20150827-DBS_Group-中国食品-00506.HK-Back_to_black_11页_323kb

DBS Group Research Summary: China Foods Limited

Core Content

This report provides an analysis of China Foods Limited, a subsidiary of COFCO Group, focusing on its performance, financial forecasts, and investment potential. The research upgrades the rating from Hold to BUY, citing improved earnings and strong margin expansion in the wine segment as key drivers.

Key Highlights

• Current Price and Target:

  • Last Traded Price: HK$3.27
  • Price Target: HK$3.95 (21% upside)
  • Previous Price Target: HK$5.58

• Earnings Turnaround:

  • China Foods reported a net profit of HK$118 million in 1H15, a turnaround from a HK$135 million loss in 1H14.
  • The wine segment was the standout performer, showing strong volume growth (26% y-o-y) and better-than-expected margin expansion (3.9ppt increase in gross margin, 13.5ppt increase in operating margin).
  • The kitchen food segment also showed positive growth, with 17% sales increase, driven by volume, despite a slight decline in gross margin.

• Segmental Performance:

  • Wine: Strong performance with improved margins.
  • Kitchen Food: Continued improvement with positive sales and EBIT.
  • Beverages: Modest growth in sales (3%) but margin compression due to lower ASP.
  • Confectionery: Declined by 8.9% in sales, but losses narrowed in 1H15.
  • Others: Cross-selling increased, contributing to 17.5% sales growth.

• Valuation:

  • The share price has corrected over 46% since the downgrade in May 2015, making the valuation more attractive.
  • The new SOTP-based target price is HK$3.95, with a 21% upside from current levels.
  • PE (15F): 27.7 (vs. 18.9 in 2017F)
  • P/Cash Flow (15F): 10.1 (vs. 7.4 in 2017F)
  • EV/EBITDA (15F): 9.7 (vs. 7.9 in 2017F)
  • P/Book Value (15F): 1.5 (vs. 1.3 in 2017F)

• Financials:

  • Turnover: Expected to grow from HK$26,742m in 2014A to HK$33,047m in 2017F.
  • Pre-tax Profit: Expected to rise from HK$251m in 2014A to HK$1,079m in 2017F.
  • Net Profit: Expected to turn positive from HK$-225m in 2014A to HK$484m in 2017F.
  • EPS: Expected to increase from HK$-0.08 in 2014A to HK$0.17 in 2017F.
  • ROAE: Expected to improve from -3.7% in 2014A to 7.0% in 2017F.
  • Net Debt/Equity: Remains stable at 0.2x across FY15-17F.

• Investment Thesis:

  • Positive Aspects:
    • Strong earnings recovery in wine and kitchen food segments.
    • Potential for continued margin expansion.
    • Improvement in the distributors' destocking situation.
    • COFCO's ownership and SOE reform possibilities.
  • Risks:
    • Macroeconomic environment.
    • Fluctuation of raw material prices.
    • Food safety concerns.

• Peer Comparison:

  • Compared to peers in the food producers sector, China Foods is seen as a BUY due to its improved performance and margin expansion.
  • The company is among the top 10 Coke bottlers globally and one of the three bottlers in China.

• Capital Expenditure:

  • Capital expenditure is expected to increase to HK$1bn for expansion in carbonated drinks and water capacity.
  • Net gearing is expected to remain manageable at 16.7% in 1H15.

• Dividend Policy:

  • Dividend per share (DPS) is expected to increase from HK$0.00 in 2014A to HK$0.05 in 2017F.
  • Dividend payout ratio is expected to reach 30% in 2017F.

• Key Ratios:

  • Current Ratio: 1.1 (1H15)
  • Quick Ratio: 0.5 (1H15)
  • Inventory Turnover (avg days): Improved from 95.4 (2014A) to 74.3 (2017F).
  • Asset Turnover: Increased from 1.3 (2014A) to 1.6 (2017F).

Analysts

• Alice HUI CFA: +852 2971 1960 | alice_hui@hk.dbsvickers.com
• Alison Fok: +852 2971 1938 | alison_fok@hk.dbsvickers.com

Investment Recommendations

• Rating Upgrade: From Hold to BUY due to improved earnings and margin performance.
• Catalyst: Stronger-than-expected wine margins and continued improvement in the wine and kitchen food segments.
• Earnings Forecast:
  • FY15: 30-61% increase in earnings estimates.
  • FY16: 25.2% EPS growth.
  • FY17: 17.2% EPS growth.

Company Overview

• Industry: Consumer Goods (ICB)
• Sector: Food Producers
• Principal Business: F&B branch of COFCO Group, involving edible oil, confectionery, wine, beverages, and retailing.
• Issued Capital: 2,797 million shares
• Market Cap: HK$9,147m / US$1,180m
• Major Shareholder: COFCO Corporation (74.1%)
• Free Float: 25.9%
• 3m Avg. Daily Valuation (US$m): 5.6

Summary of Financial Performance

Summary of Profit and Loss

Summary of Balance Sheet

Summary of Cash Flow

Catalysts and Outlook

• Wine Margin Expansion: Expected to continue in 2H15, with inventory levels at ~2 months.
• Beverage Segment: May see softer growth due to competition, but margin should remain stable.
• Confectionary: Expected to stabilize, with limited further deterioration.
• Capital Expenditure: HK$1bn for expansion in carbonated drinks and water capacity.

Risk Factors

• Macroeconomic environment
• Fluctuation of raw material prices
• Food safety concerns

Conclusion

China Foods Limited is showing promising signs of recovery, particularly in the wine and kitchen food segments. The upgrade to BUY reflects the analysts' confidence in the company's ability to sustain this growth and improve margins. The valuation has become more attractive following a significant share price correction. The report highlights the company's strong position in the Chinese wine industry and potential benefits from SOE reform. However, risks remain due to macroeconomic factors and raw material price fluctuations.