of 20%. The lower PBT margin was mainly due to lower number of fish catch, thus increasing overall production cost.

Page 26


Animal Protein

Appendix 2 Key assumptions

Indonesia Population growth (2016-2021) 1.2% Industrial contribution of animal feed (2021) 100% Poultry Beef Chicken consumption growth (2016-2021) 11.7% Beef consumption growth (2016-2021) 8.0% Carcass yield 70% Carcass yield 63% Meat yield 60% Meat yield 70% Weight of live bird 1.8 Weight of cattle 500.0 Mortality rate 7% Mortality rate 15% FCR 1.8 FCR n/a Domestic production (2021) 100% Domestic production (2021) 100% Vietnam Population growth (2016-2021) 1.1% Industrial contribution of animal feed (2021) 70% Poultry Swine Chicken consumption growth (2016-2021) 8.6% Pork consumption growth (2016-2021) 2.2% Carcass yield 70% Carcass yield 72% Meat yield 60% Meat yield 80% Weight of livebird 2.0 Weight of swine 120.0 Mortality rate 12% Mortality rate 15% FCR 1.8 FCR 4.4 Domestic production (2021) 87% Domestic production (2021) 100% Required industry capital expenditure in Indonesia (2017-2021) Source: DBS Bank estimates Required industry capital expenditure in Vietnam (2017-2021) Source: DBS Bank estimates

Capex per facility (2016) Capex per facility (2 Total capex

Breeding farm 2,700,000 DOC/year 1,279 units 25,000,000,000Rp 2,089,306$ 2,672,222,197$ Commercial farm 1,026,000 broiler/yea 3,365 units 22,000,000,000Rp 1,838,589$ 6,186,852,517$ Feedmil 240,000 MT/year 47 units 290,000,000,000Rp 24,235,948$ 1,138,544,775$

9,997,619,488$

Capacity Additional facility needed

Capex per facility (2016) Capex per facility (2 Total capexBreeding farm 2,700,000 DOC/year 264 units 42,300,000,000VND 2,089,330$ 551,583,003$ Commercial farm 1,026,000 broiler/yea 694 units 37,200,000,000VND 1,837,425$ 1,275,172,654$ Feedmil 210,000 MT/year 9 units 490,700,000,000VND 24,237,211$ 208,445,042$

2,035,200,699$

Capacity Additional facility needed

Page 27


Appendix 3 Abbreviation

A&P Advertising and Promotion

ASP Average Selling Price

BMI Business Monitor International

BPS Badan Pusat Statistik (Central Bureau of Statistic)

Bulog Badan Urusan Logistik (Logistic Bureau)

CAGR Compound Annual Growth Rate

DOC Day Old Chick

FCR Food Conversion Ratio

GGPS Great Grandparent Stock

GPMT Gabungan Pengusaha Makanan Ternak (Feed Miller Association)

GPS Grandparent Stock

Ha Hectare

KPPU Komisi Pengawasan Persaingan Usaha (Business Competition Supervisory Commission)

MT Metric Ton

MY Marketing Year

PS Parent Stock

SNI Standar Nasional Indonesia (Indonesian National Standard)

Page 28


Animal Protein

Stock profiles

Page 29

*This Equity Explorer report represents a preliminary assessment of the subject company, and does not represent initiation into DBSV’s coverage universe. As such DBSV does not commit to regular updates on an ongoing basis. The rating system is distinct from stocks in our regular coverage universe and is explained further on the back page of this report.

ed: TH / sa: BC, PY

NOT RATED RM1.71 KLCI : 1,691.24 Closing price as of 6 Feb 2017 Return *: 2 Risk: Moderate Potential Target 12-mth* : RM1.71 (0% downside) Analyst Regional Research Team

Price Relative

Forecasts and Valuation FY Sep (RMm) 2015A 2016A 2017F 2018F Revenue 892 1,101 1,235 1,401 EBITDA 50.5 75.6 84.3 98.9 Pre-tax Profit 29.3 46.7 45.0 63.2 Net Profit 16.0 26.0 32.2 45.2 Net Pft (Pre Ex.) 10.9 21.2 32.2 45.2 EPS (sen) 11.5 16.1 18.6 26.1 EPS Pre Ex. (sen) 7.84 13.1 18.6 26.1 EPS Gth (%) 44 39 16 40 EPS Gth Pre Ex (%) 50 68 42 40 Diluted EPS (sen) 10.3 13.3 15.5 21.8 Net DPS (sen) 0.0 1.00 1.16 1.63 BV Per Share (sen) 133 152 160 184 PE (X) 14.8 10.6 9.2 6.5 PE Pre Ex. (X) 21.8 13.0 9.2 6.5 P/Cash Flow (X) 6.9 6.5 4.3 3.7 EV/EBITDA (X) 8.7 6.4 6.6 5.9 Net Div Yield (%) 0.0 0.6 0.7 1.0 P/Book Value (X) 1.3 1.1 1.1 0.9 Net Debt/Equity (X) 0.7 0.5 0.6 0.6 ROAE (%) 9.5 12.1 12.3 15.2 ICB Industry : Consumer Goods ICB Sector: Food Producers Principal Business: CAB Cakaran is one of the largest integrated poultry farmers in Malaysia with production capacity of 7m birds/month. Its products cater to both the domestic and international market. Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Building momentum

Growth driven by acquisitions and joint ventures Increase local market share and overseas presence Improved visibility: 28% earnings CAGR in FY16-18F

RM1.71 TP is pegged to 11x FY17F EPS The Business Big on broiler. CAB Cakaran (CABC) is one of the largest local integrated poultry players with potential maximum capacity of 7m birds/month, catering to both domestic and international markets. CABC is also involved in poultry/marine food manufacturing, supermarket, restaurant and franchising. Inorganic growth drivers by ventures and acquisitions. CABC has signed MOU with KMP Pte Ltd owned by Salim Group. The MOU aims to set up a JV with Salim Group owning 90% and CABC the remaining 10% (with option to increase to 30% in 3 years after initial set-up). The JV targets to have a production capacity of 5m birds/mo. in 3 years, to be used internally by Salim Group for its processed food production. It also targets to generate RM1bn revenue p.a. in 5 years’ time. CABC will provide the know-how in setting up integrated poultry farms in Indonesia and oversee the operations. On 24 January 2017, CABC signed S&P for the acquisition of breeder farms from Sinmah Breeders Sdn Bhd (SBSB), subsidiary of Farm’s Best Bhd, for RM63m. CABC's current production capacity is 5m birds/mo. After this acquisition, CABC’s broiler production capacity will further expand, through the increase in its breeding capacity from 510,000 to 940,000 parent stock. We estimate CABC’s full broiler production to reach 7m birds/month when acquisition is complete. The Stock Fair value of RM1.71. Our fair value is based on 11x fully-diluted FY17F EPS (i.e. industry’s average excluding QL and Lay Hong). We excluded QL and Lay Hong due to their larger market cap and higher institutional shareholding. We deem it justifiable given our expectation of a strong 2-year EPS CAGR of 28% FY16-18F. The stock is trading at 8.7x FY17F PE. CABC proposed dividend of 1 sen in FY16, implying 6% payout and 0.6% yield. This is a milestone; as CABC has not distributed dividends since 2006. Two-pronged growth strategy. Management adopts dual engine growth strategy, focused on growing integrated poultry farming and food manufacturing regionally. It aims to be one of the largest poultry players in Malaysia. For food manufacturing, CABC is targeting to grow in bigger consumer markets such as Japan. At A Glance Issued Capital (m shrs) 177.4 Mkt. Cap (RMm/US$m) 283.8 / 63.6 Major Shareholders (%) Chuah Ah Bee 28.7 Chan Kim Keow 19.6 Plant Wealth Holdings 19.9

Free Float (%) 31.8 3m Avg. Daily Val (US$m) 0.03


Regional Equity Explorer

CAB Cakaran Corp

Bloomberg: CABC MK | Reuters: CABC.KL Refer to important disclosures at the end of this report

87

137

187

237

287

337

387

437

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

Feb-13 Feb-14 Feb-15 Feb-16 Feb-17

Relative IndexRM

CAB Cakaran Corp (LHS) Relative KLCI (RHS)

SMC Research

Equity Explorer

CAB Cakaran Corp

Page 2

REVENUE DRIVERS

Exhibit 1: Revenue weightage by business segment

Source: Company, DBS Bank

Exhibit 2: PBT weightage by business segment

Source: Company, DBS Bank Exhibit 3: Historical wholesale and retail broiler price

Source: Department of Statistics Malaysia; “Selected Agricultural Indicators 2016”

Stability of broiler prices. The integrated livestock farming (ILF) segment which focuses on poultry (broiler) farming contributes 86%/104% of total revenue/PBT in FY16 (see Exhibits 1 and 2). As such, CABC’s earnings are highly exposed to price fluctuations that depend on the supply-demand dynamics of broilers. FY16 net earnings came in at RM26m (+62% y-o-y) due to higher broiler ASP despite higher raw material costs. Although CABC is subject to price fluctuations, we believe that its outlook remains positive as chicken meat is a consumer staple and small-ticket item in household spending. We expect the revenue contribution weightage to be maintained and PBT contribution at 92% in FY17/FY18 as other segments will grow concurrently.

Diversification in food manufacturing segment. CABC’s second largest business segment is marketing and food processing with 5%/3% revenue/PBT contribution in FY16. This is a complementary segment to the poultry division as raw materials are obtained internally for the manufacture and trade of various food products such as sausages, nuggets, burgers and dim sum. CABC produces c.500MT/month of meat-based halal-certified products.

Profitability of other segments. Aside from poultry farming and food manufacturing, CABC has also delved into other business such as supermarket, marine product manufacturing, restaurant and franchising. However, these other segments are either contributing minimal PBT or loss-making. These segments are complementary to CABC’s core poultry business and will contribute tremendously to the group’s synergistic growth if they turn profitable.

Inorganic growth by joint ventures... CABC has signed an MOU with KMP Private Ltd that is owned by Salim Group, one of Indonesia’s largest conglomerates with assets like Indofood Sukses Makmur which is the world’s largest instant noodle producer. The MOU aims to set up a joint-venture entity with Salim Group owning a 90% stake and CABC owning the remaining 10% stake, with an option for CABC to increase its stake to 30% in the next three years after the initial set-up. The JV targets to have a production capacity of 5m birds/month in three years to be used internally by Salim Group for the production of processed food. It also targets to generate RM1bn revenue p.a. in five years’ time. CABC will provide the know-how in setting up integrated poultry farms in Indonesia and oversee the operations. ...and acquisitions. On 24 January 2017, CABC signed the S&P for the acquisition of breeder farms from Sinmah Breeders Sdn Bhd (SBSB), a subsidiary of Farm’s Best Berhad for RM63m. CABC current production capacity is 5m birds/month. After the acquisition of SBSB’s assets, CABC’s broiler production capacity will further expand, supported by

77%82%

86% 85% 81%

19% 16%11% 11% 10%7% 5% 5% 4%

8%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY14 FY15 FY16 FY17F FY18F

Integrated livestock farming Supermarket Food manufacturing

92%97%

104%

92% 90%

1% 1% 1% 1% 1%

13%6% 3% 2% 5%

0%

20%

40%

60%

80%

100%

120%


Integrated livestock farming Supermarket Food manufacturing

6.35

6.85 6.70 6.70

7.20

7.55

7.95 7.85 7.85

8.30

5.50

6.00

6.50

7.00

7.50

8.00

8.50

12 13 14 15 16

RM/kg

Wholesale Price Retail Price

Equity Explorer

CAB Cakaran Corp

Page 3

the increase in its breeding capacity from 510,000 to 940,000 parent stock. We estimate CABC’s full broiler production capacity to reach 7m birds/month after the acquisition is completed. We conservatively expect the broiler production to grow gradually to 5.5m/month in FY17 and 6m/month in FY18 as CABC enhances its farm facilities and streamline its distribution post acquisition of SBSB. As such, revenue derived from the broiler section is expected to grow by 10%/9% in FY17/FY18. COST STRUCTURE

Managing raw material prices. Raw materials constitute about c.70% of the group’s total costs. The weakening of the ringgit will negatively affect CABC’s margins, as the majority of its raw materials, namely corn and soybean purchases are contracted in US dollars. Management has stated that CABC does not participate in hedging and mitigates the fluctuation of raw prices through its economies of scale. CABC also does not undertake complementary activities such as biogas which contributes to cost saving. In addition, apart from the ILF segment, CABC’s other segments are either loss-making or contribute negligible earnings. Thus, CABC’s margins are at the low end compared to its peers that practice currency hedging, forward purchases and incorporation of biogas facilities. Net margins have gradually improved from a low 1.7% in FY14 to 2.4% in FY16 supported by stabilisation of broiler price and CABC’s increase in production capacity. We expect net margins to improve further in FY17/FY18 to 2.6%/ 3.3% due to; 1) the stabilisation of broiler price, 2) cost-saving initiatives implemented by farm enhancements, and 3) economies of scale from further increase in production capacity (See Exhibit 4). Exhibit 4: Margin trends


Exhibit 5: Peer Margin Comparison

Source: Bloomberg Finance L.P., DBS Bank Capex for expansion plan. CABC is in a midst of acquiring Farm’s Best Berhad's subsidiary SBSB’s assets for RM63m. The purchase consideration will be funded by 20% internal cash and 80% debt. Furthermore, CABC has set up a joint venture with Salim Group with a c.RM10m investment for a 10% stake. Apart from expansion capex, we estimate the group to allocate c.RM50m for annual maintenance capex. As such, we are forecasting the group’s capex to be RM123m in FY17. In FY18, we expect the bulk of RM100m capex to be for enhancement and restorations of the newly acquired breeder farms from SBSB (See Exhibit 6). Exhibit 6: Capex trend

Source: Company, DBS Bank KEY OPERATING ASSETS

Growing farming capacity. CABC has ten breeder farms and 140 broiler farms throughout Peninsular Malaysia with current capacity of 5m birds/month. The farms are located in Kedah, Penang, Perak, Selangor, Malacca, Johor, Pahang and Kelantan. After the acquisition of SBSB’s assets, CABC will add another six breeder farms into its portfolio. We expect CABC’s full broiler production to reach 7m birds/month after the acquisition is completed. Aside from that, CABC acquired a 51% stake in Tong Huat Poultry Processing Factory, a Singaporean company with seven slaughter houses and 15% market share in Singapore.

8.0% 8.3%

9.7% 9.7% 9.7%

1.7% 1.8% 2.4% 2.6%3.2%2.8%

3.3%4.2%

3.6%4.5%

3.7%4.4%

5.7%5.0% 5.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

FY14 FY15 FY16 FY17F FY18FGross Margin Net MarginPBT Margin PBT ILF Margin

QL Resources 17% 9% 7%Lay Hong 11% 5% 2%Teo Seng 32% 13% 10%Huat Lai 18% 5% 3%CAB Cakaran 8% 4% 2%LTKM 29% 23% 23%

Gross Ma rg in

Ope ra ting Ma rg in

Ne t Ma rg in

FY15

21.8

73.7 68.4

123.0

100.0

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0


RM'm

CAPEX

Equity Explorer

CAB Cakaran Corp

Page 4

GROWTH PROSPECTS

Land bank for expansion. Currently, CABC has more than 1,000 acres of land bank valued at RM44.1m in FY16 which is earmarked for future growth, either for its farm expansion or other prospective projects. Management has not announced any major plans involving the land bank but we do not discount the possibility of outright sales or joint ventures to unlock the value of the land.

Expansion in production capacity. CABC is one of largest broiler farmers in Malaysia with production capacity of 5m birds/month in FY16. According to the Department of Statistics Malaysia, the total local broiler livestock production in 2015 was 308m birds with an additional c.11m imported birds. Based on CABC’s estimated broiler production of 50m birds in FY15, we estimate CABC to have c.16% of the local market share (See Exhibit 7). In the near term, CABC targets to increase this production capacity to 7m birds/month after the purchase completion of SBSB’s assets. At current levels, a +/-1% shift in broiler production volume will affect revenue by +/-0.86% and earnings by +/-1.2%. Exhibit 7: Annual broiler livestock in Malaysia

Annual broiler livestock

12 13 14 15

Local production (m birds) 251 272 288 308

Estimated Import (m birds) 8 9 9 11

Total broiler (m birds) 259 281 297 319

Estimated CABC market share (%)

11.3 11.2 11.8 15.6

Import dependency ratio (%) 3.1 3.1 3.0 3.4

Source: Department of Statistics Malaysia; “Selected Agricultural Indicators 2016”, DBS Bank Market share gain. Malaysia imports broilers in the form of frozen poultry for local processed food manufacturers from Thailand and China. We understand that import prices are c.10% lower than local market prices. However, the strengthening of Thai Baht and Chinese yuan against the ringgit towards end-2016 has narrowed the parity of price difference. Moving forward, we believe local food producers will be more inclined to source their raw materials locally. As such, CABC is well positioned to benefit from the reduction in import volume with its timely capacity expansion. Growing the food manufacturing segment. Post-acquisition of SBSB’s assets, CABC plans to expand its production capacity for processed food by 600MT/month, with another 500MT/month in the near term. The current production capacity is at 500MT/month. We believe this is a value-added area the group aims to grow in the next few years.

Spreading the market. The export segment contributed c.16% of revenue in FY16 with Singapore being the largest market. We expect this to grow exponentially from FY19 onwards as the group is placing ample focus on expanding its processed food product market. CABC plans to tap into the international halal market as the availability of the global halal food is limited. The first market of interest will be Japan as its product offerings and variety of product distribution is at the forefront of processed food innovation. Indonesia venture to drive future growth. CABC has signed an MOU with Salim Group to form a joint-venture agreement. The JV targets to have a production capacity of 5m birds/month in three years to be used internally by Salim Group for the production of processed food. CABC will provide the know-how in setting up integrated poultry farms in Indonesia and oversee the operations, whereas Salim Group will oversee the food manufacturing and distribution side. We view this positively as Salim Group has a large presence in Indonesia with >11,000 Indomaret convenient stores and operates >500 KFC outlets. Possible collaborations include the supply of poultry to the KFC outlets and selling value-added frozen food at the convenience store chain. We expect CABC’s export revenue contribution to increase to 50% once the venture is in full swing with the joint venture revenue target of RM1bn pa. We have not imputed this into our forecast as we believe it will take some time for the full execution of the venture. MANAGEMENT & STRATEGY

Managed by founding members. CABC’s leadership team comprises founding members from the Chuah family, who are still actively managing the business since the group was established in 1986. Since FY10, revenue and earnings have grown from RM508m/RM7.2m to RM1.1bn/RM26m in FY16. This represents a 6 year CAGR of 14%/24% in revenue and earnings. As CABC remains very much a family business, we believe that the founding members will allow the next generation to run the business going forward. We note that the second generation is already involved in the company in various capacities, namely Chris Chuah Hoon Phong as the Managing Director. Two-pronged growth strategy. Management has adopted a dual engine growth strategy that focuses on growing the integrated poultry farming business and the food manufacturing segment regionally. Management aims to one of the largest poultry players in Malaysia. For the food manufacturing segment, management is now targeting bigger consumer markets such as Japan.

Equity Explorer

CAB Cakaran Corp

Page 5

Key Assumptions

FY Sep 2013A 2014A 2015A 2016A 2017F 2018F Monthly Production (m) 2.63 2.94 4.14 5.00 5.50 6.00 Avg weight per bird 2.20 2.20 2.20 2.20 2.20 2.20 Estimated Wholesale ASP (RM) 6.85 6.70 6.70 7.20 7.20 7.20 Segmental Breakdown

FY Sep 2013A 2014A 2015A 2016A 2017F 2018F Revenues (RMm) Investment holding 0.12 8.59 5.32 5.35 5.35 5.35 Integrated livestock 476 519 732 950 1,045 1,141 Supermarket 105 125 140 124 130 137 Food manufacturing 45.8 46.1 46.6 53.9 53.9 119 Others 3.79 4.55 2.16 0.26 0.26 0.26 Total 609 672 892 1,101 1,235 1,401 Operating profit (RMm) Investment holding (0.2) 8.22 3.87 3.05 2.68 2.68 Integrated livestock 12.4 19.1 31.9 54.3 52.3 57.0 Supermarket 0.84 2.06 0.28 0.28 0.52 0.55 Food manufacturing 0.77 1.35 2.72 2.05 1.32 1.35 Others (0.3) (0.5) 0.0 (0.3) (0.8) 0.0 Total 14.2 30.7 29.2 54.5 50.1 61.6 Operating profit Margins (%)

Investment holding (130.7) 95.7 72.8 56.9 50.0 50.0 Integrated livestock 2.6 3.7 4.4 5.7 5.0 5.0 Supermarket 0.8 1.6 0.2 0.2 0.4 0.4 Food manufacturing 1.7 2.9 5.8 3.8 2.4 1.1 Others (7.8) (9.8) (0.2) (130.5) (286.2) 0.0 Total 2.3 4.6 3.3 4.9 4.1 4.4 Income Statement (RMm)

FY Sep 2013A 2014A 2015A 2016A 2017F 2018F Revenue 609 672 892 1,101 1,235 1,401 Cost of Goods Sold (565) (619) (818) (995) (1,116) (1,266) Gross Profit 43.8 53.7 73.9 107 120 136 Other Opng (Exp)/Inc (28.2) (32.9) (41.1) (54.1) (62.7) (72.4) Operating Profit 15.6 20.8 32.8 52.5 56.8 63.2 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (5.5) (5.6) (8.7) (10.5) (11.8) 0.0 Exceptional Gain/(Loss) 5.49 3.91 5.14 4.76 0.0 0.0 Pre-tax Profit 15.6 19.1 29.3 46.7 45.0 63.2 Tax (2.1) (7.4) (8.3) (10.8) (12.8) (18.0) Minority Interest (1.6) (0.5) (4.9) (10.0) 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit 11.9 11.2 16.0 26.0 32.2 45.2 Net Profit before Except. 6.44 7.25 10.9 21.2 32.2 45.2 EBITDA 25.8 34.2 50.5 75.6 84.3 98.9 Growth Revenue Gth (%) 13.9 10.4 32.6 23.5 12.2 13.5 EBITDA Gth (%) 837.2 32.7 47.9 49.5 11.6 17.3 Opg Profit Gth (%) nm 33.1 57.9 60.0 8.3 11.3 Net Profit Gth (Pre-ex) (%) nm 12.6 50.3 94.8 51.7 40.4 Margins & Ratio Gross Margins (%) 7.2 8.0 8.3 9.7 9.7 9.7 Opg Profit Margin (%) 2.6 3.1 3.7 4.8 4.6 4.5 Net Profit Margin (%) 2.0 1.7 1.8 2.4 2.6 3.2 ROAE (%) 8.8 7.6 9.5 12.1 12.3 15.2 ROA (%) 3.4 2.9 3.3 4.1 4.4 5.5 ROCE (%) 0.3 0.6 0.6 2.2 3.5 6.9 Div Payout Ratio (%) 0.0 0.0 0.0 6.2 6.2 6.2 Net Interest Cover (x) 2.8 3.7 3.8 5.0 4.8 NM Source: Company, DBS Bank

Sensitivity Analysis 2017Monthly output +/- 1% Net Profit +/- 1.2% Wholesale ASP +/- 1% Net Profit +/- 1.2%

Margins Trend

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

2014A 2015A 2016A 2017F 2018F

Operating Margin % Net Income Margin %

Equity Explorer

CAB Cakaran Corp

Page 6

Quarterly / Interim Income Statement (RMm)

FY Sep 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 4Q2016 Revenue 232 263 254 268 272 308 Cost of Goods Sold (208) (236) (242) (239) (245) (269) Gross Profit 24.2 26.7 11.8 28.8 27.6 38.4 Other Oper. (Exp)/Inc (9.3) (13.2) (12.5) (15.7) (14.0) (11.9) Operating Profit 14.8 13.5 (0.7) 13.1 13.5 26.5 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (2.4) (2.8) (2.6) (2.8) (2.6) (2.6) Exceptional Gain/(Loss) (0.2) 5.63 (0.6) 0.08 (0.4) 5.64 Pre-tax Profit 12.2 16.3 (3.8) 10.4 10.6 29.6 Tax (2.8) (3.7) (0.2) (1.6) (3.2) (5.8) Minority Interest (1.4) (3.8) (0.1) (2.7) (2.1) (5.0) Net Profit 7.98 8.80 (4.2) 6.19 5.23 18.8 Net profit bef Except. 8.21 3.16 (3.6) 6.11 5.61 13.1 EBITDA 19.2 19.1 5.17 18.9 19.2 32.3 Growth Revenue Gth (%) 11.5 13.1 (3.5) 5.5 1.7 13.2 EBITDA Gth (%) 80.5 (0.4) (72.9) 264.4 2.1 67.8 Opg Profit Gth (%) 123.5 (9.2) nm nm 3.4 95.7 Net Profit Gth (%) 219.1 10.2 nm nm (15.5) 259.0 Margins Gross Margins (%) 10.4 10.1 4.7 10.7 10.1 12.5 Opg Profit Margins (%) 6.4 5.1 (0.3) 4.9 5.0 8.6 Net Profit Margins (%) 3.4 3.3 (1.7) 2.3 1.9 6.1 Source: Company, DBS Bank

Balance Sheet (RMm)

FY Sep 2013A 2014A 2015A 2016A 2017F 2018F Net Fixed Assets 177 193 267 319 414 479 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 0.0 Other LT Assets 65.6 77.2 101 108 107 107 Cash & ST Invts 15.4 21.7 37.6 69.8 62.2 66.5 Inventory 29.0 38.7 49.4 52.2 60.1 68.2 Debtors 67.8 66.4 107 129 120 136 Other Current Assets 8.58 7.66 8.61 15.1 15.1 15.1 Total Assets 364 404 570 692 779 872 ST Debt 85.0 86.6 112 119 119 119 Creditor 80.1 97.1 127 146 153 173 Other Current Liab 0.43 2.13 2.72 4.84 4.84 4.84 LT Debt 26.5 32.4 80.8 103 153 183 Other LT Liabilities 7.94 12.7 17.8 18.5 18.5 18.5 Shareholder’s Equity 142 152 184 246 276 319 Minority Interests 22.3 21.2 45.2 54.1 54.1 54.1 Total Cap. & Liab. 364 404 570 692 779 872 Non-Cash Wkg. Capital 24.9 13.6 35.5 45.4 37.8 41.5 Net Cash/(Debt) (96.0) (97.3) (156) (153) (210) (236) Debtors Turn (avg days) 37.5 36.4 35.5 39.1 36.8 33.4 Creditors Turn (avg days) 47.7 53.4 51.1 51.2 50.1 48.3 Inventory Turn (avg days) 18.1 20.4 20.1 19.1 18.8 19.0 Asset Turnover (x) 1.7 1.8 1.8 1.7 1.7 1.7 Current Ratio (x) 0.7 0.7 0.8 1.0 0.9 1.0 Quick Ratio (x) 0.5 0.5 0.6 0.7 0.7 0.7 Net Debt/Equity (X) 0.6 0.6 0.7 0.5 0.6 0.6 Net Debt/Equity ex MI (X) 0.7 0.6 0.8 0.6 0.8 0.7 Capex to Debt (%) 9.8 18.3 38.2 30.8 45.2 33.1 Source: Company, DBS Bank

Revenue Trend

Asset Breakdown (2016)

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

16%

0

50

100

150

200

250

300

350

3Q

2014

4Q

2014

1Q

2015

2Q

2015

3Q

2015

4Q

2015

1Q

2016

2Q

2016

3Q

2016

4Q

2016

Revenue Revenue Growth % (QoQ)

Equity Explorer

CAB Cakaran Corp

Page 7

Cash Flow Statement (RMm)

FY Sep 2013A 2014A 2015A 2016A 2017F 2018F Pre-Tax Profit 15.6 19.1 29.3 46.7 45.0 63.2 Dep. & Amort. 10.1 13.4 17.7 23.1 28.5 37.7 Tax Paid (2.1) (7.4) (8.3) (10.8) (12.8) (18.0) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 1.68 5.47 (8.7) (13.9) 7.62 (3.7) Other Operating CF (2.4) 7.66 4.34 (2.6) 0.0 0.0 Net Operating CF 23.0 38.2 34.3 42.5 68.3 79.2 Capital Exp.(net) (10.9) (21.8) (73.7) (68.4) (123) (100.0) Other Invts.(net) 0.29 (2.0) 1.50 0.19 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 (6.9) 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 0.0 Other Investing CF 0.18 0.11 (0.4) (0.6) 0.0 0.0 Net Investing CF (10.5) (23.7) (79.6) (68.8) (123) (100.0) Div Paid 0.0 0.0 0.0 (1.6) (2.0) (2.8) Chg in Gross Debt (2.5) 7.54 74.1 29.2 50.0 30.0 Capital Issues 0.0 0.0 8.87 36.4 0.0 0.0 Other Financing CF (7.9) (17.8) (21.9) (7.2) 0.0 0.0 Net Financing CF (10.4) (10.3) 61.1 56.8 48.0 27.2 Currency Adjustments 0.01 0.0 0.82 (0.1) 0.0 0.0 Chg in Cash 2.07 4.22 16.7 30.4 (6.7) 6.36 Opg CFPS (sen) 15.3 23.5 31.0 34.9 35.1 47.9 Free CFPS (sen) 8.65 11.8 (28.4) (16.1) (31.6) (12.0) Source: Company, DBS Bank

Capital Expenditure

VALUATIONS

Fair value of RM1.71. Our fair value is based on 11x fully-diluted FY17F EPS, which is the industry’s average (excluding QL and Lay Hong). We have excluded QL and Lay Hong due to their larger market cap and higher institutional shareholding. We deem it justifiable given our expectation of a strong 2-year EPS CAGR of 28% FY16-18F. The stock is currently trading at 8.7x FY17F PE. CABC proposed dividend of 1 sen in FY16, implying a payout of 6% with yield of 0.6%. This is a milestone as the group has not been paying out dividends since 2006. Risk Assessment: Moderate

Category Risk Rating Wgt Wgtd Score 1 (Low) - 3

(High) Earnings 2 40% 0.8 Financials 1 20% 0.2 Shareholdings 1 40% 0.4 Overall 1.4

Expect steady earnings growth. Its sales volatility is low, given the defensive nature of food products. The main source of earnings volatility stems from the fluctuations of currency and raw material prices. Management’s interest aligned with shareholders. Most key executives in CABC are paid less than RM500,000 annually, with the exception of one director who was paid RM750,000 in FY15. The Chuah family (key management and founders) collectively own a 48.3% stake in CABC. As such, management’s interest appears to be aligned with the shareholders’, in our view.

