ASIAN INSIGHTS VICKERS SECURITIES ed-TH / sa- CW 10 May 2017 DBS Group Research . Equity A meaty task to meet demand • China pork demand to sustain stable growth • Long-term focus still on self-sufficiency • Liberalisation of market trade creates opportunity • BUY WH Group and COFCO Meat Stable demand in the world’s largest pork market. China is the largest pork consumer and producer globally, accounting for close to half of global production. China's pork consumption is expected to sustain a steady growth of 1.3-1.4% p.a. going forward. Growing income along with rising middle class and continual urbanisation would drive Chinese consumers towards a heavier animal protein-based diet. Coupled with an expanding population, we estimate that China would add an additional 3.5m tonnes of pork demand in the next five years. A shakeup in the industry allowing new opportunities. With the government’s intention to move hog farms away from urban areas and water sources, many farms have been forced to close down or relocate. Based on our findings, we estimate this could potentially create a shortfall of 77m heads from now until 2020E. We believe the key beneficiaries will be large-scale farmers and import which will grow in importance. Pick emerging winners. We see the following key trends and potential in the China pork market: (i) industry consolidation with larger players gaining market share as smaller players are phased out due to cost and environmental issues; (ii) vertical integration to maximise profit and secure food safety; (iii) rising focus on production efficiency given the higher cost in China at the moment; and (iv) product innovation, especially for downstream processed meat sector. The latter two are areas where global players could have an added advantage. Leading players with ability to gain market share from consolidation trend and those with strong vertical integration capability would be the long term winners. BUY market leader WH Group (288.HK) and integrated player COFCO Meat (1610.HK). HSI: 25,015 ANALYST Alison FOK +852 2971 1938 [email protected]Alice HUI, CFA +852 2971 1960 [email protected]Valuation Price Target Price Rating Mkt Cap FY17F Local$ Local$ US$bn PE (x) WH Group* (288 HK) HKD 6.82 7.7 BUY 12.8 11.7 COFCO Meat* (1610 HK) HKD 1.67 2.1 BUY 0.8 5.4 Shuanghui (000895 CH) CNY 21.67 n.a. NR 10.4 14.4 GD Wenshi Food (300498 CH) CNY 27.46 n.a. NR 17.3 13.1 Muyuan Foods (002714 CH) CNY 25.34 n.a. NR 4.3 9.3 Chuying Agro- Past. (002477 CH) CNY 4.69 n.a. NR 2.1 7.5 Source: Thomson Reuters, *DBS Vickers Asian Insights Spar X China Pork Sector Refer to important disclosures at the end of this report
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China Pork Sector - DBS Bank Stable demand in the world’s largest pork market. China is the largest pork consumer and producer globally, accounting for close to half of global production.
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ASIAN INSIGHTS VICKERS SECURITIESed-TH / sa- CW
10 May 2017DBS Group Research . Equity
A meaty task to meet demand • China pork demand to sustain stable growth
• Long-term focus still on self-sufficiency
• Liberalisation of market trade creates opportunity
• BUY WH Group and COFCO Meat
Stable demand in the world’s largest pork market. China is the largest pork consumer and producer globally, accounting for close to half of global production. China's pork consumption is expected to sustain a steady growth of 1.3-1.4% p.a. going forward. Growing income along with rising middle class and continual urbanisation would drive Chinese consumers towards a heavier animal protein-based diet. Coupled with an expanding population, we estimate that China would add an additional 3.5m tonnes of pork demand in the next five years.
A shakeup in the industry allowing new opportunities. With the government’s intention to move hog farms away from urban areas and water sources, many farms have been forced to close down or relocate. Based on our findings, we estimate this could potentially create a shortfall of 77m heads from now until 2020E. We believe the key beneficiaries will be large-scale farmers and import which will grow in importance.
Pick emerging winners. We see the following key trends and potential in the China pork market: (i) industry consolidation with larger players gaining market share as smaller players are phased out due to cost and environmental issues; (ii) vertical integration to maximise profit and secure food safety; (iii) rising focus on production efficiency given the higher cost in China at the moment; and (iv) product innovation, especially for downstream processed meat sector. The latter two are areas where global players could have an added advantage. Leading players with ability to gain market share from consolidation trend and those with strong vertical integration capability would be the long term winners. BUY market leader WH Group (288.HK) and integrated player COFCO Meat (1610.HK).
China Pork Sector Refer to important disclosures at the end of this report
Asian Insights SparX China Pork Sector
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The DBS Asian Insights SparX report is a deep-dive look into thematic angles impacting the longer-term investment thesis for a sector, country or the region. We view this as an ongoing conversation rather than a one-off treatise on the topic, and invite feedback from our readers, and in particular welcome follow-on questions worthy of closer examination.
Table of Contents
Executive summary 3
A Middle-class Consumption Story 4
Implications on infrastructure, and key challenges 8
China pork supply chain – who are the players? 12
Business model 28
Case study of a global player - USA 33
Stock recommendation 38
Appendix: Market trends 42
Appendix: Which province produces the most meat? 43
Appendix: Optimising regional distribution 44
Appendix: Others 45
Stock Profiles 52
COFCO Meat (1610 HK) 52 WH Group (288 HK) 58
Note: Prices used as of 10 May 2017
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Executive summary
Pork demand still on the rise.... Already the world's largest pork market representing around half of the global demand, China's pork consumption is expected to sustain a steady growth of 1.3-1.4% p.a. going forward. Growing income along with rising middle class and continual urbanisation would drive Chinese consumer towards a heavier animal protein-based diet. Coupled with an expanding population, we estimate that China would add on an additional 3.5m tonnes of pork demand in the next five years.
... and so are pork imports. While the higher demand would mean opportunities for domestic players, it has also created more demand for pork imports, which have been surging since late 2015. Widening price disparity between domestic and overseas prices in recent years has made this an increasingly attractive option. While pork imports represent a mere 3% of total demand in 2016, this ratio could swell to 7% by 2020, based on our estimates.
Food safety and environmental concerns to drive sector reform. Despite growing demand, China has faced a number of food scandals and disease outbreaks due to a lack of environmental and regulatory enforcement, which created large volatility in supply and prices historically. With growing land, feed, water and environmental constraints, the governmental has initiated industrialisation and standardisation as well as more stringent food safety protocols to ensure a safe and more secure supply chain.
Market consolidation to continue. In particular, the Chinese government is looking to move hog farms away from urban areas and water sources, with many farms located in the restricted areas being forced to close down or relocated. The stricter environmental laws have also led to closures of smaller and outdated hog farms, to the benefit of large-scale hog producers. Based on our estimation, these closures could potentially create a shortfall of 77m hogs from now till 2020, and the majority of these will benefit major players which have the ability to expand their capacities.
Raising productivity the key goal. Apart from market consolidation, opportunities for large-scale hog players would be in increasing efficiency. Cost of hog production, despite rising scale, is still higher in China than in overseas, largely due to inherently high feed costs, and less efficient farm management. As such, improving efficiency/productivity is a key goal for the government's current 5-year plan for hog production.
Processed meat production has good potential. We expect decent growth outlook for downstream processed meat demand, driven by an increasing focus on convenience as well as rising westernised dietary habits. This is, however, also a sector where competition is expected to intensify, as domestic players strive to gain shares while overseas players also have the competitive edge especially in the premium market.
Convergence a growing trend. The focus on food safety and production efficiency has driven both upstream and downstream players to go for vertical integration. Majority of the leading feed companies in China nowadays have exposure to hog raising and some even in slaughtering, and vice versa as hog producers expand their self-production of feed. Major slaughterhouses are also expanding their raw material sources by investing in hog farms, with some even venturing overseas (WH Group's acquisition of Smithfield) as imports become a more viable option given the price disparity.
Scale and efficiency matters. In summary, we see the below key trends/growth potential in the China pork market: (i) industry consolidation with larger players gaining as smaller players are phased out due to cost and environmental issues; (ii) vertical integration to maximise profit and secure food safety; (iii) rising focus on production efficiency given the higher cost in China at the moment; and (iv) product innovation, especially for downstream processed meat sector. The latter two are areas where global players could have an added advantage.
Stock picks. Against this backdrop, market leader WH Group should be well-positioned to benefit from the rising demand for pork imports and processed meats. For the latter, its know-how from Smithfield could be an added advantage. We reiterate BUY on WH Group with a TP of HK$7.7/sh. We also like COFCO Meat, an integrated player which is expected to benefit from the market consolidation trend. Buy with TP at HK$2.1/share.
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A Middle-class Consumption Story
(I) Future required capacity – how big is the pork market?
How much pork have the Chinese been consuming? Already the world’s largest pork market representing c.50% of the global consumption, pork consumption in China has been growing at a CAGR of 1.0% in the past six years, reaching 54.5m tons in 2016. On a per capita basis, pork consumption in China is estimated at 31.6kg in 2015 (OECD data), growing at a 1.2% CAGR since 2010.
China pork consumption
51.0
54.5
58.1
46.0
48.0
50.0
52.0
54.0
56.0
58.0
60.0
2011 2016 2021E
MM metric tons
Source: CEIC, DBS Vickers est
China pork consumption per capita – 1995 – 2025E
20.2
31.6 34.9
0
5
10
15
20
25
30
35
40
1995
1998
2001
2004
2007
2010
2013
2016
E
2019
E
2022
E
2025
E
kg/capita
Source: OECD, DBS Vickers
How does China compare to the rest of the world? At 31.6kg, China’s per capita consumption of pork ranks relatively high globally, being only slightly behind that of EU but higher than most Asian countries as well as the US and Canada. This likely reflects the dominance of pork in Chinese society. In fact, if compared to HK where per capita consumption exceeds 67kg, China still has ample growth potential. In terms of overall meat consumption, China’s 50kg per capita is still below levels for most other countries, indicating that there should be room to grow.
China overall meat consumption per capita - 2015
95.4 92.5
68.3 68.1
51.9 50.0
35.4 28.8
22.4
0.0
20.0
40.0
60.0
80.0
100.0
120.0
USA AUS EU28 CAN VNM CHN JPN PHL THA
kg/capita
Source: OECD, DBS Vickers
China pork consumption per capita - 2015
33.0 31.6
29.1
22.7 20.3
15.7 15.0 14.2
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
EU28 CHN VNM USA AUS CAN JPN PHL
kg/capita
Source: OECD, DBS Vickers
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A gradual change in meat preference? While pork has remained the major type of meat consumed in China, representing c.60% of total, consumption of other types of meat products have been rising. Per capita consumption of beef and lamb, for example, have posted a CAGR of 2.4% and 2.3% respectively during 2010-15, vs 1.2% growth in pork and 1.1% in poultry. This trend, we believe, indicates that as consumers become more affluent, they are diversifying their protein consumption towards more “expensive” ones. In China, beef and lamb typically costs more than double vs pork and poultry.
China per capita meat consumption – pork to stay dominant
0
10
20
30
40
50
60
1990
1995
2000
2005
2010
2015
2020
2025
kg/capita
Beef Pig Poultry Sheep
Source: OECD, DBS Vickers
Price comparison (domestic – Jan-17)
31.2
67.1
59.0
22.0
0
10
20
30
40
50
60
70
80
Pork(Marble meat)
Beef(ham)
Lamb(ham)
Chicken
Rmb/kg
Source: NDRC, DBS Vickers
Still room for pork consumption per capita to rise. As such, we expect growth in pork consumption to continue lagging behind that of beef and mutton, but should maintain its dominant position considering the Chinese dietary preference towards pork. Moreover, the slower growth for pork consumption in the past two years was also partly due to supply constraints, as the pig farming sector has been undergoing consolidation, hence limiting supply. As supply growth is expected to resume gradually, this should also help consumption ahead. Pork consumption per capita is expected to grow mildly by 0.8% in CAGR till 2020E.
An additional 3.5m tonnes of demand for the next five years. Growing per capita consumption aside, pork demand would be further fuelled by expanding population, increasing urbanisation and rising middle class. With a population of close to 1.38bn in 2016, China’s National Health and Family Planning Commission estimates that China's population will reach 1.43bn, adding another 50m by 2020, boosted by the relaxation of its one-child policy. This alone would translate into an additional demand of 1.6m tonnes. On top of that, the continual urbanisation would bring in an additional 80m urban population by 2020. And with rural consumption per capita being less than 70% of urban consumption, this would represent another 0.8-0.9m tonnes of additional demand. Summarising the above, we estimate an overall pork demand growth of 1.3-1.4% p.a., or an additional demand of 3.5m tonnes from now until 2020.
China population
600
700
800
900
1,000
1,100
1,200
1,300
1,400
1,500
19
60
19
64
19
68
19
72
19
76
19
80
19
84
19
88
19
92
19
96
20
00
20
04
20
08
20
12
20
16
20
20
m
Source: World Bank, UN forecasts, DBS estimates
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(II) Income growth and expenditure –
How much are Chinese consumers spending on meat?
Rising disposable income... Disposable income per capita in China has been growing at c.10% p.a. in the past five years, slightly ahead of the GDP growth. With a slower economy ahead (DBS economist forecasts GDP growth at 6.5% in 2017, vs 7.9% p.a. in the last five years), we expect disposable income per capita (urban) in China to post a softer 8% CAGR, from Rmb23,821 in 2016 to Rmb32,408 in 2020. In fact, China’s GDP growth has been outperforming most of its Asian peers' and is expected to remain so despite slower growth ahead.
China disposable income
14,551 16,510
18,311 20,167
21,966 23,821
0
5,000
10,000
15,000
20,000
25,000
30,000
2011 2012 2013 2014 2015 2016
Rmb/capita
Source: National Bureau of Statistics of China, DBS Vickers
Annual GDP growth by country (2011-15)
6.7
5.2
1.4
6.7 6.7
5.3
4.2
0
1
2
3
4
5
6
7
8
9
Chi
na
Indo
nesia
Taiw
an
Vie
tnam
Indi
a
Mya
nmar
Mal
aysia
%
2012 2013 2014 2015 2016
Source: World Bank, Bloomberg Finance L.P, DBS Vickers
… to support higher spending. Along with higher income, China’s per capita expenditure has been growing at a similar rate of 9.7% in CAGR since 2010, reaching c.Rmb21,400 in 2015. Of which, food is the largest item representing about 30% of total expenditure, followed by residence, telecom and education. And among various food categories, spending on meat alone (excluding dairy and aquatic products) is estimated at 20%, or close to Rmb1,300 p.a, with the bulk being pork.
