20140127-DBS_Group-Food_and_Beverage_Sector_5_horses_that_will_gallop_37页_899kb

5 Horses That Will Gallop: Summary

Core Content

This report analyzes the performance and valuation of several Hong Kong-listed companies in the food and beverage sector, focusing on how changes in raw material prices and market conditions affect their margins and earnings. It highlights the key stocks that are expected to perform well in 2014 and provides investment recommendations based on these analyses.

Main Viewpoints

• Breweries Benefit from Barley Price Drops: The decline in international barley prices, especially from Canada, is expected to benefit breweries like Tsingtao (168 HK) and CRE (291 HK), as they are major users of barley. This should lead to improved margins for these companies.
• Dairy Sector Mixed Impact: While upstream dairy farms may benefit from high raw milk prices, downstream producers like Mengniu (2319 HK) face margin pressures. CMD (1117 HK) is expected to benefit from the normalization of raw milk prices and the anticipated drop in international milk powder prices.
• Noodle and Beverage Producers: Companies like Tingyi (322 HK) and Uni-President (220 HK) are expected to see a stable cost environment, with slight increases in palm oil and wheat flour prices. However, these can be offset by moderate increases in average selling prices (ASP).
• China Foods Turnaround Potential: The company is upgraded to BUY due to the potential for a turnaround under new management, with a focus on the wine segment, which is undervalued. The stock is expected to benefit from a more practical management approach and better performance in the wine business.
• Mengniu Downgraded to Hold: Mengniu is downgraded to HOLD due to margin pressures and lack of catalysts, despite its stake increase by CMD.

Key Information

Raw Material Trends in 2014

• Barley: Prices are expected to drop by around 10% in 2014, benefiting breweries.
• Raw Milk: Prices are expected to rise by 15% y-o-y, which will hit downstream dairy producers but benefit upstream farms.
• Corn and Wheat: Prices are expected to rise slightly due to government-guided pricing, though the impact is less significant than on milk and barley.
• Rice: Prices are expected to increase moderately.
• Palm Oil: Prices are expected to rise by 5-9%.
• Sugar: Prices are expected to remain weak, benefiting beverage producers.
• Alfalfa: Prices are expected to continue rising due to increased demand from ranches.

Investment Recommendations

Valuation Summary

Key Stocks and Catalysts

• China Foods (506 HK): Turnaround potential, new management, and undervalued wine segment.
• CMD (1117 HK): Benefit from high raw milk prices and expected drop in international milk powder prices.
• Tsingtao (168 HK): Benefit from plunging barley prices and M&A opportunities.
• CRE (291 HK): Strong financials and M&A potential.
• Uni-President (220 HK): Improved noodle margins and potential for growth.

Conclusion

The report concludes that the food and beverage sector in 2014 is expected to see a mix of opportunities and challenges. Companies with strong financial positions and favorable raw material trends are positioned to benefit, while others face margin pressures. The key focus is on the potential for margin recovery and the impact of new management and M&A strategies on performance.