Source: DBS Bank

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

2014A 2015A 2016A 2017F 2018F

Capital Expenditure (-)

RMm

Equity Explorer

CAB Cakaran Corp

Page 8

Exhibit 7: Forward PE Band (x) Exhibit 8: PB Band (x)

Sources: DBS Bank, Bloomberg Finance L.P Sources: DBS Bank, Bloomberg Finance L.P Exhibit 9: Peer comparison (as at 31 Jan 2017)

* Based on consensus earnings estimates Sources: DBS Bank, Bloomberg Finance L.P

CallTarget

Price (LC)

Current

Price (LC)

Mkt Cap

(MYR m)CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017

QL Resources HOLD 4.60 4.39 5,453.9 9% 16% 26.6x 22.9x 3.2x 2.9x 1.1% 1.3% 13% 12%

Teo Seng Capital NOT RATED 1.38 1.03 308.7 -36% 56% 12.8x 8.2x 1.5x 1.3x 2.2% 3.4% 15% 12%

CAB Cakaran Corp NOT RATED 1.71 1.63 290.8 26% 23% 11.8x 9.5x 1.1x 1.0x 0.6% 0.8% 12% 12%

Lay Hong* 0.81 493.1 -86% 15% 16.9x 24.3x 0.2x 0.2x 0% 0% 1% 2%

PWF Consolidated* 0.76 121.0 -47% 13% 15.0x 15.2x 0.5x 0.5x 0% 0% 3% 4%

LTKM* 1.33 173.0 -75% 10% 13.5x 14.2x 0.8x 0.8x 0% 0% 5% 6%

Total / weighted avg 6,840.5 -3% 18% 24.1x 21.4x 2.7x 2.5x 1.0% 1.2% 12% 11%

Without QL & Lay

Hong

893.6 -25% 31% 12.9x 10.8x 1.1x 1.0x 1.0% 1.4% 10% 10%

EPS (FD) Growth

(YoY)P/E (FD) Price/ BVPS Dividend Yield ROE

Avg: 0.81x

+1sd: 1.06x

+2sd: 1.31x

‐1sd: 0.56x

‐2sd: 0.32x

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Feb-13 Feb-14 Feb-15 Feb-16

(x)

Avg: 9.7x

+1sd: 11.2x

+2sd: 12.6x

‐1sd: 8.3x

‐2sd: 6.8x6.1

7.1

8.1

9.1

10.1

11.1

12.1

13.1

14.1

15.1


(x)

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:MA, PY

HOLD

Last Traded Price ( 6 Feb 2017): Rp3,240 (JCI : 5,396.00) Price Target 12-mth: Rp3,430 (6% upside) (Prev Rp3,580) Where we differ: Lower FY16F/FY17F earnings on conservative feed margins, flattish DOC/live broiler ASP Analyst Ben SANTOSO +65 6682 3707 [email protected] Indonesian Research Team

What’s New

FY16F/17F earnings revised by +10/-10%

4Q16 earnings to sequentially drop on seasonally lower DOC breeding, feed margins

Expect flattish ASP this year; earnings growth to be driven by 5-7% volume expansion

HOLD call maintained

Price Relative

Forecasts and Valuation FY Dec (Rp m) 2015A 2016F 2017F 2018F Revenue 30,108 31,743 34,365 37,136 EBITDA 3,587 5,133 5,240 6,037 Pre-tax Profit 2,282 3,820 4,096 5,009 Net Profit 1,837 2,867 3,075 3,760 Net Pft (Pre Ex.) 1,837 2,867 3,075 3,760 Net Pft Gth (Pre-ex) (%) 5.2 56.1 7.2 22.3 EPS (Rp) 112 175 188 229 EPS Pre Ex. (Rp) 112 175 188 229 EPS Gth Pre Ex (%) 5 56 7 22 Diluted EPS (Rp) 112 175 188 229 Net DPS (Rp) 18.0 32.5 50.7 54.4 BV Per Share (Rp) 765 908 1,044 1,219 PE (X) 28.9 18.5 17.3 14.1 PE Pre Ex. (X) 28.9 18.5 17.3 14.1 P/Cash Flow (X) 31.1 11.1 14.9 12.2 EV/EBITDA (X) 16.5 10.5 10.4 8.6 Net Div Yield (%) 0.6 1.0 1.6 1.7 P/Book Value (X) 4.2 3.6 3.1 2.7 Net Debt/Equity (X) 0.5 0.0 0.1 CASH ROAE (%) 15.6 20.9 19.2 20.3 Earnings Rev (%): 10 (10) (5) Consensus EPS (Rp): 186 215 251 Other Broker Recs: B: 5 S: 1 H: 4

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P

Staying on top Earnings growth priced in. We expect Charoen Pokphand Indonesia (CPIN) to book 11% EBITDA CAGR between FY16F and FY19F, driven by recovery in breeding margins, feed volume expansion, and to some extent, anticipated new product launches at its Processed Chicken segment. This is mostly reflected in the current share price, in our view. With feed margins expect to normalise this year (from high base), we do not expect significant near-term catalysts. FY16F/17F earnings adjusted by +10%/-10%. Adjustments to our forecasts reflect higher feed and breeding margins in 4Q16; and higher local corn/imported soybean meal costs, stronger US dollar and flatter day-old-chick (DOC) and live broiler ASP growth this year. With the bulk (i.e. 67%) of CPIN gross profit coming from feed, the lower expected feed margins (from high base in 2016) resulted in lower FY17F earnings (vis-à-vis previous expectations) – partly offset by better margin from DOC segment – vs. our previous forecasts. HOLD call maintained. With industry-wide restrictions in place to avoid a repeat of the oversupply situation in 2014 and 2015, we expect less volatility in DOC and broiler prices this year; as CPIN’s DOC output growth is expected to remain moderate. In the longer term, CPIN’s growth would be driven by smaller segments such as Processed Chicken and Live Bird. While we understand the group had acquired additional commercial farms at the end of 2016, we have not included them in current revisions – pending 4Q16 results. Valuation:

We value the counter at Rp3,430/share – adjusted lower from Rp3,580/share previously – based on average forward EV/EBITDA multiple of 11.0x (average between January 2010 and June 2013). We excluded CY14 and CY15 multiples to avoid distortions from DOC oversupply. Key Risks to Our View:

Outbreak of diseases affecting livestock at the group’s poultry farms would have a material effect on the group’s business and financial position. Additionally, an outbreak (such as bird flu) would likely have an adverse impact on demand. Regulatory risks also feature prominently in this industry. At A Glance Issued Capital (m shrs) 16,398 Mkt. Cap (Rpbn/US$m) 53,130 / 3,989 Major Shareholders (%) Central Agromina 55.5

Free Float (%) 44.5 3m Avg. Daily Val (US$m) 1.5 ICB Industry : Consumer Goods / Food Producers


Indonesia Company Guide

Charoen Pokphand Indonesia Version 4 | Bloomberg: CPIN IJ | Reuters: CPIN.JK Refer to important disclosures at the end of this report

35

55

75

95

115

135

155

175

195

215

1,260.0

1,760.0

2,260.0

2,760.0

3,260.0

3,760.0

4,260.0

4,760.0

5,260.0

5,760.0


Relative IndexRp

Charoen Pokphand Indonesia (LHS) Relative JCI (RHS)

ASIAN INSIGHTS VICKERS SECURITIES Page 2

Company Guide


WHAT’S NEW

Staying on top Highlights We revised FY16F/17F earnings by +10%/-10% We expect CPIN’s FY17F earnings to growth by a more modest 7% y-o-y to Rp3.07tr – cut 10% from previous forecast of Rp3.40tr – mainly to account for: 1. Moderation in feed margins; which no longer benefits

from cheaper feed wheat substitution. Adjustments to our feed margin forecasts primarily reflect higher local corn/imported soybean meal costs and slightly stronger US dollar exchange rates. We expect feed segment EBIT margins to ease towards 11% this year (from 14% in 2016) and thus contribute 63% of FY17F EBIT

2. With government measures designed to stabilise both DOC and live broiler prices, we also anticipate a smaller y-o-y increase DOC ASP and a flatter live broiler prices this year (both +1% y-o-y)

These would be offset by 5% and 7% increase in feed and DOC volumes this year, respectively. Based on our revised number, 4Q16 earnings are expected to come in at Rp579bn (-24% q-o-q; -1% y-o-y). HOLD rating maintained

Our TP (based on an FY17F EV/EBITDA multiple of 11.0x) is adjusted to Rp3,430/share – offering limited 6% upside potential from the current level. We maintain our HOLD rating – as we believe the share price has mostly reflected the group’s growth prospects and stable price outlook. Yet, we believe any improvements in both DOC and broiler prices (on better demand outlook) may portend upside risk to our TP and call. Feed segment: Boosting local procurement

In managing to the corn import ban, CPIN is expected to absorb as much local corn as possible. To resolve the storage hurdle, the group intends to rent warehouses with strict considerations including ventilation, hygiene, and distance to farms/mills. CPIN may also procure corn through Bulog; which typically has some reserves, although the amount and quality is unclear. We understand Bulog is expected to import if there is a big gap in supply and demand from feedmillers – subject to government policy. For CPIN local corn is preferred; as imported corn will involve currency fluctuations, issues on freshness (nutrient degradation/moulds), shipping risks, and advance payment. However, local corn crop generally has high moisture content

(>30%) – requiring further drying. A corn dryer is an expensive investment when not operating at full capacity (subject to the number of corn estates nearby). Local corn (harvested in February and September) is often undersupplied due to farmer’s insufficient returns (i.e. crops are generally sold in advance at a discount to agents); where the average cultivated land per farmer is only 0.3 ha. CPIN strives to employ raw material formula with optimum nutrients (i.e. certain levels of carbohydrate, protein, etc.) at lowest possible cost for its feed segment. Even though raw material substitutes are possible nutrient-wise, an important consideration is the unknown practical effects on the chicken. The group had previously substituted banned corn imports with feed wheat (i.e. the feed produced was harder); before the government also banned the feed wheat imports. Breeding segment: Business as usual

New government requirement (i.e. to sell half of DOC produced externally) should not affect the group’s DOC breeding segment sales; as even with its live broiler segment doubling in size, we estimate the group’s external sales would account for more than 50%. Principally, CPIN favours selling day-old-chicks (DOC) to independent farmers and agents on cash basis. For its internal DOC sales, CPIN sells both DOC and feed to contract farmers and buy the live bird produced at cost plus margin (typically 10%). Hence, unlike sales to independent farmers, the profitability of contract farmers is fixed. Weaker demand during the oversupply period of 2014 and 2015 generally prompted farmers to delay selling, resulting in heavier broilers (i.e. up to 2kg vs. 1.8kg typically). As demand generally prefers lower weight, this eventually forces farmers to sell at an even bigger discount (i.e. below breakeven cost). As a result, many independent farmers suffered losses and closed down; or opted to become contract farmers for large integrators. Live bird segment: Acquiring more

The group’s commercial farm currently neither makes a loss or profit. Of its internal live broiler output, only 10% is sold to the group’s processing plants. The remaining 90% is sold to agents at market price. We understand the group had acquired additional grow-out farms at the end of 2016 – roughly the same size as those acquired at end 2015 (hence doubling in size). Capital outlay for this potential acquisition should be met with internal cash.


Company Guide


This expansion would cause its balance sheet asset to expand; but with insignificant earnings accretion. We have not included them in our current revisions – pending 4Q16 results Processed Chicken segment: New launches expected

The group experienced delays in its ready-to-eat meal launch in 2016; principally due to extended approval process in BPOM (National Agency of Drug and Food Control). No further timetable was given. Likewise, the group’s plan to bring in Meiji Dairy products is delayed on labelling requirements by BPOM. Most of the products will be milk derivatives (i.e. yoghurt, etc.); as shelf-life risk is high in Indonesia due to potential freight delays,

including entry permits, queue in port, and inefficient loading procedure. These risks could be balanced by the increasing demand and better health awareness. The group has not considered running its own dairy farms in Indonesia. Should there be a plan, CPIN would consider building own dairy processing plant first. Capital expenditure: Still subdued

No significant expansion in the next two years as the supply-demand are currently balanced and they still have around 20% unutilised feedmilling capacity. We have imputed Rp1.15tr capex in FY17F.


Company Guide


CRITICAL DATA POINTS TO WATCH

Earnings Drivers:

Cost of raw materials On our estimates, corn and soybean meal account for roughly c.64-67% of CPIN’s poultry feed raw material costs. Following price declines in 2015, in 2016 local corn prices rebounded 21%; while international soybean meal eased c.3. We expect both corn and soybean costs to creep up this year. At the same time, the release of China’s strategic oilseed reserves and Argentine stockpile should continue to cap prices. Our sensitivity analysis shows that for every 5% drop in corn prices, gross margins will improve by 0.1%. IDR weakness to impart less influence Historically, CPIN imports 100% of its soybean meal and c.30% of corn requirements, thereby directly linking the group’s cost structure to USD/IDR movements. While the poultry feed segment’s cost-plus model should enable it to maintain margins, DOC breeding operation is exposed to a currency mismatch. Likewise, USD debts (primarily working capital) would also cause swings in FX translation gains (losses) below the line. A sharp rupiah depreciation amid DOC oversupply in 2014 and 2015 had substantially offset the group’s stable poultry feed margins, while significant translation FX losses had further weighed on overall profitability. Based on our sensitivity analysis, every 5% drop in the USD/IDR rate would reduce its gross margins by 0.4%. However since corn import restrictions were instituted on 24 March 2016, it has progressively been replaced with local corn. The government is targeting zero imports from 2017 through expansion of corn cultivation areas. While slightly more expensive, local corn procurement necessitates less USD working capital in integrators’ balance sheets. Through ongoing deleveraging and cutbacks in USD borrowings, we believe volatility in US dollar exchange rates should have diminishing impact on integrators’ P&L Beware of DOC price volatility Following a 16% y-o-y drop in FY14 due to DOC oversupply, CPIN’s FY15 DOC revenue jumped by 21% y-o-y, as ASP gained a firmer footing after the government mandated Parent Stock (PS) culling in Oct 15 and Dec 15. This trend continues in 9M16, as DOC revenue expanded 50% y-o-y. We expect DOC ASP to remain stable this year. This should be supported by an earlier government decision to cut GPS import quota by 7.6% from the beginning of FY15 and again by 9.8% at the beginning of FY16, which have had a positive impact since 4Q15.

Poultry feed prices (Rp/kg)

Corn prices (Rp/kg)

Soybean meal prices (Rp/kg)

DOC prices (Rp/chick)

Broiler prices (Rp/kg live)


63976015

6220 6326 6436

0.0

928.6

1857.3

2785.9

3714.6

4643.2

5571.9

6500.5

2014A 2015A 2016F 2017F 2018F

38843749 3658

39064077

0.0

831.7

1663.4

2495.1

3326.8

4158.5

2014A 2015A 2016F 2017F 2018F

8554

7048

5875 5986 5903

0.00

1744.98

3489.96

5234.94

6979.92

8724.90

2014A 2015A 2016F 2017F 2018F

3450

4400

5214 5274 5406

0.0

1092.0

2183.9

3275.9

4367.9

5459.9

2014A 2015A 2016F 2017F 2018F

1508816150

17226 17424 17641

0.0

3563.6

7127.2

10690.7

14254.3

17817.9

2014A 2015A 2016F 2017F 2018F


Company Guide


Balance Sheet:

Deleveraging The group has made efforts to cut borrowings, especially its USD-denominated debt. On our estimates, CPIN’s net debt to total equity ratio should shrink to 24% by end FY16F vis-à-vis 52% in FY15, as the group repays its borrowings, reduces capex and lowers its USD debt exposure. We expect CPIN to be in a net cash position by end-FY18F. Slower capex ahead In view of the recent DOC oversupply, the group reduced its capital spending on new capacities in FY15, and we expect this remain at Rp1.15tr p.a. in FY16F and Rp1.24tr in FY17F. ROA is likewise expected to improve to 15% by FY18F from 8% FY15. Share Price Drivers:

Better-than-expected DOC/broiler prices. A higher-than-expected recovery in DOC/broiler prices could act as a positive catalyst for the stock, as DOC prices affect the group’s earnings significantly. Key Risks:

Outbreak of diseases affecting livestock at the group’s poultry farms would have a material effect on the group’s business and financial status. While the group has instituted strict biosecurity measures to reduce the risk of these events happening, there is no assurance that CPIN would be immune to them. Additionally, an outbreak (such as bird flu) would likely have an adverse impact on demand. Changes in government regulation, licensing, change in raw material import policy (as demonstrated by the corn import restriction in Aug 15) and price/volume controls across various jurisdictions may adversely affect CPIN’s profitability. For example, the requirement to reduce DOC supply post-Eid given the oversupply situation would temporarily affect the group’s financial performance. The group is also exposed to volatile movements in raw material costs and currencies across its key markets. For example, the recent drop in rupiah and weakness in consumer purchasing power in Indonesia had resulted in delays in passing on higher raw material costs. Company Background

Charoen Pokphand Indonesia (CPIN) is the market leader in all its business segments, such as poultry feed, day-old-chicks (DOC), and processed chickens with strong established brands. CPIN listed its shares on the IDX in 1991. CPIN was established in 1972 as the first high-volume feedmill in Jakarta, Indonesia. Today, the group has operations throughout Indonesia, supported by an extensive distribution network and integrated strategy.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


1.2

1.3

1.3

1.4

1.4

1.5

1.5

1.6

1.6

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

2014A 2015A 2016F 2017F 2018F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

2014A 2015A 2016F 2017F 2018F


Rpm

0.0%

5.0%

10.0%

15.0%

20.0%

2014A 2015A 2016F 2017F 2018F

Avg: 27.1x

+1sd: 35.5x

+2sd: 43.9x

‐1sd: 18.7x

‐2sd: 10.2x8.2

13.2

18.2

23.2

28.2

33.2

38.2

43.2

48.2


(x)

Avg: 5.44x

+1sd: 7.14x

+2sd: 8.84x

‐1sd: 3.74x

‐2sd: 2.04x1.7

2.7

3.7

4.7

5.7

6.7

7.7

8.7

9.7

10.7


(x)


Company Guide


Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F Poultry feed prices (Rp/kg) 6,397 6,015 6,220 6,326 6,436 Corn prices (Rp/kg) 3,884 3,749 3,658 3,906 4,077 Soybean meal prices 8,554 7,048 5,875 5,986 5,903 DOC prices (Rp/chick) 3,450 4,400 5,214 5,274 5,406 Broiler prices (Rp/kg live) 15,088 16,150 17,226 17,424 17,642

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (Rpbn) Poultry feed 22,262 21,979 19,861 21,306 22,916 DOC 3,273 3,901 3,848 4,128 4,393 Live birds 0.0 0.0 3,368 3,340 3,095 Processed chicken 2,857 3,121 3,655 4,487 5,519 Others 758 1,108 1,010 1,103 1,214 Total 29,150 30,108 31,743 34,365 37,136 Gross profit (Rpbn)

Poultry feed 3,688 3,982 4,064 3,717 3,990 DOC (438) 4.10 966 1,139 1,265 Live birds 0.0 0.0 109 208 302 Processed chicken 880 1,072 957 1,175 1,445 Others 4.20 81.9 (74.4) 86.4 114 Total 4,134 5,140 6,022 6,325 7,116 Gross profit Margins (%)

Poultry feed 16.6 18.1 20.5 17.4 17.4 DOC (13.4) 0.1 25.1 27.6 28.8 Live birds N/A N/A 3.2 6.2 9.8 Processed chicken 30.8 34.4 26.2 26.2 26.2 Others 0.6 7.4 (7.4) 7.8 9.4 Total 14.2 17.1 19.0 18.4 19.2

Income Statement (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 29,150 30,108 31,743 34,365 37,136 Cost of Goods Sold (25,016) (24,968) (25,721) (28,040) (30,021) Gross Profit 4,134 5,140 6,022 6,325 7,116 Other Opng (Exp)/Inc (1,507) (1,698) (1,783) (1,909) (2,045) Operating Profit 2,627 3,443 4,239 4,416 5,070 Other Non Opg (Exp)/Inc (260) (541) 117 (18.5) 71.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (261) (620) (536) (302) (132) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 2,106 2,282 3,820 4,096 5,009 Tax (360) (449) (955) (1,024) (1,252) Minority Interest 0.20 4.40 2.50 2.60 3.20 Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 1,746 1,837 2,867 3,075 3,760 Net Profit before Except. 1,746 1,837 2,867 3,075 3,760 EBITDA 2,828 3,587 5,133 5,240 6,037 Growth Revenue Gth (%) 13.6 3.3 5.4 8.3 8.1 EBITDA Gth (%) (27.7) 26.8 43.1 2.1 15.2 Opg Profit Gth (%) (32.7) 31.1 23.1 4.2 14.8 Net Profit Gth (Pre-ex) (%) (31.0) 5.2 56.1 7.2 22.3 Margins & Ratio Gross Margins (%) 14.2 17.1 19.0 18.4 19.2 Opg Profit Margin (%) 9.0 11.4 13.4 12.9 13.7 Net Profit Margin (%) 6.0 6.1 9.0 8.9 10.1 ROAE (%) 16.7 15.6 20.9 19.2 20.3 ROA (%) 9.5 8.1 11.6 12.4 14.3 ROCE (%) 9.5 6.3 11.7 13.8 16.1 Div Payout Ratio (%) 43.2 16.1 18.6 27.0 23.7 Net Interest Cover (x) 10.1 5.6 7.9 14.6 38.5



Company Guide


Quarterly / Interim Income Statement (Rpbn)

FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 7,262 7,592 9,244 9,835 9,274 Cost of Goods Sold (5,996) (6,273) (7,838) (8,016) (7,671) Gross Profit 1,266 1,319 1,406 1,818 1,603 Other Oper. (Exp)/Inc (401) (516) (442) (467) (500) Operating Profit 865 803 964 1,351 1,104 Other Non Opg (Exp)/Inc (360) 179 133 39.2 (2.6) Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (160) (198) (179) (150) (152) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 346 784 918 1,241 949 Tax (55.3) (201) (153) (267) (184) Minority Interest 0.70 3.60 (2.3) (4.0) (1.7) Net Profit 291 587 762 970 763 Net profit bef Except. 291 587 762 970 763 EBITDA 505 981 1,097 1,391 1,101 Growth Revenue Gth (%) (5.9) 4.5 21.8 6.4 (5.7) EBITDA Gth (%) (35.4) 94.2 11.8 26.8 (20.8) Opg Profit Gth (%) 2.0 (7.2) 20.2 40.1 (18.3) Net Profit Gth (Pre-ex) (%) (44.8) 101.6 30.0 27.2 (21.3) Margins Gross Margins (%) 17.4 17.4 15.2 18.5 17.3 Opg Profit Margins (%) 11.9 10.6 10.4 13.7 11.9 Net Profit Margins (%) 4.0 7.7 8.2 9.9 8.2

Balance Sheet (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 9,058 11,124 11,463 11,767 12,108 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 1,774 1,548 1,287 1,319 1,352 Cash & ST Invts 885 1,679 3,139 2,169 4,146 Inventory 4,321 5,454 4,301 4,688 5,020 Debtors 3,159 2,998 3,083 3,338 3,607 Other Current Assets 1,645 1,882 1,574 1,516 1,579 Total Assets 20,842 24,685 24,847 24,797 27,811 ST Debt 1,487 1,710 1,710 1,710 1,710 Creditor 1,591 2,464 1,558 1,698 1,818 Other Current Liab 1,389 1,530 4,178 1,903 2,173 LT Debt 4,723 5,881 1,971 1,775 1,501 Other LT Liabilities 647 539 537 576 611 Shareholder’s Equity 10,987 12,547 14,882 17,125 19,993 Minority Interests 17.9 14.3 11.8 9.20 6.00 Total Cap. & Liab. 20,842 24,685 24,847 24,797 27,811 Non-Cash Wkg. Capital 6,145 6,340 3,222 5,941 6,215 Net Cash/(Debt) (5,325) (5,911) (542) (1,316) 935 Debtors Turn (avg days) 35.5 37.3 35.0 34.1 34.1 Creditors Turn (avg days) 22.5 30.5 29.4 21.8 22.0 Inventory Turn (avg days) 62.2 73.5 71.4 60.3 60.8 Asset Turnover (x) 1.6 1.3 1.3 1.4 1.4 Current Ratio (x) 2.2 2.1 1.6 2.2 2.5 Quick Ratio (x) 0.9 0.8 0.8 1.0 1.4 Net Debt/Equity (X) 0.5 0.5 0.0 0.1 CASH Net Debt/Equity ex MI (X) 0.5 0.5 0.0 0.1 CASH Capex to Debt (%) 59.6 26.5 30.1 32.9 38.5 Z-Score (X) 5.8 5.1 5.9 7.2 7.0



Company Guide


Cash Flow Statement (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 2,106 2,282 3,820 4,096 5,009 Dep. & Amort. 461 686 777 842 895 Tax Paid (360) (449) (955) (1,024) (1,252) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (1,059) (482) 1,140 (327) (272) Other Operating CF (685) (329) (10.9) (11.1) (11.4) Net Operating CF 463 1,707 4,770 3,577 4,369 Capital Exp.(net) (3,702) (2,010) (1,107) (1,148) (1,238) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (34.7) 141 274 (19.2) (19.6) Net Investing CF (3,736) (1,869) (833) (1,167) (1,257) Div Paid (754) (295) (533) (832) (892) Chg in Gross Debt 3,707 1,667 (1,931) (2,587) (277) Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF 58.9 (416) (13.0) 38.9 33.7 Net Financing CF 3,011 956 (2,477) (3,380) (1,135) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (262) 794 1,460 (970) 1,977 Opg CFPS (Rp) 92.8 134 221 238 283 Free CFPS (Rp) (198) (18.5) 223 148 191


Target Price & Ratings History

Source: DBS Bank

Analyst: Ben SANTOSO

Indonesian Research Team

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 01 Apr 16 3505 3925 HOLD

2: 22 Apr 16 3650 3925 HOLD

3: 02 May 16 3710 3925 HOLD

4: 31 May 16 3500 3930 BUY

5: 29 Jul 16 3750 3590 HOLD

6: 01 Nov 16 3710 3580 HOLD

7: 10 Nov 16 3570 3580 HOLD

Note : Share price and Target price are adjusted for corporate actions.