Per capita income vs. consumption expenditure of urban households
31,200
21,400
45,500
29,900
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Disposable income Consumption expenditure
Rmb/capita
2015 2020E
Source: Frost & Sullivan, Company data, DBS Vickers
Shifting towards a higher meat and dairy-based diet. In terms of food consumption, two trends have been getting more prominent in the past 15-20 years: (i) caloric intake for the Chinese has been rising faster than in most other countries, up 26%+ to 3,073 from 1991 to 2011; (ii) there has been a shift from a grain-based diet towards more diversified ones including more meat, dairy and eggs. Both trends would be in favour of meat demand going ahead. In 2011, meat represented 17% of total caloric intake for an average Chinese, up from a mere 10% back in 1991. Meat, dairy and egg together accounted for c.23% of total caloric intake in China, still well below the 24-32% levels for most Western countries, indicating room to grow further ahead.
Calories per person (China)
243 509
2,189
2,564
0
500
1,000
1,500
2,000
2,500
3,000
3,500
1991 2011
Calories
Meat Grain, sugar, fat, produces & others
Source: National Geographic, DBS Vickers
Calories per person – by country
2,870 2,717 3,073
3,413 3,539 3,641
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
World Japan China UK Germany US
Calories
Source: National Geographic, DBS Vickers
Meat, dairy and egg consumption by country
272 332509 489 408 469
235219
170
501 684 527
0
200
400
600
800
1,000
1,200
World Japan China UK Germany US
Meat Dairy & Eggs
Calories
Source: National Geographic, DBS Vickers
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Implications on infrastructure, and key challenges
Would production need to rise in tandem with demand? From 2011-16, pork production had been growing at 1.0% CAGR, more or less in tandem with the demand growth (1.3% CAGR). Being the biggest pork market globally, China produces c.700m heads of hog every year. Production has witnessed some declines since 2015, largely a result of the market consolidation as smaller players were phased out due to stricter environmental rules and regulations. In 2016, national hog inventory declined 3.3% y-o-y to 685m heads, or an 6.8% drop from its 2014 peak.
Hog production volume
662
698
716
735
708
685
620
640
660
680
700
720
740
760
2011 2012 2013 2014 2015 2016
m heads
Source: MoA, DBS Vickers
The shortfall, however, has been partly fulfilled by imports, which saw tremendous growth in 2016 as the price gap between domestic and international prices widened. While pork demand is expected to sustain a 1.3-1.4% growth in CAGR going forward, we believe the actual supply/capacity growth required could likely lag behind, as part of the demand could be satisfied by imports.
Pork import volume and % y-o-y
-80%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
0
50
100
150
200
250
Jan
-10
Sep
-10
May
-11
Jan
-12
Sep
-12
May
-13
Jan
-14
Sep
-14
May
-15
Jan
-16
%'000 tonne
Source: WIND, DBS Vickers
Imports getting more prominent. Imports represented a mere 1.8% of total demand in 2015. This ratio, however, have surged to c.3% (or 5.6% including by-product volume) in 2016. While China hog prices have retreated from their peak in mid-2016, they remain at significant premiums over overseas prices (c. 60% more expensive than US hogs as of March 2017). This price disparity would continue to make imports a viable proposition, especially for downstream pork players. For example, WH Group, one of the major players to import pork into China from the US, has targeted imports to grow by another c.30% in FY17, following a spectacular surge of 87.5% in FY16.
Pork import as % of total demand
1.4% 1.4% 1.3%
1.8%
3.0%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
2012 2013 2014 2015 2016
Source: USDA, DBS Vickers
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China-US hog price (x)
0.0
0.5
1.0
1.5
2.0
2.5
Au
g/1
0
No
v/1
1
Feb
/13
Jun
/14
Sep
/15
Jan
/17
(x)
Source: CEIC, Bloomberg Finance L.P, DBS Vickers
Assuming that imports grow at a more modest CAGR of 15% going forward (vs a CAGR of 34.7% in 2012-2016), its contribution to total would swell to 7% in 2020 – this means that local pork production capacity would need to edge up merely 0.6% p.a. to fulfil the demand.
Pork import volume breakdown by geography (%) – 2016 – China
US13%
EU58%
Others29%
Source: China Customs, DBS Vickers
Focus on efficiency, quality and environmental issues. While our analysis above indicates that China, as a whole, may not need to expand its total pork production capacity by much, there would be significant changes in the composition of these capacities, most notably a shift from backyard hog farming towards big scale commercial farming, due to the following challenges:
(i) Land: As China’s urbanisation continues to rise, more land previously used as hog farms would be converted for other uses, both for commercial as well as environmental reasons. For example, the Ministry of Agriculture (MoA) has set targets to cap production growth in urban areas (see Appendix: Market Trend, Pg44). This would mean farms in these locations, mostly small backyard operations, would be forced to relocate or shut down.
China urbanisation rate
50.6 51.9
53.2 54.4
55.6
60.0
44
46
48
50
52
54
56
58
60
62
2011 2012 2013 2014 2015 2020E
%
Source: Historical - World Bank, Forecast based on Thirteenth Five-Year Plan; DBS Vickers
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(ii) Environmental: The Chinese government has been adopting stricter environmental regulations on hog farming. Following the launch of the new environmental law in 2015, the government is looking to move hog farms away from urban areas as well as waterways, with provincial governments assigning certain areas/zones where hog farming is prohibited or limited. Hog farms which are located in the restricted areas would be forced to close down or be relocated by end of 2017. Based on some industry estimates, these closures had already reduced total hog supply by more than 50m heads in 2016, with another 40m heads or so to be cut in 2017. As such, this would limit total hog supply in China. Based on the current classification, there is likely a gradual shift of production towards NE China which is a major corn-producing region, as well as to the Southwest (Yunnan & Guizhou).
The implementation of the environmental tax will also start in 2018, which will bring additional costs to hog farms, and thus further accelerate the industry consolidation, which has already been happening in the past few years.
Environment tax 2018
Law Descript ion
Air pollutant Rmb1.2/hog
Water pollutant tax Rmb1.4/hog
Noise pollution RMb350-11,200 per month(depending on noise level)
Applicable to hog farms above 500 hogs in size. If onlyaccounting for air and water pollutant tax, the minimum costfor a 500-hog size farm will be Rmb1,300.
Source: MoA. DBS Vickers
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(iii) Cost efficiency: Smaller and outdated farms are also
losing their competitiveness against big farms which should likely possess better cost efficiency given scale benefits. As environmental regulations are tightened, farms would need to invest more on related facilities, hence boosting their capex requirement as well as operating costs. Based on our estimates, around 15-16% of total capex for a modern farm nowadays are for investing in related environmental facilities. In the northern regions, capital expenditure is typically higher by Rmb100/head as heating facilities will be required. Smaller farms could find it hard economically to justify such an investment.
(iv) Quality assurance: Last but not least is the focus on food safety for both government and consumers. This is again an area where big farms have an advantage given their stronger control on production processes and better support in technology. For example, big farms like COFCO have established a product traceability system and obtained ISO qualification for its key production procedures. Wen’s, the biggest hog player in China, has also installed a real-time platform to monitor its farm operations.
How much investment would be required? Given the above challenges, outdated hog capacities in China, predominantly small backyard farms, will be phased out. In fact, the number of hog farms with fewer than 50 heads in China has been declining sharply in the past 15 years, shrinking more than half to 46m in 2014 from over 100m in 2002. As such, the capital expenditure required to support the growth in China hog production would be much more than just the organic growth, as that would include also replacement capex for those capacity closures.
No. of hog farms (Below 50 heads)
55.1
51.9
49.4
46.9
42
44
46
48
50
52
54
56
2011 2012 2013 2014
m no.
Source: WIND, DBS Vickers
Estimate Rmb117bn needed for large-scale farming expansion. Assuming that the reduction of small farms with <50 heads continues at c.7% p.a. just like in the past few years, while farms with <500 heads sustain a moderate 2% p.a. decline, we estimate this would create a total shortfall of c.77m heads from now till 2020. This, coupled with an extra 40m heads required to produce additional pork demand of 3.5m tonnes organically, would translate into a total of 117m heads of hog capacity. Premised on around Rmb1,000 per head of estimated capex, this would translate into c.Rmb117bn total capex required for hog farms alone for the next five years.
China hog production data
Sow inve ntory
Hog Inve ntory
Ye a r-e nd l ive hogs
Pig produc tion
Pig s la ughte r
Import vo lume
Export vo lume Consumption
m he a d m he a d m he a ds m tons m he a d m tons m tons m tons2012 50.0 463 475 53.4 696 0.5 0.08 53.9 2013 49.4 457 474 54.9 716 0.6 0.07 55.4 2014 42.9 422 466 56.7 735 0.6 0.07 57.2 2015 38.0 384 451 54.9 708 0.8 0.07 55.6 2016 36.7 367 435 53.0 685 1.6 0.10 54.5
Source: WIND, China Customs, DBS Vickers
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China pork supply chain – who are the players?
In this section, we provide a detailed walkthrough for each of the key segments in the pork supply chain, including the feed stock producers, the hog farms, the slaughterers, the processed meat producers, as well as the distributors and retailers.
Feed & hog production Slaughter/processed meat Sales & distribution
Developing private labels
Food service expanding central kitchen
Developing specialty POS
Integrated model from feed to specialty outlet
Feed players building hog farms
Hog farmers building own feed
Source: Company data, DBS Vickers
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(A) Hog farms
A fragmented sector, but large players are emerging. A traditional sector used to be dominated by backyard farms, the Chinese hog farming sector has witnessed changes in the past few decades with the rise of large-scale commercial farming. Although market concentration is still low with backyard farmers remaining the dominant contributor of hog output, accounting for 57% as of 2015, their significance has been reducing sharply from 74% in 2007. Large scale farms, on the other hand, posted the strongest growth with their contribution having more than doubled from a mere 4% in 2007 to 10% in 2015. Mid-sized farms with more than 500 hogs in production have also witnessed strong growth with contribution rising to one-third of the total in 2015.
How does one be classified as a large-scale farm? To be classified as a large-scale hog farm, one must have a minimum of 300 sows and 5,000 hogs for slaughter per year. The farms must abide by the Animal Law, Animal Epidemic Law, Livestock and Poultry Scale Pollution, Prevention, and Control regulation, and other relevant laws and regulations. The farm must register for an Animal Epidemic Prevention Conditions Certificate, as well as have two consecutive years without major disease outbreaks or quality issues. In 2016, 208 hog farms qualified for large-scale production, according to MoA.
Hog production market share
74%
57%
22%
33%
4%10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2007 2009 2011 2013 2015
1–500 500-10,000 10,000+
Source: Frost & Sullivan, DBS Vickers
Commercial farming is the trend. There are various forms of hog operations in China but the most common types for the major players are (i) self-owned and operated industrial scale farms which engage in the whole hog production process from breeding and gestation to finished hogs; and (ii) contract farming where the hog company provides seed stocks, feed etc. to the farmers in return for the finished hogs.
Type of farming
Type o f fa rming
De sc r ip t ion Pros Cons
Industria l scale farming
This is the most labour and capita l intensive type of farming. The farm begins with the breeding and gestation process up until market weight. Although this takes the longest in ramping up, the stricter enforcement of environmental laws may require this to be the way forward to ensure a secure supply chain.
Secured integrated value chain, embraces the trend ahead
High initia l capital, assume most risk
Company + Farmer
Under contract farming, farmers typically use the Company's seed stock, feed, veteninary medicine, and in return is paid a growing income in an off-take arrangement.
Initia lly fast expansion, lower initia l capital; farmers will assume the growth, labour and land responsibility
The value chain not as secure; dependent on the farmers under contract; difficulty in finding new farmers when prices are high and profit may be higher if they se ll externally
Company + Farmer (looser model)
Farmer puts up the land, capital. In return, the Company will have a purchase contract with the farmer, with additional services such as farm management, veteninary medicine, feedstock
Fast expansion, lower initia l capita l; farmers take on market risks
Insecure value chain; may not be up to current strict environmental standards
Source: Company data, DBS Vickers
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Currently, the largest hog player in China is the Guangdong-based Wen’s, with a market share of 2.5%, well above its closest competitors. Adopting the contract farming with a total of 22,200 farms under its helm, or the “Company plus farm” model, this relatively asset-light business model enables Wen’s to swiftly expand its capacity. The company’s annual hog production has doubled since 2012 to 17m heads in 2016, more than the combined total of the next four biggest players.
China hog production market share (2016)
2.5%
0.6% 0.5% 0.4% 0.3% 0.2%
0%
1%
2%
3%
0
3
6
9
12
15
18
Wen
shi
Foo
dst
uff
Zhen
gd
a
Mu
yuan
Ch
uyi
ng
A
gro
Zhen
gb
ang
CO
FCO
M
eat
Production volume (LHS) Market share (RHS)
MM head
Source: DBS Vickers compilation *Zhengda – derived from news sources
After Wen’s, the next five biggest hog players are Zhengda, Muyuan, Chuying, Zhengbang and COFCO Meat, each commanding a market share of 0.2-0.6%. Among these players, COFCO Meat adopts the self-owned and operated format while the others adopt a mixed approach with both self-owned and contract farming.
There are also numerous feed/pork players which expanded into hog farming as part of their business extension. Leading feed producers such as New Hope, for example, has been involved in hog production as well as slaughtering. Zhengda (CP Group) and Zhengbang, two major feedstock producers in China, are also in hog farming and are ranked among the top six in terms of hog production.
Large is getting larger. But no matter which business model these hog players adopt, the market shares of the leading players are expected to rise further. The top six accounted for merely 5.1% of the total in 2016 (2015: 4.1%). With the government’s increasingly stringent requirements on food safety and the environment, large-scale producers have also begun establishing strategic agreements with local governments to support local needs through a secure food chain. For example, in October 2016, Wen’s announced that it will build an administrative building, feed plants, commercial hog farms (both self-owned and company-family model) to supply 500,000 hogs in Bei-an, Heilongjiang.
