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Japfa Ltd Site Visit and Investment Analysis Summary

Core Content

Japfa Ltd, a subsidiary of Phillip Securities Group, conducted a site visit to its Dairy Farm 3 and 4 in Dongying City, Shandong Province, China, on 24 August 2017. The visit provided insights into the company's dairy operations and strategic expansion plans in both China and Indonesia. The report highlights Japfa's position as a leading producer of premium raw milk in these markets, its capacity expansion initiatives, and its downstream business development.

Key Takeaways from the Site Visit

1. Ramping Up Raw Milk Production

• China: Farm 7 in Inner Mongolia began milking in November 2016 and aims to be fully operational by the end of 2017. The company is expanding its five-farm hub with three new farms planned over the next three years.
• Indonesia: The new Farm 2 in Wlingi, East Java is under construction and is expected to start milking in early 2018. The company is also discussing the acquisition of a site for Farm 3.

2. New Processing Plants for Downstream Business

• China: A 300,000 metric tonnes per annum milk processing plant is under construction and will be completed by June 2018. This plant will enable Japfa to produce a broader range of dairy products and expand its Greenfields brand in Asia.
• Indonesia: A new 7-hectare processing plant has been established, increasing fresh milk production capacity by 80% to 72 million litres per year. This supports the expansion of product offerings like yogurt and cheese.

3. Competitive Strength

• Japfa is one of the leading producers of premium raw milk in China and Indonesia.
• Its operations are highly efficient, with a focus on large-scale, industrialised dairy farms.
• Greenfields is the No.1 brand of Fresh Pasteurized Milk in Indonesia and is also exported to neighboring Southeast Asian countries.
• High-quality milk is preferred by baristas and coffee chains such as Costa and Starbucks.

Investment Actions and Peer Comparison

Japfa is undervalued relative to its peers based on EV/EBITDA and P/E multiples, trading at approximately 43% and 23% discounts respectively. However, no stock rating or price target was provided.

Market Cap Weighted Average (Excl. JAP):

• EV/EBITDA TTM: 11.1
• EV/EBITDA FY1: 9.3
• P/E: 20.2
• P/E FY1: 16.1
• Net D/E (%): 134.8
• ROA (%): 5.9
• ROE (%): 4.6
• P/B: 3.9

Financial Performance

• Japfa's Dairy segment is the most profitable, contributing 9% of FY16 revenue but 17% of operating profit with an 18% operating margin.
• In 2Q17, the segment saw improved profits despite raw milk price pressures, driven by higher milk yields and sales volume.
• The new processing plant in Indonesia will increase fresh milk production capacity by 80%, supporting the expansion of product offerings and brand development.

Strategic Expansion and Operational Efficiency

• Japfa's dairy farms are designed with a standardised 10,000 head blueprint, ensuring consistent productivity and sustainability.
• Advanced technology, including a rotary milking parlour, improves operational efficiency and reduces staff costs.
• The company uses a mix of locally sourced and imported feed ingredients, with corn making up about 60% of the feed mix.
• Strategic farm locations in China, such as Dongying, benefit from ideal environmental conditions and supportive local government policies.

Downstream Business Development

• Japfa aims to expand its dairy product range, targeting the premium market with products like yogurt and cheese.
• Greenfields is positioned as a premium brand, with a strong presence in Indonesia and exports to several Southeast Asian countries.
• The company is rebranding and changing packaging in China to align with its downstream strategy.

Cattle Fattening Farm

• Japfa operates a cattle fattening farm in Shandong, providing a source of young bulls for its beef feedlot operations, thus integrating its dairy and beef segments.

Research and Sales Contacts

• Research Team: Benny WANG, ZHANG Jing, John WONG, FAN Guohe, WANG Yannan
• Sales Team: Aric AU, Matthew WONG, Yoshikazu SHIKITA

Disclaimer

This report is not intended to provide tailored investment advice and is for general circulation. It is based on sources believed to be accurate and should not be construed as a solicitation to act as a securities broker or dealer. Investors should seek financial advice before making any investment decisions.