Charoen Pokphand Food

BUY 2nd half 2012 overall look of CPV still not bright but growth seen in long term
Charoen Pokphand Food Plc (CPF)

Abundant business opportunities in CPV… focusing on feed and food According to the visit of CP Vietnam Corporation or CPV in Vietnam (CPF) holds both direct and indirect stake at 82% in total), the overall look of CPV’s agriculture-food business is still on the growth for the next 5 years because of supportive factors as follows. 1) Animal feed business (53% from CPV’s total revenue): animal-farming entrepreneurs have more tendency of purchasing readymade animal feed instead of self-mixing which is a benefit for animal feed sales of CPV who possesses the first highest market share in Vietnam. 2) Processed food business (3% from CPV’s total revenue, but with

high margin): CPV currently has a low number of processed food sales, mostly from Vietnam. However, the company has launched a measure to expand more selling distribution to approach domestic customers from both organic (CP Fresh Mart and CP Shop) and inorganic (Modern Trade Market) methods including expansion of international export to boost the revenue and

gross profit margin of CPV. 3) Animal farming business (44% from CPV’s total revenue): the aquatic farming, in particular, is advantageous for its location in Vietnam that is on the coast. Combined with CPF’s high technology, the cost is also advantageous since the quality of products is up to the global standard, urging CPV’s growth of processed food business in the future.

However, the tendency of CPV’s business in 2H12 isn’t so bright (but already under our coverage) due to the fallen price of land animal product (like Thailand) as a result of oversupply, pressuring CPV who has 15% revenue from poultry farming from the total revenue. Nevertheless, the mentioned situation is projected to be nearly over since domestic producers will begin cutting supply, so the recovery of price could be seen in the late of 2012.

2012: tough year, but recovery projected in 2013

Although CPF’s business doesn’t tend to shine in 2H12 because of oversupply problem from animal product that the company has to face and the rise of global raw material prices which is a pressure for the gross profit margin of the animal-farming business (33% from the total income). Nevertheless, CPF has already applied a strategy of stocking raw material until end-2012,

therefore the impact from raw material price is quite limited. Moreover, CPF’s main strategy focuses on expanding income base abroad and on more to be the upstream business (animal feed business), so these will help reduce risks from the abovementioned situation at some level. We’re convinced that CPF’s net profit before extraordinary item in 2013 will grow by 16% YoY due to the

recovery of land animal industry and the production that tends to decline to the same level of demand. Moreover, the acceleration on inorganic growth (M&A) that the company is in the process of considering international acquisition, projecting to complete within 2012 under a condition that it will have to urge EPS and ROE to rise, which is a positive factor that we haven’t included in our 2013 net profit forecast.

Recommend “BUY”… CPF’s share price already reflects negative factors

We maintain our recommendation “BUY” for CPF. 2012 fair value, using 17x PER, is B41. The share price has been through fall, already reflecting negative factors quite considerably, so it is a good chance to accumulate, waiting for the recovery of operating result in 2013.