China hog production market share (2014-16) – we estimate top 6 players added 5.8m heads of production in 2016
Northeast and Southwest the potential regions. Sichuan, Henan, Hunan, Shandong and Hubei were the top five pork producing regions in China, accounting for 45% of total pork production in 2015. Going forward, growth in some major regions such as Hunan and Hubei are expected to be limited given constraints on land and environmental issues. The government has classified key cities including Beijing, Tianjin, and Shanghai, as well as Jiangsu, Zhejiang, Fujian, Anhui, Hubei, Hunan and Guangdong, as the Development Control Area where new capacities would be limited. Instead, regions close to the Corn Belt, especially in Northeast and Southeast China, would be the key development areas.
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Pork output by province (2014) (‘000 ton)
Key dev elopment areaRestricted dev elopment areaPotential growth areaExcessiv e dev elopment area
Guangdong2,826
Hainan486
Hubei
Hunan4,581
Jiangxi2,598
Fujian1,511
Heilongjiang1,426
Inner Mongolia
Hebei2,812
Henan4,780
Jiangsu2,324
Shandong4,068
Anhui2,648
Guangxi2,663
Guizhou1,656
Beijing240
Tianjin299
Jilin1,404
Gansu527
Shaanxi918
Qinghai105
Xinjiang339
Tibet15
Ningxia77
Zhejiang1,270
Yunnan2,924
Liaoning2,403
Shanxi642
Sichuan5,272 Chongqing
1,585
Shanghai188
Source: Ministry of Agriculture, DBS Vickers
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Listed hog farms – key operating parameters
Wensh iF oodst u f f
M uy uanF oodst u f f Chuy ing A gro Z hengbang CO F CO M eat
廣東溫氏食品 牧原食品 雛鷹農牧集團 正邦集團 中 糧 肉 食
300498 :CH 002714 :CH 002477 :CH 002157 :CH 1610: HK
Wenshi M uy uan Z hengbang Chuy ing Subtotal % y - o- y
J an-16 161 16 17 5 199
Feb-16 110 16 16 5 147
Mar-16 140 17 24 11 192
Apr-16 138 19 28 6 190
May-16 131 20 27 9 188
Jun-16 125 27 17 6 174
Jul-16 142 32 21 6 200Aug-16 144 34 17 11 206
Sep-16 140 26 11 8 184
Oct-16 152 27 15 8 203
Nov-16 161 31 17 12 221
Dec-16 169 47 17 12 246
Jan-17 142 40 13 8 203
Feb-17 126 40 15 8 188
Mar-17 159 43 18 16 236
2015 1,535 192 158 139 2,024
2016 1,713 311 226 99 2,349 16%
2016 1-3 411 49 56 21 537
2017 1-3 428 124 45 31 628 17%
Source: Company data, DBS Vickers
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(B) Slaughtering & fresh pork manufacturers Top ten players account for 5.1% of market share. Although the slaughtering industry in China has been undergoing consolidation since 2008, the sector's concentration remains low. The top ten players in China represent a mere 5.1% of the total market (by sales revenue) in 2015, significantly below developed countries such as the US, where the top five players already account for almost 70% of the market (by daily capacity). The top player in China at the moment is Henan Shuanghui, and other major players include Yurun, People’s Food, Zhongpin, New Hope, etc.
Most players in the slaughtering industry are involved in multiple segments within the pork value chain. For example, major players such as Shuanghui and Yurun are also leaders in the processed meat market.
Fresh pork market share – (2015) by revenue
WH Group37.71%
China Yurun
23.03%
Top 3 - 10 players39.26%
Source: Frost & Sullivan, DBS Vickers
Other players include People’s Food, Zhongpin, Goajin, Longda, TRS,COFCO etc
Overcapacity, but should see improvement ahead. Utilisation in the China slaughtering sector remains low, as reflected in weakening profitability in China Yurun (1068.HK), one of the leading slaughterers. China Yurun had a total of 55.8m heads of slaughter capacity in 2016, with an 11.9% utilisation rate, significantly below breakeven levels of c.30%.
According to the Outline of Development Plan of the National Hog Slaughter Industry (2010-2015), the Chinese government aimed to enforce stricter food safety and production efficiency to ensure faster industry consolidation. Hence, the number of slaughterhouse licenses had declined to c.4,000 in 2015 versus 28,600 in 2008. This trend is expected to continue with the number of slaughterhouse licenses expected to cut by another half to 2,000 by 2018, according to Frost & Sullivan's projection.
No. of slaughter house licences
0
5,000
10,000
15,000
20,000
25,000
30,000
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
20
16
E
20
17
E
20
18
E
No.
Source: MoA, DBS Vickers
We believe one reason for the persistent overcapacity in the industry, despite the substantial cut in the number of slaughtering licenses’, is the presence of illegal slaughter houses, and the slow execution of local governments in phasing out non-compliant players. The situation, however, should likely improve going forward as the Chinese government has tightened the implementation of its regulations since mid-2016. As of December 2016, the government had already closed down 4,839 slaughter plants, of which 2,715 were illegal ones while the remaining plants were those not meeting the required standards.
Decline in slaughtering volume in 2016. With lower hog production as the market consolidates, slaughtering volume has been on a declining trend since 2015. In 2016, slaughtering volume declined 3.3% y-o-y. However, as hog production recovers gradually, we expect slaughtering volume to resume mild growth going forward.
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Slaughtering volume (quarterly)
0
50
100
150
200
250
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
m head
Source: MoA, DBS Vickers
In terms of seasonality, January and December are typically the peak slaughtering seasons due to higher demand during the holidays. Slaughtering volume usually falls after Chinese New Year but begins to rise starting September in anticipation of the peak festive holidays.
Slaughtering volume (above scale-slaughter house)
10
15
20
25
30
Janu
ary
Febr
uary
Mar
ch
Apr
il
May
June July
Aug
ust
Sept
embe
r
Oct
ober
Nov
embe
r
Dec
embe
r
m head
2012 2013 20142015 2016 2017
Source: MoA, DBS Vickers
A shift towards chilled fresh pork. Another key trend in fresh meat consumption is the shift towards chilled and frozen pork. Depending on different chilling processes, fresh pork in China are sold under three major formats - warm fresh pork, chilled fresh pork and frozen pork. While warm fresh pork, typically sold in traditional wet markets, remains the largest category representing 55.4% of domestic consumption in 2015, demand for it has been on a declining trend. As modern trade channels continue to expand, demand for chilled and frozen pork is expected to rise rapidly. Chilled pork, in particular, has
witnessed over 20% CAGR in 2010-15, and is expected to maintain a double-digit growth ahead.
China fresh pork consumption volume breakdown by category (2010-20E)
This trend should benefit major players as their focus is more on the chilled and frozen meat category. Leading players like Shuanghui produces only chilled and frozen meat while Yurun derived more than 80% of its revenue from chilled pork. (C) Processed pork manufacturers
As mentioned, major slaughterers in China are also involved in the processed meat market. Shuanghui (under WH Group) is currently the biggest player in the market, followed by Yurun, People’s Food, Zhongpin and TRS Group. The top five players are estimated to account for 14.3% of the total market in 2015 based on Frost & Sullivan. Given that processed meats have higher added value, and opportunity to use by-products to enhance margins, both domestic and foreign players are paying close attention to this segment.
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China processed pork market share (2015) by sales
WH Group54.20%
Top 2 - 10 players45.80%
Source: Frost & Sullivan Other players include People’s Food, Zhongpin, Goajin, Longda, TRS, COFCO etc Westernisation and premiumisation. According to Frost & Sullivan, processed meat consumption is expected to grow at a faster rate of 6% in 2015-20E, against 2010-15 CAGR of 4.6%. This is driven by an increase in disposable income, expansion of middle class population and rising westernised dietary habits. Processed meat can be categorised into LTMP (ham, sausages and bacon) and HTMP (ham, sausages and canned pork). It is expected that LTMP products, such as bacon and ham, will grow at a faster rate as western-style products gain popularity while the cold chain in supporting the chilled product category improves.
Processed meat consumption breakdown by LTMP & HTMP
Although growth is expected to be quite promising for this segment, competition is also quite intense, as margins have been relatively attractive. Leading player WH Group, for example, has managed to command a decent operating margin of over 20% for its China packaged meat division, doubling that of its US packaged meat margins. To capture growth, packaged meat players have been striving to improve their product mix, with premiumisation becoming a more evident trend as consumers focus more on food safety and quality.
Shuanghui – Packaged meat gross profit margin
24%27%
28%32% 32%
20%23%
24%
31% 31%
0%
5%
10%
15%
20%
25%
30%
35%
2012 2013 2014 2015 2016
HTMP (高温肉制品 ) LTMP (低温肉制品)
Source: Company data, DBS Vickers
Increasing foreign participation. The premiumisation trend has also attracted more foreign participation in the packaged meat product market, though overall market share of international brands remains relatively low at c.5% (based on Euromonitor). Hormel, which entered China as early as 1994, had tripled its processing capacity in 2016. Danish Crown also announced in late 2016 of its plan to invest around DKK300m in a new processing plant in Shanghai. WH Group has also introduced its Smithfield brand into China with the commencement of a dedicated production plant for its brand in 2016.
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Foreign company investment
Compa ny Origin De sc ription Re la tionship with Chine se compa nyHormel Food USA Food processor with brands under Applegate,
Jennie-O, Muscle Milk, Skippy, Spam and more. JV with Beijing Capital Agricultural Group, Shanghai Shangshi Meat Products
BRF S.A Brazil Meatpacker and food processor Strategic investment in COFCO Meat (US$20M)
Danish Crown Denmark A global meat processor To open up a meat processing plant in China
Smithfield USA Largest pork company globally Acquisition by Shuanghui International, now under WH Group
Source: Company compilation , DBS Vickers
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(D) Pork distributors and retailers Wet market still dominant. Pork is traditionally sold in the form of fresh and warm format through wet markets and now more so in modern retail chains (supermarkets, and hypermarkets), hotels and restaurants, and retail stores (grocery stores and branded chain stores). Around 70% of pork are sold fresh, while frozen (25%) and chilled (5%) are smaller but growing faster, particularly in the chilled category as China’s cold chain logistics improve.
Fresh pork distribution channel breakdown (%)
Fresh70%
Frozen25%
Chilled5%
Source: Frost & Sullivan, DBS Vickers
… but modern trade picking up fast. Wet market still dominates the fresh pork channel, distributing over 56% of total volume in 2015. But with rapid urbanisation and the rise in middle class, the preference has been shifting towards modern retailers and retail stores. The modern retailer channel is expected to grow at a CAGR of 14% between 2015-20E, vs a decline in the traditional wet market channel.
Hotel and restaurants. Another key trend is the rise of the food services channel like hotels and restaurants, especially in the top-tier cities. Frost & Sullivan estimates sales in this channel to grow at over 8% CAGR till 2020. To tap into the food services channel, pork players are not only extending their processed product offerings, but some are also working with restaurant chains to collaborate at a central kitchen level, and even providing cooked processed products as a value-add for its clients. This subsequently reduces the proportion of processed meat sold to wholesalers, and increases it at higher-margin channels.
Specialty outlets to increase brand awareness. Pork players have also extended their channel offerings into specialty outlets (standalone outlets) under their own brands to increase brand awareness and create deeper penetration into local regions. This could be through wholly-operated stores or franchise outlets. Some have established membership loyalty programmes to enhance the number of repeat customers. In addition, specialty stores allow cross-selling of other brands and products, and provide a platform for pork players to gather more on-the-ground market insights.
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Pork brands
Compa ny Bra nd
WH Group Shuanghui (雙匯)
Yurun Yurun (雨潤)
People's Food Jinluo (金鑼)
No. 1 Pig No. 1 Pig (壹號土豬)
COFCO Meat Joycome (家佳康)
COFCO Meat Maverick (萬威客)
Beijing Shunxin Shunxin (順鑫)
Muyuan Longda (龍大)
Source: DBS compilation
E-commerce – the fastest-growing retail channel. Last but not least is the fast growing popularity of the e-commerce channel. The revenue of online fresh-food grocery shopping, reached Rmb50bn in 2015, and is expected to grow at a CAGR of 68% in 2015-18E, according to iResearch. The strong growth of this channel has two implications: (i) Domestic brands are placing more focus on digital marketing; (ii) the online platform also provides a channel for international brands to get into China.
Fresh grocery e-retailing
3.6 12.7 22.0 49.7 90.5
153.8
236.6
0.4%1.3%
2.4%
3.4%
4.8%
6.1%7.0%
0%
1%
2%
3%
4%
5%
6%
7%
8%
0
50
100
150
200
250
2012
2013
2014
2015
2016
F
2017
F
2018
F
RMB bn
Online grocery % of agriculture sales of retail products
Source: iResearch
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(E) Cold chain logistics
Along the pork industry supply chain, the growth in cold chain logistics in China has been crucial in supporting the development of downstream chilled meat and processed meat sector. According to China Warehousing Industry Bluebook 2016, the cold chain warehouse capacity grew by 12% in 2015 to 27m tonnes, with cold chain warehouse space per capita reaching 78 litres (vs 53 litres in 2011). The penetration, however, remains far below global level. US, for example, has a per capita space of 372 litres, more than 4x that of China.
Cold chain space per capita
78
372
0
50
100
150
200
250
300
350
400
China US
litre
Source: China Warehouse Industry Bluebook 2015, DBS Vickers
A report by ITA in 2016 also revealed that China’s cold storage penetration has been lower than some developing countries such as India and Brazil.
Cold storage by country per capita (cubic m)
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
US
Jap
an
Au
stra
lia
Ind
ia
Bra
zil
Ch
ina
Ind
on
esia
Mex
ico
Cold storage capacity per capita
Source: ITA, US Department of Commerce, DBS Vickers
With the increasing demand for fresh products and rising food safety concerns, the cold chain logistics market is expected to sustain solid growth. At the moment, the market is fragmented but some large players have been emerging. Some pork players have also been developing their own cold chain logistic operation. Case in point being Shuanghui, which cold chain logistic operation is among the largest in China.