1

2

3 45

6

7

2755

2955

3155

3355

3555

3755

3955

Feb-16 Apr-16 Jun-16 Aug-16 Oct-16 Dec-16 Feb-17

Rp

ed: CK / sa: LEY / AH

BUY, KRW364,000 KOSPI: 2,075.2 Price Target: KRW530,000 Reason for Report: 4Q16 earnings preview Potential Catalyst: Processed food to continue to deliver upbeat revenue, underpinning CJCJ’s revenue growth potential for 2017 Where we differ: We are more positive than consensus Analyst Regional Research Team [email protected]

Price Relative

60

70

80

90

100

110

120

130

050,000

100,000150,000200,000250,000300,000350,000400,000450,000500,000

Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16

Stock price(LHS,KRW) Rel. to KOSPI(RHS,pts)

Forecasts and Valuation FY Dec (KRW bn) 2015A 2016F 2017F 2018F Revenue 12,924.5 14,454.4 15,957.7 17,427.1 EBITDA 1,235.0 1,397.4 1,554.7 1,711.5 Operating profit 751.4 868.0 1,004.2 1,143.3 Pre-tax Profit 364.8 614.6 738.6 903.8 Net Profit 253.7 427.4 513.6 628.4 Net Pft (Pre Ex.) 253.7 427.4 513.6 628.4 Net Pft Attributable to Controlling Interest 189.3 299.2 385.2 471.3

EPS (KRW) 14,394 22,730 29,267 35,810 EPS Pre Ex. (KRW) 19,293 32,214 38,765 47,489 EPS Gth (%) 105.2 57.9 28.8 22.4 EPS Gth Pre Ex (%) 83.5 67.0 20.3 22.5 Diluted EPS (KRW) 14,394 22,473 29,010 35,552 Net DPS (KRW) 2,500 2,500 2,500 2,500 BV Per Share (KRW) 216,981 234,250 267,193 308,060 PE (X) 26.2 16.3 12.7 10.4 PE Pre Ex. (X) 19.6 11.5 9.6 7.8 P/Cash Flow (X) 4.7 4.2 5.0 4.4 EV/EBITDA (X) 8.3 7.2 6.3 5.5 Net Div Yield (%) 0.7 0.7 0.7 0.7 P/Book Value (X) 1.7 1.6 1.4 1.2 Net Debt/Equity (X) 0.9 0.9 0.7 0.6 ROE (%) 8.3 13.1 14.1 15.1 Earnings Rev (%): (5.2) (5.8) (3.5) Consensus EPS (KRW): 22,482 27,479 31,705 Other Broker Recs: B : 25 S : 0 H : 0 ICB Industry: Consumer Products ICB Sector: Consumer Staples Principal Business: CJ CheilJedang Corp. manufactures processed food products. The company's products include refined sugar, monosodium glutamate (MSG), condiment, wheat powder, flour, cooking oil, processed meats, and animal feed. CJ CheilJedang also manufactures pharmaceutical and household products.

Source of all data: Company, DBS Bank, Bloomberg Finance L.P

Intact growth potential

4Q16 earnings could miss consensus on narrower margins due to cost burden

But upbeat processed food revenue and improving bio product prices to underpin growth in 2017

Retain BUY and KRW530,000 TP

4Q16 earnings likely to be weaker than initially expected. On a consolidated basis, we estimate CJ Cheiljedang (CJCJ) to have posted revenue of KRW3.63tr (11% y-o-y) and an OP of KRW181.2bn (+62.1% y-o-y, OPM of 5%) for 4Q16. Our earnings estimates were lowered in light of i) narrower margins from the ingredient business due to cost pressure; ii) weaker methionine sales price (4Q16 estimate cut from US$3.4 to US$3); and iii) higher cost due to the rise in lysine transportation cost in China.

Ingredient business’s margins to normalise and sales price for bio products to improve in 2017. The processed food business is estimated to have continued to see stable revenue growth and margin improvement, supported by upbeat sales of new products and expanded market share. In particular, the high-margin home meal replacement segment is believed to have met its sales guidance (KRW100bn), and this should be favourable for CJCJ to defend its profitability despite sales promotion costs. Meanwhile, we believe that CJCJ will hike selling prices in 1H17, due to cost pressure. On the back of this, CJCJ will likely achieve an annual OPM of 4-5%, with margins for its ingredient unit gradually normalising. The sales price for its bio business is also expected to improve in q-o-q terms (amid higher oil price and sales price hikes by peers), helping to expand its operating margins.

Actual risks mitigated. There are fears over narrower margins amid strong USD, but we see actual risks being mitigated as i) there will be limited pressure in terms of input cost if grain prices are to stabilise; and ii) foreign currency-denominated debts have been minimised since 2015, with a higher hedging ratio.

Retain BUY with KRW530,000 TP. We maintain our BUY call on CJCJ and TP of KRW530,000 (based on SOTP valuation). Although its share price has been moving sideways at the high-KRW300,000 range on concerns that CJCJ may miss consensus estimates due to narrower margins arising from cost pressure, we see solid growth potential for its 2017F revenue. We advise investors to buy CJCJ on any share price dip post its earnings release, taking the KRW/USD FX rate into consideration as well.

At A Glance Issued Capital (m shrs) 13.16 Mkt. Cap (KRWbn/US$m) 4,791/4,187 Major Shareholders CJ Corp and 6 others (%) 34.4 Free Float (%) 45.5 Avg. Daily Vol.(‘000) 52


Regional Company Focus

CJ Cheiljedang

Bloomberg: 097950 KS, Reuters: 097950.KS Refer to important disclosures at the end of this report

Company Focus

CJ Cheiljedang

Page 2

Earnings forecasts

Unit: KRW bn, % 2014 2015 2016F 2017F 2018F 2019F 2020F

Revenue 11,702 12,924 14,454 15,958 17,427 19,170 21,183 OP 580 751 868 1,004 1,143 1,304 1,499 EBITDA 1,028 1,235 1,397 1,555 1,711 1,866 2,094 NP 138 254 427 514 628 729 866 Total assets 13,383 13,751 15,114 15,831 16,726 17,463 18,340 Total equity 4,950 5,385 5,881 6,358 6,950 7,642 8,472 Net debt 5,325 5,016 5,007 4,737 4,302 4,119 3,871 Revenue growth 7.9 10.4 11.8 10.4 9.2 10.0 10.5 OP margin 5.0 5.8 6.0 6.3 6.6 6.8 7.1 Net margin 1.2 2.0 3.0 3.2 3.6 3.8 4.1 EPS growth (21.3) 105.2 57.9 28.8 22.4 4.2 18.8 ROE 4.7 8.3 13.1 14.1 15.1 15.2 15.5

Note: Based on consolidated K-IFRS Source: DBS Bank

Company Focus

CJ Cheiljedang

Page 3

CJCJ’s processed food unit: Solid revenue from high-

margin products CJCJ: Share in Korean market by product category

25

30

35

40

45

0

200

400

600

800

1Q10 2Q11 3Q12 4Q13 1Q15 2Q16 3Q17F

Processed food revenue (LHS)

GPM (RHS)

(KRW bn) (%)

0

20

40

60

80

100

2013 2014 2015 Oct. 2016

Condiment Gochujang DoenjangCooked rice Dumpling Frozen foodKimchi

(%)

Source: CJCJ, DBS Bank Source: CJCJ, DBS Bank

Global grain prices trend Grain purchase price and applied FX rate (YoY)

0

200

400

600

800

2009 2010 2011 2012 2013 2014 2015 2016 2017

Wheat Corn

Raw sugar Soybean

(US$/tonne)

(60)

(40)

(20)

0

20

40

60

80

1Q09 4Q09 3Q10 2Q11 1Q12 4Q12 3Q13 2Q14 1Q15 4Q15 3Q16

Applied FX rate Raw wheat

Corn Raw sugar

Soybean

(YoY,%)

Source: Bloomberg Finance L.P., DBS Bank Source: CJCJ’s business report, DBS Bank

PPI index for refined sugar CPI index for sugar

-30

-20

-10

0

10

20

30

40

60

70

80

90

100

110

120

130

140

1Q00 4Q02 3Q05 2Q08 1Q11 4Q13 3Q16

Refined sugar

YoY (RHS)

(pt. 2010=100) (%)

-30

-20

-10

0

10

20

30

60

70

80

90

100

110

120

130

140

1Q00 4Q02 3Q05 2Q08 1Q11 4Q13 3Q16

Sugar

YoY (RHS)

(pt. 2010=100) (%)

Source: Korea Statistics, DBS Bank Source: Korea Statistics, DBS Bank

Company Focus

CJ Cheiljedang

Page 4

Lysine spot price Lysine spot price in Europe/North America, China

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2008 2009 2010 2011 2012 2013 2014 2015 2016

Lysine price in China

(US$/tonne)

0

500

1,000

1,500

2,000

2,500

3,000

2012 2013 2014 2015 2016

Lysine price in Europe

Lysine price in China

(US$/tonne)

Source: eFeedLink, DBS Bank Source: eFeedLink, DBS Bank

CJCJ’s global sales price vs. spot price in China CJCJ’s global sales price vs. spot price in Europe

7,000

8,000

9,000

10,000

11,000

12,000

1,000

1,100

1,200

1,300

1,400

1,500

1,600

Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

pO

ctN

ovD

ec Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

pO

ctN

ov

2015 2016

(USD/T) CJCJ global sales price (LHS)(RMB/T) Spot price in China (RHS)

(US$/tonne) (RMB/tonne)

1,100 1,150 1,200 1,250 1,300 1,350 1,400 1,450 1,500

850

1,050

1,250

1,450

1,650

Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

pO

ctN

ovD

ec Jan

Feb

Mar

Apr

May Jun Jul

Aug Se

pO

ctN

ov2015 2016

(USD/T) CJCJ global sales price (LHS)

(EUR/T) Spot price in Europe (RHS)

(US$/tonne) (EUR/tonne)

Source: CJCJ, DBS Bank Source: CJCJ, DBS Bank

Methionine spot price trend KRW/US$ FX rate vs. CJCJ share price

0

5

10

15

20

25

0

30

60

90

120

150

2008 2010 2012 2014 2016

Methionine price (RMB, LHS)Methionine price (US$, RHS)

(RMB/Kg) (US$/Kg)

0

100

200

300

400

500

800

1,000

1,200

1,400

1,600

2008 2009 2010 2011 2012 2013 2014 2015 2016

KRW/US$ FX rate (LHS)

CJCJ's share price (RHS)(KRW/US$) (KRW '000)

Source: eFeedLink, DBS Bank Source: Quantiwise, DBS Bank

Company Focus

CJ Cheiljedang

Page 5

CJCJ: Earnings revision

4Q16 2016F 2017F 4Q16 2016F 2017F 4Q16 2016F 2017F

Consolidated revenue 3,647 14,470 15,971 3,632 14,454 15,958 -0.4% -0.1% -0.1%

① Food 1,081 4,588 5,091 1,081 4,588 5,091 0.0% 0.0% 0.0%

Processed food 663 2,741 3,176 663 2,741 3,176 0.0% 0.0% 0.0%

Food ingredients 418 1,847 1,915 418 1,847 1,915 0.0% 0.0% 0.0%

② Bioscience 572 2,285 2,469 557 2,270 2,456 -2.7% -0.7% -0.5%

Pharmaceutical 143 517 566 143 517 566 0.0% 0.0% 0.0%

Bio (lysine) 429 1,769 1,903 413 1,753 1,890 -3.6% -0.9% -0.7%

③ Feed & livestock 528 2,017 2,243 528 2,017 2,243 0.0% 0.0% 0.0%

④ Distribution 1,594 6,043 6,705 1,594 6,043 6,705 0.0% 0.0% 0.0%

Consolidated OP 200 887 1,016 181 868 1,004 -9.3% -2.1% -1.1%

OP margin 5.5% 6.1% 6.4% 5.0% 6.0% 6.3% -0.5%p -0.1%p -0.1%p

Consolidated net profit 113 451 545 90 428 515 -20.3% -5.1% -5.6%

Net margin 3.1% 3.1% 3.4% 2.5% 3.0% 3.2% -0.6%p -0.2%p -0.2%p

Net profit (controllinginterest)

85 360 436 88 364 438 3.7% 0.9% 0.3%

Net margin (controllinginterest)

2.3% 2.5% 2.7% 2.4% 2.5% 2.7% 0.1%p 0.0%p 0.0%p

③ Food ingredient business's OPM expected to be atBEP in 4Q16

CJCJ to find it difficult to transfer the cost burden tosales price

(KRW bn)Previous Revised Difference

Based on estimates as of 4Q16

① Methionine sales price (US$3.4→US$3.0)

② Annual operating loss for lysine (-0.5%→-1.0%)

Notes

Source: CJCJ, DBS Bank

CJCJ: 2016 – 2017 earnings forecasts (KRW bn) 1Q16 2Q16 3Q16 4Q16F 1Q17F 2Q17F 3Q17F 4Q17F 2015 2016F 2017F YoY

Revenue 3,534 3,610 3,679 3,632 3,921 3,933 4,123 3,980 12,924 14,454 15,958 10.4%

① Food 1,160 1,104 1,244 1,081 1,283 1,221 1,372 1,215 4,150 4,588 5,091 11.0%

Processed food 682 630 766 663 791 725 881 779 2,368 2,741 3,176 15.9%

Food ingredients 478 473 478 418 492 496 491 436 1,782 1,847 1,915 3.7%

② Bioscience 546 581 586 557 602 610 615 629 2,196 2,270 2,456 8.2%

Pharmaceutical 118 126 130 143 129 137 143 157 457 517 566 9.7%

Bio (lysine) 428 456 456 413 472 472 472 472 1,740 1,753 1,890 7.8%

③ Feed & livestock 489 521 479 528 544 559 571 568 1,805 2,017 2,243 11.2%

④ Distribution 1,445 1,514 1,490 1,594 1,621 1,677 1,701 1,705 5,056 6,043 6,705 11.0%

OP 233 211 243 181 247 236 271 250 751 868 1,004 15.7%

OPM 6.6% 5.8% 6.6% 5.0% 6.3% 6.0% 6.6% 6.3% 5.8% 6.0% 6.3% 0.3%p

Net profit 149 72 73 90 131 123 148 112 254 428 515 20.3%

Net margin 4.2% 2.0% 2.0% 2.5% 3.4% 3.1% 3.6% 2.8% 2.0% 3.0% 3.2% 0.3%p

Net profit(controlling interest)

123 42 111 88 112 105 126 94.9 189 364 438 20.3%

Net margin(controlling interest)

3.5% 1.2% 3.0% 2.4% 2.9% 2.7% 3.1% 2.4% 1.5% 2.5% 2.7% 0.2%p

Source: CJCJ, DBS Bank Note: Based on consolidated K-IFRS; Earnings for CJ Korea Express are our estimates (consolidation adjustments were reflected)

CJCJ: 2016 – 2017 earnings forecasts (excl. CJ Korea Express) (KRW bn) 1Q16 2Q16 3Q16 4Q16F 1Q17F 2Q17F 3Q17F 4Q17F 2015 2016F 2017F YoY

Revenue 2,195 2,206 2,308 2,165 2,429 2,390 2,559 2,412 6,710 8,874 9,790 10.3%

Food 1,160 1,104 1,244 1,081 1,283 1,221 1,372 1,215 3,507 4,588 5,091 11.0%

Bioscience 546 581 586 557 602 610 615 629 1,713 2,270 2,456 8.2%

Feed & livestock 489 521 479 528 544 559 571 568 1,489 2,017 2,243 11.2%

Gross profit 669 632 701 596 735 700 784 698 2,002 2,598 2,918 12.3%

Food 417 367 434 337 450 414 497 413 1,218 1,555 1,774 14.1%

Bioscience 186 190 195 189 209 204 204 207 571 760 825 8.6%

Feed & livestock 67 76 71 69 76 82 83 77 214 283 318 12.4%

GPM 30.5% 28.7% 30.4% 27.5% 30.3% 29.3% 30.7% 28.9% 29.8% 29.3% 29.8% 0.5%p

OP 183 152 186 131 186 168 206 179 587 652 738 13.2%

Food 118 84 114 64 106 96 135 98 349 381 436 14.3%

Bioscience 50 47 54 56 62 54 52 62 186 206 231 11.9%

Feed & livestock 15 21 18 11 17 18 18 18 52 65 72 11.1%

OPM 8.3% 6.9% 8.1% 6.0% 7.6% 7.0% 8.0% 7.4% 8.7% 7.3% 7.5% 0.2%p Source: CJCJ, DBS Bank

Company Focus

CJ Cheiljedang

Page 6

BALANCE SHEET INCOME STATEMENT

(Unit:KRWbn) 2014 2015 2016F 2017F 2018F (Unit:KRWbn) 2014 2015 2016F 2017F 2018FCurrent Assets 3,973.3 4,018.5 4,958.8 5,496.6 6,228.3 Revenue 11,701.8 12,924.5 14,454.4 15,957.7 17,427.1 Cash & Short-terminvestment

642.2 744.5 1,619.9 1,890.2 2,324.6 Growth (%) 7.9 10.4 11.8 10.4 9.2

Accounts Receivable 1,873.0 1,768.8 1,879.1 2,074.5 2,265.5 Operating Profit 579.9 751.4 868.0 1,004.2 1,143.3 Inventories 1,065.6 1,097.6 1,084.1 1,117.0 1,185.0 Growth (%) 67.9 29.6 15.5 15.7 13.9Fixed assets 9,409.3 9,732.8 10,155.3 10,334.3 10,497.7 EBITDA 1,027.5 1,235.0 1,397.4 1,554.7 1,711.5

Investment Assets 1,274.4 1,305.2 1,217.7 1,267.2 1,318.6Non-operatingGains/Losses

(336.9) (386.6) (253.4) (265.6) (239.5)

Tangible Assets 6,383.9 6,690.2 6,777.3 6,936.5 7,078.2 Net Interest Income (165.6) (159.7) (155.9) (156.5) (153.9) Intangible Assets 1,750.9 1,737.3 2,160.3 2,130.6 2,100.9 Foreign Currency Gains (47.2) (126.4) (57.8) (31.9) 0.0Total Assets 13,382.5 13,751.3 15,114.1 15,830.9 16,726.0 Equity Method Gains 2.3 21.3 20.0 20.0 20.0Current Liabilities 4,122.4 4,335.7 3,982.9 4,187.3 4,453.7 Pre-tax Profit 243.0 364.8 614.6 738.6 903.8 Accounts Payable 1,173.1 1,294.1 1,373.2 1,436.2 1,516.2 Net Profit 137.9 253.7 427.4 513.6 628.4

Short-term Debts 2,479.1 2,594.8 2,240.5 2,240.5 2,240.5Net profit attributable tocontrolling interest

92.0 189.3 299.2 385.2 471.3

Non-current Liabilities 4,310.2 4,030.3 5,250.6 5,285.7 5,322.2 Growth (%) 94.0 84.0 68.5 20.2 22.4 Long-term Debts 3,488.4 3,166.1 4,386.5 4,386.5 4,386.5 NOPLAT 329.0 522.5 603.5 698.3 795.0Total Liabilities 8,432.7 8,366.0 9,233.5 9,473.0 9,775.9 (+) Dep 447.6 483.6 529.4 550.6 568.2Capital Stock 72.3 72.4 72.4 72.4 72.4 (-) Wc 84.1 (154.5) 63.4 63.1 30.8Capital Surplus 914.3 922.8 924.3 924.3 924.3 (-) Capex 474.3 673.5 620.7 620.7 620.7Earned Surplus 2,187.2 2,334.2 2,664.2 3,141.5 3,733.7 OpFCF 218.2 487.2 448.8 565.0 711.6Capital Adjustment (188.9) (186.3) (266.8) (266.8) (266.8) 3 Yr CAGR & Margins Treasury Stock (101.9) (100.3) (100.3) (100.3) (100.3) Revenue growth(3Yr) 21.4 9.4 10.0 10.9 10.5Total Equity 4,949.9 5,385.2 5,880.6 6,357.9 6,950.1 OP growth(3Yr) 8.0 6.9 35.9 20.1 15.0Invested capital 9,747.1 9,828.6 10,706.8 10,906.4 11,056.5 EBITDA growth(3Yr) 17.0 10.1 24.3 14.8 11.5Net debt / (cash) 5,325.2 5,016.4 5,007.2 4,736.9 4,302.4 NP growth(3Yr) (24.0) (6.5) 81.9 55.0 35.3ROA 1.0 1.9 3.0 3.3 3.9 OP margin (%) 5.0 5.8 6.0 6.3 6.6ROE 4.7 8.3 13.1 14.1 15.1 EBITDA margin (%) 8.8 9.6 9.7 9.7 9.8ROIC 3.4 5.3 5.9 6.5 7.2 NP margin (%) 1.2 2.0 3.0 3.2 3.6

CASH FLOW KEY INDICATOR

(Unit:KRWbn) 2014 2015 2016F 2017F 2018F (Unit:KRW,x,%) 2014 2015 2016F 2017F 2018FOperating cash flow 688.6 1,154.6 1,107.5 1,016.2 1,182.3 Per share Data (w) Net Profit 137.9 253.7 427.4 513.6 628.4 EPS 7,015 14,394 22,473 29,010 35,552 Depr. & Amort. 447.6 483.6 529.4 550.6 568.2 BPS 206,344 216,981 234,250 267,193 308,060 Chg in Working Capital (150.9) 81.7 (38.7) (63.1) (30.8) DPS 2,000 2,500 2,500 2,500 2,500

Chg in AccountsReceivable

(148.5) 174.9 (157.5) (195.4) (191.0) Valuation (x,%)

Chg in inventories (14.6) (26.6) (27.8) (33.0) (68.0) PER 43.7 26.2 16.5 12.8 10.4Chg in Accounts Payable 48.1 (61.1) 48.3 63.0 80.0 PBR 1.5 1.7 1.6 1.4 1.2

Investing cash flow (537.2) (693.0) (1,116.1) (732.8) (735.7) EV/EBITDA 9.3 8.3 7.2 6.3 5.5 Chg in Short-termInvestments

(82.1) 63.8 (119.0) (23.2) (24.1) Dividend yield 0.7 0.7 0.7 0.7 0.7

Chg in Long-termInvestment Securities

7.5 32.5 15.2 12.7 12.4 PCR 4.6 4.7 4.2 5.0 4.4

Capex (474.3) (673.5) (620.7) (620.7) (620.7) PSR 0.4 0.4 0.4 0.3 0.3 Disposal of Tangible &Intangible Assets

(15.5) (34.8) (35.4) (59.4) (59.4) Stabilities (%)

Financing cash flow (141.4) (364.5) 553.2 (36.3) (36.3) Liabilities Ratio 170.4 155.4 157.0 149.0 140.7 Chg in debt 41.8 (439.4) 559.5 0.0 0.0 Net debt/Equity 107.6 93.2 85.1 74.5 61.9 Chg in Equity (37.1) (42.2) (51.9) (36.3) (36.3) Net debt/EBITDA 518.2 406.2 358.3 304.7 251.4

Dividend Payout 37.1 42.2 36.0 36.3 36.3 Current ratio 96.4 92.7 124.5 131.3 139.8Chg in Cash 4.1 93.8 518.7 247.1 410.3 Interest coverage ratio 3.5 4.7 5.6 6.4 7.4Gross cash flow 971.7 1,171.5 1,290.4 1,079.2 1,213.1 Interest/revenue 1.7 1.4 1.2 1.1 1.0(-) Chg in WC 84.1 (154.5) 63.4 63.1 30.8 Asset Structure(-) Capex 474.3 673.5 620.7 620.7 620.7 IC 83.6 82.7 79.0 77.5 75.2(+) Disposal of Assets (15.5) (34.8) (35.4) (59.4) (59.4) Cash + IC(%) 16.4 17.3 21.0 22.5 24.8Free Cash Flow 397.8 617.8 570.9 336.0 502.2 Capital Structure(-) Other Investments (7.5) (32.5) (15.2) (12.7) (12.4) Debt/Asset 54.7 51.7 53.0 51.0 48.8Free Cash 405.3 650.2 586.1 348.7 514.6 Equity/Asset 45.3 48.3 47.0 49.0 51.2 Source: DBS Bank Note: Results are consolidated *Asset = Equity + Debt, P/E is derived by using diluted EPS. This report has been prepared for informational purposes only, and does not constitute an offer or solicitation of a contract for trading. Opinions in this report reflect professional judgment at this date based on information and data obtained from sources we consider reliable. However, DBS Bank does not warrant or guarantee the accuracy or completeness of this document and has no liability for its content. The investment should be made based on each client's own judgment, and we expressly disclaim all liability for any investment decisions and any results thereof. This report is a copyrighted material of DBS Bank and thus, it may not be reproduced, distributed or modified without the prior consent of DBS Bank.

Company Focus

CJ Cheiljedang

Page 7

Stock Ratings The stock investment opinion below is based on the expected return of the recommended stock over the next 12 months relative to the closing price of the day it is recommended. STRONG BUY: Expected to produce a return of at least 50% from the closing price of the day the stock is recommended BUY: Expected to produce a return between 15% and 50% from the closing price of the day the stock is recommended HOLD: Expected to produce a return between 5% and 15% from the closing price of the day the stock is recommended REDUCE: Expected to produce a return of less than 5% from the closing price of the day the stock is recommended RATING UNDER REVIEW: Temporary suspension of recommendation when there is material uncertainty in corporate value. TP is not provided. The investment opinion presented in this report is based on the industry’s outperformance relative to the market, and may differ from that of an individual stock. Overweight: The industry’s return is expected to outperform the average total return of the KOSPI over the next 12 months. Neutral: The industry’s return is expected to be in line with the average total return of KOSPI, over the next 12 months. Underweight: The industry’s return is expected to underperform the average total return of KOSPI, over the next 12 months. Notes) The industry’s return is on a risk-adjusted basis

Recent 2yr. Rating and TP Change CJ Cheiljedang (097950 KS)

Date 2014.12.22 2015.02.06 2015.05.26 2016.05.13 Rating BUY BUY Analyst BUY Analyst BUY

TP 410,000 490,000 changed 540,000 changed 530,000 Date

Rating TP

Recent 2yr. TP Change CJ Cheiljedang (097950 KS)

0

100,000

200,000

300,000

400,000

500,000

600,000

Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb-17

Stock price Target price(KRW)

Analyst changedAnalyst changed

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa: MA, PY

BUY

Last Traded Price ( 6 Feb 2017): Rp1,780 (JCI : 5,396.00) Price Target 12-mth: Rp2,025 (14% upside) (Prev Rp2,100) Potential Catalyst: Consistent 4Q16 earnings delivery Where we differ: Lower FY16F/17F earnings on conservative feed margins Analyst Ben SANTOSO +65 6682 3707 [email protected] Indonesian Research Team

What’s New

FY16F/FY17F earnings adjusted by -3%/-1%

4Q16 earnings to sequentially moderate 42% on seasonally lower DOC breeding, feed margins

Absence of gains, higher raw material costs, flatter DOC/live broiler ASP to weigh on FY17F earnings

BUY call reiterated

Price Relative

Forecasts and Valuation FY Dec (Rp m) 2015A 2016F 2017F 2018F Revenue 25,023 25,973 27,619 29,768 EBITDA 2,383 4,117 3,948 4,458 Pre-tax Profit 698 3,056 2,731 3,429 Net Profit 468 2,170 1,939 2,400 Net Pft (Pre Ex.) 468 2,170 1,939 2,400 Net Pft Gth (Pre-ex) (%) 38.0 363.4 (10.6) 23.8 EPS (Rp) 43.9 190 170 210 EPS Pre Ex. (Rp) 43.9 190 170 210 EPS Gth Pre Ex (%) 38 333 (11) 24 Diluted EPS (Rp) 43.9 190 170 210 Net DPS (Rp) 0.0 7.34 34.0 30.4 BV Per Share (Rp) 526 704 840 1,020 PE (X) 40.5 9.4 10.5 8.5 PE Pre Ex. (X) 40.5 9.4 10.5 8.5 P/Cash Flow (X) 13.1 7.8 10.2 7.6 EV/EBITDA (X) 10.6 6.1 6.1 5.1 Net Div Yield (%) 0.0 0.4 1.9 1.7 P/Book Value (X) 3.4 2.5 2.1 1.7 Net Debt/Equity (X) 0.9 0.5 0.3 0.1 ROAE (%) 9.0 31.8 22.0 22.6 Earnings Rev (%): (3) (1) 8 Consensus EPS (Rp): 161 168 207 Other Broker Recs: B: 2 S: 2 H: 5


Taking a breather Not just about poultry. Japfa Comfeed Indonesia (JPFA) is a leading vertically integrated animal protein producer with products including poultry, beef and aquaculture. The group is Indonesia’s second largest poultry producer and one of the largest cow feedlot operators. We expect JPFA to continue to capitalise on Indonesia’s demographic dividend and growing protein consumption. FY16F/17F earnings adjusted by -3%/-1%. This year JPFA booked strong earnings growth on the back of both DOC and live broiler ASP recoveries, robust feed margins, as well as gains from sale of Australia cattle ranches. We trimmed FY16F/17F earnings by 3%/1% largely to account for seasonally lower-than-expected DOC/live broiler prices in 4Q16; as well as higher expected local corn costs this year. FY17F earnings are due to dip slightly on moderation in feed margins; offset by DOC/feed volume expansions. Deleveraging continues. JPFA had borne the brunt of the rupiah’s depreciation over the past two years, given its exposure to USD notes (due in CY18). The group had recently issued of Rp3.0tr re-tap bonds to refinance both its rupiah and potentially USD bonds. Imputing this, we expect JPFA’s net gearing ratio to drop to 10% by end of next year and eventually achieve net cash position by end of 2019 – helped by 6% CAGR in EBITDA between FY16F and FY19F. Valuation:

We adjusted our TP to Rp2,025/share from Rp2,100 previously to account for lower FY17F EBITDA – given lower DOC/live broiler ASP and lower expected feed margins. Our TP is based on forward EV/EBITDA multiple of 6.5x, pegged to the average from January 2010 to June 2013 to avoid distortions from the decline in FY14/15 EBITDA. Key Risks to Our View:

Changes in government regulations, licensing, raw material import policy (as demonstrated in the recent restriction of corn imports), and price/volume controls across various jurisdictions may adversely affect JPFA’s profitability. At A Glance Issued Capital (m shrs) 11,410 Mkt. Cap (Rpbn/US$m) 20,310 / 1,525 Major Shareholders (%) Japfa Pte Ltd 51.0 KKR Jade 12.0




Japfa Comfeed Indonesia Version 7 | Bloomberg: JPFA IJ | Reuters: JPFA.JK Refer to important disclosures at the end of this report

20

70

120

170

220

267.3

767.3

1,267.3

1,767.3

2,267.3


Relative IndexRp

Japfa Comfeed Indonesia (LHS) Relative JCI (RHS)


Company Guide


WHAT’S NEW

Taking a breather

Highlights

We revised FY16F/17F earnings by -3%/-1% We expect Japfa Comfeed FY17 earnings to ease y-o-y; driven by: 1. Moderation in feed margins; which no longer benefits

from cheaper feed wheat substitution. Adjustments to our feed margin forecasts primarily reflect higher local corn/imported soybean meal costs and stronger US dollar exchange rates. We expect feed segment EBIT margins to ease towards 12% this year (from 13% in 2016) and thus contribute 71% of FY17 EBIT

2. With government measures designed to stabilise both DOC and live broiler prices, we also anticipate a smaller y-o-y increase DOC ASP and a flatter live broiler prices this year (both +1% y-o-y)

3. Absence of US$12m gain (net of tax) from the sale of two Australian cattle stations

These would be offset by c.5% increase in both feed and DOC volumes. Accordingly, FY16F/17F earnings are revised –3%/-1% – translating to 4Q16 earnings expectations of Rp445bn (-42% q-o-q; -28% y-o-y). Post revisions, JPFA’s interest coverage ratio is expected to average 6.4x this year – from 6.5x in FY16 – as slightly higher EBITDA would be offset by slightly higher borrowing costs (i.e. IDR notes were refinanced at slightly higher coupon rate). BUY rating reiterated

Our TP (based on an FY17F EV/EBITDA multiple of 6.5x) is adjusted to Rp2,025/share – offering 14% upside potential from the current level. Higher-than-expected expansion in DOC/broiler prices (on better demand outlook) may portend upside risk to our TP. Animal Feeds segment: Normalising margins

Despite increased competition, we expect feed EBIT margin to normalise at 12% this year. We understand local corn undersupply may remain an issue this year; and that the group may not be able to procure all of their requirements.

