20131003-Maybank_KERPL-China_Foods_Buy_One,_Get_Four__Upgrade_to_BUY_14页_549kb

China Foods Summary

Core Content

China Foods (506 HK) is a manufacturer of wine, confectionary products, and one of Coca-Cola's bottlers in China. The stock has seen a rating change from Sell to Buy, with the target price raised from HKD2.33 to HKD4.30. The current share price is HKD2.72, and the stock is trading at 2SD below its five-year historical forward PBR average. The valuation approach has been switched from PER to PBR, based on 1.8X FY14F PBR (1SD below historical average).

Main Points

• Rating Change: The stock has been upgraded from Sell to Buy due to emerging investment value.
• Valuation: Switched from PER to PBR-based valuation. The new target price of HKD4.30 is based on 1.8X FY14F PBR.
• Earnings Recovery: Projected to report a net loss of HKD119m in 2H13F, with earnings recovery expected in 2014F and 2015F.
• Segment Performance:
  • Wine: Sales volume declined 34% YoY in 1H13, but the new Classical series is expected to narrow the decline to 20% YoY in 2H13.
  • Beverages: Sales rose 4.8% YoY in 1H13, driven by new product launches and marketing campaigns. EBIT margin improved to 5.4%.
  • Kitchen Food: Expected to remain in loss due to structural cost disadvantages and high fixed operating costs.
  • Confectionary: A loss-making segment with low growth prospects. Market share is 6%, and growth is expected to be in line with the industry.

Key Information

• Share Price and Target Price: HKD2.72 / HKD4.30
• Shares Issued: 2,797.2 million
• Market Cap (USDm): 975.44
• 3-Month Avg Daily Turnover (USDm): 1.9
• Free Float (%): 25.78
• Major Shareholder: COFCO (74.22%)

Key Catalysts

1. Narrowing Losses: Expected to narrow losses in 2H13F and recover in 2014F.
2. Beverage Sales Boost: Hot summer weather and new product launches, including Coca-Cola's "nickname" campaign, are expected to drive sales.
3. New Product Launches: Great Wall Classical Series is expected to contribute 7% of FY13 sales.
4. Lower Input Costs: Reduced raw material costs and better inventory management.
5. Low Base Effect: Favorable comparison base for sales growth.
6. Organizational Changes: New management team and restructuring efforts.

Key Risks

1. Top Management Changes: Potential impact on execution and strategy.
2. Execution Risk: Due to ongoing organizational restructuring and product rationalisation.
3. Macroeconomic and Policy Changes: Could affect overall market conditions.
4. Intensifying Competition: Especially in the beverage and confectionary sectors.
5. Unexpected Raw Material Price Volatility: Could impact profitability.

Earnings Projections

Business Segments Outlook

Wine

• Sales Volume: 33.4k tons in 1H13, expected to narrow to 20% YoY decline in 2H13.
• Gross Margin: Expected to stay around 52-53%, with new product contributing above 50%.
• EBIT Margin: Improved to 0.33% in 2H13F, projected to increase to 7.29% in FY14F and 9.84% in FY15F.

Beverages

• Sales Volume: Increased 4.8% YoY in 1H13, with positive growth expected in 2H13.
• EBIT Margin: Rose to 5.4% in 1H13, expected to remain stable.
• Growth Drivers: Diversification into non-sparkling drinks, new product launches, and marketing campaigns.

Kitchen Food

• EBIT Margin: Expected to remain low at 0.8-1.0% in FY14-15.
• Industry Pressure: Global soybean price downtrend and competition from Sinograin.

Confectionary

• Market Share: 6%, with strong competition from international brands.
• Growth: Projected to grow at 10% CAGR over FY14-15, but still lag behind international players.

Financial Highlights

• Net Cash (HKDm): 1,729
• NTA/shr (HKD): 2.30
• Interest Cover (x): 0.97
• ROE: Expected to recover to 6% in FY14F.
• Dividend Cover (x): 4.88 in FY12A, 5.50 in FY14F.

Conclusion

China Foods is showing signs of recovery, particularly in the beverage and wine segments, with a new management team and product launches. The stock is undervalued based on PBR, and the target price reflects this. However, the confectionary and kitchen food segments remain under pressure, and the company must manage its execution risks and competitive landscape effectively.