20150706-大和证券-Initiation__the_winner_takes_all_26页_1015kb

Fufeng Group 546 HK - Buy (Initiation)

Core Content

Fufeng Group is initiated with a Buy (1) rating and a 12-month target price of HKD7.50, representing a 50% upside from the 3 Jul price of HKD5.00. The company is identified as China's largest mono-sodium glutamate (MSG) and xanthan gum (XG) producer, with a 45% market share in MSG and over 50% in XG as of 2014.

Main Viewpoints

• MSG ASP (Average Selling Price) is expected to rise by 19% over 2015-2017, driving a 5% increase in gross margin.
• Pricing power is expected to strengthen due to market consolidation, with MSG prices forecasted to increase by 11%, 4%, and 3% YoY for 2015, 2016, and 2017, respectively, offsetting potential increases in corn costs.
• Fufeng's production costs are at least 15% lower than smaller players due to its large-scale operations and access to government corn reserves.
• Threonine and high-end amino acids are key growth drivers, with threonine revenue rising 73% YoY in 2014 and sales volume expected to grow at 40% CAGR over 2014-2017.
• Debt reduction and increased sales of high-margin products are expected to drive EPS growth at 25% CAGR over 2014-2017.

Key Information

• Revenue forecast: CNY13,725m in 2015E, CNY15,007m in 2016E, and CNY15,361m in 2017E.
• Net profit forecast: CNY887m in 2015E, CNY1,240m in 2016E, and CNY1,396m in 2017E.
• Core EPS (fully-diluted): 0.380 in 2015E, 0.526 in 2016E, and 0.591 in 2017E.
• Dividend yield: Expected to rise from 2.5% in 2015E to 3.9% in 2017E.
• PBR (Price-to-Book Ratio): Expected to fall from 1.4 in 2015E to 1.0 in 2017E.
• EV/EBITDA: Projected to decline from 5.4 in 2015E to 3.2 in 2017E.
• ROE: Expected to increase from 15.3% in 2015E to 18.2% in 2017E.
• Free cash flow: Projected to rise significantly, from CNY1,041m in 2015E to CNY1,776m in 2017E.

Investment Case

• Rerating potential: The stock is likely to be rerated from its 5-year average PER due to the consolidation of the MSG market and rising ASPs.
• Target PER: 12x for 2016E, which is at the high end of its historical valuation range.
• EPS growth: Fufeng's 2015E EPS is 8% below the consensus, but 2016-17E EPS is 6% above, reflecting optimistic assumptions about MSG price trends and new product lines.

Catalysts

• Hikes in MSG ASPs.
• Lower corn prices due to government reserves.
• Further debt reduction.

Risks

• Decline in XG or other product prices.
• Surge in corn or coal costs.

Competitive Strengths

• Scale advantage: Fufeng is one of the largest corn processors in China, giving it a cost advantage.
• Efficiency: Over 80% of its MSG capacity is located in major corn-producing provinces, reducing unit costs by at least 5% below the national average.
• Market consolidation: The MSG market has consolidated significantly over the past 5 years, with top 2 players accounting for 75% of the market.
• Diversification: The company is expanding into high-margin biochems and specialty products.

Financial Summary

Market Trends

• MSG demand: Steady at 1.9m tpa since 2013, after a 7% CAGR from 2007-2013.
• Market share: Fufeng has increased its MSG market share from 18% in 2008 to 45% in 2014.
• MSG price cycles: Fufeng has historically been able to cut prices during oversupply and maintain profitability, allowing it to consolidate the market.

Company Background

• Founding: Mr. Li Xuechun, the founder, has been in the fermentation industry since the 1970s.
• Growth Strategy: Acquired small plants and expanded capacity, becoming the largest MSG producer in China by 2014.
• Production Locations: Inner Mongolia, Xinjiang, and Shaanxi.
• Capacity: Fufeng has a total capacity of 940ktpa for MSG and 950ktpa for fertilizers.

Conclusion

Fufeng Group is positioned to benefit from market consolidation, rising MSG prices, and debt reduction, with strong growth prospects in both core and high-margin products. The company's scale and efficiency provide a significant competitive advantage, and its diversification into specialty products and high-margin biochems should further enhance profitability and shareholder returns.