Distribution problems, such as lack of corn dryers and delays in transportation meant that harvested corn’s poor quality typically limits the amount available for feedmillers. We understand Bulog will remain responsible for the corn supply gap. Bulog is hence expected to import corn to manage the price – should the government’s plan to increase corn planted area by c.700k ha fail to materialise. The group’s strategy is to invest in corn dryers in close proximity to corn estates to secure local corn supplies at reasonable costs (i.e. given transport cost considerations). DOC segment: Expanding market share

The government’s requirement to sell half of integrators’ DOC output externally is not an issue for JPFA; as the group is already undertaking the same ratio (excluding contract farmers). We understand the government’s requirement also works in favour of integrators; as it would increase their DOC market penetration and feed sales (as DOC are typically sold in packaged arrangements). This could potentially erode market share of pure feedmillers that do not participate in DOC sales. Any potential reference price for the DOC market would also encourage price stability and act as barrier to entry for new players without economies of scale. Capex plans: Moderating further

We expect JPFA to spend Rp700bn this year (down from Rp833bn in FY16F); mainly on the back of maintenance capex, breeding farms (the group is looking to improve its land bank utilisation) as well as slaughter houses (big expansion, subject to increasing demand in the downstream). No feed mill expansion plan is planned this year. Balance sheet: Lowering borrowing costs

The group has recently launched Rp3.0tr re-tap bonds – of which Rp1.0tr had been drawn down. The group may use the remainder Rp2.0tr funds to repay existing USD bond due 2018 – subject to exchange rate movements. We understand the group continues to hedge 70% of payables.


Company Guide



Earnings Drivers:

Cost of raw materials Historically, corn and soybean meal account for c.63-65% of JPFA’s poultry feed cost. Following price declines in 2015, in 2016 local corn prices rebounded 21%; while international soybean meal eased c.3%. We expect both corn and soybean costs to creep up this year. At the same time, the release of China’s strategic oilseed reserves and Argentine stockpile should continue to cap prices. Our sensitivity analysis shows that every 5% drop in corn prices will boost JPFA’s gross margins by 0.2% IDR weakness to impart less influence Historically, 80% of the group’s costs are linked to USD (i.e. 100% of its soybean meal requirements and c.30-40% of corn requirements were imported). Based on our sensitivity analysis, every 5% fall IDR vs the USD would reduce gross margins by 0.4ppt. However since corn import restrictions were instituted on 24 March 2016, it has progressively been replaced with local corn. The government is targeting zero imports from 2017 through expansion of corn cultivation areas. While slightly more expensive, this consequently necessitates less USD working capital in integrators’ balance sheets. Through ongoing deleveraging and cutbacks in USD borrowings, we believe volatility in US Dollar exchange rates should have diminishing impact on integrators’ P&L. Impact of DOC price volatility Following a 9% y-o-y drop in FY14 due to DOC oversupply, JPFA’s FY15 DOC revenue jumped by 25% y-o-y, as ASP gained a firmer footing after the government mandated Parent Stock (PS) culling in Oct15 and Dec15. This trend continues in 9M16, as DOC revenue expanded 28% y-o-y. Through government mandate to cull 6m PS from Oct15 (only 3m were culled due to stoppage at the request of the Anti-Trust Commission in Dec-15), we expect DOC ASP to remain stable this year. This should be supported by an earlier government decision to cut GPS import quota by 7.6% from the beginning of FY15 and again by 9.8% at the beginning of FY16, which have had a positive impact since 4Q15.


Corn prices (Rp/kg)





5929 58106261 6329 6399

0.0

923.2

1846.4

2769.6

3692.9

4616.1

5539.3

6462.5

2014A 2015A 2016F 2017F 2018F

3210 3208

3857 39704123

0.0

841.2

1682.3

2523.5

3364.6

4205.8

2014A 2015A 2016F 2017F 2018F

7269

6148 6316 6296 6215

0.00

1482.96

2965.91

4448.87

5931.83

7414.79

2014A 2015A 2016F 2017F 2018F

3905

4450

5216 5276 5407

0.0

1092.3

2184.6

3276.9

4369.3

5461.6

2014A 2015A 2016F 2017F 2018F

1508816150

17226 17424 17641

0.0

3563.6

7127.2

10690.7

14254.3

17817.9

2014A 2015A 2016F 2017F 2018F


Company Guide


Balance Sheet:

Lower capital spending overtime Between FY11 and FY16, JPFA expanded its poultry feed capacity by c.50% while achieving declining utilisation rate (from 75% to 61%). We expect the group’s expansion plan to decelerate in FY17F, having halted most of its expansion plans in FY15 (due to the industry over-capacity in DOC breeding nationwide). The prospective drop in capital expenditure should in turn improve its ROA from 2.8% in FY15 to 12% in FY18F. Leveraging down Between 2014 and 2016, JPFA’s net debt to total equity ratio has dropped from 119% to 47% through various measures, drop in capex, including asset disposals, private placements as well as debt repurchase. The group is due to refinance Rp1.5tr notes this year through Rp3.0tr re-tap bonds and – together with recent placement and improved EBITDA – to repay the USD notes (due CY18). Until then, we expect JPFA to continue servicing its borrowings through cash flow from its feed-milling operations, savings from lower capital spending and recovery in DOC/live bird ASP. The group’s interest coverage ratio is forecast to improve from 2.0x in FY15 to 6.4x this year and 9.5x in FY18F. Share Price Drivers:

Better-than-expected DOC and broiler prices. Higher recovery in both DOC and broiler prices could act as a positive catalyst for the stock, as both have a significant impact on JPFA’s earnings. Key Risks:

Outbreak of diseases affecting livestock at its poultry operations would have material effect on the group’s business and financial position. Additionally, an outbreak (such as bird flu) would likely have an adverse impact on demand. Changes in government regulations, licensing, as well as other interventions, change in raw material import policy (as demonstrated by corn import restrictions in Aug15), and price/volume controls across various jurisdictions may adversely affect JPFA’s profitability. For example, the required reduction in DOC supply to control post-Eid oversupply would temporarily affect the group’s financial performance. Also, a reduction in quota and/or restrictions for the importation of live cattle would adversely affect the group’s beef feedlot operations. Company Background

The group was established in 1971 under Java Pelletizing Factory as a copra pellet producer. Following its listing in Jakarta and Surabaya stock exchanges in 1989 and the acquisition of four poultry feed producers in 1990, its name was changed to Japfa Comfeed Indonesia (JPFA IJ). The group is now run by the second generation of the Santosa family. In the control of the family, the group has transformed into one of the largest and most integrated poultry companies in Indonesia.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


1.4

1.5

1.5

1.6

1.6

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

2014A 2015A 2016F 2017F 2018F


0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

1,400.0

1,600.0

1,800.0

2014A 2015A 2016F 2017F 2018F


Rpm

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2014A 2015A 2016F 2017F 2018F

Avg: 20.4x

+1sd: 35.4x

+2sd: 50.4x

‐1sd: 5.3x

-8.7

1.3

11.3

21.3

31.3

41.3

51.3


(x)

Avg: 1.9x

+1sd: 2.68x

+2sd: 3.45x

‐1sd: 1.13x

‐2sd: 0.35x0.3

0.8

1.3

1.8

2.3

2.8

3.3

3.8


(x)


Company Guide


Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F Poultry feed prices (Rp/kg) 5,929 5,810 6,261 6,329 6,399 Corn prices (Rp/kg) 3,210 3,208 3,857 3,970 4,123 Soybean meal prices 7,269 6,148 6,316 6,297 6,216 DOC prices (Rp/chick) 3,905 4,450 5,216 5,276 5,408 Broiler prices (Rp/kg live) 15,088 16,150 17,226 17,424 17,642

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (Rpbn) Poultry + aqua feed 11,930 11,138 12,418 13,224 13,858 DOC 1,220 1,494 1,694 1,751 1,991 Broiler 9,412 10,270 9,612 10,243 11,361 Others 1,897 2,120 2,248 2,402 2,559 Total 24,459 25,023 25,973 27,619 29,768 Gross profit (Rpbn)

Poultry + aqua feed 2,616 2,457 3,053 3,108 3,242 DOC 141 355 1,140 974 1,264 Broiler 211 657 703 893 1,004 Others 458 524 937 798 922 Total 3,426 3,993 5,834 5,774 6,432 Gross profit Margins (%)

Poultry + aqua feed 21.9 22.1 24.6 23.5 23.4 DOC 11.6 23.7 67.3 55.7 63.5 Broiler 2.2 6.4 7.3 8.7 8.8 Others 24.1 24.7 41.7 33.2 36.0 Total 14.0 16.0 22.5 20.9 21.6


FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 24,459 25,023 25,973 27,619 29,768 Cost of Goods Sold (21,033) (21,030) (20,139) (21,845) (23,337) Gross Profit 3,426 3,993 5,834 5,774 6,432 Other Opng (Exp)/Inc (2,141) (2,265) (2,388) (2,552) (2,741) Operating Profit 1,285 1,728 3,446 3,222 3,690 Other Non Opg (Exp)/Inc (55.1) (367) 147 (33.7) 93.6 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (678) (663) (536) (457) (355) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 551 698 3,056 2,731 3,429 Tax (160) (173) (734) (656) (857) Minority Interest (52.5) (56.3) (153) (137) (171) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 339 468 2,170 1,939 2,400 Net Profit before Except. 339 468 2,170 1,939 2,400 EBITDA 1,775 2,383 4,117 3,948 4,458 Growth Revenue Gth (%) 14.2 2.3 3.8 6.3 7.8 EBITDA Gth (%) (14.7) 34.3 72.7 (4.1) 12.9 Opg Profit Gth (%) (28.7) 34.5 99.4 (6.5) 14.5 Net Profit Gth (Pre-ex) (%) (43.0) 38.0 363.4 (10.6) 23.8 Margins & Ratio Gross Margins (%) 14.0 16.0 22.5 20.9 21.6 Opg Profit Margin (%) 5.3 6.9 13.3 11.7 12.4 Net Profit Margin (%) 1.4 1.9 8.4 7.0 8.1 ROAE (%) 7.1 9.0 31.8 22.0 22.6 ROA (%) 2.2 2.8 12.1 10.0 12.0 ROCE (%) 7.0 9.7 17.7 14.7 16.2 Div Payout Ratio (%) 31.4 0.0 3.9 20.0 14.4 Net Interest Cover (x) 1.9 2.6 6.4 7.0 10.4



Company Guide



FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 6,587 6,287 6,435 7,108 7,059 Cost of Goods Sold (5,382) (5,003) (5,318) (5,512) (5,374) Gross Profit 1,205 1,285 1,117 1,596 1,685 Other Oper. (Exp)/Inc (530) (584) (722) (591) (573) Operating Profit 675 701 395 1,005 1,112 Other Non Opg (Exp)/Inc (268) 152 175 (16.2) 78.5 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (177) (157) (140) (141) (120) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 230 696 430 848 1,070 Tax (79.8) (70.0) (123) (121) (282) Minority Interest (25.0) (10.7) (29.6) (39.7) (27.2) Net Profit 125 616 277 687 761 Net profit bef Except. 125 616 277 687 761 EBITDA 407 853 570 989 1,190 Growth Revenue Gth (%) 6.1 (4.5) 2.3 10.5 (0.7) EBITDA Gth (%) 167.9 109.8 (33.2) 73.4 20.4 Opg Profit Gth (%) 179.4 3.8 (43.6) 154.1 10.6 Net Profit Gth (Pre-ex) (%) nm 393.0 (55.0) 147.8 10.8 Margins Gross Margins (%) 18.3 20.4 17.4 22.5 23.9 Opg Profit Margins (%) 10.2 11.1 6.1 14.1 15.7 Net Profit Margins (%) 1.9 9.8 4.3 9.7 10.8


FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 6,362 6,809 7,131 7,169 7,085 Invts in Associates & JVs 5.00 6.00 7.00 8.00 9.00 Other LT Assets 688 746 984 1,220 1,388 Cash & ST Invts 780 913 2,344 2,923 1,926 Inventory 5,134 5,855 5,262 5,707 6,097 Debtors 1,243 1,200 1,268 1,348 1,453 Other Current Assets 1,553 1,637 1,607 1,774 1,944 Total Assets 15,759 17,160 18,595 20,141 19,894 ST Debt 2,213 1,863 2,892 4,156 1,394 Creditor 2,004 2,746 2,088 2,265 2,420 Other Current Liab 699 744 551 559 631 LT Debt 4,742 4,757 3,491 1,824 1,822 Other LT Liabilities 921 940 893 967 1,033 Shareholder’s Equity 4,755 5,612 8,031 9,582 11,636 Minority Interests 425 498 651 787 959 Total Cap. & Liab. 15,759 17,160 18,595 20,141 19,894 Non-Cash Wkg. Capital 5,226 5,202 5,497 6,005 6,443 Net Cash/(Debt) (6,175) (5,707) (4,038) (3,058) (1,290) Debtors Turn (avg days) 18.2 17.8 17.3 17.3 17.2 Creditors Turn (avg days) 26.6 42.3 45.2 37.5 37.8 Inventory Turn (avg days) 87.5 97.9 103.9 94.5 95.2 Asset Turnover (x) 1.6 1.5 1.5 1.4 1.5 Current Ratio (x) 1.8 1.8 1.9 1.7 2.6 Quick Ratio (x) 0.4 0.4 0.7 0.6 0.8 Net Debt/Equity (X) 1.2 0.9 0.5 0.3 0.1 Net Debt/Equity ex MI (X) 1.3 1.0 0.5 0.3 0.1 Capex to Debt (%) 23.0 16.4 13.1 11.7 19.2 Z-Score (X) 3.4 3.4 4.0 3.9 4.5



Company Guide



FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 551 698 3,056 2,731 3,429 Dep. & Amort. 468 544 609 661 700 Tax Paid 0.0 0.0 0.0 0.0 0.0 Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 775 372 (325) (739) (602) Other Operating CF (224) (160) (736) (658) (860) Net Operating CF 1,571 1,453 2,605 1,994 2,667 Capital Exp.(net) (1,601) (1,089) (833) (699) (616) Other Invts.(net) (7.0) 32.8 (0.5) (0.5) (0.5) Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF 19.3 374 7.80 (1.1) (1.0) Net Investing CF (1,588) (682) (826) (700) (618) Div Paid (106) 0.0 (83.7) (388) (347) Chg in Gross Debt (443) (436) (833) 10.9 (3.3) Capital Issues (124) 0.0 702 0.0 0.0 Other Financing CF (291) (231) (121) (338) (2,696) Net Financing CF (965) (667) (336) (715) (3,046) Currency Adjustments 5.10 28.3 0.0 0.0 0.0 Chg in Cash (978) 133 1,443 579 (997) Opg CFPS (Rp) 74.6 101 257 240 286 Free CFPS (Rp) (2.8) 34.2 155 114 180



Source: DBS Bank



S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 01 Mar 16 830 620 HOLD

2: 02 Mar 16 845 720 HOLD

3: 19 Apr 16 940 720 HOLD

4: 22 Apr 16 985 720 HOLD

5: 29 Apr 16 925 910 HOLD

6: 25 May 16 915 910 HOLD

7: 09 Jun 16 1055 910 HOLD

8: 27 Jul 16 1420 1420 HOLD

9: 13 Aug 16 1475 1430 HOLD

10: 20 Sep 16 1585 1430 HOLD

11: 24 Oct 16 1755 1430 HOLD12: 28 Oct 16 1950 2100 BUY13: 07 Dec 16 1550 2100 BUY14: 09 Jan 17 1465 2100 BUY


1

23

45 6

7

8

9

10

11

12

13

14

703

903

1103

1303

1503

1703

1903


Rp

ASIAN INSIGHTS VICKERS SECURITIES ed: TH / sa: YM, PY

BUY

Last Traded Price ( 6 Feb 2017): S$1.035 (STI : 3,056.91) Price Target 12-mth: S$1.26 (22% upside) (Prev S$1.18) Potential Catalyst: Consistent 4Q16 earnings delivery Where we differ: N/A Analyst Ben SANTOSO +65 6682 3707 [email protected]

What’s New FY16F/17F earnings revised by +2%/-9%

4Q16 earnings to sequentially moderate 24% on seasonally lower DOC breeding, feed margins

Reduced JPFA's contribution to flatten EBITDA growth, driven by rising contributions from Dairy/Animal Protein outside Indonesia

BUY rating reiterated

Price Relative

Forecasts and Valuation FY Dec (US$m) 2015A 2016F 2017F 2018F Revenue 2,787 3,028 3,202 3,449 EBITDA 292 444 448 537 Pre-tax Profit 112 315 298 401 Net Profit 64.7 153 148 206 Net Pft (ex. BA gains) 64.0 153 148 206 Net Pft (Pre Ex.) 70.3 153 148 206 Net Pft Gth (Pre-ex) (%) (1.5) 118.2 (3.3) 39.0 EPS (S cts) 5.16 12.2 11.8 16.5 EPS Pre Ex. (S cts) 5.61 12.2 11.8 16.5 EPS Gth Pre Ex (%) (2) 118 (3) 39 Diluted EPS (S cts) 5.16 12.2 11.8 16.5 Net DPS (S cts) 0.0 0.0 0.0 0.0 BV Per Share (S cts) 53.5 65.8 77.6 94.1 PE (X) 20.0 8.4 8.7 6.3 PE Pre Ex. (X) 18.4 8.4 8.7 6.3 P/Cash Flow (X) 5.1 6.6 5.4 3.7 EV/EBITDA (X) 8.0 5.4 5.5 4.6 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 1.9 1.6 1.3 1.1 Net Debt/Equity (X) 0.7 0.4 0.4 0.2 ROAE (%) 9.7 20.5 16.5 19.2 Earnings Rev (%): 2 (9) 29 Consensus EPS (S cts): 11.6 12.8 13.4 Other Broker Recs: B: 2 S: 0 H: 0

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Benefitting from diversified model Attractive valuation. Japfa Limited (JAP) is involved in all major animal proteins across different geographies in Asia. It currently trades at a significant discount to its sum-of-parts valuation despite delivering consistent earnings growth from Indonesia, China, Vietnam, Myanmar and India, where per capita demand for dairy, animal protein and branded consumer food is rising. JAP’s FY16F-18F EBITDA CAGR of 10% justifies implied 6.3x forward EV/EBITDA multiple. FY16F/17F earnings adjusted by +2%/-9%. On expectations of stable prices in Indonesia this year, we trimmed day-old-chick (DOC) and live broiler ASP; adjusted local corn costs higher, and imputed slightly weaker Rupiah vis-à-vis our previous forecasts. We expect Japfa Comfeed's (JPFA) FY17F EBITDA contribution to moderate, as feed margins normalise. We also reduced Diary's FY17F EBITDA slightly on lower expected volumes; as we believe our previous forecasts were too aggressive. Insignificant changes were applied to FY17F EBITDA contributions from Animal Protein outside Indonesia and Consumer Products. BUY rating reiterated for 22% upside. JAP’s diversified business model makes its EBITDA growth delivery more resilient than JPFA. Following a 55% EBITDA growth in FY16F, JAP’s FY17F EBITDA should expand 1%. This will be driven by rising contribution in Animal Protein outside Indonesia, Dairy and Consumer Food segments – offset by lower contribution from JPFA (in the absence of cheaper feed wheat feedstock and gains from sale of Australian cattle ranch). Valuation:

Changes to our forecasts trimmed the counter’s EV by 4% but also lowered net debt by 17% – resulting in a 2% increase in equity value to US$0.87/share. Our SOP-based TP (pegged to FY17F EV/EBITDA) is likewise raised to S$1.26 after imputing stronger US Dollar exchange rate. Key Risks to Our View:

JAP’s share price is driven by DOC, broiler and swine prices as well as China raw milk price movements and the USD/IDR exchange rate. A strong recovery in the group’s ASP and/or Rupiah would boost JAP’s share price higher than our fair value, and vice versa. At A Glance Issued Capital (m shrs) 1,765 Mkt. Cap (S$m/US$m) 1,826 / 1,295 Major Shareholders (%) Rangi Management Limited 52.6 Morze International Limited 16.0 Tasburgh Limited 7.2



Singapore Company Guide

Japfa Ltd Version 9 | Bloomberg: JAP SP | Reuters: JAPF.SI Refer to important disclosures at the end of this report

32

52

72

92

112

132

152

172

192

212

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

1.1

1.2

Aug-14 Feb-15 Aug-15 Feb-16 Aug-16

Relative IndexS$


Company Guide

Japfa Ltd

WHAT’S NEW

Benefitting from diversified model Highlights

FY16F/17F earnings revised by +2%/-9% On expectations of lower contribution from JPFA and slightly lower dairy volume (vis-à-vis our previous forecasts), we reduced JAP's FY17F earnings by 9%. Adjustments to JPFA's earnings forecasts primarily reflect higher local corn/imported soybean meal costs, removal of feed wheat (i.e. a cheaper corn substitute, due to Indonesian government import ban), as well as slightly stronger USD/IDR exchange rates and lower day-old-chick (DOC) and live broiler ASP (vis-à-vis previous forecasts). Post revisions, JAP’s interest coverage ratio is expected to average 5.3x this year – from 5.5x in FY16 – as slightly higher EBITDA would be offset by slightly higher borrowing costs (i.e. IDR notes were refinanced at slightly higher coupon rate). JAP’s 4Q16 earnings are expected to come in at US$37.4m (-22% q-o-q; -20% y-o-y). The lower y-o-y comparison was due to the absence of one-off US$6.2m gains from bonds repurchase, US$13.8m biological fair value gains; as well as US$6.9m translation FX gains booked in 4Q15.

TP adjusted to S$1.26; BUY rating reiterated

JAP’s EBITDA is due to expand 1% this year – following a 55% spike in 2016. Through capital raising, asset sale, debt repayment and higher operating cash flow, the group is forecast to cut its net debt by 23% by end-2016 to Rp547bn and a further 4% towards Rp524bn by end-2017. We employed SOP valuation based on forward EV/EBITDA multiples on each segment. Changes to our forecasts caused a 4% cut in the counter’s EV as well as reduced the group’s net debt by 17% – resulting in a net 2% increase in equity value to US$0.87/share. Our SOP-based TP (pegged to FY17F EV/EBITDA) is likewise raised to S$1.26 after imputing stronger US Dollar exchange rate We reiterate our BUY rating for 22% upside to our revised TP. We believe the stock is significantly undervalued relative its presence in Asia’s largest population, relative to peers, and for its secular growth prospects

Japfa Comfeed's (JPFA) contribution to moderate

We expect Japfa Comfeed's FY17 earnings to ease y-o-y, driven by a moderation in feed margins, a smaller y-o-y increase in DOC and live broiler ASP this year (both +1% y-o-y), in addition to the absence of US$12m gain (net of tax) from sale of two Australian cattle stations. These would be offset by c.5% increase in both feed and DOC volumes.

Animal Protein (other): Increasing investment

The group continues to invest in both Vietnam and Myanmar, we expect EBITDA contribution to expand faster (19% CAGR between FY16F and FY19F) than that of JPFA (4% CAGR between FY16F and FY19F) – albeit from a lower base.

Dairy: Adding volumes, limited downside on ASP

While we expect average raw milk prices in China to bottom in FY16F, they were compensated by operational efficiency and better yields. This year, we expect the group’s Dairy EBITDA to expand by 28% y-o-y to US$90.0m (reduced slightly from previous estimate of US$93.5m). In Indonesia, the group’s dairy farm in East Java is due to commence construction with most of land cut and fill being completed. The new farm is expected to be fully milking by the end of 2018. This farm will have around 8,000-10,000-head capacity. Daily milking yield is guided to reach c.30-31 litres per day.

Consumer Products: Adding distribution channels

We understand projected volume growth for the group’s processed foods segment is targeted at 20% per annum – although we have conservatively projected a 7% annual growth rate. We understand 9M16F volume growth had settled at high teens – attributable to increased distribution channels, including convenience stores. To this end, we understand that JAP intends to install more freezers in its modern retail outlets such as Alfamart and Indomaret.

Net gearing increased slightly

As at end-September 2016, the group had total borrowings of US$732m – down from US$846m at end-June 2016. This translated to net debt-to-total equity ratio of 43% (declining from 64% at end-June 2016). The lower net gearing ratio reflects debt repayments undertaken by JPFA – following cash injection from recently completed placement to KKR. No additional USD bond repurchase was undertaken in 3Q16. JPFA has recently issued re-tap bonds for maximum amount of Rp3.0tr – of which Rp1.0tr had been drawn down to repay Rp1.5tr IDR bonds due February/March 2017.We expect the group’s net gearing ratio to settle at 50% by end-FY16F and 38% by end FY17F.

ASIAN INSIGHTS VICKERS SECURITIES

Company Guide

Japfa Ltd

CRITICAL DATA POINTS TO WATCH Earnings Drivers:

DOC capacity expansion in Indonesia. Hampered by oversupply in FY14-15, JPFA’s DOC production in Indonesia is expected to ease to c.580m chicks in FY16F as a result of the government-mandated cull of c.640,000 Parent Stock (JAP’s estimated share of 3m culled between October and December 2015). Feedmill capacity expansion on hold in Indonesia. Capital expenditure in poultry feedmill capacity is likewise expected to remain on hold until capacity utilisation rates are in excess of 90%. However, we expect continued expansion in fish and shrimp feeds. Volatility of raw material costs (as well as changes in government regulations with regard to importation of raw materials) and exchange rates may adversely affect profitability, if JAP is unable to pass on the cost pressures. Expansion of Animal protein operations in Vietnam, India and Myanmar. The group is expanding its geographical operations in Vietnam for both poultry and swine segments; swine profitability in Vietnam should improve in FY16 on the back of improved genetics. The group’s Myanmar operations expanded poultry operations into Mandalay in FY15, and we expect improved earnings following the purchase of the remaining 15% minority interest. JAP’s operation in India is small, with some increase in feedmill capacity there. More dairy farms. The group intends to expand its dairy business in China through continued replication of its successful business model. The first five-farm hub is located in Shandong province (Farm 5 was completed in FY15) and the second five-farm hub is located in Inner Mongolia. Farm 6 has started milking at end of FY15 and Farm 7 started milking at the end of FY16. JAP is also expanding its dairy capacity in Malang, East Java to hold an additional 9,000 heads (construction started at end-FY16, full milking due in FY18). Expansion of beef cattle feedlot. Japfa has a beef cattle feedlot in Shandong province with production capacity of 10,000 heads per annum. The bull calves produced by Japfa’s five dairy farms in Shandong will be the livestock input into the new beef cattle feedlot in China. In Indonesia, imports of cattle are subject to government approvals and regulations, including quotas. Further investment in high-growth Consumer Food brands. The group intends to expand its manufacturing and processing capacities in Indonesia and Vietnam, as it seeks to expand the reputation and market reach of its brands, including Real Good for UHT milk and So Good, So Nice and Best Chicken for processed meats.