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China top 10 cold chain logistics provider (2015)
Capab ilit y Remark s
1 Rokin Logistics 80,000 sqm of refrigeratedwarehouse plus ov er 450 cold trucks
Bought by CJ Korea Express in 2015
2 Shuanghui Logistics 17 logistics centres plus 1,200 coldtrucks
Subsidiary of Shuanghui Dev elopment
3 Henan Xiany i Supply Chain Ov er 20 logistics centres A logistic solution prov ider and a subsidiary ofZhongpin
5 ZM Logistics 600+ cold trucks Inv estors include Sequoia Cap, Cathay Capital PE6 SF Express 130,000 sqm of refrigerated
warehouse, 497 cold trucksLargest courier serv ice prov ider in China
7 Hav i Logistics Specialised in prov iding logisticsupport to restaurant brands
Global logistic prov ider
8 Zhongrong Logistics F ocus on meat, dairy , v egetable, andpharmaceutical cold chain logistic
Third-party cold chain logistic prov ider
9 DCH Logistics Manages ov er 3m sf of godown Subsidiary of DCH Grouop
10 China Merchants Americold 14 refrigerated warehouse with total154,000 sqm
J V between China Merchant Logistic & AmericoldRealty Trust
Source: China Cold Chain Logistics Committee, Company websites, DBS Vickers
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(F) The raw material suppliers – the feedstock producers
China: largest feed supplier. China is the largest feed producer globally, accounting for c.20% of global output, followed by the US and Brazil. Current demand for feed is driven mainly by the swine sector, which represented c.42% of total feed output in 2015, followed by poultry and aquaculture. During 2010-15, total feed output in China grew at a CAGR of 4.3%, or which swine feed output saw a stronger CAGR of 6.9%, according to China’s Feed Association.
2015 China feed output breakdown (%)
Swine42%
Poultry - egg15%
Poultry -meat28%
Aquaculture9%
Others6%
Source: China Feed Association; DBS Vickers
2010-2015 China total feed output
162181
194 191 192 200
0
50
100
150
200
250
2010
2011
2012
2013
2014
2015
m mt
Source: MoA, DBS Vickers
Being the largest feed market globally, China has also produced some of the biggest feed companies. Domestic market leader New Hope Liuhe, estimated to command 7% of the market in 2015, ranked third globally in terms of volume
after CP Group and Cargill. Other major players in China include Haida, CP, Zhengbang, etc.
Feed player market share 2015
New Hope7%
Haida3% CPH
3%
Zhengbang2%
DBN2%
Tongwei2%Others
81%
Source: Companies, DBS Vickers
Feed players – both challenges and opportunities. The consolidation in the hog production segment during the past two years has affected demand for feed in China. While we expect hog production to resume growth, the new capacities should come mostly from large-scale farms, whose feed demand will be largely filled by self-production. Major hog farms like Cofco have been expanding their feed production capacity, looking to build a vertical integration chain.
While this would post a challenge for the feedstock companies, we believe their opportunities lie on the following:
(i) Market consolidation. The abuse in the use of feed additives and the H7N9 outbreak have led to stricter licensing standards on local farms, as well as on the feed companies to meet acceptable raw material standards (Regulation on the Administration of Feed and Feed Additives). The Ministry of Agriculture also initiated a strict re-licensing campaign in 2014, requiring feed companies to meet stricter standards. This has been causing a decline in the number of feed companies since 2014. On top of this, the government also plans to phase out the smaller feed manufacturers, given their inefficiency and pollution problems. It is estimated that around 3,000 smaller players will be closed in the next five years.
(ii) Material costs: Corn is the largest component of feed, amounting >60% of total raw material, thereafter followed by soybean meal. In September 2015, China announced a 10% cut on state support prices, the first since 2008 when the price support was put in place. The government has also announced stricter quality requirements on state purchases. If the standards are not met, the farmers will
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have to sell on the market at a discount. In March 2016, NDRC announced that the temporary reserve policy in Northern provinces and Inner Mongolia will be replaced by direct subsidies. With a cut in support prices and as indicated by the Thirteenth Five-Year Plan, corn planting acreage is expected to reduce by 70m acres in 2015-20E. Nevertheless, corn prices were roughly 90% higher in China as compared to the US in 2016. Hence, we expect domestic feed prices to decline in FY17F.
Corn price – China vs. US
0.5
1.0
1.5
2.0
2.5
3.0
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
US corn China corn
Rmb/kg
Source: Bloomberg Finance L.P, DBS Vickers
Liberalising agricultural sector. In summary, this indicates rising liberalisation of the market, with efforts to relieve state reserves as well as to narrow the rising pressure of cheaper imports.
Thirteenth Five-Year plan production target
2015 2020
Corn m acre 570.0 500.0Soybean m acre 98.0 140.0Cotton m acre 57.0 50.0Oil Planted m acre 210.0 200.0Meat production m tons 86.3 90.0
Source: MoA, DBS Vickers
Corn production
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
0
50
100
150
200
250
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
m ton
m tons % y-o-y
Source: MoA, WIND, DBS Vickers DDGS: some reprieve for feed producers. Unlike pork, we believe corn alternatives may find it more difficult to enter into China as a form of protectionism. A smaller proportion of feed is comprised of Distiller-Dried Grain Soluble (DDGS). DDGS is a corn-based by-product used as a substitute for corn and soy meal. In 2015, China purchased 6.8m tons of DDGS, valued at US$2bn. However, since September 2016, MOFCOM has been stepping up on anti-duty subsidies on DDGS, in efforts to support the domestic corn sector. Anti-dumping duties will now range between 42.2% and 53.7%, while anti-subsidy tariffs will be between 11.2% and 12% over the next five years (previous anti-dumping duties: 33.8% and anti-subsidies: 10-10.7% in September 2016).
DDGS export (US to China)
2.2 2.8
6.2
5.4
3.4
0
1
2
3
4
5
6
7
2011 2012 2013 2014 2015
m ton
Source: WIND, DBS Vickers
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Business model
(i) Dissecting cost of producing a pig in China
The biggest cost component in raising a hog is feed, which is estimated to account for c. 60% of total production costs in China. Feed mainly comprises of corn, follow by soybean meal, cottonseed and other oilseed meals. While some backyard farms still use fodders, which include food scraps, vegetables, and other by-products of food processing, well over 90% of the farms in China now use feed concentrates (grains, oilseed meal, etc) given its better effectiveness in weight gain.
Pork production cost and income breakdown (%)
Farm profit7%
Farm cost52%
Retail-wholesale profit &
cost14%
Slaughter profit &
cost 27%
Source: Yearbook of Cost and Income of Agricultural Products (China),DBS Vickers Assumptions: (i) Based on live hog weight of Rmb15.6/kg, and cost to raise on
Yearbook scalable farming costs (ii) 85% pork yield Other costs include utilities, labour, depreciation, vaccine and other expenses. Hog production costs in China have been rising sharply since 2005, largely due to higher feed costs, as well as rising labour costs. The lower feed costs since 2015 has helped ease overall production costs in the past two years.
Hog production costs - US
0.0
0.5
1.0
1.5
2.0
2.5
1990 1995 2000 2005 2010 2015
Feed Piglet Other Retail Pork Price
Dollars per lb
Source: USDA, DBS Vickers
In terms of profit and cost allocation along the whole industry chain, we estimate that the farms and the retailers/distributors earn the biggest portion, while the slaughterers' profits are slimmer. For every kg of pork sold in China, we estimate that close to 60% of the value goes to the farms.
Retail price breakdown by industry chain players
0.89 9.8 12
21.8
33.3
55.1
2.216.1 18.3
8
26.3
4.7
31
0102030405060
Farm
er P
rofit
Farm
er C
ost
Farm
er V
alue
Cos
t of S
laug
hter
Who
lesa
le
valu
e
Who
lesa
le
& re
tail c
ost
Reta
il val
ue
Rmb/kg
US China
Source: Yearbook of Cost and Income of Agricultural Products (China),DBS Vickers estimate
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(ii) China costs vs global level
While China is the world's largest producer of pork, its hog production costs are relatively high compared to other countries. Based on ADHB, farmer cost in the US is c.56% below the cost in China, likely due to cheaper raw materials, economies of scale and better farm management. China's hog production costs are also relatively high against key European and American producers.
Cost of hog production (2015/16)
0.2 1.5 0.9 1.5 0.5
2.0 1.2
1.9 1.5
1.1 1.1
1.0
7.7
7.4
5.5 6.6
3.8 11.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
China (Scalable farming)
EU USA Denmark
Indirect cost Other variable costs
Labour Feed
Piglet
Rmb/kg
13.7 12.0
8.7
Source: Yearbook of Cost and Income of Agricultural Products (China),ADHB, DBS Vickers
Cost of hog production changes % y-o-y
2012 2013 2014 2015
Total production cost 3% -9% -9% 15%
Live hog price 7% 1% -2% 0%
Piglet 4% -7% -11% 11%
Feed 9% 5% 2% -4%
Energy 0% -3% 2% -1%
V eterinary 1% 3% 2% -3%
Mortality -4% 1% -8% -4%
Technology -1% -1% 0% -4%
Indirect cost 3% 4% 11% -2%
Labour cost 22% 15% 6% 4%
Source: Yearbook of Cost and Income of Agricultural Products (China),DBS Vickers
In the following sections, we compare some of the key operating parameters and examine the cost differences in more details:
(1) Feed cost per kg
China's feed costs have doubled in the past ten years, a reflection of higher corn prices. Due to the government's pricing policies, China's corn prices have been at a significant premium over that in US. We estimate that China’s feed cost per kg is close to double of US’s feed cost, while it stands at 4% above EU's. We note feeder cost is not included in China’s feed cost/kg.
Feed cost per kg
7.7 7.4
5.5
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
China EU USA
Rmb/kg
Source: Yearbook of Cost and Income of Agricultural Products (China),AHDB, DBS Vickers
In terms of daily weight gain, China's average daily weight gain is largely similar to EU and USA.
Average daily weight gain
812
821
814
806
808
810
812
814
816
818
820
822
China USA EU
g
Source: Yearbook of Cost and Income of Agricultural Products (China),AHDB, DBS Vickers
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(2) Feed conversion ratio
Feed conversion ratio is an indicator of the efficiency of feed use. Based on NDRC and USDA data, China’s industry feed ratio is at 3.0-3.1x (2006-15), a premium versus the US's 2.76x (2013). However, based on our conversations with large-scale players, their feed conversion ratio has already reached 2.8x. We expect large-scale players to continue focusing on improving feed mix, environmental impact, genetics, and to pay close attention on improving feed diet. Wen’s, the largest hog producer in China, indicated that its feed conversion ratio is as low as 2.4.
Feed conversion ratio (x)
3.00
2.80 2.76 2.83
1
2
3
China industry avg.
China large-scale
US (2015) EU (2015)
x
Source: CNDRC, USDA, DBS Vickers
(3) Pig weaned per sow
In terms of piglets weaned per sow ("PSY"), China's large-scale farms average 22-23 piglets weaned per year, but the figure is likely to be lower at smaller backyard farms. Although some farms such as New Hope reported PSY of more than 26 heads (in 1H16), China farms' PSY in general is towards the low end compared to global standards, suggesting a higher mortality rate and further room for better nutrition.
Average no. of pigs weaned per sow/annum
22.6
25.3
26.8
21
22
23
24
25
26
27
28
China USA EU
weaned/sow/yr
Source: AHDB (based on 2014), Company data (China - COFCO Meat), DBS Vickers
(4) Average live weight at slaughter
Production cycle is slightly longer in the Western countries, where they typically grow the finishing hog to a heavier weight to achieve maximum production efficiency. On the other hand. China's average live-weight at slaughter is slightly lower, likely due to higher demand for piglets, as well as lower efficiency.
Average live-weight at slaughter
117
128
120
110
112
114
116
118
120
122
124
126
128
130
China USA EU
kg
Source: Yearbook of Cost and Income of Agricultural Products (China), ADHB , USDA, DBS Vickers
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(5) Mortality rate
With a larger percentage of hog farms below 500 hogs in size, we expect hog farms in China to be more vulnerable to disease outbreaks, and higher mortality rate.
(1) Pre-weaning piglet losses – Pre-weaning process is likely the most vulnerable stage in hog production, as the piglet will detach from milking to dry feeds. To reduce the overall mortality rate, stronger vaccination of gestating sows, regular hygiene procedures for sows in the farrowing units, as well as greater nutrition (iron, milk) for the newborns and piglets are various ways to reduce overall mortality.
(2) Finishing mortality rate – Feeder-to-finish mortality rate is generally lower. Key options to improve this would include maintaining optimal temperature in barns, hygiene, environmental waste treatment, and pro-active screening of diseased animals.
(6) Labour costs
Labour is one of the key concerns for the upstream hog players, given the high worker turnover rate and lack of skilled agriculture labour force. In terms of percentage of total production cost, labour cost is largely in-line to Western countries. According to Yearbook of Cost and Income of Agricultural Products, labour costs account for 11% of total production costs, versus 12.4% in the US and 9% in EU. To improve efficiency, we expect labour spent on per hog basis to be reduced as the industry continues to move towards large-scale farming.
Labour cost as % of production cost
11.0%
9.0%
12.4%
0%
2%
4%
6%
8%
10%
12%
14%
China EU USA
Source: AHDB, Yearbook of Cost and Income of Agricultural Products(China), DBS Vickers
(7) Hog-to-corn ratio
Hog-to-corn ratio. This is a strong indicator to determine the pork industry’s profitability. In the US, when the ratio is above 15x, it indicates attractive profitability. In China, the hog-to-corn ratio range is much lower, likely a reflection of the higher feed costs. We expect the pork sector to attract capacity growth when the ratio is at 6.5x and above.
Hog-to-corn ratio (US vs. China)
0
2
4
6
8
10
12
0
5
10
15
20
25
30
Jan/
14
Apr
/14
Jul/1
4
Oct
/14
Jan/
15
Apr
/15
Jul/1
5
Oct
/15
Jan/
16
Apr
/16
Jul/1
6
Oct
/16
Jan/
17
US (LHS) China (RHS)
X X
Source: Iowa State estimates, CEIC, DBS Vickers
We believe the lower production costs in the US largely reflect the stronger productivity of the hog players there. With much higher market concentration in the US hog industry, the cost difference lies in:
(i) Higher average finishing hog weight in the US at least over 120kg per head, compared to China where the typical weight is around 117kg;
(ii) Closer proximity to cheaper and readily available feed materials for US players, while China feed costs, representing 60% of production costs and comprising corn, soybean, DDGS and other materials, are typically higher.