Raw & fresh milk output (k MT)

Broiler sales (mn birds)

Consumer foods volume (k MT)

China raw milk price (CNY/kg)

Average USD/IDR rate


224

316

373

489

536

0.0

77.4

154.8

232.1

309.5

386.9

464.3

541.6

2014A 2015A 2016F 2017F 2018F

351 352335

350

382

0.0

77.8

155.7

233.5

311.4

389.2

2014A 2015A 2016F 2017F 2018F

77.482.4

87.993.9

101

0.00

20.52

41.03

61.55

82.06

102.58

2014A 2015A 2016F 2017F 2018F

4.9

43.75 3.9 3.94

0.0

1.0

2.0

3.0

4.0

4.9

2014A 2015A 2016F 2017F 2018F

11879

1371713237 13608 13764

0.0

2780.3

5560.7

8341.0

11121.3

13901.6

2014A 2015A 2016F 2017F 2018F


Company Guide

Japfa Ltd

Balance Sheet:

JAP’s net debt-to-total equity ratio came in at 43% as at end of September 2016 and is conservatively forecast to settle at 50% by end of FY16F. We expect the group to refinance the outstanding Rp1.5tr notes (due 2017) and to repay the USD notes (due 2018) to reduce its USD debt exposure through recently launched Rp3.0tr re-tap bonds – of which Rp1.0tr had been drawn down . Share Price Drivers:

DOC oversupply issues. The Indonesian poultry industry is dominated by a few players, which collectively control more than 75% of the market. Overinvestment and/or miscalculated demand often lead to depressed DOC and broiler prices on top of an already volatile market. Changes in prices would have an instant impact on JAP’s profitability – even with cuts in parent stock (PS) numbers. Rupiah movements. JAP’s USD bonds have created translation FX losses in Japfa’s subsidiary, JPFA, together with the Rupiah’s depreciation YTD. Hence, Rupiah movements would impact reported earnings. Key Risks:

Outbreak of diseases. Outbreak of diseases affecting livestock would have material effect on the group's business and financial status. Intense competition. Excess capacity and intense competition in Indonesia may continue to result in DOC oversupply and slower-than-expected price growth. Movements in raw material costs and currencies. JAP is exposed to volatile movements in raw material costs and currencies. For example, weakness in Rupiah and consumer purchasing power led to delays in passing on raw material costs. Changes in regulations. Changes in government regulations/ licensing/price or volume controls may adversely affect JAP’s profitability. Vulnerable to liquidity and credit risks Company Background

Japfa Ltd (JAP) is a leading industrialised and vertically integrated producer of multiple animal proteins, dairy and consumer food products in Indonesia (second largest), Vietnam, Myanmar, India and China. The group is involved in production of animal feeds, poultry breeding, poultry commercial farms, beef cattle feedlots, swine breeding, swine commercial farms, dairy farms as well as frozen and ambient temperature consumer food products.


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


1.1

1.2

1.2

1.3

1.3

1.4

1.4

0.00

0.20

0.40

0.60

0.80

1.00

2014A 2015A 2016F 2017F 2018F


0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

2014A 2015A 2016F 2017F 2018F


US$m

0.0%

5.0%

10.0%

15.0%

20.0%

2014A 2015A 2016F 2017F 2018F

Avg: 7.7x

+1sd: 12.2x

+2sd: 16.7x

‐1sd: 3.2x

-1.1

3.9

8.9

13.9

18.9

23.9


(x)

Avg: 1.04x

+1sd: 1.31x

+2sd: 1.59x

‐1sd: 0.76x

‐2sd: 0.48x0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8


(x)


Company Guide

Japfa Ltd

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F Raw & fresh milk output 224 316 373 489 536 Broiler sales (mn birds) 351 352 335 350 382 Consumer foods volume 77.4 82.4 87.9 93.9 101 China raw milk price 4.90 4.00 3.75 3.90 3.94 Average USD/IDR rate 11,879 13,717 13,237 13,608 13,764

Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (US$m) Dairy 226 257 275 344 388 Animal protein 2,513 2,201 2,550 2,642 2,826 Consumer foods 209 329 204 217 235 Total 2,947 2,787 3,028 3,202 3,449 EBITDA (US$m)

Dairy 70.4 60.7 70.3 90.0 120 Animal protein 191 223 364 348 405 Consumer foods 9.10 8.80 9.97 10.4 11.1 Total 270 292 444 448 537 EBITDA Margins (%)

Dairy 31.2 23.6 25.6 26.2 31.1 Animal protein 7.6 10.1 14.3 13.2 14.3 Consumer foods 4.3 2.7 4.9 4.8 4.7 Total 9.2 10.5 14.7 14.0 15.6

Income Statement (US$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 2,947 2,787 3,028 3,202 3,449 Cost of Goods Sold (2,441) (2,267) (2,337) (2,490) (2,628) Gross Profit 506 520 692 712 821 Other Opng (Exp)/Inc (315) (304) (321) (338) (361) Operating Profit 191 217 371 374 460 Other Non Opg (Exp)/Inc 1.62 (31.9) 11.3 (9.6) 1.80 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (79.2) (67.2) (67.4) (65.7) (60.7) Exceptional Gain/(Loss) (40.2) (5.6) 0.0 0.0 0.0 Pre-tax Profit 73.7 112 315 298 401 Tax (14.5) (20.2) (72.4) (59.7) (80.2) Minority Interest (28.0) (27.1) (89.1) (90.3) (114) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 31.2 64.7 153 148 206 Net Profit before Except. 71.4 70.3 153 148 206 Net Pft (ex. BA gains) 51.8 64.0 153 148 206 EBITDA 271 292 444 448 537 EBITDA (ex. BA gains) 271 292 444 448 537 Growth Revenue Gth (%) 9.3 (5.4) 8.7 5.7 7.7 EBITDA Gth (%) 4.7 7.9 52.1 1.0 19.7 Opg Profit Gth (%) (5.1) 13.2 71.3 0.7 23.0 Net Profit Gth (Pre-ex) (%) 101.1 (1.5) 118.2 (3.3) 39.0 Margins & Ratio Gross Margins (%) 17.2 18.7 22.8 22.2 23.8 Opg Profit Margin (%) 6.5 7.8 12.3 11.7 13.3 Net Profit Margin (%) 1.1 2.3 5.1 4.6 6.0 ROAE (%) 5.8 9.7 20.5 16.5 19.2 ROA (%) 1.5 2.9 6.4 5.5 7.0 ROCE (%) 8.2 8.9 13.5 12.3 13.8 Div Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0 Net Interest Cover (x) 2.4 3.2 5.5 5.7 7.6



Company Guide

Japfa Ltd

Quarterly / Interim Income Statement (US$m)

FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 695 712 718 782 788 Cost of Goods Sold (557) (559) (571) (591) (601) Gross Profit 138 153 146 191 187 Other Oper. (Exp)/Inc (72.5) (77.5) (91.0) (82.8) (81.9) Operating Profit 65.8 75.3 55.1 108 105 Other Non Opg (Exp)/Inc (21.2) 7.87 9.89 (1.2) 5.95 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (17.2) (15.2) (15.4) (15.1) (13.9) Exceptional Gain/(Loss) (9.3) 13.8 (1.6) (10.8) 5.75 Pre-tax Profit 18.1 81.7 48.0 80.8 103 Tax (7.7) (6.8) (10.9) (11.2) (24.2) Minority Interest (2.4) (28.2) (13.7) (25.0) (31.0) Net Profit 7.99 46.7 23.4 44.6 48.0 Net profit bef Except. 17.3 33.0 25.0 55.4 42.3 EBITDA 92.0 95.1 76.6 132 131 Growth Revenue Gth (%) (1.3) 2.4 0.8 9.0 0.8 EBITDA Gth (%) 45.3 3.4 (19.5) 72.9 (1.0) Opg Profit Gth (%) 49.3 14.3 (26.8) 95.6 (2.3) Net Profit Gth (Pre-ex) (%) (15.6) 91.1 (24.2) 121.7 (23.7) Margins Gross Margins (%) 19.9 21.5 20.4 24.4 23.8 Opg Profit Margins (%) 9.5 10.6 7.7 13.8 13.4 Net Profit Margins (%) 1.1 6.6 3.3 5.7 6.1

Balance Sheet (US$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 834 835 854 911 979 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 310 331 491 564 650 Cash & ST Invts 287 148 301 365 349 Inventory 598 609 546 582 614 Debtors 151 132 147 155 167 Other Current Assets 148 157 208 253 288 Total Assets 2,327 2,213 2,546 2,831 3,047 ST Debt 476 330 476 556 359 Creditor 233 260 205 218 231 Other Current Liab 25.0 20.3 46.8 40.0 51.3 LT Debt 507 510 405 365 436 Other LT Liabilities 91.4 83.2 81.4 79.8 78.2 Shareholder’s Equity 662 671 824 972 1,179 Minority Interests 332 338 509 599 713 Total Cap. & Liab. 2,327 2,213 2,546 2,831 3,047 Non-Cash Wkg. Capital 639 618 649 732 787 Net Cash/(Debt) (697) (693) (580) (556) (446) Debtors Turn (avg days) 17.7 18.5 16.8 17.2 17.0 Creditors Turn (avg days) 32.9 41.0 37.5 32.0 32.1 Inventory Turn (avg days) 87.5 100.4 93.2 85.3 85.6 Asset Turnover (x) 1.4 1.2 1.3 1.2 1.2 Current Ratio (x) 1.6 1.7 1.7 1.7 2.2 Quick Ratio (x) 0.6 0.5 0.6 0.6 0.8 Net Debt/Equity (X) 0.7 0.7 0.4 0.4 0.2 Net Debt/Equity ex MI (X) 1.1 1.0 0.7 0.6 0.4 Capex to Debt (%) 29.8 21.7 18.2 23.0 29.6 Z-Score (X) 2.5 2.6 2.7 2.7 2.9



Company Guide

Japfa Ltd

Cash Flow Statement (US$m)

FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 73.7 112 315 298 401 Dep. & Amort. 62.2 71.9 74.0 75.6 77.8 Tax Paid (37.8) (20.2) (72.4) (59.7) (80.2) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (88.4) 11.8 (140) (102) (82.0) Other Operating CF 0.12 0.08 0.02 0.03 0.03 Net Operating CF 125 254 197 240 351 Capital Exp.(net) (293) (182) (160) (212) (236) Other Invts.(net) 0.01 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (5.9) (3.6) (2.9) (2.9) (3.0) Net Investing CF (299) (186) (163) (215) (239) Div Paid (3.7) 0.0 0.0 0.0 0.0 Chg in Gross Debt 68.1 (132) 39.9 40.8 (126) Capital Issues 198 0.0 0.0 0.0 0.0 Other Financing CF (27.3) (75.3) 79.4 (2.0) (1.9) Net Financing CF 235 (207) 119 38.9 (128) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 61.6 (139) 153 64.5 (16.5) Opg CFPS (S cts) 17.0 19.4 26.8 27.3 34.5 Free CFPS (S cts) (13.4) 5.75 2.91 2.28 9.18



Source: DBS Bank Analyst: Ben SANTOSO

S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 01 Mar 16 0.51 0.90 BUY

2: 02 Mar 16 0.51 0.90 BUY

3: 22 Apr 16 0.70 0.90 BUY

4: 29 Apr 16 0.70 1.10 BUY

5: 05 May 16 0.70 1.10 BUY

6: 09 Jun 16 0.80 1.10 BUY

7: 14 Jun 16 0.78 1.10 BUY

8: 27 Jul 16 0.84 0.96 HOLD

9: 15 Aug 16 0.81 0.97 BUY

10: 21 Sep 16 0.80 0.97 BUY

11: 28 Oct 16 0.84 1.18 BUY


1

2

3

4

5

6

7

8

9

10

11

0.43

0.53

0.63

0.73

0.83

0.93

1.03


S$


Company Guide

Japfa Ltd

Valuation

CY17F Target Holdco CY17F CY17F CY17F Proport ion Stake Equit yEBITDA CY17F discount Net Net EV Net debt of net debt value

(US$ m) EV/EBITDA EV/EBITDA (US$ m) (US$ m) (US$ m)Dairy 90.0 9.0 0% 9.0 809.8 63.8 12% 61.9% 461.7Animal Protein (JPFA) 285.3 6.5 20% 5.2 1,483.8 461.6 51.0% 521.3Animal Protein (ex JPFA) 62.7 7.0 0% 7.0 439.2 -44.1 100.0% 483.3Consumer Foods 10.4 10.0 0% 10.0 104.2 42.7 8% 100.0% 61.5Aggregate va lue 448.5 6.3 2,837.0 524.1 100% 1,527.8

-4% -17% 2%(+) Cash 365.3(-) Borrowings 889.3Net debt 524.1

Number of shares (m) 1,765Equity value/share (US$) 0.87Equit y value/share (S$) 1.26FY17F earnings (US$ m) 148.4Implied FY17F PER based on TP 10.3Implied FY17F EV/EBITDA based on TP 6.3Source: DBS Bank estimates

80%

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:MA, PY

BUY

Last Traded Price ( 6 Feb 2017): Rp1,190 (JCI : 5,396.00) Price Target 12-mth: Rp1,550 (30% upside) (Prev Rp2,150) Potential Catalyst: Consistent 4Q16 earnings delivery Where we differ: Lower FY16F/17F earnings on conservative feed margins, flatish DOC/live broiler ASP Analyst Ben SANTOSO +65 6682 3707 [email protected] Indonesian Research Team +6221 3003 4900

What’s New FY16F/17F earnings lowered by 10%/11%

4Q16 profit to come in at Rp36.7bn (-52% q-o-q)

Focused on expansion while managing leverage

BUY rating reiterated; selldown is unwarranted

Price Relative

Forecasts and Valuation FY Dec (Rp m) 2015A 2016F 2017F 2018F Revenue 4,775 5,847 6,368 7,261 EBITDA 264 708 761 858 Pre-tax Profit (72.1) 338 376 472 Net Profit (62.8) 270 292 352 Net Pft (Pre Ex.) (62.8) 270 292 352 Net Pft Gth (Pre-ex) (%) 25.9 nm 8.0 20.8 EPS (Rp) (28.1) 121 130 157 EPS Pre Ex. (Rp) (28.1) 121 130 157 EPS Gth Pre Ex (%) 41 nm 8 21 Diluted EPS (Rp) (28.1) 121 130 157 Net DPS (Rp) 0.0 0.0 24.3 26.3 BV Per Share (Rp) 693 815 921 1,052 PE (X) nm 9.9 9.1 7.6 PE Pre Ex. (X) nm 9.9 9.1 7.6 P/Cash Flow (X) nm 6.4 9.6 7.4 EV/EBITDA (X) 15.5 5.8 5.5 4.7 Net Div Yield (%) 0.0 0.0 2.0 2.2 P/Book Value (X) 1.7 1.5 1.3 1.1 Net Debt/Equity (X) 0.9 0.8 0.7 0.6 ROAE (%) (4.8) 16.0 15.0 16.0 Earnings Rev (%): (10) (11) (3) Consensus EPS (Rp): 138 157 177 Other Broker Recs: B: 9 S: 0 H: 1


In expansionary mode On stronger footing. Despite its strong performance in 9M16, we think that Malindo Feedmill’s (MAIN) stock price was overly punished in 2H16 – when the rupiah depreciated slightly against the US dollar. A weaker rupiah did not have significant impact to MAIN’s earnings; as the group was able to pass on feed raw material costs (mainly higher local corn prices). While EBITDA is forecast to expand modestly this year (high-base effect), we continue to anticipate 12% CAGR between FY16F and FY19F. FY16F/17F earnings adjusted by -10%/-11%. Revisions to our forecasts reflect seasonally lower-than-expected DOC/live broiler prices in 4Q16; as well as higher expected local corn costs this year. We lowered FY17F day-old-chick (DOC) and live broiler ASP and imputed a slightly weaker rupiah (vis-a-vis previous forecasts). Our revised FY16F earnings imply 4Q16 earnings of Rp36.7bn (-52%; 3-fold increase y-o-y). Following capacity expansions in past two years, we also expect MAIN to accelerate its poultry feed sales volume over the next two years. BUY rating reiterated. Strong earnings mainly reflect balanced DOC supply and demand, volume expansion, and reduced borrowing costs. We believe the market underestimates the group’s earnings resilience this year; as we expect MAIN to deliver 8% EBITDA growth (from record high base). Valuation:

We value MAIN based on an average forward EV/EBITDA multiple of 6.5x (calculated between January 2010 and June 2013), to arrive at a TP of Rp1,550 (from Rp2,150 previously) – offering 30% upside from the current level. We adjusted down the multiple from 8.0x; as our previous calculation still included some distortion from DOC oversupply in 2014/15. Key Risks to Our View:

Disease outbreak affecting livestock at the group’s poultry farms would have a material effect on the group’s business and financial status. While the group has instituted strict biosecurity measures to reduce the risk of these events happening, there can be no assurance that MAIN would be immune to them. At A Glance Issued Capital (m shrs) 2,239 Mkt. Cap (Rpbn/US$m) 2,664 / 200 Major Shareholders (%) Dragon Amity Ltd 57.1




Malindo Feedmill Version 5 | Bloomberg: MAIN IJ | Reuters: MAIN.JK Refer to important disclosures at the end of this report

37

57

77

97

117

137

157

177

197

217

990.0

1,490.0

1,990.0

2,490.0

2,990.0

3,490.0

3,990.0

4,490.0


Relative IndexRp

Malindo Feedmill (LHS) Relative JCI (RHS)


Company Guide

Malindo Feedmill

WHAT’S NEW

In expansionary mode Highlights

FY16F/17F earnings adjusted by 10%/-11%.

Adjustments to our forecasts reflect primarily higher local corn/imported soybean meal costs and stronger long-term USD/IDR exchange rates. In this report, we also trimmed day-old-chick (DOC) and live broiler ASP (vis-à-vis our previous forecasts) – in anticipation of 5-6% y-o-y rebound market volume, following a stagnant 2016.

Changes in our forecasts translate to forecast 4Q16 earnings of Rp36.7bn (-52% q-o-q; 3-fold increase y-o-y). The Feed segment should contribute most of 4Q16 EBIT. However, both DOC breeding and Broiler segments may have sequentially suffered lower ASP due to a pick-up in supply.

We did not impute KPPU (Business Competition Supervisory Commission) fine; as the case is undergoing an appeal process.

BUY rating reiterated

Our TP (based on an FY17F EV/EBITDA multiple of 10.5x) is adjusted to Rp2,050/share – offering 30% upside potential from the current level. We maintain our BUY rating – as we believe the share price has excessively borne the brunt of rupiah depreciation in 4Q16 and depleted cash balance (on the back of debt repayments). Any improvements in both DOC and broiler prices (accompanied by shorter cash conversion cycle) may portend upside risk to our TP.

Feed segment: investing in corn dryers

MAIN increased its feed prices by Rp100-150/kg in October 2016 to between Rp6,300 and Rp6,350/kg – to reflect higher local corn costs. We expect feed segment EBIT margins to ease towards 9% this year (from 11% in FY16F), on account of higher local corn prices.

Local corn yields typically average higher in first half of the year – hence, the group expects local corn prices to moderate to below Rp4,000/kg in 1H17. However, if government’s plan to increase corn planted area by c.700k ha did not materialise, there could potentially another price escalation in 2H17. We assumed that 100% of corn intake will sourced locally this year. Any shortfall would have to be procured through Bulog.

MAIN is setting aside c.Rp180bn-Rp200bn this year to build Lampung feedmill (completion scheduled in 1H18), corn dryers, and silos. As the group’s feedmills are typically located in corn belts; it also makes sense to invest in corn dryers and silos close to the group’s feed mills. The group’s feedmills in Makassar and Surabaya are already fitted with corn dryers; while additional corn dryer will be installed in Semarang feedmill in the future. Following capacity expansions in past two years, we expect MAIN to accelerate its poultry feed sales volume over the next two years.

Breeding segment: Room to grow

The government’s new requirement to sell half of DOC output externally is not an issue for MAIN; as we understand the group is the only integrator that sells more than half (c.80%) of its DOC production externally (excluding contract farmers). Hence, the group is implicitly able to expand internal commercial farm capacity – noting the 30% room in selling DOC internally before reaching the 50% limitation.

FY17F DOC volume growth is guided c.5-6%. We assume 2017 DOC ASP to average Rp5,100/chick.

Broiler segment: expanding coverage

MAIN plans to build c.4 commercial farms p.a. beginning in 2017. This year it plans to build one commercial farm in Sumatra, and three others in Central and East Java.

The group has guided for 2017 live bird ASP to range between Rp17,100 and Rp17,200/kg. Live broiler prices had dipped to Rp15,500/kg in November 2016 but has since steadily rebounded to Rp17,000 in December 2016. Live broiler volume growth is guided to range between 8% and 15% in 2017. We assume 2017 live broilers to average Rp17,400/kg.

Processed food segment: Boosting volumes

The goal for this segment remains ramping up production. The current sales volume of processed food division (c.200MT/month) represents an improvement, representing c.20% y-o-y increase YTD. The group expects to book an additional 20% increase for 2017. The increasing in sales volume is expected to come from new 200 channels and next year is expected to increase at the same amount.

The group will have new product launches next year, which will be a combination of chicken breast and sausages, but mostly on sausages – being the largest revenue contribution. The group intends to construct its own slaughter house this year with project cost expected to range between Rp80bn and Rp100bn – subject to finalisation.

Balance sheet: Deleveraging continues

The group’s blended borrowing cost currently stands at 9.5%. MAIN increased its USD borrowings (working capital) by US$10m in October 2016 and by a further US$5m in November 2016 – given cheaper borrowing cost compared to rupiah. The group’s hedging cost is included in FX losses – which are guided to range between Rp20bn and Rp30bn in 4Q16 (similar to 3Q16).

The group also undertook PPE (Property Plant and Equipment) revaluation to take advantage of government tax incentive. Any resulting deferred tax credit will hence be reflected in 4Q16 earnings.


Company Guide

Malindo Feedmill


Earnings Drivers:

Cost of raw materials Corn and soybean meal account for c.80% of MAIN’s poultry feed raw material costs. Following price declines in 2015, in 2016 local corn prices rebounded 21%; while international soybean meal eased c.3. We expect both corn and soybean costs to creep up this year. At the same time, the release of China’s strategic oilseed reserves and Argentine stockpile should continue to cap prices. Based on our sensitivity analysis, every 5% drop in corn prices will boost MAIN’s gross margins by 0.2ppt. IDR weakness to impart less influence Historically, MAIN imports 100% of its soybean meal requirements and c.70-80% for corn (this may have dropped to 40% in 2016 with corn import restrictions in place), thereby directly linking the group’s cost structure to USD/IDR movements. While the poultry feed segment’s cost-plus model should enable it to maintain margins, DOC breeding operation is exposed to a currency mismatch. Likewise, USD debts (primarily working capital) would also cause swings in FX translation gains (losses) below the line. A sharp rupiah depreciation amid DOC oversupply in 2014 and 2015 had substantially offset the group’s stable poultry feed margins, while significant translation FX losses had further weighed on overall profitability. Based on our sensitivity analysis, every 5% weakening of the rupiah will reduce gross margins by 0.4ppt Since corn import restrictions were instituted on 24 March 2016, it has progressively been replaced with local corn. The government is targeting zero imports from 2017 through expansion of corn cultivation areas. While slightly more expensive, local corn procurement necessitates less USD working capital in integrators’ balance sheets. Through ongoing deleveraging and cutbacks in USD borrowings, we believe volatility in US dollar exchange rates should have diminishing impact on integrators’ P&L Beware of DOC price volatility Following a 15% y-o-y drop in FY14 due to DOC oversupply, MAIN’s FY15 DOC revenue jumped by 34% y-o-y, as ASP gained a firmer footing after the government mandated Parent Stock (PS) culling in Oct15 and Dec15. This trend continues in 9M16, as DOC revenue expanded 22% y-o-y. As DOC prices start to recover, we expect MAIN’s FY16F EBITDA to recover and surpass the FY13 level. The group’s EBITDA is forecast to expand by 12% CAGR between FY16F and FY19F.


Corn prices (Rp/kg)





6199 6200 6308 6425 6552

0.0

945.4

1890.8

2836.1

3781.5

4726.9

5672.3

6617.7

2014A 2015A 2016F 2017F 2018F

37073452

36953837 3936

0.0

802.9

1605.7

2408.6

3211.4

4014.3

2014A 2015A 2016F 2017F 2018F

7751

6141 6173 6122 6038

0.00

1581.15

3162.30

4743.45

6324.60

2014A 2015A 2016F 2017F 2018F

3210

3900

4694

5125 5254

0.0

1061.2

2122.5

3183.7

4244.9

5306.1

2014A 2015A 2016F 2017F 2018F

16149 1660017214 17412 17630

0.0

3561.2

7122.4

10683.7

14244.9

17806.1

2014A 2015A 2016F 2017F 2018F


Company Guide

Malindo Feedmill

Balance Sheet:

Leveraging down The group has taken steps to lower its debt burden, such as the recent rights issue. In our estimates, the group’s net gearing should settle at 81% by end-FY16F and 73% by end-FY17F. The lower interest expense and reduced FX exposure should help to reduce variability in the group’s earnings outlook. The group’s interest coverage ratio is also expected to steadily improve towards 2.9x this year and 3.5x next year Capex cut to boost ROA The group’s ROA is forecast to recover over the next several years, following a reduced capital spending program instituted from FY15 onwards – as a result of DOC oversupply. MAIN is expected to spend Rp264bn in FY17F, down from Rp450bn in FY16. MAIN is poised to post an ROA of 7.6% in FY18F vs. -6.6% in FY16F. Share Price Drivers:

Better-than-expected DOC and broiler prices. A stronger recovery in both DOC and broiler prices could act as a positive catalyst for the stock, as both have a significant impact on the company’s earnings. Key Risks:

Diseases outbreak affecting livestock at the group’s poultry farms would have a material effect on the group’s business and financial status. While the group has instituted strict biosecurity measures to reduce the risk of these events happening, there can be no assurance that MAIN would be immune to them. Additionally, an outbreak (such as bird flu) would likely have an adverse impact on demand. Changes in government regulations, licensing, as well as interventions, change in raw material import policy (as demonstrated by corn import restrictions) and price/volume controls across various jurisdictions may adversely affect MAIN’s profitability. For example, the required reductions in DOC supply to control post-Eid oversupply would temporarily affect the group’s financial performance. Foreign exchange risk. Most of the raw materials (corn and soybean) are purchased in USD, while sales are recognised in rupiah. Therefore, there is some foreign exchange risk. Furthermore, the group does have a big portion of debt in USD, and has limited hedging experience. Company Background

Malindo Feedmill (MAIN) was established in 1997 and listed on the Indonesian stock exchange in 2006. The group is one of the growing main players in Indonesia’s poultry industry, despite having a far shorter history in Indonesia than its key competitors.


Capital Expenditure

ROE (%)

PB Band (x)


1.2

1.3

1.3

1.4

1.4

1.5

1.5

1.6

1.6

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2014A 2015A 2016F 2017F 2018F


0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

2014A 2015A 2016F 2017F 2018F


Rpm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

2014A 2015A 2016F 2017F 2018F

Avg: 4.06x

+1sd: 6.22x

+2sd: 8.39x

‐1sd: 1.89x

-0.2

1.8

3.8

5.8

7.8

9.8


(x)


Company Guide

Malindo Feedmill

Key Assumptions

FY Dec 2014A 2015A 2016F 2017F 2018F Poultry feed prices (Rp/kg) 6,199 6,200 6,308 6,425 6,552 Corn prices (Rp/kg) 3,707 3,452 3,695 3,837 3,936 Soybean meal prices 7,751 6,141 6,173 6,122 6,038 DOC prices (Rp/chick) 3,210 3,900 4,694 5,126 5,254 Broiler prices (Rp/kg live) 16,149 16,600 17,214 17,412 17,630 Segmental Breakdown

FY Dec 2014A 2015A 2016F 2017F 2018F Revenues (Rpbn) Poultry feed 3,313 3,316 4,049 4,323 4,905 DOC 622 862 988 1,122 1,263 Broiler 373 424 463 493 526 Processed food 55.8 61.2 84.1 154 277 Others 330 280 278 276 290 Total 4,502 4,775 5,847 6,368 7,261 EBIT (Rpbn)

Poultry feed 225 323 518 463 526 DOC (197) (169) 69.8 64.2 185 Broiler (12.3) (25.4) 12.1 11.5 7.60 Processed food (45.8) (45.4) (48.7) (56.6) (82.7) Others 45.6 123 (30.5) 79.5 14.3 Total 15.1 206 521 561 650 EBIT Margins (%)

Poultry feed 6.8 9.7 12.8 10.7 10.7 DOC (31.7) (19.6) 7.1 5.7 14.6 Broiler (3.3) (6.0) 2.6 2.3 1.5 Processed food (82.1) (74.2) (57.9) (36.8) (29.9) Others 13.8 44.1 (11.0) 28.8 4.9 Total 0.3 4.3 8.9 8.8 8.9 Income Statement (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Revenue 4,502 4,775 5,847 6,368 7,261 Cost of Goods Sold (4,180) (4,235) (4,957) (5,407) (6,171) Gross Profit 322 540 890 960 1,090 Other Opng (Exp)/Inc (307) (334) (369) (399) (440) Operating Profit 15.1 206 521 561 650 Other Non Opg (Exp)/Inc (32.9) (112) 0.30 (0.4) 0.10 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (90.6) (167) (183) (185) (178) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit (108) (72.1) 338 376 472 Tax 23.6 10.0 (64.9) (80.2) (115) Minority Interest 0.10 (0.7) (3.5) (3.8) (4.8) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit (84.8) (62.8) 270 292 352 Net Profit before Except. (84.8) (62.8) 270 292 352 EBITDA 110 264 708 761 858 Growth Revenue Gth (%) 7.4 6.1 22.4 8.9 14.0 EBITDA Gth (%) (76.5) 140.9 168.0 7.6 12.7 Opg Profit Gth (%) (96.9) 1,268.3 152.3 7.8 15.7 Net Profit Gth (Pre-ex) (%) nm 25.9 nm 8.0 20.8 Margins & Ratio Gross Margins (%) 7.2 11.3 15.2 15.1 15.0 Opg Profit Margin (%) 0.3 4.3 8.9 8.8 8.9 Net Profit Margin (%) (1.9) (1.3) 4.6 4.6 4.9 ROAE (%) (8.7) (4.8) 16.0 15.0 16.0 ROA (%) (3.0) (1.7) 6.6 6.8 7.6 ROCE (%) 0.6 6.2 11.6 11.7 12.1 Div Payout Ratio (%) N/A N/A 0.0 18.7 16.7 Net Interest Cover (x) 0.2 1.2 2.8 3.0 3.7



Company Guide

Malindo Feedmill


FY Dec 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 1,229 1,241 1,300 1,450 1,210 Cost of Goods Sold (1,047) (1,063) (1,063) (1,182) (980) Gross Profit 182 178 237 268 231 Other Oper. (Exp)/Inc (89.0) (95.3) (106) (89.2) (93.3) Operating Profit 93.0 82.4 131 179 137 Other Non Opg (Exp)/Inc (35.5) (2.7) (18.1) (0.9) (9.4) Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (43.3) (57.3) (49.5) (43.1) (34.3) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 14.2 22.4 63.0 135 93.6 Tax (1.0) (13.8) (10.7) (29.6) (17.7) Minority Interest (0.2) (0.5) (0.2) 0.20 (0.2) Net Profit 13.1 8.10 52.2 105 75.7 Net profit bef Except. 13.1 8.10 52.2 105 75.7 EBITDA 57.5 79.7 113 178 128 Growth Revenue Gth (%) 3.9 0.9 4.8 11.5 (16.5) EBITDA Gth (%) 1,543.9 38.6 41.1 58.1 (28.1) Opg Profit Gth (%) 255.0 (11.4) 58.4 36.9 (23.2) Net Profit Gth (Pre-ex) (%) nm (37.8) 542.5 102.1 (28.2) Margins Gross Margins (%) 14.8 14.3 18.2 18.5 19.1 Opg Profit Margins (%) 7.6 6.6 10.0 12.3 11.3 Net Profit Margins (%) 1.1 0.7 4.0 7.3 6.3 Balance Sheet (Rpbn)

FY Dec 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 1,577 1,822 2,085 2,148 2,098 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 Other LT Assets 78.5 112 115 118 120 Cash & ST Invts 310 525 270 231 377 Inventory 610 551 666 712 796 Debtors 464 441 543 579 647 Other Current Assets 491 512 490 678 817 Total Assets 3,530 3,962 4,168 4,466 4,855 ST Debt 1,258 1,173 948 949 948 Creditor 418 263 407 453 527 Other Current Liab 66.0 84.6 94.0 104 119 LT Debt 629 789 789 789 789 Other LT Liabilities 77.9 104 105 106 108 Shareholder’s Equity 1,083 1,550 1,824 2,061 2,355 Minority Interests (2.4) (1.9) 1.60 5.40 10.3 Total Cap. & Liab. 3,530 3,962 4,168 4,466 4,855 Non-Cash Wkg. Capital 1,081 1,156 1,198 1,413 1,615 Net Cash/(Debt) (1,578) (1,437) (1,467) (1,506) (1,360) Debtors Turn (avg days) 31.0 34.6 30.7 32.2 30.8 Creditors Turn (avg days) 29.7 30.6 25.6 30.1 30.0 Inventory Turn (avg days) 45.1 52.1 46.6 48.3 46.2 Asset Turnover (x) 1.6 1.3 1.4 1.5 1.6 Current Ratio (x) 1.1 1.3 1.4 1.5 1.7 Quick Ratio (x) 0.4 0.6 0.6 0.5 0.6 Net Debt/Equity (X) 1.5 0.9 0.8 0.7 0.6 Net Debt/Equity ex MI (X) 1.5 0.9 0.8 0.7 0.6 Capex to Debt (%) 30.5 21.3 25.9 15.2 9.1 Z-Score (X) 2.2 2.4 3.1 3.2 3.3



Company Guide

Malindo Feedmill


FY Dec 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit (108) (72.1) 338 376 472 Dep. & Amort. 128 170 187 200 208 Tax Paid 0.0 0.0 0.0 0.0 0.0 Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (314) (101) (42.5) (215) (201) Other Operating CF (6.4) (22.8) (67.6) (83.1) (118) Net Operating CF (302) (26.3) 415 278 361 Capital Exp.(net) (576) (417) (450) (264) (158) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 Other Investing CF (88.5) 61.9 0.0 0.0 0.0 Net Investing CF (664) (355) (450) (264) (158) Div Paid (35.8) 0.0 0.0 (54.4) (58.8) Chg in Gross Debt 914 82.7 (226) (0.7) (1.1) Capital Issues 336 534 3.70 0.0 0.0 Other Financing CF (20.7) (20.5) 1.90 2.00 2.00 Net Financing CF 1,193 596 (220) (53.1) (57.8) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash 227 214 (255) (38.8) 146 Opg CFPS (Rp) 7.06 33.4 204 220 251 Free CFPS (Rp) (490) (198) (15.5) 6.39 91.0



Source: DBS Bank



S.No.Date of Report

Closing Price

12-mth Target Price

Rat ing

1: 01 Apr 16 1305 1975 BUY

2: 22 Apr 16 1515 1975 BUY

3: 03 May 16 1420 1975 BUY

4: 01 Aug 16 1800 2075 BUY

5: 02 Nov 16 1605 2150 BUY


1

2

3

4

5

1111

1211

1311

1411

1511

1611

1711

1811

1911

2011


Rp

ASIAN INSIGHTS VICKERS SECURITIES ed: CK / sa:BC, PY

HOLD Last Traded Price ( 21 Nov 2016): RM4.40 (KLCI : 1,623.80) Price Target 12-mth: RM4.60 (5% upside) (Prev RM4.60) Potential Catalyst: Volume and capacity expansion Where we differ: Lower margins assumptions Analyst Regional Research Team

What’s New 2QFY17 earnings below expectations ILF PBT grew by 9% y-o-y, supported by

improvement in egg prices MPM PBT shrank on lower margins FamilyMart venture – first store opened

Price Relative

Forecasts and Valuation FY Mar (RM m) 2016A 2017F 2018F 2019F Revenue 2,853 3,273 3,610 4,042 EBITDA 372 415 473 551 Pre-tax Profit 249 280 329 396 Net Profit 192 211 248 300 Net Pft (Pre Ex.) 192 211 248 300 Net Pft Gth (Pre-ex) (%) 4.9 9.7 17.7 20.7 EPS (sen) 15.4 16.9 19.9 24.0 EPS Pre Ex. (sen) 15.4 16.9 19.9 24.0 EPS Gth Pre Ex (%) 5 10 18 21 Diluted EPS (sen) 15.4 16.9 19.9 24.0 Net DPS (sen) 4.25 5.06 5.96 7.20 BV Per Share (sen) 127 139 153 170 PE (X) 28.6 26.1 22.1 18.3 PE Pre Ex. (X) 28.6 26.1 22.1 18.3 P/Cash Flow (X) 20.2 20.6 16.9 14.7 EV/EBITDA (X) 16.4 14.8 13.0 11.1 Net Div Yield (%) 1.0 1.2 1.4 1.6 P/Book Value (X) 3.5 3.2 2.9 2.6 Net Debt/Equity (X) 0.3 0.3 0.3 0.2 ROAE (%) 12.7 12.7 13.6 14.9 Earnings Rev (%): (9) (5) (3) Consensus EPS (sen): 17.9 19.9 22.5 Other Broker Recs: B: 0 S: 1 H: 10


Keep on sight Maintain HOLD. We revise our earnings on the back of lower than expected MPM PBT margins in 1HFY17 at 17% against the historical/forecasted PBT margins of 20%. The lower PBT margin was mainly due to lower number of fish catch, thus increasing overall production cost. As such, we cut our earnings by 9%/5%/3% in FY17/FY18/FY19. FY17F PE valuation remains high at near 1SD above the mean PE, while near-term growth is moderated by the consolidation of prices of its surimi-based and poultry products after the strong surge in FY15. Although we continue to like QL for its diversified business model, we believe near-term growth initiatives are priced in and unlocking the long-term earnings potential of its expansion plans is a key re-rating catalyst. Volume, capacity expansion the next step. QL’s core staple food businesses will likely remain resilient despite expectations of a slowdown in Malaysia’s private consumption and economic growth. Hence, to boost near-term growth, QL plans to ramp up its regional feedmill production, aquaculture (prawn farming) project, and the volume of frozen surimi-based products plus snack foods for export. FamilyMart venture to offer long-term synergies. QL’s venture with Japan’s FamilyMart Co. Ltd targets to open 300 stores in five years. After the opening of the first store in Nov 2016 at Wisma Lim Foo Yong Jalan Raja Chulan, QL is looking to open another store in Dec 2016 and 10 more in 2017. The intention to focus on ready-to-eat F&B will bring synergies to QL’s surimi-based products, snack foods, and processed poultry product businesses. However, earnings impact in the near term is negligible given the prerequisite 2-3 years’ gestation period. In the mid to long term, positive accretion from this venture will depend a lot on FamilyMart’s ability to differentiate itself from its competitors such as 7-11 Malaysia and Bison. Valuation: Our DCF-derived TP is RM4.60 (8.0% WACC, 5% TG), and implies 24x FY17F (ending March) PE. Key Risks to Our View: Severe price volatility is a threat to commodity-intensive sectors like poultry. Prolonged weak product prices or high feed costs may hurt earnings, though QL’s integrated and diversified structure implies less earnings fluctuations than its peers. At A Glance Issued Capital (m shrs) 1,248 Mkt. Cap (RMm/US$m) 5,491 / 1,249 Major Shareholders (%) CBG Holdings Sdn Bhd 42.1 Farsathy Holdings Sdn Bhd 12.1


DBS Group Research . Equity 22 Nov 2016

Regional Company Guide

QL Resources Version 4 | Bloomberg: QLG MK | Reuters: QLRES.KL Refer to important disclosures at the end of this report

78

98

118

138

158

178

198

218

1.8

2.3

2.8

3.3

3.8

4.3

4.8

Nov-12 Nov-13 Nov-14 Nov-15 Nov-16

Relative IndexRM

QL Resources (LHS) Relative KLCI (RHS)


Company Guide

QL Resources

WHAT’S NEW

Hiccups in MPM and POA

Highlights

2QFY17 core earnings of RM50.5m (-8% y-o-y) were below our/consensus expectations, with improvement in the integrated livestock farming (ILF) segment’s earnings being dragged by the decline in other segments.

Improvement in the ILF segment’s earnings

The ILF division saw topline grew by 9% y-o-y to RM443m, due to higher contribution from Malaysian poultry operations and Indonesian feedmill unit.

PBT grew by 17% y-o-y to RM29m. This was mainly attributable to the increase in volume of raw feed trade and also the increase in farm-produced prices; particularly the improvement in egg price of 31 sen in 2Q17 compared to 30 sen in 2Q16.

According to Department of Veterinary Services Malaysia (DVS) website, the current average commercial egg price (from grade AA to grade E) remained at c.32-sen levels in Oct-Nov 2016. We believe QL’s blended ASP will stay at this level for 3QFY17 with earnings being supported by a gradual c.3% annual increase in production volume from improved farm utilisation.

Exhibit 1: Malaysia’s average commercial egg price

Source: DVS, @>OĂ>]jg

MPM slight hiccup in domestic demand, sales supported

by stronger export

QL’s marine products manufacturing (MPM) segment revenue grew 6% y-o-y to RM219m, owing to higher surimi-based products and fishmeal export contribution. The segment had mainly benefited from its export products (fishmeal, surimi and surimi-based products or SBP) which gained from higher order volume.

However, PBT contracted by 8% y-o-y to RM39m, making up 55% of 2QFY17 group PBT (1QFY16: 60%). This was due to the lower number of fish catch in 2QFY17 driving

up production costs and a stronger ringgit in the quarter compared to previous year.

Consequently, MPM’s profitability has deteriorated with a PBT margin of 18% in 2QFY17 (2QFY16: 21%).

In 2QFY17, palm oil activities (POA) segment’s PBT declined by 16% y-o-y despite the higher CPO price of RM2,507/MT (2QFY16: RM2,041/MT). This was because of: 1) lower contributions from its associate Boilermech Holdings, and 2) lower FFB produced and processed by the Sabah palm oil unit.

Outlook

FamilyMart venture to offer long-term synergies

QL has signed an area franchise agreement with Japan’s FamilyMart Co. Ltd to open 300 stores in five years. After the opening of the first store in Nov 2016 at Wisma Lim Foo Yong Jalan Raja Chulan, QL is looking to open another store in Dec 2016 and 10 more in 2017.

We anticipate capex needs for this venture to make up a small proportion of QL’s total capex, as the requirement per-store of c.RM200k is small in comparison to the group’s expected annual capex of RM200-300m.

The intention to focus on ready-to-eat F&B will bring synergies to QL’s surimi-based products, snack foods, and processed poultry product businesses. However, the earnings impact in the near term is negligible given the prerequisite 2-3 years’ gestation period. In the mid to long term, positive accretion from this venture will depend a lot on FamilyMart’s ability to differentiate itself from its competitors such as 7-11 Malaysia and Bison.

MPM to expand into food manufacturing QL plans to produce surimi-based products as an

extension of its existing Surabaya operations – this is in progress and should be realised in three years. Meanwhile, QL plans to set up a distribution centre in Indonesia to provide an immediate channel to market its surimi-based products from the plants in Hutan Melintang and Johor.

QL’s Hutan Melintang unit is constructing a new chilled surimi-based production plant with an estimated capacity of 25k MT, whose completion is slated for 3QFY18.

Phase 1 of the new plant that specialises in frozen surimi-based products in Kulai, Johor has been completed, with full completion expected in the next two years.

The new plants will be technologically enhanced with more automation, less manpower requirements and improved production efficiency.

QL is also ramping up its commercial prawn farming initiative with expected earnings contribution of RM1-2m in FY17. We are optimistic on the prospects of commercially cultivated aquaculture-based products as this business carries high margins – similar to surimi-based

0.318 0.332

0.372 0.369

0.296 0.305 0.320

0.299 0.300 0.313 0.319

0.200

0.250

0.300

0.350

0.400

0.450

0.500

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16 1Q17 2Q17 3Q17

Avg Commercial ASP ‐ QL Financial Year

Avg Blended Egg Price (Gred AA‐Gred E)


Company Guide

QL Resources

products – and it is possible for QL to aggressively expand the farming volume in the future.

ILF to count on raw material feed trade for near-term

earnings boost

The recent completion of the new commercial feedmill in Bekasi, Indonesia is expected to increase FY17’s total group production by >200k MT/yr from >980k MT/yr currently. This additional volume allows QL to enhance its cost efficiency and expand further into commercial feedmilling.

There are plans to build additional commercial feedmill plants in Indonesia and Malaysia, supported by management’s efforts to replicate its local raw material trade business regionally.

Our interactive QL model We invite readers to explore the effects of changes in the various assumptions we imputed with our interactive model. We highlight two possible near-term scenarios: 1) egg oversupply, and 2) surimi price increase – these illustrate the stability of QL’s integrated and diversified business model, given the relatively contained net profit impact from both events.


FY Mar 2Q2016 1Q2017 2Q2017 % chg yoy % chg qoq

Revenue 690 670 730 5.7 9.0

Gross Profit 690 670 730 5.7 9.0

Other Oper. (Exp)/Inc (618) (612) (654) 5.8 6.9

Operating Profit 72.4 58.0 76.0 5.0 31.1

Other Non Opg (Exp)/Inc 0.0 0.0 0.0 nm nm

Associates & JV Inc 5.24 3.60 2.09 (60.2) (42.0)

Net Interest (Exp)/Inc (7.0) (8.8) (7.4) (6.2) 15.8

Exceptional Gain/(Loss) 0.0 0.0 0.0 nm nm

Pre-tax Profit 70.7 52.8 70.7 0.1 33.9

Tax (15.9) (11.5) (14.8) (6.5) 28.8

Minority Interest 0.34 0.84 (5.4) nm (742.3)

Net Profit 55.2 42.1 50.5 (8.4) 19.9

Net profit bef Except. 55.2 42.1 50.5 (8.4) 19.9

EBITDA 99.2 85.5 107 8.1 25.3

Margins (%)

Opg Profit Margins 10.5 8.7 10.4

Net Profit Margins 8.0 6.3 6.9

Source of all data: Company, DBS Bank

https://www.trefis.com/modeldemo/institutional/23104/l9l2x/QLG.MK?easyAccessToken=PROVIDER_a0063f1911c10534e7a8b0b185eff7884ffec709

https://www.trefis.com/modeldemo/institutional/23104/l9l2x/QLG.MK?derived=52216&derivedToken=d430b0a6e54cafe4c8ac6517ad157f9faaf71b57

https://www.trefis.com/modeldemo/institutional/23104/l9l2x/QLG.MK?derived=52216&derivedToken=d430b0a6e54cafe4c8ac6517ad157f9faaf71b57

https://www.trefis.com/modeldemo/institutional/23104/l9l2x/QLG.MK?derived=52217&derivedToken=a5e60ec35d13620e350403f594b45c527478e75b


Company Guide

QL Resources

CRITICAL DATA POINTS TO WATCH Earnings Drivers:

Integrated food businesses to be resilient. QL has 3 key segments – marine product manufacturing (MPM), integrated livestock farming (ILF) and palm oil activities (POA). As staple protein food, MPM and ILF products enjoy resilient demand. QL’s integrated business operations with both upstream and downstream activities provide some cushion against the price volatility of commoditised goods like eggs, feed material and surimi. Surimi, the backbone of MPM. In FY16, QL produced up to 40k MT p.a. of surimi – ground fish paste - whereby 25k MT came from Malaysia (split between plants in Perak and Sabah), and 15k MT from Surabaya, Indonesia. Based on management’s estimates, QL commands c.10% market share of surimi in ASEAN. Most is sold directly (typically exported), though around half of Malaysian output is used for surimi-based products (SBP) at Hutan Melintang plant in Perak with a capacity of 55k MT/yr. Surimi and SBP make up 60-70% of MPM's revenue and PBT. The remainder comes from sale of fishmeal (>30k MT/yr), deep-sea fishing and relatively new venture in aquaculture or prawn farming. MPM is QL’s most profitable division, making up 25-30% of sales but >50% of pretax (margins are strong at c.20%). Solid ILF presence. QL is one of the 3 largest egg producers in Malaysia, with around 3.3m eggs per day (epd); plus c.0.65m epd in Indonesia and c.0.65m epd in Vietnam. Its other poultry presence is primarily in East Malaysia, with around 20m day-old chicks (DOC) and 12m broilers. Additionally, it has a production of around 20m DOC/yr in Indonesia. QL has feedmills supplying its own feed to all eight farms; plus a poultry processing house in Sabah with capacity of 4,000 birds/hr. The integrated structure supports relatively steady ILF pretax margins of 5-8%. In FY16, ILF contributes c.60% to group revenue and >40% to group PBT. Feed material trading. A differentiating factor for QL’s ILF division is its feed material trading, primarily involving the import of corn and soybean meal used to mix poultry feed. Trading an estimated >980k MT/yr of feed material in FY16, QL has a market share of about 20%. It enjoys cost advantages and stability over other pure poultry players, as feed material comprises up to 80% of COGS for layer and boiler operations. This volume-driven business is a significant contributor with up to 60% of ILF revenue and up to 50% of ILF PBT in FY16. POA still needs time. In FY16, QL has c.10k ha of oil palm plantations in Kalimantan, Indonesia, plus three palm oil mills (two in Tawau, Sabah, and one in Tarakan, Indonesia). Due to the young age profile of its trees (1k ha immature, others 4-7 years old), and low CPO prices, the division has been loss-making. We expect a gradual turnaround as its palms mature to yield more fruit fresh fruit bunches (FFB), and CPO price ecovers. Earnings at the pretax level have been held up by its 41.5% stake in Boilermech Holdings, which manufactures biomass boilers. It currently contributes a minimal c.5% of total group PBT.

Surimi prod (k MT)

Eggs prod (m/day)

Own FFB prod (k MT)

MPM key indicators and assumptions

ILF key indicators and assumptions


35

40

45 45 45

0.0

6.5

13.0

19.5

26.0

32.5

39.0

45.5

2015A 2016A 2017F 2018F 2019F

4.16

4.6 4.71 4.825.05

0.0

1.0

2.1

3.1

4.1

5.2

2015A 2016A 2017F 2018F 2019F

68

85.5

117

138

168

0.00

34.33

68.67

103.00

137.33

171.67

2015A 2016A 2017F 2018F 2019F

Total production (MT p.a.) FY15 FY16 FY17 FY18F FY19FSurimi 35,000 40,000 45,000 45,000 45,000Fishmeal 37,500 45,000 45,000 45,000 45,000Surimi-based products 47,500 55,000 55,000 55,000 80,000Aquaculture 600 1,500 1,800 2,813 4,230

Total production FY15 FY16 FY17F FY18F FY19FEggs (m/day) 4.2 4.6 4.7 4.8 5.1DOC (m) 34.0 20.0 40.0 40.0 40.0Broilers (m) 7.0 12.0 12.0 12.0 12.0Traded feed material (MT) 900 980 1,200 1,257 1,320ASP (RM)Eggs (ea) 0.33 0.27 0.27 0.28 0.28DOC (ea) 0.70 0.70 0.71 0.73 0.74Broilers (/kg) 6.77 6.25 6.25 6.38 6.50


Company Guide

QL Resources

Balance Sheet:

Solid balance sheet from strong cash flow. QL has a manageable gearing level of <0.5x gross debt-to-equity (0.3x net). Net interest cover is also secure at >8x. Given the strong operating cash generation nature of its businesses, we think that QL would have little trouble gearing up further for any expansion needs. We also forecast QL to continue with a 30% dividend payout, close to its historical trend, though there is no fixed policy. Share Price Drivers:

Key product pricing. QL‘s share price is strongly correlated to the pricing outlook and supply-demand dynamics of its core products like eggs, broilers, surimi and fishmeal. Rising prices from low supply or growing demand may boost its earnings and share price. Capacity expansion or downstream progress. Growing its capacity will increase QL’s long-term earnings potential, particularly for core products like surimi and eggs. We believe that further expansion into the higher-margin surimi-based products (SBP), particularly at its Indonesian and Sabah surimi operations, also offers upside potential. Key Risks:

Feed costs volatility. ILF margins can be affected by higher feed costs (corn and soybeans). But, as a feed material trader, QL has an edge over industry peers with no direct access to the materials. Volatility in prices of commodity products. QL is exposed to risks of falling/weak chicken egg prices, which may be caused by general supply-and-demand forces and seasonality. This could affect ILF margins. On a regional basis, the large supply growth of fishmeal and surimi can also drive down prices and hurt the MPM segment. Company Background

QL has three core businesses: ILF – integrated livestock farming (chicken eggs, broilers, day-old chicks, feed material trading), MPM – marine product manufacturing (surimi, surimi-based products, frozen food), and POA – palm oil activities (palm oil plantation, milling).


Capital Expenditure

ROE (%)

Forward PE Band (x)

PB Band (x)


1.0

1.1

1.1

1.2

1.2

0.00

0.10

0.20

0.30

0.40

0.50

0.60

2015A 2016A 2017F 2018F 2019F


205.0

210.0

215.0

220.0

225.0

230.0

235.0

240.0

245.0

250.0

255.0

2015A 2016A 2017F 2018F 2019F


RMm

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

2015A 2016A 2017F 2018F 2019F

Avg: 22.2x

+1sd: 25.6x

+2sd: 29x

‐1sd: 18.7x

‐2sd: 15.3x

13.7

15.7

17.7

19.7

21.7

23.7

25.7

27.7

29.7

31.7

Nov-12 Nov-13 Nov-14 Nov-15

(x)

Avg: 2.98x

+1sd: 3.49x

+2sd: 4x

‐1sd: 2.47x

‐2sd: 1.95x

1.6

2.1

2.6

3.1

3.6

4.1

Nov-12 Nov-13 Nov-14 Nov-15

(x)


Company Guide

QL Resources

Key Assumptions

FY Mar 2015A 2016A 2017F 2018F 2019F Surimi prod (k MT) 35.0 40.0 45.0 45.0 45.0 Eggs prod (m/day) 4.16 4.60 4.71 4.82 5.05 Own FFB prod (k MT) 68.0 85.5 117 138 168

Segmental Breakdown

FY Mar 2015A 2016A 2017F 2018F 2019F Revenues (RMm) MPM 733 835 864 925 1,199 POA 345 310 363 379 369 ILF 1,630 1,708 2,046 2,305 2,474 Total 2,708 2,853 3,273 3,610 4,042 Pretax profit (RMm)

MPM 127 164 163 192 245 POA 14.8 12.1 11.8 15.8 21.1 ILF 95.6 73.8 105 121 130 Total 246 249 280 329 396 Pretax profit Margins

MPM 17.4 19.6 18.9 20.8 20.5 POA 4.3 3.9 3.2 4.2 5.7 ILF 5.9 4.3 5.1 5.2 5.2 Total 9.1 8.7 8.5 9.1 9.8

Income Statement (RMm)

FY Mar 2015A 2016A 2017F 2018F 2019F Revenue 2,708 2,853 3,273 3,610 4,042 Cost of Goods Sold (2,240) (2,351) (2,728) (3,004) (3,355) Gross Profit 467 501 545 606 686 Other Opng (Exp)/Inc (223) (232) (243) (255) (267) Operating Profit 244 269 301 351 419 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 23.3 12.6 10.7 11.3 11.8 Net Interest (Exp)/Inc (29.7) (32.5) (32.3) (33.9) (35.0) Exceptional Gain/(Loss) 8.35 0.0 0.0 0.0 0.0 Pre-tax Profit 246 249 280 329 396 Tax (50.0) (47.7) (58.8) (69.0) (83.1) Minority Interest (4.5) (9.7) (10.3) (11.5) (13.2) Preference Dividend 0.0 0.0 0.0 0.0 0.0 Net Profit 191 192 211 248 300 Net Profit before Except. 183 192 211 248 300 EBITDA 333 372 415 473 551 Growth Revenue Gth (%) 10.2 5.4 14.7 10.3 12.0 EBITDA Gth (%) 10.9 11.7 11.7 14.0 16.5 Opg Profit Gth (%) 10.1 10.3 11.9 16.5 19.3 Net Profit Gth (Pre-ex) (%) 14.5 4.9 9.7 17.7 20.7 Margins & Ratio Gross Margins (%) 17.3 17.6 16.6 16.8 17.0 Opg Profit Margin (%) 9.0 9.4 9.2 9.7 10.4 Net Profit Margin (%) 7.1 6.7 6.4 6.9 7.4 ROAE (%) 14.1 12.7 12.7 13.6 14.9 ROA (%) 7.9 7.1 7.2 7.8 8.6 ROCE (%) 8.8 9.0 9.1 9.7 10.7 Div Payout Ratio (%) 27.7 27.6 30.0 30.0 30.0 Net Interest Cover (x) 8.2 8.3 9.3 10.4 12.0