(iii) Better feed conversion, lower mortality rate in the US, hence better yields.
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(iii) Imports to grow Net importer of pork. As China demand grows, import has become increasingly important. In 2006, the blue ear swine disease sent hog prices surging, and created an opportunity for imports, leading the boom in 2006-2008. In 2009, there was an immediate plunge in imports due to the 2009 flu pandemic (Swine Flu). This caused China to fully ban pork imports from countries such as the US. The ban was thereby lifted in 2010, which led to a resurgence of pork imports. Currently, China’s pork self-sufficiency is roughly at c.97%, which we expect to drop as the market consolidates.
Import requirements. Imports are typically subjected to a tariff (fresh or chilled – 20%, and frozen – 12%), as well as 13% VAT for most items. Based on industry players, an average of 1.4x above domestic prices will be required for import volume to be profitable. Aside from this, imported pork must not contain ractopamine, and the meat processing plants are required to be monitored by a third-party testing organisation.
US pork export to China (Inc. HK) (Volume & Value)
0
200
400
600
800
1,000
1,200
0
100,000
200,000
300,000
400,000
500,000
600,000
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
US$mton
Volume (LHS) Value (RHS)
Source: USDA, DBS Vickers
Surge in import by 29.6% in February 2017 YTD. In 2016, pork import volume and value grew 108% to 1.62m tons and 120% to US$3.2bn respectively, accounting for 3.1% of domestic pork production. If we include pork by-products, imports account for 5.6% of total volume. In February YTD, pork import volume grew 29.6% y-o-y to 2.2m tons. The key exporting countries include the EU, US, Canada, Germany, France and Spain.
EU accounts for 58% of pork imports. EU accounted for 58% of total pork imports into China in 2016, followed by the US (13%) and Canada (11%).
Import v o lume (m k g)Denmark 4 43 32 53Chile 4 46 8 47UK 4 43 17 31F rance 5 87 (27) 103Canada 16 179 94 192Spain 16 260 (7) 90Denmark 7 159 (27) 96Germany 27 344 7 68US 14 216 58 112T ot al 113 1,620 18 108
Source: WIND, DBS Vickers
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Case study of a global player - USA
The US now commands one of the most competitive pork industries in the world. Its hog production, despite much smaller than that of China, has been growing at a decent 1.3% p.a. during 2011-16, with 20.8% of its production are now exported to other countries. The development in the US pork industry, which saw significant productivity gain as well as structural changes in the past two decades, could possibly shed some lights on how China pork industry could move going forward.
Hog production – China vs US
(m head) China US
2011 662 111
2012 698 113
2013 716 112
2014 735 107
2015 708 115
2016 685 118
2017e 672 123
Product ion v olume
Source: WIND, DBS Vickers
Hog farming consolidation. The change in market structure has been a major trend in the US pork industry since the 90s. While the US hog production has been rising, the number of hog farms declined by more than 70% between 1992 and 2009, based on USDA. This resulted in larger farms; the average size of a hog farm grew from 945 heads in 1992, to 8,389 heads in 2009.
Average size of a hog farm - US
945
8,389
0
2,000
4,000
6,000
8,000
10,000
1992 2009
No. of hogs per farm
Source: USDA, DBS Vickers
Back in 1994, hog production from farms with more than 5,000 heads in the US represented less than 30% of total. In 20 years’ time, this number has surged to 93% (2014), indicated that bigger hog farms are taking market shares from the smaller players – number of hog operations with fewer than 5,000 heads shrank significantly from over 210,000 in early 90s to fewer than 70,000 in 2006.
Pig crop distribution by size of operations - US
0%
20%
40%
60%
80%
100%
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
5000+ Head places <5000 Head places
Source: U.S. Pork Powerhouse, Successful farming, USDA, DBS Vickers
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Specialised farming & contract farming. Apart from market structure, there has also been a notable change in the way farms operate. Farms have been increasingly focused on a single phase of operation, rather than the traditional farrow-to-finish format (i.e. from hog breeding to hog raising). Market shares for feeder-to-finish producers (only involved in raising piglets to market hog) increased from 19% in 1992 to 47% in 2009 while farrow-to-finish players saw shares declining from 54% to 23% during the same period.
Type of hog producers as % of total operations -US
0%
10%
20%
30%
40%
50%
60%
1992 1998 2004 2009
Farrow-to-finish Feeder-to-finish
Source: USDA, DBS Vickers
This apparent shift is likely also related to the increasing popularity of contract farming, which represents 48% of US hog production in 2009, a significant jump from merely 3% in 1992.
Improvement in productivity. The above changes, coupled with adoption of better technology and knowhow in genetics, equipment, veterinary services etc have helped to improve overall productivity in the industry. During 1992-2009, US hog production costs have fallen between 27-43%, with significant improvement noted in key parameters such as hogs per litter, feed and labour efficiency.
Hog per litter - US
0
2
4
6
8
10
12
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
Hogs per litter
Source: USDA, DBS Vickers
Scale matters. The structural change in the US pork industry in the past 20 years also helped producing some of the biggest pork companies in the world. The top three pork companies in the US now have more sows than the combined total of the top 25 producers back in 1996. Smithfield, the leader in the industry, has grown its sow stocks by more than 7 times in the past 20 years.
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Top U.S pork companies
Top U.S. Pork play ers - by no. of sows
Top 10 in 2016 Top 10 in 1996
Smithfield 880,000 Murphy Family 260,300
Triumph Foods 385,500 Smithfield 112,000
Seaboard Foods 290,000 Carroll's Foods 111,400
The Maschhoffs 218,000 Tyson Foods 110,000
Pipestone System 185,000 Premium Standard 105,000
JBS 177,000 Prestage Farms 102,200
Prestage Farms 175,000 Cargill 90,000
Iowa Select Farms 171,000 Seaboard 90,000
Carthage System 145,000 DeKalb Swine 72,000
AMVC Management 115,000 Iowa Select Farms 62,000
Total 2,741,500 Total 1,114,900
Top 10 as % of total 45% Top 10 as % of total 17%
Source: USDA, DBS Vickers
How did all these big players grow to their current size? Through both organic expansion as well as acquisition. Smithfield became the top player via acquisition of two of its biggest rivals, Carroll’s Foods and Murphy Family Farms. Triumph Foods was formed by several major pork producers. Seaboard Foods grew both organically as well as through acquisition.
Smithfield’s number of sows
0
200,000
400,000
600,000
800,000
1,000,000
1,200,000
19
94
19
96
19
98
20
00
20
02
20
04
20
06
20
08
20
10
20
12
20
14
20
16
Acquired Carroll's Foods & Murphy Family Farms
Acquired Premium Standard FarmsNo of sows
Source: USDA, DBS Vickers
Vertical integration. Another common feature among these big players is that they are integrated players involving in multiple stages of the production chain. Smithfield is the leading player in hog production, slaughtering as well as
processed meat production. Both Triumph and Seaboard are also engaged in the processed meat business.
Source: EMI Analytics, National Hog Farmers, DBS Vickers
Implications to Chinese players. We believe the development in the US pork industry indicated that there should still be lots of room for China to improve its productivity, as the market consolidation should drive scale of pork players. Rising adoption of contract farming, which enabled better specialization as seen in the US, should likely apply to China too. One such example is the market leader Wen’s, which specialization in the contract farming model has helped to double the company’s hog business in 4-years’ time. Last but not least, some form of integration along the supply chain appears to be the way to help efficiency as well as to ensure food safety.
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Opportunities across the industry chain Food safety a top priority. Food safety and productivity improvement are the key priorities of the Chinese government. To achieve this, the government has imposed licensing requirements for the feed sector, hog farms and slaughterhouses, as well as strengthening environmental regulations as a way to consolidate the market. These changes would bring opportunities to different players along the industry chain. Hog farm – scale, knowhow and integration. Hog farming, being the most fragmented segment along the chain, is likely to be the most vibrant segment in terms of market potential. Apart from expanding scale to capture the shortfall due to closures of smaller farms, there are room for industry players to further improve their productivity via better farming technology and knowhow.
Meanwhile, we expect the Company + Farmer model to get increasingly popular, as it offers a speedy way of expanding with much lower capital needs. Last, but not least, is the potential for hog farms to extend their presence along the supply chain (upstream to feed production and downstream to fresh meat and processed meat manufacturing) to capture greater profits.
Other segments with opportunities. With demand for processed meat expected to outgrown other segments , we expect product innovation, brand awareness, and consumers trading up will be the key captures. We also expect food services will require accountability from its upstream, which represents opportunities for stronger partnerships. Lastly, import should display strong growth, as long as the hog price disparity (including tariff) remains attractive.
Stabilising overall profitability in the sector. While pork prices may appear to be softening, we believe the market consolidation, softer corn prices and volume expansion by large players will continue to stabilise the overall profitability in the sector. Pork imports and potential overseas partnerships could drive greater premiumisation in the long run. For a mature market, the pork sector is marked to grow in a stable manner, favouring large-scale players.
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Growth opportunities
No. K ey t rends & opport un it ies ExamplesF eedst ock a - Since the removal of floor pricing in corn, hog
producers are building internal capacity .- COFCO Meat plans to build feedmills to fulfil 35-40% ofits needs by 2017F .- Wenshi is fully sufficient in its feedstock to supply to itsfarmers.- CP Group, Zhengda, New Hope are either building hogfarms or building farm+company model to capture demand.
Hog f arm a - With stricter env ironmental laws, backyard farmersare forcibly removed if they do not meet therequirements
- The closure of hog farms reported up to 50m heads in2016
b - Players are fast expanding their capacity / influencein regions to gain market share, which requires highcapital
- Heavy capital needed to own their own farms, while someopt for Company+ Farmer off-take contracts to expand ata faster pace.- Larger players have set long-term targets of close todoubling their existing capacity .
c - There are difficulties in recollecting land due to thefragmentation of rural land.
- By offering Company -Farmer Contract, the Companyguarentees a growing fee to farmers to ensure stableincome, thereby able to consolidate land use.
Slaught er /f resh pork
a - There is an overcapacity situation in the sector atthe moment, which has resulted as the weakest linkin the pork sector in terms of profitability .
- There may be opportunities in the sale of defunct plants.
b Distribution channel is changing from wet-marketsto modern and e-commerce fresh retailing channels.
F ranchising or own-operated specialty outlets have been agood option in adapting to such changes, and improveretailing margins.
Processedpork
a LTMP is increasingly a more popular choice of meat. - Product innovation, brand awareness and marketpenetration will be required to gain market share.
b Distribution channel is changing from wet-marketsto modern and e-commerce fresh retailing channels.
Building brand awareness in local areas, and working withe-commerce retailers would be key to gain market share asthe channel noticably shifts.
c Import volume is growing rapidly as consumers areincreasingly able to accept chilled pork.
International players are looking for domestic partners or attheir own capacity to expand over. Danish Crownannounced it will be building its own processing plant inNov '16.
d Food chains demand greater accountability from theupstream value chain to ensure greater food safety .
Hog players could work with food chains to produce value-added products and serv ice the entire supply chain toensure greater food safety .
Source: Company data, DBS Vickers
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Stock recommendation
Stock picks. To conclude, we prefer pork players with ability to develop an integrated supply chain. We expect profitability along the supply chain will continue to fluctuate in the midst of rapid market consolidation and pork price cycles over the next few years. Among listed players, we like WH Group (288.HK) and COFCO Meat (1610.HK), both of which have extensive presence along the hog supply chain.
While we believe the volatility in pork price would remain a concern for upstream pork players, whose profitability would be affected, we are convinced that market consolidation is inevitable. This should favour the large-scale farms as the government is taking action to remove unqualified hog farms in the next few years. Hence, although we expect hog prices to decline in FY17, we maintain BUY on COFCO Meat, given its stronger-than-industry volume growth and attractive valuation.
WH Group (288.HK, BUY). We like WH Group for its market leadership in China as the top slaughterer and packaged meats processor. Despite a decline in packaged meat sales volume in FY16, market share for Shuanghui’s packaged meat products reached 39.6% (+1.9ppts y-o-y) in the national supermarket channel, according to National Supermarket Channel Share (CICC data). We expect packaged meat’s margin to improve in 2H as impact from lower raw material costs kick in. We are also positive on its US operations, as solid upstream operations should support growth in its export volume. Maintain BUY on WH Group, with TP at HK$7.7/sh.
COFCO Meat (1610.HK, BUY). COFCO Meat is one of the leading hog producers in China with production volume reaching 1.6m heads as of FY16. We expect the Company will expand its upstream capacity from 3.5m in FY16 to 5.5m heads in FY20E. Apart from improving productivity efficiencies, the Company is expected to expand its feed self-sufficiency ratio from 5% to 35-40% by end-FY17. The Company also offer sufficient slaughtering and packaged meat facilities to support its growing upstream supply. Valuation is undemanding at 5.4x FY17F PE. We rate COFCO Meat as a BUY, TP at HK$2.1/sh.
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Peers valuation
M k t PE PE Y ield Y ield P/Bk P/Bk RO E RO E
Currenc y Pric e Cap F isc al 17F 18F 17F 18F 17F 18F 17F 18F
Company Name Code L oc al$ US$m Y r x x % % x x % %
ChinaCOF CO Meat*(中糧肉食)
1610 HK HKD 1.67 837 Dec 5.4 4.6 0.0 0.0 0.9 0.8 19.1 18.7
WH Group*(萬洲國際)
288 HK HKD 6.82 12,837 Dec 11.7 10.6 2.6 2.8 1.8 1.6 16.3 16.1
Environmental concerns leading to closure of smaller farms. In March 2013, it was reported that at least 10,000 dead pigs were found floating on the Huangpu river, near Shanghai Songjiang section. The carcasses were found to have porcine circovirus, and were disposed by farmers in Jiaxing. In other years, pork products were found to contain clenbuterol, a lean meat chemical, which caused a recall of products.
Since 2014, China began the reconstruction, or closure of several pig farms in China. According to news sources, over 13k farms closed down in Fujian Province in 2H15, while 70k farms closed in Zhejiang by end-Sept-14. Several more news sources conferred in Guangdong, Guangxi, Hunan, Shandong, Hainan and more on news of forcible closure of hog farms not up to regulatory standards.
Heavy investment into upstream pork. The closure of small hog farms has enticed large companies to expand their hog farming capabilities. In 2016, hog players came forward with indicative targets for the next 3-10 years on hog production
capabilities via organic growth, collaboration with family farms or offering services for farmers (farm structure, feedstock, and veterinary medicine).
While the companies’ targets appear aggressive, several of the companies may rely on management or cooperation with family farms, thereby lowering overall investment expenditure.
Pork accounts for 63.4% of total meat output. In 2016, China total meat output reached 83.64m tons (-1.1% y-o-y). Of which, pork production reached 52.99m tons (-3.4% y-o-y), versus beef at 7.17m tons (+2.4% y-o-y), poultry at 30.95m tons (+3.2% y-o-y), and dairy at 36.02m tons (-4.1% y-o-y).
Top 10 provinces account for 58% of output. The top 10 pork production provinces are Sichuan, Henan, Hunan, Shandong, Hubei, Yunnan, Hebei, Guangdong, Anhui, and Guangxi. These provinces account for roughly 58% of total output.
Meat production breakdown by province (%) – 2014
0%10%20%30%40%50%60%70%80%90%
100%
Sich
uan
Hen
anSh
ando
ngH
unan
Hub
eiH
ebei
Yun
nan
Anh
uiLi
aoni
ngG
uang
dong
Gua
ngxi
Jiang
xiJia
ngsu IM
Hei
long
jiang Jilin
Gui
zhou
Cho
ngqi
ngFu
jian
Zhej
iang
Xin
jiang
Shaa
nxi
Gan
suSh
anxi
Hai
nan
Tian
jinQ
ingh
aiBe
ijing
Nin
gxia
Tibe
tSh
angh
ai
Pork Beef Mutton
Source: Company data, DBS Vickers
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Appendix: Optimising regional distribution
In 2014, MOA set indicative targets for industry standards to reach higher levels by 2020E. While the overall hog production volume is not expected to change significantly (2020E has a +1.4% difference with 2014 production output), MoA aims to improve overall production efficiency in the sector by 2020E, and cap growth in urban areas.
Land, environmental and social constraints remain a key issue due to the fragmentation of the market. The government has structured a guideline on the growth rate in each province to ensure standardisation and improve productivity to optimal regional distribution use. In order to reduce costs, hog farms are encouraged to be situated closer to the Corn Belt to reduce transportation costs.
According to recent environmental regulations, the key development regions include Hebei, Shandong, Henan, Chongqing, Guangxi, Sichuan and Hainan. Production volume is expected to grow 1% y-o-y, which will also cater to neighbouring regions such as Shanghai, Jiangsu, Zhejiang, and Guangdong.
Regions with limited production (Limited Regions) include Beijing, Tianjin, Shanghai, Jiangsu, Zhejiang, Fujian, Anhui, Jiangxi, Hubei, Hunan, Guangdong and other Southern regions due to land constraints. Their volume growth is expected to be flat. The key potential growth region is Northeast China, which includes Liaoning, Jilin, Heilongjiang and Inner Mongolia, as well as Yunnan and Guizhou. These locations offer good land
space and their volume growth is expected to increase by 1-2% y-o-y. This will be the key pork producing region in the future.
Southern Water Network. In November 2015, the MoA issued the “Southern Water Network on the promotion of the layout of the optimal adjustment of pig farming guidance,” to reiterate regional focus on agricultural land, particularly focusing on the Limited Regions. This particularly focuses on Shanghai, Zhejiang, Jiangsu, Guangdong, Anhui, Jiangxi, Henan, Hubei, Hunan, etc. due to strong hog production and growing water and waste constraints. By 2020E, MoA aims to increase hog farms with >500 heads each to cover up to 70% market share, and up to 85% market share for those with adequate disposal treatment facilities. By outlining designated zones, those that do not fit the criteria will be forcibly removed.
Hog production target
2010 2014 2020EPork production (m ton) 50.7 56.7 57.6Above 500 hogs farms (%) 38 42 52Industrial-size slaughter house (%)
66 68 75
Effi c ie nc y ta rge tEx-inventory target (%) 144 155 160Per sow provides.. (head) 13 15 19No. of hogs managed per person (Hog/ person)
500 650 1,000
Feedstock to pork 2.9 2.8 2.7
Source: MoA
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Appendix: Others
National Swine Breeding Improvement.
Since 2010, the Ministry of Agriculture (MoA) has implemented a swine genetic improvement programme with 100 selected core national breeding fields. Among these, 74 were selected as core breeding companies. Aside for basic permits and complete breeding facilities and equipment required, the core number of sows (large-white pigs) must be more than 600, with over 300 heads of Duroc breed. The company must have a clear programme for breeding pigs, with over two years of experience and work report. The key objective of the programme is to facilitate performance testing, and to ensure sustainable development of the seed-stock in China to raise overall quality and efficiency of the existing breed.
Bio-security & government support
Bio security measures and government support. Since 2005, the Chinese government has provided subsidies for animal protein players in breeding stock, construction of industrial-scale farms, insurance, environmental-related purposes, compensation for culled animals, warehousing facilities, subsidies for village veterinarians and free vaccination.
Vaccination is required starting from sow (pre-pregnancy stage), piglet, to finishing hogs. MoA periodically conducts tests at designated breeding farms on (i) respiratory syndrome, swine fever, pseudo rabies, circovirus disease, porcine parvovirus disease and others, (ii) the grandparent stock testing on highly pathogenic avian influenza, avian leukemia, and others.
Government support can come from various farms relating to (i) the raising of environmental standards through better wastage management, piglet and feed loans and insurance premiums, (ii) introduction of quality breed sow (Rmb400-600/head), (iii) introduction of large-scale farming, (iv) vaccination support programmes, (vi) insurance premium support, and more.
No. of disease incidences
0
5,000
10,000
15,000
20,000
25,000
30,000
Feb-
12Ju
n-12
Oct
-12
Feb-
13Ju
n-13
Oct
-13
Feb-
14Ju
n-14
Oct
-14
Feb-
15Ju
n-15
Oct
-15
Feb-
16Ju
n-16
Oct
-16
Feb-
17
Swine Fever (Incidence)
Blue Ear (Incidence)
Porcine Reproductive and Respiratory Syndrom (Incidence)
Cysticercosis (Incidence)
Anthrax (Incidence)
Swine Erysipelas (Incidence)
Pig Lung Diseas (Incidence)
Brucellosis (Incidence)
Source: WIND, DBS Vickers
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Page 46
Common hog diseases
Disease Prev ent ion/ T reatment
Foot and Mouth Disease 口蹄疫 Vaccination
Porcine Epidemic Diarrhea V irus (PEDV) 豬流行性腹瀉病毒(PEDV) Vaccination
European Union (EU). EU is the largest exporter to China. Bilateral protocols have been signed with China to meet veterinary and health requirements. They must register at AQSIQ through CNCA to receive proper certification. Meat products will only enter the country through specific inspection and quarantine centres.
United States (US). The US is competing intensely with EU in exporting to China. With similar requirements in registration and certification, US plants are also required to have third-party testing to confirm no presence of ractopamine in its pork export.
A net importer of pork. China is the world’s largest pork producer, accounting for c.50% of global pork consumption in FY15. It is a net importer of pork, where imports fulfilled 1.4% of domestic consumption. Due to a widening discrepancy between domestic and international pork prices, import share is expected to expand to 3% in 2016F.
Global production est. at 108m mt (2016F)
China49%
EU22%
US11%
Brazil3%
Russia3%
Vietnam2%
Canada2%
Philippines1%Mexico
1%Japan 1%
Others5%
Source: pork.org, DBS Vickers
Asian Insights SparX China Pork Sector
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Page 47
Key environmental laws
Law Desc ript ion
Env ironmental Protection Law of the PRC (Rev ised,and effectiv e on J an-15)
Entities that cause env ironmental pollution and other public hazards mustincorporate env ironmental protection work into their plans, establish anenv ironmental protection responsibility sy stem, and adopt effective measures toprevent and control pollution and other env ironmental harms caused to theenv ironment by waste gases, wastewater, waste residues, dust, malodorous gases,radioactive substances, noise, v ibration and electromagnetic radiation generated inthe course of the production, construction or other activ ities. Enterprises that are inv iolation of the Env ironmental Protection Law may be subject to a warning,payment of damages, imposition of a fine, or limitation or suspension of productionin accordance with the seriousness of the case. If a criminal offense is committed,the offender may be subject to criminal liabilities
The Administrative Measures on the Prevention andCure of Pollution Caused by Breeding of Liv estockand Poultry and the Regulations on the Preventionand Control of Pollution from Large-scale Breedingof Liv estock and Poultry (Effectiv e 2014)
Set out the requirements for the prevention and ratification of pollution caused byor contaminants emitted during the breeding of liv estock and poultry . In the eventof v iolation of such administrative measures, the relevant authorities ofenv ironment protection can impose orders to stop by production and to rectify thev iolation.
Law on Prevention of Water Pollution of the PRC Enterprises which discharge water or air pollutants must pay discharge fees basedon the types and volumes of the pollutants discharged. The discharge fees arecalculated by the local env ironmental protection authority , which will rev iew andverify the types and volumes of pollutants discharged.
Under the above-mentioned laws and regulations, companies are required to abide by various prov isions regarding the env ironmentalprotection and prevention of pollution. Companies are required to complete the env ironmental impact evaluation process prior tocommencing a construction project. Companies are also required to obtain discharge permits and pay discharge fees for the discharge ofpollutants. F ailing to comply with env ironmental protection laws and regulations would subject the companies to a range of penaltiesvary ing from warnings, fines and suspension of the production or operation to other administrativ e sanctions, depending on the degreeof damage or adverse consequences. The responsible person of the breaching entity may be subject to criminal liabilities for seriousbreaches which result in significant damages to private or public property or personal injury or death.
Source: COFCO Meat Prospectus, DBS Vickers
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Major regulator overview
L aw s andreg u lat io n s
Det ails
V eterinary DrugsSuperv ision
According to Regulations on Administration of V eterinary Drugs (《獸藥管理條例》 ) , which were promulgatedby the State Council on 9 Apr 2004 and became effectiv e on 1 Nov 2004, and were amended on 29 J ul 2014 and 6F eb 2016, it is prohibited to add in animal feedstuffs or drinking water any hormonal drug or other prohibited drugsspecified by the administrativ e department for v eterinary medicine under the State Council, administer humanmedicine to animals, or to sell animal food products that contain illicit drugs or in which the residual amount ofv eterinary drugs exceeds the limits. The drugs prohibited to be added in animal feedstuffs or drinking water are listedin detail in the List of Drugs F orbidden to be Used in F eeds or Drinking Water of Animals (《關於禁止在飼料和動
物飲用水中使用的藥物品種目錄》 ) co-promulgated by the MOA, the Ministry of Health, and the State F oodand Drug Administration (formerly known as "State Drug Administration") on 9 F eb 2002.
Hog SlaughteringRequirement
According to Regulations on Administration of Hog Slaughtering (《生豬屠宰管理條例》 ), which werepromulgated by the State Council on 19 Dec 1997 and 19 Dec 2007, respectiv ely , and became effectiv e on August1, 2008, and Implementing Measures for Regulations on Administration of Hog Slaughtering (《生豬屠宰管理條例
實施辦法》 ), the PRC gov ernment implements a sy stem that requires hogs to be slaughtered by designated hogslaughtering plants (houses) and quarantined in a centralized manner. The gov ernments of prefecture-lev el cities areresponsible for issuing the permits and signboards of designated hog slaughtering plants (houses) to the designatedplants. A designated hog slaughtering plant (house) is required to:(1) hav e a source of water supply that is commensurate with the operation scale of the slaughter and meet thestandards for water quality set by the national gov ernment authorities;(2) hav e stand-by slaughter rooms, slaughter rooms, emergency slaughter rooms, hog slaughter equipment andmeans of transportation which conform to the requirements prescribed by the national gov ernment authorities;(3) hav e the technical staff for hog slaughter who hav e obtained health certificates;(4) hav e qualified meat product quality inspectors;(5) hav e inspection equipment and sterilization facilities that conform to the requirements prescribed by thegov ernment, and the facilities for pollution prev ention and control that conform to the env ironmental protectionrequirements ;(6) hav e the facilities for innocuous disposal of diseased hogs and hog products deriv ed therefrom; and(7) obtain a qualification certificate of animal epidemic prev ention.A designated hog slaughtering plant (house) is required to establish a stringent inspection sy stem controlling meatproduct quality . Inspection of meat product quality must be carried out simultaneously with hog slaughtering, andthe inspection results must be recorded truthfully . The records of inspection results must be retained for at least twoy ears. Hog products of a designated hog slaughtering plant (house) shall not leav e the plant (house) before theyhav e undergone the inspection process or if they fail such inspection.
Breeding F arm orLarge-ScaleBreeding Plot
According to the Animal Husbandry Law of the PRC (《中華人民共和國畜牧法》 ) which was promulgated bythe Standing Committee of the National People's Congress (the "Standing Committee") on 29 Dec 2005 and becameeffectiv e on 1 J ul 2006, and amended on 24 Apr 2015, and Administrativ e Measures for Labeling the Liv estock andPoultry and Breeding F iles (《畜禽標識和養殖檔案管理辦 法》 ), which were issued by Ministry of Agriculture(農業部 ) (the "MOA") on 26 J un 2006 and became effectiv e on 1 J ul 2006, liv estock and poultry breeding farmsand large-scale breeding plots are required to, among other things:(1) hav e production premises and supporting facilities commensurate with their scales of breeding;(2) hav e animal husbandry and v eterinary technicians in their serv ice;(3) meet the epidemic prev ention conditions, as prov ided for by laws and administrativ e regulations and prescribedby the administrativ e department for animal husbandry and v eterinary medicine under the State Council;(4) hav e facilities such as methane-generating pits for the comprehensiv e use of, or other facilities for innocuoustreatment of, the feces of liv estock and poultry , waste water and other solid wastes; and(5) meet other conditions prov ided for by laws and administrativ e regulations.