Company Guide

QL Resources


FY Mar 2Q2016 3Q2016 4Q2016 1Q2017 2Q2017 Revenue 690 738 769 670 730 Cost of Goods Sold 0.0 0.0 0.0 0.0 0.0 Gross Profit 690 738 769 670 730 Other Oper. (Exp)/Inc (618) (655) (712) (612) (654) Operating Profit 72.4 83.1 56.5 58.0 76.0 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 5.24 2.14 1.55 3.60 2.09 Net Interest (Exp)/Inc (7.0) (8.7) (8.6) (8.8) (7.4) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 70.7 76.5 49.4 52.8 70.7 Tax (15.9) (12.4) (8.4) (11.5) (14.8) Minority Interest 0.34 (6.3) (3.0) 0.84 (5.4) Net Profit 55.2 57.9 38.1 42.1 50.5 Net profit bef Except. 55.2 57.9 38.1 42.1 50.5 EBITDA 99.2 106 85.5 85.5 107 Growth Revenue Gth (%) 5.4 6.9 4.2 (12.9) 9.0 EBITDA Gth (%) 22.9 7.0 (19.5) 0.0 25.3 Opg Profit Gth (%) 26.8 14.8 (32.0) 2.7 31.1 Net Profit Gth (Pre-ex) (%) 34.8 4.9 (34.2) 10.6 19.9 Margins Opg Profit Margins (%) 10.5 11.3 7.3 8.7 10.4 Net Profit Margins (%) 8.0 7.8 5.0 6.3 6.9 Balance Sheet (RMm)

FY Mar 2015A 2016A 2017F 2018F 2019F Net Fixed Assets 1,239 1,377 1,486 1,615 1,734 Invts in Associates & JVs 94.7 105 116 127 139 Other LT Assets 278 230 228 226 225 Cash & ST Invts 201 245 279 329 414 Inventory 335 375 430 475 531 Debtors 307 279 321 354 396 Other Current Assets 131 193 193 193 193 Total Assets 2,585 2,804 3,052 3,318 3,632 ST Debt 431 473 498 523 548 Creditor 238 267 307 338 379 Other Current Liab 16.8 13.5 13.5 13.5 13.5 LT Debt 326 303 328 353 378 Other LT Liabilities 73.7 79.9 79.9 79.9 79.9 Shareholder’s Equity 1,427 1,588 1,736 1,910 2,119 Minority Interests 72.9 79.3 89.6 101 114 Total Cap. & Liab. 2,585 2,804 3,052 3,318 3,632 Non-Cash Wkg. Capital 518 566 624 669 728 Net Cash/(Debt) (556) (531) (547) (547) (512) Debtors Turn (avg days) 39.0 37.5 33.5 34.1 33.8 Creditors Turn (avg days) 34.5 41.0 40.1 40.9 40.6 Inventory Turn (avg days) 47.8 57.6 56.2 57.3 57.0 Asset Turnover (x) 1.1 1.1 1.1 1.1 1.2 Current Ratio (x) 1.4 1.4 1.5 1.5 1.6 Quick Ratio (x) 0.7 0.7 0.7 0.8 0.9 Net Debt/Equity (X) 0.4 0.3 0.3 0.3 0.2 Net Debt/Equity ex MI (X) 0.4 0.3 0.3 0.3 0.2 Capex to Debt (%) 32.3 30.4 26.6 28.5 27.0 Z-Score (X) 0.0 0.0 0.0 0.0 0.0



Company Guide

QL Resources


FY Mar 2015A 2016A 2017F 2018F 2019F Pre-Tax Profit 246 249 280 329 396 Dep. & Amort. 88.5 102 114 122 132 Tax Paid (50.0) (47.7) (58.8) (69.0) (83.1) Assoc. & JV Inc/(loss) (23.3) (12.6) (10.7) (11.3) (11.8) Chg in Wkg.Cap. (71.5) (48.6) (57.1) (45.7) (58.6) Other Operating CF 35.4 29.5 0.0 0.0 0.0 Net Operating CF 225 272 267 325 374 Capital Exp.(net) (245) (236) (220) (250) (250) Other Invts.(net) (0.4) 60.6 0.0 0.0 0.0 Invts in Assoc. & JV (37.2) 0.0 0.0 0.0 0.0 Div from Assoc & JV 4.82 0.0 0.0 0.0 0.0 Other Investing CF 0.0 2.38 0.0 0.0 0.0 Net Investing CF (277) (173) (220) (250) (250) Div Paid (53.0) (53.0) (63.2) (74.4) (89.9) Chg in Gross Debt 103 19.2 50.0 50.0 50.0 Capital Issues 0.0 0.0 0.0 0.0 0.0 Other Financing CF (54.8) (12.3) 0.0 0.0 0.0 Net Financing CF (5.2) (46.1) (13.2) (24.4) (39.9) Currency Adjustments 0.0 0.0 0.0 0.0 0.0 Chg in Cash (57.5) 53.1 33.8 50.2 84.6 Opg CFPS (sen) 23.8 25.7 26.0 29.7 34.7 Free CFPS (sen) (1.6) 2.91 3.76 5.98 9.97



Source: DBS Bank

Analyst: Regional Research Team

S.No.Date of Report

Closing Price

12-mth T arget Price

Rat ing

1: 23 Nov 15 4.21 4.10 HOLD

2: 26 Feb 16 4.49 4.10 HOLD

3: 12 Apr 16 4.32 4.10 HOLD

4: 31 May 16 4.41 4.10 HOLD

5: 07 Jun 16 4.42 4.60 HOLD

6: 25 Aug 16 4.39 4.60 HOLD


1

2

3

4

5

6

3.99

4.09

4.19

4.29

4.39

4.49

4.59

4.69

4.79

Nov-15 Mar-16 Jul-16 Nov-16

RM


ed: JS / sa: SM, PY

NOT RATED Rp695 JCI : 5,396.00 Closing price as of 6 Feb 2017 Return *: 2 Risk: Moderate Potential Target 12-mth* : Rp 895.00 (29% upside) Analyst Indonesia Research Team Ben SANTOSO +65 6682 3707 [email protected]

Price Relative

Forecasts and Valuation FY Dec (Rpbn) 2014A 2015A 2016F 2017F Revenue 2,506 2,113 2,423 3,133 EBITDA 110 (196) 191 221 Pre-tax Profit 26.6 (444) 6.64 12.1 Net Profit 2.99 (352) 6.98 14.6 Net Pft (Pre Ex.) 2.99 (352) 6.98 14.6 EPS (Rp) 0.32 (375) 5.22 10.9 EPS Pre Ex. (Rp) 0.32 (375) 5.22 10.9 EPS Gth (%) (69) nm nm 109 EPS Gth Pre Ex (%) (69) nm nm 109 Diluted EPS (Rp) 0.32 (375) 5.22 10.9 Net DPS (Rp) 0.0 0.0 0.0 0.0 BV Per Share (Rp) 135 782 852 863 PE (X) 2119.5 nm 129.4 62.0 PE Pre Ex. (X) 2119.5 nm 129.4 62.0 P/Cash Flow (X) nm 3.1 19.3 15.0 EV/EBITDA (X) 65.5 nm 7.2 6.1 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 5.0 0.9 0.8 0.8 Net Debt/Equity (X) 0.7 1.2 0.4 0.4 ROAE (%) 0.2 (35.1) 0.7 1.3 Principal Business: Sierrad Produce produces animal feeds and breeds commercial day-old chicks (DOC). The group also sell processed chicken under Belfoods brand. We expect the group to books positive EBITDA after a downturn in 2015.


A recovery story Integrated poultry player with strong consumer food

brand Recovery in motion, following buyout in 2015 and

recapitalisation in 2016 Fair value is Rp895 based on 7.5x forward EV/EBITDA The Business Fully integrated value chain. Sierad Produce (SIPD) is one of Indonesia’s leading vertically integrated poultry players with a sizeable market share. The group derives its earnings from sales of poultry feed, day-old-chicks (DOC), live broilers, dressed chickens, and processed food products. Strong economic outlook and internal improvement. SIPD suffered net losses in 2014 and 2015 due to DOC oversupply; which had forced the group to sell off some assets, including a feed mill and breeding farms. Following a buyout from Gunung Sewu Group in 2015 and a subsequent rights issue in 2016, we expect SIPD’s EBITDA margins to recover over the next three years through cost efficiencies, recoveries in DOC and broiler ASPs, as well as lower borrowing costs. What is its competitive edge? SIPD’s processed food business – spearheaded by Belfoods – is ranked third behind Fiesta (CP Group) and So Good (Japfa Group), but well ahead of Malindo’s Sunny Gold. With consumers’ growing appetite for processed food, we believe SIPD’s focus on branded products should also drive growth in the group’s upstream businesses in the long run. The Stock Fair value of Rp895/share We value SIPD based on 7.5x forward EV/EBITDA (average multiple from Jan 2010-June 2013). Recovery in motion. We expect a turnaround in FY16E EBITDA to Rp191bn from a loss last year. Re-organisation, cost efficiency, investment in new commercial farms, and new product launches are expected to further boost its EBITDA to record 13.5% CAGR during FY16-19. What could go wrong with this stock? Scarcity in domestic corn supplies amid an import ban, weaker Rupiah and consumer purchasing power may adversely impact SIPD’s EBITDA margins. At A Glance Issued Capital (m shrs) 1,339 Mkt. Cap (Rpbn/US$m) 964,154 / 70.5 Major Shareholders (%)

PT Great Giant Pineapple 84.2 Free Float (%) 15.8 3m Avg. Daily Val (US$m) 0.00


Indonesia Equity Explorer

Sierad Produce

Bloomberg: SIPD IJ | Reuters: SIPD.JK Refer to important disclosures at the end of this report

SMC Research

Equity Explorer

Sierad Produce

Page 2

BACKGROUND

Fully integrated poultry player in Indonesia. As one of Indonesia’s major poultry players, SIPD continues to leverage on its market share as the industry grows. New ownership, new structure. SIPD suffered net losses in 2014 and 2015 due to DOC oversupply, which forced them to sell off some assets, including a feedmill and breeding farms. In 2015, SIPD issued new shares before doing a reverse stock split in a 10:1 ratio. Following the reverse stock split, SIPD was acquired by Gunung Sewu Group. At the end 2015 Gunung Sewu, via its subsidiary PT Great Giant Pineapple (GGP), held 57.3% ownership of SIPD. In April 2016, SIPD undertook a rights issue and raised Rp400bn. GGP exercised all of its rights and its stake in SIPD stood at 84.2% as at end of September 2016 (below 92.5% threshold limit regulated by IDX). REVENUE DRIVERS

Day-old-chick and live broiler prices. Following a government mandated nationwide culling of 3 million (PS) in 2015 (to address DOC oversupply), DOC and broiler ASPs recovered strongly in 2016. SIPD did not participate in the culling programme, as it does not produce PS. Feed volume. The main contributor to group revenue is poultry feed and DOC. Broiler, dressed chickens, and others (Belfoods) were loss-making for the nine months to Sep 2016. Similar to peers, SIPD’s poultry feed business employs a cost plus model. The group’s raw material costs are higher than peers (due to lower economies of scale). COST STRUCTURE

Corn, soybean meal, and others make up c.90% of

poultry feed cost. Poultry feed for DOCs and broilers make up c.50%-60% of total cost. Hence, raw materials play an important part in SIPD’s cost structure. As most of the raw materials are imported (there were restrictions placed on corn imports since mid-2016), volatility in USD/IDR exchange rates led to cost fluctuations. However, global raw material prices (i.e. soybean meal, lysine, etc., used to make poultry feed) were generally soft during 2016. High fixed cost component relative to peers. SIPD’s operating expenses during the last four years averaged 14.8% of sales, significantly higher than peers, which averaged less than 10%. Selling, and general and administration expenses made up 9.5% and 12.9% of sales respectively in FY15. The group incurred high promotional expenses for its processed foods (Belfoods) segment, with advertisement and promotion (A&P) costs accounting for almost half of its selling expenses (i.e. 4.6% of FY15 revenue). The group has recently undertaken aggressive cost cutting measures to reduce operating expenses.

KEY OPERATING ASSETS

Operations mainly in Java. Unlike other integrated poultry players, SIPD’s operating assets are focused on Java Island (West and East). As at end 2015, the group has two feedmills, nine breeding farms, two hatcheries, four commercial farms, two slaughterhouses, and one food-processing factory. SIPD added a new commercial farm in West Java last year. Its East Java slaughterhouse is currently inactive due to limited number of commercial farms nearby. Revenue Breakdown by Business Segment

Prices of Key Raw Materials

Cost Breakdown


Equity Explorer

Sierad Produce

Page 3

Location of Key Operating Facilities

Source:

Equity Explorer

Sierad Produce

Page 4

GROWTH PROSPECTS

Adequate local corn supply to support price. Corn prices form a significant portion (c. 50%) of poultry feed costs. In our forecasts, we had assumed FY16E and FY17F local corn prices of Rp4,028/kg and Rp4,233/kg respectively, substantially above the reference price of Rp3,650 set by the government. Lower corn prices are possible if Agriculture Ministry program on corn self-sufficiency in 2018 comes to fruition. However, restrictions on corn imports since mid-2016 has raised prices of local corn. Chicken consumption per capita. Indonesia’s chicken consumption is relatively low compared to neighbouring countries. According to Agriculture Ministry, Indonesia’s chicken consumption per capita grew at a CAGR of 18.6% between 2009 and 2012, and currently stands at 11.4kg per capita. As the world’s fourth largest populous nation, Indonesia holds significant demand growth potential and we expect per capita consumption to reach 22.1kg per capita by 2021, representing 14.1% CAGR. Increasing appetite for processed food. According to data from Euromonitor, Indonesia’s frozen processed poultry market size expanded by 16.7% CAGR between 2010 and 2015. As SIPD is the third largest player in the processed food business, we believe the group will benefit from the expected growth in the industry, assuming it can maintain its market share. Historical data from Euromonitor shows that the group has maintained its market share over the past five years. MANAGEMENT`S STRATEGY

No new expansion planned in the medium term.

Following the completion of its new commercial farm in 2016, SIPD is not looking to add any new capacity over the next few years. This is in line with the government’s intention to tightly regulate supply from the big players to avoid the suspicion of a cartel formation. The limitation of broiler production will support broiler prices in the market. In feedmilling, the group has not fully utilised its production capacity (currently running at c.50% utilisation rate). On our estimates, the group would not need to add any new capacity until 2021. Focused on downstream business. SIPD is focused on developing its processed food brand, Belfoods. To help boost its market share, SIPD has allocated a significant budget on advertisement and promotion. Over the long term, we understand the group aims to consume almost all of its broiler production for internal use. Further improvement of its processed food’s sales volume thereafter should justify upstream expansion.

Chicken consumption per capita

Market size – frozen processed poultry

Market share of frozen processed poultry product players

Source: Company, DBS Bank, Frost & Sullivan, Euromonitor

Equity Explorer

Sierad Produce

Page 5

Key Assumptions

FY Dec 2012A 2013A 2014A 2015A 2016F 2017F Poultry feed prices 6,191 6,963 6,206 5,913 6,139 6,389 Corn prices (Rp/kg) 3,410 3,725 3,217 3,066 3,076 4,050 Soybean meal prices 6,396 7,008 8,369 6,658 5,390 5,464 DOC prices (Rp/chick) 3,846 4,432 3,210 3,900 4,910 5,010 Broiler prices (Rp/kg live) 13,969 15,893 16,149 16,600 17,030 17,030

Segmental Breakdown

FY Dec 2012A 2013A 2014A 2015A 2016F 2017F Revenues (Rpbn) Poultry feed 1,520 1,705 1,462 1,097 1,226 1,665 DOC 310 320 348 223 361 428 Broiler 366 276 150 264 362 381 Dressed Chciken 324 202 195 248 291 313 Others 1,402 833 (35.3) (117) (171) (179) Total 4,354 3,854 2,506 2,113 2,423 3,133 EBIT (Rpbn) Poultry feed 201 290 118 (124) 150 249 DOC (1.6) (17.5) (130) (83.9) 37.7 4.88 Broiler (17.3) (83.0) (6.9) (32.2) (3.2) (21.5) Dressed Chciken 5.70 (44.3) (1.2) (43.0) (14.0) 4.96 Others (42.0) (3.3) 19.0 (6.0) (76.3) (114) Total 146 142 (1.2) (289) 94.5 123 EBIT Margins (%) Poultry feed 13.2 17.0 8.1 (11.3) 12.2 14.9 DOC (0.5) (5.5) (37.5) (37.7) 10.5 1.1 Broiler (4.7) (30.1) (4.6) (12.2) (0.9) (5.6) Dressed Chciken 1.8 (21.9) (0.6) (17.4) (4.8) 1.6 Others (3.0) (0.4) (53.9) 5.2 44.7 63.9 Total 3.4 3.7 0.0 (13.7) 3.9 3.9


FY Dec 2012A 2013A 2014A 2015A 2016F 2017F Revenue 4,354 3,854 2,506 2,113 2,423 3,133 Cost of Goods Sold (3,772) (3,268) (2,128) (1,929) (1,956) (2,594) Gross Profit 583 587 378 184 466 539 Other Opng (Exp)/Inc (437) (445) (379) (473) (372) (416) Operating Profit 146 142 (1.2) (289) 94.5 123 Other Non Opg (Exp)/Inc (4.9) 18.2 183 (28.0) 29.0 (0.2) Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (121) (149) (155) (126) (117) (111) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 19.8 11.3 26.6 (444) 6.64 12.1 Tax (4.8) (2.9) (23.0) 81.6 0.19 2.21 Minority Interest 7.26 1.26 (0.6) 9.70 0.15 0.26 Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit 22.3 9.64 2.99 (352) 6.98 14.6 Net Profit before Except. 22.3 9.64 2.99 (352) 6.98 14.6 EBITDA 243 255 110 (196) 191 221 Growth Revenue Gth (%) 8.1 (11.5) (35.0) (15.7) 14.6 29.3 EBITDA Gth (%) 22.5 5.0 (56.9) nm nm 16.1 Opg Profit Gth (%) 12.7 (2.6) nm (23,942.3) nm 30.2 Net Profit Gth (Pre-ex) (%) 1.1 (56.8) (69.0) nm nm 108.6 Margins & Ratio Gross Margins (%) 13.4 15.2 15.1 8.7 19.2 17.2 Opg Profit Margin (%) 3.4 3.7 0.0 (13.7) 3.9 3.9 Net Profit Margin (%) 0.5 0.3 0.1 (16.7) 0.3 0.5 ROAE (%) 1.8 0.8 0.2 (35.1) 0.7 1.3 ROA (%) 0.8 0.3 0.1 (14.0) 0.3 0.5 ROCE (%) 4.4 3.8 0.0 (13.5) 4.6 5.6 Div Payout Ratio (%) 42.1 0.0 0.0 N/A 0.0 0.0 Net Interest Cover (x) 1.2 1.0 0.0 (2.3) 0.8 1.1


Sensitivity Analysis 2017 DOC prices +/- 1% Net Profit +/-24% USD/IDR +/1% Net Profit +/-0.2%

Margins Trend

Higher price of DOC and broilers after culling program

Poultry feed is still the main contributor to revenue

High interest expenses eroded profit

Equity Explorer

Sierad Produce

Page 6


FY Dec 1Q2015 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016 Revenue 485 557 545 527 593 639 Cost of Goods Sold (453) (507) (537) (432) (496) (504) Gross Profit 31.6 49.9 8.26 94.5 96.6 135 Other Oper. (Exp)/Inc (137) (97.0) (132) (108) (91.2) (98.6) Operating Profit (105) (47.1) (123) (13.5) 5.46 36.3 Other Non Opg (Exp)/Inc (5.6) (0.1) (25.8) 3.60 45.2 3.64 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (32.4) (30.3) (31.9) (31.8) (32.2) (27.2) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit (143) (77.5) (181) (41.7) 18.4 12.8 Tax 26.6 14.9 31.0 9.05 8.14 (3.5) Minority Interest (2.6) (1.1) 3.70 (9.7) 0.0 0.0 Net Profit (119) (63.7) (146) (42.3) 26.6 9.30 Net profit bef Except. (119) (63.7) (146) (42.3) 26.6 9.30 EBITDA (111) (47.2) (149) (9.9) 50.7 39.9 Growth Revenue Gth (%) (20.0) 14.9 (2.2) (3.3) 12.5 7.8 EBITDA Gth (%) nm 57.5 (216.0) 93.4 nm (21.3) Opg Profit Gth (%) 15.1 55.4 (162.2) 89.1 nm 564.5 Net Profit Gth (%) nm 46.7 (129.9) 71.1 nm (65.0) Margins Gross Margins (%) 6.5 9.0 1.5 17.9 16.3 21.1 Opg Profit Margins (%) (21.8) (8.4) (22.6) (2.6) 0.9 5.7 Net Profit Margins (%) (24.7) (11.4) (26.9) (8.0) 4.5 1.5



FY Dec 2012A 2013A 2014A 2015A 2016F 2017F Net Fixed Assets 1,493 1,588 914 866 805 753 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 0.0 Other LT Assets 145 164 165 236 170 174 Cash & ST Invts 85.9 31.2 151 54.4 397 413 Inventory 662 508 557 374 376 539 Debtors 635 432 432 252 392 507 Other Current Assets 277 433 580 465 450 339 Total Assets 3,298 3,156 2,800 2,247 2,591 2,726 ST Debt 890 819 827 667 609 609 Creditor 328 161 155 173 166 221 Other Current Liab 218 245 221 206 218 281 LT Debt 480 474 173 243 257 260 Other LT Liabilities 106 172 133 223 200 200 Shareholder’s Equity 1,258 1,267 1,271 734 1,141 1,156 Minority Interests 18.3 17.9 19.2 0.0 (0.2) (0.4) Total Cap. & Liab. 3,298 3,156 2,800 2,247 2,591 2,726 Non-Cash Wkg. Capital 1,029 967 1,194 711 834 883 Net Cash/(Debt) (1,284) (1,262) (850) (855) (468) (455) Debtors Turn (avg days) 40.3 50.5 62.9 59.1 48.5 52.4 Creditors Turn (avg days) 26.4 28.3 28.6 32.6 33.3 28.3 Inventory Turn (avg days) 60.3 67.7 96.4 92.6 73.6 66.9 Asset Turnover (x) 1.5 1.2 0.8 0.8 1.0 1.2 Current Ratio (x) 1.2 1.1 1.4 1.1 1.6 1.6 Quick Ratio (x) 0.5 0.4 0.5 0.3 0.8 0.8 Net Debt/Equity (X) 1.0 1.0 0.7 1.2 0.4 0.4 Net Debt/Equity ex MI (X) 1.0 1.0 0.7 1.2 0.4 0.4 Capex to Debt (%) 23.1 14.8 (32.4) 5.0 4.6 5.3


Revenue Trend


Equity Explorer

Sierad Produce

Page 7


FY Dec 2012A 2013A 2014A 2015A 2016F 2017F Pre-Tax Profit 19.8 11.3 26.6 (444) 6.64 12.1 Dep. & Amort. 97.0 113 111 93.8 96.0 98.2 Tax Paid 0.0 0.0 0.0 0.0 0.0 0.0 Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. (257) (66.2) (136) 530 (53.2) (49.5) Other Operating CF (3.0) (14.0) (28.6) 25.0 (2.5) (0.5) Net Operating CF (143) 44.0 (26.5) 206 46.9 60.3 Capital Exp.(net) (316) (191) 324 (45.1) (40.2) (46.0) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 0.0 Other Investing CF 4.39 1.46 (4.0) (209) 3.63 (1.5) Net Investing CF (312) (190) 320 (254) (36.5) (47.6) Div Paid (9.4) 0.0 0.0 0.0 0.0 0.0 Chg in Gross Debt 430 (26.5) (333) (81.0) (77.2) 0.95 Capital Issues 0.0 0.0 0.0 0.0 400 0.0 Other Financing CF 69.5 118 159 32.7 9.34 2.57 Net Financing CF 490 91.3 (174) (48.4) 332 3.52 Currency Adjustments 0.0 0.0 0.0 0.0 0.0 0.0 Chg in Cash 35.1 (54.6) 120 (96.4) 343 16.2 Opg CFPS (Rp) 12.1 11.7 11.6 (346) 74.8 81.9 Free CFPS (Rp) (48.9) (15.7) 31.7 171 5.05 10.6


Capital Expenditure

VALUATION

Currently trading at above average historical

valuation. SIPD currently trades at 6.3x EV/EBITDA, implying close to -3.0 SD over the average traded EV/EBITDA forward multiple between 2010 and mid-2013. The current price is below our fair value of Rp895 based on 7.5x FY17F EV/EBITDA – implying 29% upside potential. Risk Assessment: Moderate Category Risk Rating Wgt Wgtd Score

1 (Low) - 3 (High) Earnings 3 40% 1.2 Financials 3 20% 0.6 Shareholdings 2 40% 0.8 Overall 2.6

High fixed costs and interest expenses. The group has the highest operating expense to sales ratio among its peers along with high borrowing costs. Our sensitivity analysis shows that every 1% change in operating expenses will result in 22%, 2%, and 3% changes in net income, EBITDA, and fair value respectively. A 1% change in interest rate will result in 13% change in net income. Low liquidity stock. The stock’s liquidity is quite low compared to its peers. In 2016, its daily average trading volume stood at 107k, far below that of Charoen Pokphand Indonesia (CPIN), Japfa Comfeed Indonesia (JPFA), and Malindo Feedmill (MAIN) of 6.1m, 7.8m, and 871k respectively.

Historical EV/EBITDA ratio (x)

Peers’ Comparisons

Source: DBS Bank, Bloomberg Finance L.P

R

Prev.

CY16F

EPS

Prev.

CY17F

EPS

New

CY16F

EPS

New

CY17F

EPS

CY16F

EPS

rev.

CY17F

EPS

rev.

Prev.

TP

New

TP TP rev.

Indonesia (EPS/TP)

Charoen Pokphand I'sia (Rp) H 160 207 175 188 10% -10% 3,580 3,270 -9%

Japfa Comfeed Indonesia (Rp) B 195 172 190 170 -3% -1% 2,100 2,025 -4%

Malindo Feedmill (Rp) B 134 146 121 130 -10% -11% 2,150 1,550 -28%

Low capital expenditure to limit oversupply

6.00

7.00

8.00

9.00

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

(x)


ed: CK / sa: BC, PY

NOT RATED RM1.01 KLCI : 1,691.24 Closing price as of 6 Feb 2017 Return *: 2 Risk: Moderate Potential Target 12-mth* : RM 1.38 (37% upside) Analyst Regional Research Team

Price Relative

Forecasts and Valuation FY Dec (RMm) 2015A 2016F 2017F 2018F Revenue 413 446 499 556 EBITDA 68.5 57.1 79.9 88.5 Pre-tax Profit 50.7 33.3 52.1 58.9 Net Profit 41.0 27.0 42.2 47.7 Net Pft (Pre Ex.) 41.0 27.0 42.2 47.7 EPS (sen) 14.0 9.00 14.1 15.9 EPS Pre Ex. (sen) 14.0 9.00 14.1 15.9 EPS Gth (%) (16) (36) 56 13 EPS Gth Pre Ex (%) (16) (36) 56 13 Diluted EPS (sen) 12.5 8.02 12.5 15.9 Net DPS (sen) 3.60 2.25 3.52 3.98 BV Per Share (sen) 65.7 70.7 81.2 93.5 PE (X) 7.2 11.2 7.2 6.3 PE Pre Ex. (X) 7.2 11.2 7.2 6.3 P/Cash Flow (X) 8.0 6.0 5.6 5.0 EV/EBITDA (X) 5.6 6.9 4.9 4.3 Net Div Yield (%) 3.6 2.2 3.5 3.9 P/Book Value (X) 1.5 1.4 1.2 1.1 Net Debt/Equity (X) 0.4 0.4 0.4 0.3 ROAE (%) 23.4 13.4 18.5 18.2 Consensus EPS (sen): 10.0 16.0 18.0 Other Broker Recs: B: 0 S: 0 H: 2 ICB Industry : Consumer Goods ICB Sector: Food Producers Principal Business: TSC is one of the largest egg producer in Malaysia with a daily output of 3.5m eggs. Moreover, one-third of its production is exported to Singapore. The group is also involved in the trading of pet food, medicine and other related products.

Source of all data on this page: Company, DBS Bank, Bloomberg Finance L.P.

Good long-term prospects

Growth strategies; capacity expansion; diversification

into other streams and cost-saving initiatives Improved visibility: 41% earnings CAGR in FY16-FY18F RM1.38 TP is pegged to 11x FY17 EPS The Business

Modern poultry farmer. Teo Seng Capital (TSC) is one of the largest egg producers in Malaysia with a daily output of 3.5m eggs, of which one-third is exported to Singapore. TSC is also involved in the manufacture and marketing of paper egg trays, animal feeds, and the distribution of animal health products. Aggressive growth strategies. TSC is a vertically-integrated layer farming player with 8.8% share in Malaysia and 19% in Singapore. TSC targets to grow this to 12.5% in Malaysia and 30% in Singapore by 2019. We forecast earnings to grow in line with TSC’s targeted expanding market share, supported by 1) stabilisation of egg selling price, 2) expansion in daily production capacity (TSC plans to increase daily production volume by +522k p.a. in Singapore and +982k p.a. in Malaysia; both by 2019), 3) vertical and upstream diversification, 4) cost-saving initiatives, and 5) superior operating margin vs. peers. Its continued growth is also supported by management’s projected annual commercial egg consumption CAGR of 4.2% until 2019. TSC believes it will be able to achieve its faster-than-industry-demand growth target due to the fragmented layer industry, where the largest 5 players account for only c.37% market share. Stable industry outlook. Although there are fluctuations in the demand of eggs and ASP, we believe TSC’s outlook is still stable, as eggs are deemed inelastic goods as they are a consumer staple and small-ticket item in household spending. The Stock

Fair value of RM1.38. Our fair value is based on 11x fully-diluted FY17F EPS, which is the industry’s average (excluding QL and Lay Hong). We have excluded QL and Lay Hong due to their larger market cap and higher institutional shareholding. The stock is currently trading at 7.3x FY17F PE. Although our PE target is above the historical mean PE, we deem this undemanding given our expectation of a strong 2-year EPS CAGR of 41% FY16-18F. The stock is also trading at a PEG of c.0.3x. Strong fundamentals. Aside from its strong EPS CAGR, we also like TSC for its positive cashflow despite its aggressive expansion, coupled with low egg prices in FY16, superior net margins (c.10%) and positive ROAE (>13%). At A Glance Issued Capital (m shrs) 328.4 Mkt. Cap (RMm/US$m) 374.7 / 91.7 Major Shareholders (%) Emerging Glory Sdn Bhd 52.1 Koperasi Permodalan Felda 5.0

Free Float (%) 42.9 3m Avg. Daily Val (US$m) 0.05


Malaysia Equity Explorer

Teo Seng Capital

Bloomberg: TSCB MK | Reuters: TSCP.KL Refer to important disclosures at the end of this report

78

178

278

378

478

578

0.3

0.8

1.3

1.8

2.3


Relative IndexRM

Teo Seng Capital (LHS) Relative KLCI (RHS)

SMC Research

Equity Explorer

Teo Seng Capital

Page 2

REVENUE DRIVERS

Sensitivity to movement of egg price. Layer farming contributes c.62% of total revenue in FY16 (see Exhibit 1). As such, TSC’s earnings are highly exposed to the ASP fluctuations that depend on the supply-demand dynamics of eggs. 9MFY16 net earnings came in at RM19m (-48% y-o-y) due to lower egg ASP and higher raw material costs. Although TSC is subject to ASP fluctuations, we believe that its outlook remains positive, supported by management’s forecast of stable growth in egg consumption – CAGR of 4.2% until 2019. This is in line with TSC’s plans to expand its daily egg production to 4.4m by FY19 (FY16: 3.5m). Egg ASP had declined sharply to 26 sen in 2Q15 from a high of 35 sen in 4Q14, as a result of the oversupply conditions during the period and to some extent, the impact of GST on overall consumer sentiment. While egg ASP had rebounded slightly to 30 sen as at end-3Q16, it is much lower compared to its peak. However, we believe egg prices will maintain at 30 sen levels in FY17F due to the slight improvement in the consumer sentiment and closure of small layer farms. TSC’s local market share has increased from 6% in FY15 to 8.8% in FY16. Furthermore, we believe TSC’s outlook will remain stable, as eggs are a consumer staple and small-ticket item in household spending. See Exhibit 2. Exhibit 1: Revenue weightage by business segment

Source: Company, DBS Bank Exhibit 2: Historical average commercial egg ASP

Source: Company

First pick of top layer breed. According to DVS data, the Hisex Brown is a popular breed in Malaysia in 2013/2014 with a market share of 39%/28%. Leong Hup (LH) is the dominant breeder of Hisex Brown. LH and Nam Family collectively have a 53% stake in TSC. Given TSC’s relationship with LH, it usually gets the first pick of these top breeds for its Day-Old-Chick (DOC) purchases. This helps ensure the quality of TSC’s eggs production. Diversification into other segments. Aside from layer farming, TSC is also involved in the trading and distribution of a wide range of imported pet food, medicine and other animal health-related products. This makes up c.37% of total revenue. TSC has a competitive advantage in this segment, as it is the sole agent for Bayer Group to distribute the latter’s animal health products in Malaysia, Singapore and Brunei. Additionally, TSC is the sole distributor for Vetpharm Laboratories (S) Pte Ltd’s animal antibiotics and supplements in Malaysia. Moreover, TSC has expanded upstream into the manufacturing and marketing of paper egg trays, and the production of animal feed, to complement its layer farming division. Its two paper egg tray machines produce 126,000 egg trays daily or 45m pcs p.a. This is sufficient to meet 90% of its internal requirements and the remaining 10% of its egg tray production is sold to external customers. COST STRUCTURE

Economies of scale from LH tie-up. TSC benefits from economies of scale as it purchases its raw materials on a group basis with LH. Collectively, LH purchases c.2m tonnes of raw materials p.a. and management has stated that LH proactively hedges its USD-denominated purchases of its raw materials, namely soybean and corn. Its forward purchase of soybean is now up to six months while corn is at four months. The weakening of the ringgit had negatively affected TSC’s margins, as the majority of its raw materials, namely corn and soybean purchases are contracted in USD. Although net margins in FY14 increased to 13% owing to cost improvement measures, net margins in FY16F dropped to 6% due to the depreciation of the ringgit and rising raw material costs. Moving forward, we expect margins to steadily improve to 10% by FY18F due to TSC’s further cost-management initiatives, which can offset the impact of a weaker ringgit, fluctuating egg ASP and the group’s expansion plan. See Exhibit 3.

37% 37% 38% 38% 38%

63% 63% 62% 62% 62%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY14 FY15 FY16F FY17F FY18F

%

Others Layer Farming

0.30 0.29

0.31

0.35 0.34

0.26

0.28 0.30

0.27 0.28

0.30

0.20

0.22

0.24

0.26

0.28

0.30

0.32

0.34

0.36

0.38

0.40

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16

Sen Average Commercial Egg Selling Price

Equity Explorer

Teo Seng Capital

Page 3

Exhibit 3: Margin trend


Cost-management initiatives. TSC has carried out several initiatives to improve its cost structure. This includes the replacement of liquefied petroleum gas with natural gas in its egg tray production to reduce its energy costs by 75% or RM2m p.a. Moreover, TSC plans to construct five biogas facilities at its farms to convert raw chicken manure to electricity. The electricity generated will also be used to dry its paper egg trays. The first plant has commenced operations at end-4QFY16 and once in operation, TSC may save up to RM2m p.a. on its electricity expenses. These cost-management initiatives are expected to help stabilise net margins and mitigate the increase in costs from the capacity expansion. Capex for expansion plan. TSC is allocating c.RM183m capex for its expansion plan over 2015-2019 that covers building two layer farms and renovating its existing farms. The group targets to achieve a daily egg production of 4.4m by end-2019 (see Exhibit 4). Moreover, the group is also allocating RM6.7m p.a. to the construction of five biogas plant-ups. Aside from the expansion plans, the group has a small capex amount of c.RM20m earmarked for the maintenance of farms and machineries. Exhibit 4: Targeted daily production

Source: Company

KEY OPERATING ASSETS

Farms and production capacity. TSC operates 25 farms in total, and these are categorised into brooding, pullet and layer farms (two brooding, seven pullets and 16 layers). Purchased DOCs are placed in brooding farms for five weeks. The chicks are then moved to a pullet farm until they reach 16 weeks old. When the layers reach 17 weeks old, they are moved to their laying units – where they will remain until they reach 85 weeks old when the spent hens are then sold. The existing capacity of the layer farms are 4.2m birds, laying approximately 3.3m eggs daily. Currently, eight of its layer farms are accredited and granted export licences by the Agri-Food and Veterinary Authority of Singapore (AVA). GROWTH PROSPECTS

Aggressive earnings growth. We forecast TSC’s earnings to grow at a 2-year CAGR of 48% over FY16-FY18F (see Exhibit 6), supported by 1) stabilisation of commercial egg selling price, 2) expansion in production capacity; TSC plans to increase its daily production volume by +522k p.a. in Singapore and +982k p.a. in Malaysia; both by 2019 from the current production volume of c.1.1m in Singapore and c.2.4m in Malaysia, 3) vertical diversification, 4) cost- saving initiatives, and 5) superior operating margin compared to its peers. (See Exhibit 7). Its continued growth is also supported by management’s projected commercial egg consumption CAGR of 4.2% in Malaysia and 6% in Singapore until 2019, amid population CAGR of 1.2%. Although TSC targets to grow at a faster rate than industry demand growth, management believes it will be able to achieve its targeted growth due to the fragmented local layer industry where the largest five players account for only c.37% of market share. We believe the bigger players are poised to gain market share amid closure of smaller farms due to volatile commodity prices and egg prices (See Exhibit 5). Based on TSC’s current Malaysian market share of 8.8% at 3.5m daily production volume, total daily production in Malaysia is estimated at 40m. At projected 4.2% demand growth per annum, absolute demand is expected to increase by 1.9m eggs per day. By 2019, absolute demand is expected to grow by 5.6m per day as compared to current demand. At the projected capacity expansion of 0.92m eggs per day by 2019, this implies that TSC targets to capture a 16% share of incremental demand over three years. Besides topline growth, we expect margins to improve slightly despite the low expected blended ASP at 30 sen, compared to 31 sen in FY14, due to softer commodity prices (soybean and corn) and the addition of biogas plants to lower operating costs.

10% 10%

18%

13%

9%

12% 12%

6% 7%

13%

10%

6%

8% 9%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

FY12 FY13 FY14 FY15 FY16F FY17F FY18F

%

Gross Margin Net Margin

Equity Explorer

Teo Seng Capital

Page 4

Exhibit 5: Estimated 2015 layer industry market share

Source: Stats.my, DBS Bank Exhibit 6: Earnings trend

Source: Company, DBS Bank Exhibit 7: Peer margins comparison

Source: Bloomberg Finance L.P., DBS Bank

Leading layer farmer. TSC is the third largest egg producer in Malaysia, with a daily egg production of 3.5m and market share of c.8.8% in Malaysia. In the mid to long term, TSC targets to increase its daily egg supply domestically by +982k eggs p.a. and is aiming to grow its market share by 3.7ppts to 12.5%.

Growing the export segment. TSC is among the top Malaysian egg exporters to Singapore with a market share of c.19%. The group currently exports about c.30% of its total egg production, which is a large increase compared to only 10% of total egg production three years ago. In the mid to long term, TSC targets to increase its daily egg supply to Singapore by +522k eggs p.a. and is aiming to grow its market share by 11ppts to 30%. Penetration into niche segment. TSC is also focusing on expanding its animal health product segment which we expect to contribute c.13% of total revenue in FY16F. Management targets a 2-year revenue CAGR of 15% from FY16-FY18F. Aside from being the sole distributor for Bayer Group and Vetpharm Laboratories (S) Pte Ltd, TSC also distributes other high-quality and branded products such as Elanco, Innovad and O. Corporation (Korea). Monetising waste with fertilisers. TSC plans to recycle its waste and maximise its profit, as chicken manure production is expected to increase in tandem with the growing farm capacity. The group has developed organic pure fertiliser which it sells to farmers. Management has forecast the revenue contribution from this area to reach approximately RM9m by FY2019 (FY16-18F CAGR of 3.6%). MANAGEMENT AND STRATEGY

Strong regional back-up. TSC has a strong management track record and parentage, backed by regional poultry giant LH. It is 52.1% owned by LH and Nam family, who are still actively managing the business since the group was established in 1978. TSC’s revenue and net profit have grown from RM168m/RM15m in FY10 to RM413m/RM41m in FY15. This represents a 5-year CAGR of 20%/22% in revenue/earnings from FY10 to FY15. As part of LH, TSC has the first pick of the top layer breeds, which ensures the quality of its eggs. It also enjoys bulk discounts for its raw materials, as these are purchased by LH at the group level. Two-pronged growth strategy. Management has adopted a dual- engine growth strategy that focuses on growing the layer farming capacity and the other segments regionally. TSC plans to expand its market share in Malaysia and Singapore from the existing 19%/8.8% to 30%/12.5% by 2019. Additionally, TSC also plans to grow its other segments, namely animal health products, at the same pace as its layer farming segment.

8.8%

10.8%

5.6%

4.6%

3.5%66.7%

Teo Seng Huat Lai QL Resources LTKM Lay Hong Others

48.6

41.0

27.0

42.247.7

0.0

10.0

20.0

30.0

40.0

50.0

60.0

FY14 FY15 FY16F FY17F FY18F

RM'm

Net Profit

QL Resources 17% 9% 7%Lay Hong 11% 5% 2%Teo Seng 32% 13% 10%Huat Lai 18% 5% 3%CAB Cakaran 8% 4% 2%LTKM 29% 23% 23%

Gross Ma rg in

Ope ra ting Ma rg in

Ne t Ma rg in

FY15

Equity Explorer

Teo Seng Capital

Page 5

Key Assumptions

FY Dec 2013A 2014A 2015A 2016F 2017F 2018F Number of Livestock (m) 3.70 4.44 4.30 4.75 5.17 Daily Production (m) 2.71 3.30 3.48 3.84 4.18 Estimated Blended ASP (RM) 0.31 0.29 0.30 0.30 0.30 Segmental Breakdown

FY Dec 2013A 2014A 2015A 2016F 2017F 2018F Revenues (RMm) Poultry Farming 209 241 260 276 309 344 Others 122 140 153 170 190 212 Total 331 381 413 446 499 556 Operating profit (RMm) Poultry Farming 29.2 64.2 41.1 27.6 46.4 51.6 Others 4.76 5.77 14.2 11.9 13.3 14.8 Total 34.0 70.0 55.2 39.5 59.7 66.5 Operating profit Margins (%)

Poultry Farming 14.0 26.7 15.8 10.0 15.0 15.0 Others 3.9 4.1 9.3 7.0 7.0 7.0 Total 10.3 18.4 13.4 8.9 12.0 12.0 Income Statement (RMm)

FY Dec 2013A 2014A 2015A 2016F 2017F 2018F Revenue 331 381 413 446 499 556 Cost of Goods Sold (226) (231) (280) (303) (339) (378) Gross Profit 105 150 133 143 160 178 Other Opng (Exp)/Inc (70.9) (80.5) (77.6) (103) (100.0) (111) Operating Profit 34.0 70.0 55.2 39.5 59.7 66.5 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (4.0) (3.6) (4.5) (6.2) (7.6) (7.6) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 30.0 66.4 50.7 33.3 52.1 58.9 Tax (6.6) (17.6) (9.6) (6.3) (9.9) (11.2) Minority Interest 0.05 (0.2) (0.1) 0.0 0.0 0.0 Preference Dividend 0.0 0.0 0.0 0.0 0.0 0.0 Net Profit 23.4 48.6 41.0 27.0 42.2 47.7 Net Profit before Except. 23.4 48.6 41.0 27.0 42.2 47.7 EBITDA 44.5 81.4 68.5 57.1 79.9 88.5 Growth Revenue Gth (%) 23.7 15.2 8.4 7.9 12.0 11.5 EBITDA Gth (%) 21.2 82.8 (15.9) (16.6) 39.8 10.7 Opg Profit Gth (%) 22.8 105.9 (21.1) (28.6) 51.2 11.4 Net Profit Gth (Pre-ex) (%) 35.7 107.6 (15.7) (34.2) 56.4 13.1 Margins & Ratio Gross Margins (%) 31.7 39.5 32.2 32.0 32.0 32.0 Opg Profit Margin (%) 10.3 18.4 13.4 8.9 12.0 12.0 Net Profit Margin (%) 7.1 12.8 9.9 6.1 8.5 8.6 ROAE (%) 19.0 33.5 23.4 13.4 18.5 18.2 ROA (%) 9.9 17.6 12.5 6.9 9.6 10.0 ROCE (%) 9.3 19.0 12.8 6.0 8.9 9.5 Div Payout Ratio (%) 21.3 41.1 25.6 25.0 25.0 25.0 Net Interest Cover (x) 8.4 19.3 12.2 6.4 7.9 8.8 Source: Company, DBS Bank

Sensitivity Analysis FY17 Daily output +/- 1% Op. Profit +/- 0.8% Blended ASP +/- 1% Op. Profit +/- 0.8%

Margins Trend

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

19.0%

2014A 2015A 2016F 2017F 2018F

Operating Margin % Net Income Margin %

Equity Explorer

Teo Seng Capital

Page 6


FY Dec 2Q2015 3Q2015 4Q2015 1Q2016 2Q2016 3Q2016 Revenue 90.6 102 107 102 108 112 Cost of Goods Sold (83.5) (92.8) (100) (95.7) (95.9) (104) Gross Profit 7.13 9.63 6.85 6.25 12.1 8.36 Other Oper. (Exp)/Inc 2.62 3.74 0.49 0.09 1.77 1.43 Operating Profit 9.75 13.4 7.34 6.34 13.9 9.79 Other Non Opg (Exp)/Inc 0.0 0.0 0.0 0.0 0.0 0.0 Associates & JV Inc 0.0 0.0 0.0 0.0 0.0 0.0 Net Interest (Exp)/Inc (1.0) (1.3) (1.3) (1.7) (1.8) (1.7) Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 0.0 0.0 Pre-tax Profit 8.79 12.1 6.00 4.60 12.0 8.11 Tax (1.5) (0.1) (1.7) (1.0) (2.3) (2.5) Minority Interest 0.02 0.0 0.0 0.0 0.0 0.0 Net Profit 7.27 12.0 4.26 3.59 9.70 5.65 Net profit bef Except. 7.27 12.0 4.26 3.59 9.70 5.65 EBITDA 12.9 16.6 11.1 10.1 17.7 13.9 Growth Revenue Gth (%) (19.5) 13.1 4.6 (4.9) 5.9 3.9 EBITDA Gth (%) (53.6) 28.7 (33.4) (8.6) 74.9 (21.8) Opg Profit Gth (%) (60.6) 37.1 (45.1) (13.6) 118.9 (29.4) Net Profit Gth (%) (58.4) 64.7 (64.4) (15.7) 170.1 (41.7) Margins Gross Margins (%) 7.9 9.4 6.4 6.1 11.2 7.5 Opg Profit Margins (%) 10.8 13.0 6.8 6.2 12.8 8.7 Net Profit Margins (%) 8.0 11.7 4.0 3.5 9.0 5.0 Source: Company, DBS Bank

Balance Sheet (RMm)

FY Dec 2013A 2014A 2015A 2016F 2017F 2018F Net Fixed Assets 143 160 222 254 276 291 Invts in Associates & JVs 0.0 0.0 0.0 0.0 0.0 0.0 Other LT Assets 0.31 0.12 0.95 0.95 0.95 0.95 Cash & ST Invts 35.7 39.7 30.2 51.9 53.5 65.2 Inventory 41.2 47.6 54.5 55.2 61.8 68.9 Debtors 38.1 47.5 42.1 48.4 54.1 60.4 Other Current Assets 0.02 0.10 10.9 10.9 10.9 10.9 Total Assets 258 295 360 421 457 497 ST Debt 80.9 69.6 92.5 92.5 92.5 92.5 Creditor 29.9 43.2 22.8 35.7 40.0 44.6 Other Current Liab 1.93 5.43 13.8 13.8 13.8 12.8 LT Debt 4.75 8.27 23.2 50.7 50.7 50.7 Other LT Liabilities 8.59 10.6 16.3 16.3 16.3 16.3 Shareholder’s Equity 132 158 192 212 244 280 Minority Interests (0.1) 0.10 0.0 0.0 0.0 0.0 Total Cap. & Liab. 258 295 360 421 457 497 Non-Cash Wkg. Capital 47.6 46.6 70.9 65.0 73.1 82.8 Net Cash/(Debt) (50.0) (38.1) (85.5) (91.4) (89.7) (78.0) Debtors Turn (avg days) 38.4 41.0 39.6 37.0 37.5 37.6 Creditors Turn (avg days) 44.8 60.9 45.1 37.4 43.3 43.3 Inventory Turn (avg days) 64.4 74.0 69.8 70.2 67.0 67.0 Asset Turnover (x) 1.4 1.4 1.3 1.1 1.1 1.2 Current Ratio (x) 1.0 1.1 1.1 1.2 1.2 1.4 Quick Ratio (x) 0.7 0.7 0.6 0.7 0.7 0.8 Net Debt/Equity (X) 0.4 0.2 0.4 0.4 0.4 0.3 Net Debt/Equity ex MI (X) 0.4 0.2 0.4 0.4 0.4 0.3 Capex to Debt (%) 20.4 29.8 27.4 34.7 29.4 26.1 Source: Company, DBS Bank

Revenue Trend


-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

0

20

40

60

80

100

120

2Q

2014

3Q

2014

4Q

2014

1Q

2015

2Q

2015

3Q

2015

4Q

2015

1Q

2016

2Q

2016

3Q

2016

Revenue Revenue Growth % (QoQ)

Equity Explorer

Teo Seng Capital

Page 7


FY Dec 2013A 2014A 2015A 2016F 2017F 2018F Pre-Tax Profit 30.0 66.4 50.7 33.3 52.1 58.9 Dep. & Amort. 10.5 11.4 13.2 17.7 20.2 22.0 Tax Paid (6.6) (17.6) (9.6) (6.3) (9.9) (11.2) Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 0.0 0.0 Chg in Wkg.Cap. 0.09 (4.2) (4.2) 5.94 (8.1) (8.7) Other Operating CF 3.43 7.89 (13.4) 0.0 0.0 0.0 Net Operating CF 37.4 63.9 36.8 50.6 54.3 61.0 Capital Exp.(net) (17.5) (23.2) (31.7) (49.7) (42.1) (37.4) Other Invts.(net) 0.0 0.0 0.0 0.0 0.0 0.0 Invts in Assoc. & JV 0.0 0.0 (24.1) 0.0 0.0 0.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 0.0 0.0 Other Investing CF 1.97 1.08 0.79 0.0 0.0 0.0 Net Investing CF (15.5) (22.1) (55.0) (49.7) (42.1) (37.4) Div Paid (5.0) (20.0) (10.5) (6.8) (10.6) (11.9) Chg in Gross Debt 6.06 (8.0) 37.9 27.5 0.0 0.0 Capital Issues 0.0 0.0 20.0 0.0 0.0 0.0 Other Financing CF (5.0) (8.9) (38.1) 0.0 0.0 0.0 Net Financing CF (4.0) (36.9) 9.28 20.8 (10.6) (11.9) Currency Adjustments 0.0 0.05 0.0 0.0 0.0 0.0 Chg in Cash 17.9 4.98 (8.9) 21.6 1.67 11.7 Opg CFPS (sen) 12.8 23.3 14.0 14.9 20.8 23.3 Free CFPS (sen) 6.83 14.0 1.75 0.29 4.08 7.88 Source: Company, DBS Bank

Capital Expenditure

VALUATIONS

Fair value of RM1.38. Our fair value is based on 11 x fully-diluted FY17F EPS, which is the industry’s average (excluding QL and Lay Hong). We have excluded QL and Lay Hong due to their larger market cap and higher institutional shareholding. The stock is currently trading at 7.3x FY17F PE. Although our target PE is above the historical mean PE, we deem this undemanding given our expectation of a strong 2-year EPS CAGR of 41% FY16-18F. The stock is also trading at a PEG of c.0.3x. TSC declared dividends of RM10.5m in FY15, implying a payout of 26% with a yield of 3%. Management has guided that it plans to keep its dividend payout policy at 25%-30%. Risk Assessment: Moderate

Category Risk Rating Wgt Wgtd Score 1 (Low) - 3

(High) Earnings 2 40% 0.8 Financials 1 20% 0.2 Shareholdings 1 40% 0.4 Overall 1.4

Expect steady earnings growth and strong balance sheet. Its sales volatility is low, given the defensive nature of food products. The main source of earnings volatility stems from the volatile ASP of eggs. Its balance sheet is expected to remain strong with positive cashflow, despite its aggressive expansion plans. Management’s interest is aligned with shareholders. Most key executives in TSC are paid less than RM50,000 annually, with the exception of some directors who were paid RM500,000 in FY15. The LH and Nam families (key management and founders) collectively own a 52.1% stake in TSC through Emerging Glory Sdn Bhd. As such, management’s interest seems to be aligned with the shareholders’, in our view.

Source: DBS Bank

0.0

10.0

20.0

30.0

40.0

50.0

60.0

2014A 2015A 2016F 2017F 2018F


RMm

Equity Explorer

Teo Seng Capital

Page 8

Exhibit 7: Forward PE band (x) Exhibit 8: PB band (x)

Sources: DBS Bank, Bloomberg Finance L.P Sources: DBS Bank, Bloomberg Finance L.P

Exhibit 9: Peer comparison (as at 31 Jan 2017)

* Based on consensus earnings estimates Sources: DBS Bank, Bloomberg Finance L.P

Avg: 8.6x

+1sd: 13.4x

+2sd: 18.1x

‐1sd: 3.8x

-0.8

4.2

9.2

14.2

19.2


(x)

Avg: 1.79x

+1sd: 2.56x

+2sd: 3.33x

‐1sd: 1.02x

‐2sd: 0.25x0.2

0.7

1.2

1.7

2.2

2.7

3.2

3.7

4.2


(x)

CallTarget

Price (LC)

Current

Price (LC)

Mkt Cap

(MYR m)CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017 CY2016 CY2017

QL Resources HOLD 4.60 4.39 5,453.9 9% 16% 26.6x 22.9x 3.2x 2.9x 1.1% 1.3% 13% 12%

Teo Seng Capital NOT RATED 1.38 1.03 308.7 -36% 56% 12.8x 8.2x 1.5x 1.3x 2.2% 3.4% 15% 12%

CAB Cakaran Corp NOT RATED 1.71 1.63 290.8 26% 23% 11.8x 9.5x 1.1x 1.0x 0.6% 0.8% 12% 12%

Lay Hong* 0.81 493.1 -86% 15% 16.9x 24.3x 0.2x 0.2x 0% 0% 1% 2%

PWF Consolidated* 0.76 121.0 -47% 13% 15.0x 15.2x 0.5x 0.5x 0% 0% 3% 4%

LTKM* 1.33 173.0 -75% 10% 13.5x 14.2x 0.8x 0.8x 0% 0% 5% 6%

Total / weighted avg 6,840.5 -3% 18% 24.1x 21.4x 2.7x 2.5x 1.0% 1.2% 12% 11%

Without QL & Lay

Hong

893.6 -25% 31% 12.9x 10.8x 1.1x 1.0x 1.0% 1.4% 10% 10%

EPS (FD) Growth

(YoY)P/E (FD) Price/ BVPS Dividend Yield ROE


Animal Protein

Page 30

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends

DBS Bank Equity Explorer return ratings reflect return expectations based on an assumed earnings profile and valuation parameters:

1 (>20% potential returns over the next 12 months)

2 (0 - 20% potential returns over the next 12 months)

3 (negative potential return over the next 12 months)

The risk assessment is qualitative in nature and is rated as either high, low or moderate risk. (see section on risk assessment)

Note that these assessments are based on a preliminary review of factors deemed salient at the time of publication. DBSV does not commit to

ongoing coverage and updated assessments of stocks covered under the Equity Explorer product suite. Such updates will only be made upon

official initiation of regular coverage of the stock.

Completed Date: 10 Feb 2017 11:03:25 (SGT) Dissemination Date: 10 Feb 2017 11:11:32 (SGT) GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report. This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report.


Animal Protein

Page 31

DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in the report. The DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. As of 10 Feb 2017, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates have a proprietary position in

Charoen Pokphand Foods recommended in this report as of 30 Dec 2016.

2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

Compensation for investment banking services: 3. DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for

investment banking services from Japfa Comfeed Indonesia, Japfa Ltdas of 30 Dec 2016.

4. DBS Bank Ltd., DBSVS, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for Japfa Comfeed Indonesia in the past 12 months, as of 30 Dec 2016.

5. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a

manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

Disclosure of previous investment recommendation produced: 6. DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates may have published other

investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBS Vickers Securities (Singapore) Pte Ltd (''DBSVS''), their subsidiaries and/or other affiliates in the preceding 12 months.

RESTRICTIONS ON DISTRIBUTION

General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by or on behalf of, and is attributable to DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission and/or by DBS Bank (Hong Kong) Limited which is regulated by the Hong Kong Monetary Authority and the Securities and Futures Commission. Where this publication relates to a research report, unless otherwise stated in the research report(s), DBS Bank (Hong Kong) Limited is not the issuer of the research report(s). This publication including any research report(s) is/are distributed on the express understanding that, whilst the information contained within is believed to be reliable, the information has not been independently verified by DBS Bank (Hong Kong) Limited. This report is intended for distribution in Hong Kong only to professional investors (as defined in the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) and any rules promulgated thereunder.) For any query regarding the materials herein, please contact Paul Yong (CE. No. ASE988) at [email protected].


Animal Protein

Page 32

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.

Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.

United Kingdom This report is produced by DBS Bank Ltd which is regulated by the Monetary Authority of Singapore. This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd, ("DBSVUK"). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom. In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.

Dubai

This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United States This report was prepared by DBS Bank Ltd. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVU SA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd

12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888

e-mail: [email protected] Company Regn. No. 196800306E

regional industry focus animal protein - dbs group malindo feedmill (main), cj cheiljedang (097950)...

Documents