Source: Company, DBS Vickers
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Major regulator overview (continued)
L aw s andregu lat ion s
Det ails
Animal EpidemicPrev entionRequirement
According to the Animal Epidemic Prev ention Law of the PRC (《中華人民共和國動物防疫法》 ), which werepromulgated by the Standing Committee on 3 J ul 1997, amended on 30 Aug 2007, 29 J un 2013 and 24 Apr2015, and became effectiv e on 1 J an 2008, and Censoring Measures on Conditions for Animal Epidemic Prev ention(《動物防疫條件審查辦法》 ), building an animal breeding farm (small breeding plot) or isolation place, animalslaughtering and processing house, or a place where animals and animal products are giv en innocuous treatmentrequires the Certificate of Conformity to the Conditions for Animal Epidemic Prev ention (《動物防疫條件合格
證》 ) from the administrativ e department for v eterinary medicine. Before slaughtering, selling or transporting animals,or selling or transporting animal products, the owner shall submit an application to the local animal health superv isioninstitution for quarantine. Quarantine Certificates will be issued for and quarantine marks will be attached on theanimals and animal products that hav e passed the quarantine. Measures for the Administration of Animal Quarantine(《動物檢疫管理辦法》 ), which were promulgated by the MOA on 21 J an 2010 and became effectiv e on 1 Mar2010, further prov ide that an examination must be conducted by local authorities
Import license According to the Import and Export Administration Regulations and Measures for the Administration of AutomaticImport Licensing for Goods (《貨物自動進口許可管理辦法》 ), which were promulgated by the MOF COM andGeneral Administration of Customs on 10 Nov 2004 and became effectiv e on 1 J an 2005, to import goods whichare subject to automatic import licensing requirements, the consignee (including importers and imported goods users)shall submit the application for an Automatic Import License with the local or corresponding license issuing authorityand obtain an Automatic Import License before going through customs declaration formalities. Chilled and frozenpork is included in the Catalogue of Goods Subject to Automatic Import License Administration for the Year 2014(《 2014年自動進口許可管理貨物目錄》 ), and thus are subject to such licensing requirements.
Source: Company, DBS Vickers
Asian Insights SparX China Pork Sector
ASIAN INSIGHTS VICKERS SECURITIES
Page 50
Major regulator overview (continued)
Re gu la tion Da te De sc rip t ion
Livestock and poultry scale pollution prevention and control regulations
Jan-14 The regulation targets the livestock and poultry pollution prevention and regulatory controls. There are specific ban sizes (ideal breeding areas), incentives and penalties available.
Environmental Protection Law Jan-15 The Environment Law focuses on the livestock farms, breeding areas and slaughter enterprises in the location, construction and management to be compliant to laws and regulation
Water Ten Apr-15 This specifies livestock and poultry breeding prohibition area must be enforced close to Beijing-Tianjin-Hebei, Yangtze River Delta, Pearl River Delta to be relocated.
Guidance by MoA Aug-15 MoA requried animal husbandry departments to cooperate with the environmental protection department to set up bans on work areas with submission of the delination ofprohibited regions
Southern Area on the promotion of pig farming layout adjustment and optimisation of guidance
Nov-15 the Ministry of Agriculture promulgated the "Southern Area on the promotion of pig farming layout adjustment and optimization of the guidance." Opinions, the main producing counties to develop pig breeding plan, a reasonable delineation of suitable breeding area and prohibit the construction of livestock and poultry farms and breeding area area. Prohibited area in accordance with the "Water Pollution Prevention Action Plan" time limit by the local government legally closed or relocated pig-scale farms, to guide the transfer of live pigs to non-overloaded areas.
Soil Ten May-16 In May 2016, the State Council issued a "soil ten", requiring a clear and reasonable to determine the layout and scale of livestock and poultry breeding, livestock and poultry pollution prevention and control.
Livestock and poultry breeding area designated technical guidelines
Nov-16 The Ministry of Environmental Protection, and MoA issued a "livestock and poultry breeding area designated technical guidelines", will be used as a late all over the country designated the basis of the ban area. After the completion of the document, the local environmental protection and farming and animal husbandry departments shall, in accordance with the unified arrangements of the local governments, actively cooperate with the re levant departments to assist in closing or re locating existing closed farms or relocated ones.
13th-Five Year Plan Dec'16 In the 13th-Five Year Plan, it requires the re location and closure of livestock farms which are in the prohibited areas by end-2017, such as drinking source areas, nature reserves, scenic spots, urban residential areas, and cultural and educational scientific research, and others.
Source: MoA, DBS Vickers
Asian Insights SparX China Pork Sector
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Page 51
Meat major transaction between countries
Date A cquirer T argetT argetcount ry M eat T y pe Desc ript ion
Nov -16 BRF COFCO Meat China Pork Stake BRF entered into a cornerstone agreement to acquire 77.6mshares (1.99%) of COFCO Meat as part of a strategicagreement.
Nov -16 Danish Crown n.a China Pork n.a Danish Crown will build a processing plant in China to beclose to its target consumers.
Oct-16 CPF Fujian SumpoFood
China Poultry M&A CPF agrees to purchase 70% stake in Fujian Sumpo Food,which is principally engaged in the manufacturing andtrading of animal feed, farming and trading of poultryproducts in China.
Aug-16 Zhongfu n.a Australia Cattleland
M&A Shanghai Zhongfu Group (v ia. Kimberley AgriculturalInvestment) purchased 476,000 hectare of Carlton Hill inAustralia (cattle station ) for US$76m.
Apr-16 Cranswick Crown Chicken UK Chicken M&A UK Sausage maker, Cranswick buy s Crown Chicken for £40m.
Apr-16 Foresun Group Margrif GlobalFood assets
Argentina Meat M&A Foresun Group, acquires for 3 beef slaughterhouses and alivestock confinement unit in Argentina owned by MargrifGlobal Foods S.A for US$75m .
Apr-16 Group controlledby ShanghaiPengxin Group
S. Kidman Australia Cattle M&A Chinese led group (controlled by Shanghai Pengxin Group)aims to purchase 80% of S. Kidman & Co. for AUS370m.
J an-16 Foresun Group n.a n.a n.a M&A Foresun Group reports to be planning a backdoor listingthrough a reverse merger with Sundiro Holding(000571:CH), helped by CDH
Nov -15 Delisi Food Bindaree BeefGroup
Australia Beef M&A Delisi Food purchases a 45% stake in Australia's 4th largestmeat processor that is expected to be worth US$105m.
Sep-15 Bright Food Silver Fern Farms NewZealand
Beef M&A Bright Food agrees to purchase 50% stake in New ZealandMeat processor.
J ul-15 JBS USA Cargil Porkbusiness
USA Pork M&A J BS USA agrees to purchase Cargil Pork business forUS$1.45bn.
J un-15 Pilgrim Ty son FoodMexicanoperations
Mexico Pork M&A Pilgrim acquires Ty son Food's Mexico operations
J un-14 KKR, Baring PE,HOPU, BOYU
COFCO Meat China Pork M&A KKR, Baring Private Equity , HOPU and Boyu invests inCOFCO Meat to build and manage large-scale industrialisedhog farms and meat processing plants in China
J un-14 V &V Walsh Grand Farm China Lamb J V Western Australia's largest meat processor signs US$1bndeal with Grand Farm, China's largest red meat importer, bysupply ing lambs and cattles.
Apr-14 Hong YongCapital Holdings
Tabro Meat Australia Beef M&A Tabro Meat was sold to Hong Young Capital for US$18m,which CDH Investment also participated.
May-13 Shuanghui Smithfield Foods China Pork M&A Shuanghui buys Smithfield for US$4.7bn (incl. debt), andbecomes the largest pork player globally .
Source: Company, DBS Vickers
ASIAN INSIGHTS VICKERS SECURITIESed-JS/ sa- JY
BUY Last Traded Price ( 10 May 2017):HK$1.67 (HSI : 25,015) Price Target 12-mth: HK$2.10 (26% upside) Potential Catalyst: Favourable hog and feed prices Where we differ: More conservative margins Analyst Alison FOK +852 2971 1938 [email protected] Mavis HUI +852 2863 8879 [email protected] Alice HUI CFA, +852 2971 1960 [email protected]
What’s New • 1Q production volume is on track, up 31% y-o-y • Live hog prices weaker than expected in May, a
typically low season, and expect some price recovery in 2H
Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX
Market share gains ahead 1Q17 volume growth largely on track, reiterate Buy for the fast growing hog producer. We reiterate our BUY rating on COFCO Meat, and target price at HK$2.1/share. 1Q17 hog production volume remains on track, up 31% y-o-y, forming 21% of our full year estimate. Commercial hog prices declined by 9% y-o-y to Rmb16.3/kg. Feed cost declined 3.9% y-o-y with the corn price decline partly offset by an upswing in soybean prices (+18% y-o-y). Hog prices retreated to Rmb14.6/kg in May-17 (down c.28% y-o-y), which is due to low-season. As such, we maintain our forecast of sales volume growth at 34.5% y-o-y, and an 11% decline in hog prices in FY17F. Expansion and efficiency improvement to drive earnings. Following a 30% p.a. growth in capacity from 2013-15, the company has completed five hog production projects in 2016, adding another 34.8% in capacity to over 3.1m heads, and is expected to add another 29% to 4m heads by end-FY17F. We also expect efficiency improvements from better economies of scale, standardisation, and refinement of production processes. Key beneficiary of industry consolidation. The PRC government has been adopting stricter environmental laws and regulations, which has led to the closure of smaller and outdated hog farms to the benefit of large-scale hog producers who have gained market share. With the deadline to close or shift such hog farms by end FY17/18, we believe COFCO Meat will be a key beneficiary, and would continue to grow at the expense of smaller operators and further increase its market presence. Valuation: We value COFCO Meat at 8x FY17F PE. Key Risks to Our View: Fluctuation in hog and corn prices, outbreak of hog diseases, food safety issues, potential equity fundraising.
At A Glance Issued Capital (m shrs) 3,902 Mkt. Cap (HK$m/US$m) 6,516 / 837
Major Shareholders China Foods (Holdings) Limited (%) 27.6 KKR & Co. L.P. (%) 15.0 Mitsubishi Corporation (%) 13.6 Baring Private Equity Asia GP V, L.P. (%) 6.8 Temasek Holdings (Private) Limited (%) 6.2
Free Float (%) 30.9 3m Avg. Daily Val. (US$m) 1.5 ICB Industry : Consumer Goods / Food Producers
66
86
106
126
146
166
186
206
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
2.1
2.2
Oct-16 Jan-17 Apr-17
Relative IndexHK$
COFCO Meat Holdings Ltd (LHS) Relative HSI (RHS)
DBS Group Research . Equity 10 May 2017
China / Hong Kong Company Guide
COFCO Meat Holdings Ltd Version 2 | Bloomberg: 1610 HK Equity | Reuters: 1610.HK
Refer to important disclosures at the end of this report
ASIAN INSIGHTS VICKERS SECURITIES
Page 53
Company Guide
COFCO Meat Holdings Ltd
CRITICAL FACTORS TO WATCH Sales growth driven by hog price and volume growth. Hog prices and sales volume are key determinants to COFCO Meats’ revenue growth. We expect hog prices to decline by 11% y-o-y in FY17F, thereafter decline at a softer rate to 6% in FY18F Sales volume. We expect sales volume to grow by 34.5%, which should help offset the 11% decline in hog prices in FY17F. Following a 30% p.a. growth in capacity from 2013-15, which helped to boost its market share from 0.13% in 2013 to 0.17% in 2015, the company completed another five hog production projects in 2016, adding another 34.8% in capacity to 3.1m heads. With the adoption of stricter environmental laws and regulations by the PRC government, smaller and outdated hog farms have been closing down, resulting in a decrease in supply while large-scale hog farms have been gaining market share. This should benefit COFCO Meat. Margin determined by feed costs. Feed cost account for 56-62% of costs for COFCO Meat. With the end of the government’s stockpiling policy, the difference in domestic and international corn prices will narrow, as domestic corn prices will have to be more market-competitive. As such, despite softer hog prices, we expect gross margins to stay largely flat at c.20.5% in FY16-18F.
Hog price (Rmb/kg)
Corn price (Rmb/kg)
Average finish weight (kg)
Production volume (m head)
Source: Company, DBS Vickers
13.3
15.2
18.116.5
15.5
0.0
2.6
5.2
7.8
10.4
13.1
15.7
18.3
2014A 2015A 2016A 2017F 2018F
2.3 2.3
2.0 1.9 1.9
0.00
0.46
0.92
1.38
1.84
2.30
2014A 2015A 2016A 2017F 2018F
97.8101.8 104.4 104.4 104.4
0
21
43
64
85
106
2014A 2015A 2016A 2017F 2018F
11
2
2
3
0.00
0.61
1.21
1.82
2.42
3.03
2014A 2015A 2016A 2017F 2018F
ASIAN INSIGHTS VICKERS SECURITIES
Page 54
Company Guide
COFCO Meat Holdings Ltd
Balance Sheet: We expect COFCO Meat’s net gearing to increase to 30% at end-FY17E (FY16: 22.6%). Free-cash flow is expected to turn negative in 2017F with capital expenditure of Rmb1.1bn planned. Share Price Drivers: Hog and corn prices are primary drivers to the company’s earnings with its strong upstream exposure. Aside from this, clear expansionary plans, and production efficiency improvements are also drivers to sustain stronger topline growth than its peers. Key Risks: Key earnings risks include fluctuation in selling prices of hog and meat products, outbreak of hog diseases, food safety issues, increase in feed costs and environmental-related costs, ability to ramp up new capacities as well as changes in consumption habits of meat products. Company Background: COFCO Meat is one of the major pork players in China with a vertically integrated business model. It operates across the entire industry value chain, spanning from feed production, hog production, slaughtering, and the production and distribution of fresh pork and processed meat, to import of frozen meat products. With 47 hog farms, two slaughtering plants and two processed meat plants in China, the company is ranked fourth in hog production and was the second largest meat importer in China in 2015, according to Frost & Sullivan.
Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX
Decent US performance, so far The leading global pork player. We reiterate BUY rating on WH Group with a target price of HK$7.70, which is equivalent to 13.2x FY17F PE. With higher hog inventories reported by USDA earlier this year, US hog price futures saw a y-o-y price decline in March-April after reaching the peak in Feb 2017, with prices expected to rise again into June-August, when hog supply is at the lowest. This is in anticipation of greater slaughtering capacity being introduced later in 2017 (Triumph-Seaboard). We maintain our view that US hog production losses should still narrow, and US fresh pork sales volume growth will offset temporarily compressed margins in the mid-downstream business in FY17F. We also like WH Group for its One Smithfield initiative to lower logistics and manufacturing costs, and targets in improving the product mix and scalability in China operations. China performance still soft, but should stabilise with lower hog prices. While 1Q17 China packaged meat sales disappointed largely due to an earlier CNY and a higher base comparison in 1Q16 (cheaper inventory used), the company reported a stabilisation in sales volume in April-May. With softer hog prices, we should also see some benefits materialising in 2H17. It targets to maintain double-digit EBIT margin, and volume growth for FY17F. Separately, Dalian Commodity Exchange has also applied for regulatory approval for hog futures contracts, which may take some time to materialise. This should shed some light on hog price cyclicality. Favourable credit rating and refinancing achieved. With the investment grade of Baa2 achieved in Oct 2016, WH Group has completed refinancing of US$1.4bn of its Senior Notes, in addition to a credit agreement of US$1bn of senior unsecured revolving facility and US$500m of senior unsecured term loans. Due to the refinancing activities, the group recorded a debt retirement cost of US$70m, but should also see a lower interest rate offset effect this year. Based on our estimates, we expect its net gearing to lower to 14% by end FY17F (FY16: 24%). Valuation: Maintain BUY on improving financials and solid business. Our TP is derived using SOP valuation, with the China business pegged at 16x FY17F PE (Shuanghui’s 3-year average) and the US business at 11x (the average PE for meat players in the US). Key Risks to Our View: Raw material cost volatility, trade and regulation changes, food safety and disease outbreaks, shareholder reduction overhang.
At A Glance Issued Capital (m shrs) 14,651 Mkt. Cap (HK$m/US$m) 99,920 / 12,837
Major Shareholders Rise Grand (The management) (%) 36.0 CDH (%) 9.3
Free Float (%) 54.7 3m Avg. Daily Val. (US$m) 24.6 ICB Industry : Consumer Goods / Food Producers
59
79
99
119
139
159
179
199
219
3.4
3.9
4.4
4.9
5.4
5.9
6.4
6.9
7.4
7.9
Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17
Relative IndexHK$
WH Group Ltd (LHS) Relative HSI (RHS)
DBS Group Research . Equity 10 May 2017
China / Hong Kong Company Guide
WH Group Ltd Version 2 | Bloomberg: 288 HK Equity | Reuters: 0288.HK
Refer to important disclosures at the end of this report
ASIAN INSIGHTS VICKERS SECURITIES
Page 59
Company Guide
WH Group Ltd
CRITICAL FACTORS TO WATCH US to lead growth. We expect US operating profit to achieve a CAGR of 11% in 2016-18F. We expect the company’s continuous enhancement in product mix towards more popular items (belly and ham), as well as the One Smithfield Initiative to reduce redundant positions in the company by FY17F. The Clougherty acquisition should support volume growth for packaged meats in 2017F. In addition, this should offer new distribution channels in the West Coast for Smithfield’s existing products, and shorter lead time to West port for exports. Packaged meat in China. We expect China to deliver operating profit CAGR of 4% in FY16-18F. Despite the consumption environment remaining soft in China, we expect a preference towards low-temperature meat products (LTMP), product mix enhancement (introduction of American-style products), to continue enhancing profitability. In addition, we think that the rising US exports into China for raw material use in packaged meats should bode well for overall margins. Export volume growth. With matured pork demand, the US relies on exports to support growth in the pork sector. In Feb’ 2017, US export volume growth reached 16% y-o-y, with the key export countries being Mexico (32.7% of total volume share), Japan (22.7%), South Korea (10.0%), and China/Hong Kong (9.9%). China/Hong Kong reported a mild volume decline of 3.5% y-o-y, likely due to competitive prices from the EU. Seeking M&A opportunities. With strong free-cash-flow generation, WH Group is primed to seek out M&A opportunities to continue enhancing its market share leadership in the US. In Jan 2017, the company purchased California’s largest pork processor, Clougherty, which owns two processing facilities, three farms and approx. 2k employees, which should help extend its distribution network to the West Coast.
US hog price change (%)
16%19%
0% 1%
0%
5%
10%
15%
20%
25%
0
1,000
2,000
3,000
4,000
5,000
Packaged meats
Fresh pork Hog production
Others
US$m
2016 % of sales
US FY16 sales & % of total sales
33%
21%
4%0%
0%5%10%15%20%25%30%35%
0
2,000
4,000
6,000
8,000
Packaged meats
Fresh pork Hog production
Others
US$m
2016 % of sales
Smithfield pork export to China vs. rest of US market
25 83179
280
0
100
200
300
400
2015 2016
'000 ton
Rest of the industry export to China
Smithfied export to China
Total volume of Smithfield pork export to all countries vs. rest of US industry
1,498 1,596
639 715
0
500
1,000
1,500
2,000
2,500
2015 2016
'000 ton
Rest of industry export to all countries
Smithfield export to all countries
Source: Company, DBS Vickers
ASIAN INSIGHTS VICKERS SECURITIES
Page 60
Company Guide
WH Group Ltd
Balance Sheet: The company completed the refinancing activities of its Senior Notes of US$1.4bn, and credit agreements of US$1bn and US$500m respectively in early-FY17. Excluding a debt retirement cost of US$70m, this refinancing should help lower its interest cost. As of end-FY16, WH Group had a net gearing of 24.7%. Looking at two businesses separately, China has cash before delivery policy, while US credit policy is roughly 30 days. Capital expenditure reached US$451m in FY16, and we expect this to reach US$500-600m in FY17F. Net gearing is expected to lower to 14% by end-FY17F. Share Price Drivers: Packaged meat product mix enhancement. Packaged meat operating profit accounts for bulk of the group’s operating profit. Through continuous improvement in product mix (introduction of American-style brand in China) and cost-saving initiatives (One Smithfield), we expect packaged meat operating profit to improve by 6.3% y-o-y in FY17F. Export volume. The direct access to the largest pork consuming country in the world and favourable US-China hog price gap, should continue to enhance overall economies of scale for its fresh pork operations. Key Risks: Raw material & selling price volatility. WH Group is sensitive to both hog and corn prices in the US and China. However, the company does hedging for its US operations, which should help limit price volatility. Previous key shareholder seeking to lower its stake. CDH has lowered its stake by 21.1% since Aug2016, with its remaining stake at 9.3%. Political and trade policy. WH Group’s US fresh pork and hog production sales rely on export volume growth. Any political and trade policy changes will impact WH Group’s US operations. Food safety and disease concerns. WH Group is subject to food safety and disease risks in both countries. Company Background: WH Group is the largest integrated pork player globally, with operations spanning the US, China and the EU. In the US, Smithfield is the no. 1 packaged meat player (18% of packaged meat market share). In China, the Shuanghui brand is also the no.1 packaged meat player with a market share of 39.6% as of end-FY16.
Leverage & Asset Turnover (x)
Capital Expenditure
ROE
Forward PE Band
PB Band
Source: Company, DBS Vickers
1.4
1.5
1.5
1.6
1.6
1.7
1.7
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
2014A 2015A 2016A 2017F 2018F
Gross Debt to Equity (LHS) Asset Turnover (RHS)
0.0
100.0
200.0
300.0
400.0
500.0
600.0
700.0
800.0
2014A 2015A 2016A 2017F 2018F
Capital Expenditure (-)
US$m
0.0%
5.0%
10.0%
15.0%
20.0%
2014A 2015A 2016A 2017F 2018F
Avg: 10.4x
+1sd: 12.2x
+2sd: 14.1x
‐1sd: 8.5x
‐2sd: 6.7x6.0
8.0
10.0
12.0
14.0
16.0
Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17
(x)
Avg: 1.83x
+1sd: 2.22x
+2sd: 2.61x
‐1sd: 1.44x
‐2sd: 1.05x0.9
1.4
1.9
2.4
2.9
3.4
Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17
(x)
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Company Guide
WH Group Ltd
Key Assumptions
FY Dec 2014A 2015A 2016A 2017F 2018F US hog price change (%) 11.6 (31.7) (20.0) 5.0 0.0 China hog price change (%)
(8.3) 10.0 21.7 (10.8) (6.1)
Source: Company, DBS Vickers
Segmental Breakdown (US$ m)
FY Dec 2014A 2015A 2016A 2017F 2018F Revenues (US$ m) China 7,395 7,087 7,755 7,732 8,365 US 13,235 12,745 12,358 13,267 13,712 Others 1,613 1,377 1,421 1,270 1,295 Total 22,243 21,209 21,534 22,270 23,372 Source: Company, DBS Vickers
DBSVHK 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 Completed Date: 10 May 2017 19:14:24 (HKT) Dissemination Date: 10 May 2017 19:54:14 (HKT)
Sources for all charts and tables are DBS Vickers unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited (“DBSVHK”). This report is solely intended for the clients of DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd. (“DBSVS”) and DBSVHK, 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 DBSVHK. 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., DBSVS and DBSVHK, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research 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, 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. DBSVUSA, a US-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.
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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 research analyst (s)
primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the
issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real
estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the
management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or
his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. 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. 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. There is no direct link of DBS Group's compensation to any specific investment banking function of the
DBS Group. COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBSVHK and its subsidiaries do not have a proprietary position in the securities recommended/mentioned in this report as of 09 May
2017.
2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
3. Compensation for investment banking services: DBS Bank Ltd., DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from COFCO Meat Holdings Limited (1610 HK) as of 31 Mar 2017. DBS Bank Ltd., DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for COFCO Meat Holdings Limited (1610 HK) in the past 12 months, as of 31 Mar 2017. 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.
4. Disclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA 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, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the
trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.
2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.
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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”) or DBS Vickers (Hong Kong) Limited (“DBSVHK”), 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, and DBSVHK is regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, 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 DBSVHK which is licensed and regulated by the Hong Kong Securities and Futures Commission.
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 DBSVHK which is regulated by the Securities and Futures Commission of Hong Kong. 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 DBSVHK. 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 DBSVUSA, 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 Vickers (Hong Kong) Limited
18th Floor Man Yee building, 68 Des Voeux Road Central, Central, Hong Kong
Tel: (852) 2820-4888, Fax: (852) 2868-1523
Company Regn. No. 31758
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As i a n Eq u i t i e s Sa l e s , Sa l e s Tra d i n g a n d R e s e a rc h Co n ta c ts
Sa l e s H e a d s Te l : Ema i l :Singapore Kenne th Tang 65-6398 6951 kenne thtang@dbsvicke rs.comHong Kong Andrew Au 852-2820 4992 [email protected] rs.comLondon Graham Booth 44-20-7618 1881 [email protected] York Ela ine Yu 1-212-826 3553 e la [email protected] rs.comTha iland Na risa ra Vise skosin 662-657 7759 Na risa [email protected] rs.comIndonesia Rica rdo Silaen, CFA 6221 3003 4911 rica rdo.sila [email protected] rs.com
Sa l e s Tra d i n g Co n ta c t s Te l : Ema i l :Singapore Vivian Goh 65-6398 6927 viviangohkb@dbsvicke rs.comHong Kong Franco Law 852-2971 1828 [email protected] rs.comLondon Cha rle s Davie s 44-20-7618 1883 cha rle sdavie [email protected] York Brenda Wong 1-212-826 3558 [email protected] rs.com
R e s e a rc h Co n ta c t s Te l : Ema i l :Regiona l Timothy Wong 65-6682 3691 [email protected] Janice Chua 65-6682 3692 [email protected] Kong Carol Wu 852-2863 8841 ca [email protected] rs.comMa laysia Wong Ming Tek 603-2604 3970 mingtek@a lliancedbs.comTha iland Chanpen Sirithana ra ttanakul 662-657 7824 [email protected] rs.comIndonesia Mayna rd Pria ja ya Arif 6221 3003 4930 mayna rd.a [email protected] rs.com
DBS V ic k ers Sec u rit ies - Reg ional O f f ic es
HO NG K O NG M A LA Y SIA SING A PO RE DBS V ickers (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd18th F loor Man Yee Building 19th F loor, Menara Multi-Purpose 12 Marina Boulev ard68 Des V oeux Road Central Capital Square, 8 J alan Munshi Abdullah Level 40Central, Hong Kong 50100 Kuala Lumpur Marina Bay F inancial CentreTel: 852-2820 4888 Tel: 603 2604 3333 Tower 3, Singapore 018982F ax: 852-2868 1523 F ax: 603 2604 3921 Tel: 65-6878 8888Participant of The Stock Exchangeof Hong Kong Limited
INDO NESIA UNIT ED ST A T ES UNIT ED K ING DO MPT DBS V ickers Securities (Indonesia) DBS V ickers Securities (USA) Inc DBS V ickers Securities (UK) LtdDBS Bank Tower 777 Third Av enue 4th F loor Paternoster HouseCiputra World 1, 32/F Suite 26A 65 St Paul's Churchy ardJ l. Prof. Dr. Satrio Kav . 3-5 New York, New York 10017 London EC4M 8ABJ akarta 12940, Indonesia Tel: 1-212-826 1888 Tel: 44-20-7618 1888Tel: 62-21- 3003 4900 F ax: 1-212-826 8704 Fax: 44-20-7618 1900F ax: 62-21- 3003 4943 Member of F INRA and SIPC Regulated by The F inancial Serv ices Authority
T HA ILA NDDBS V ickers Securities (Thailand) Co, Ltd989 Siam Piwat Tower Building, 9th, 14th-15th F loor, Rama 1 Road, Pathumwan, Bangkok Thailand 10330 Tel. 66 2 657 7831F ax: 66 2 658 1269