Charoen Pokphand Foods

2013 profit projected to recover due to profit base and increased profitability BUY

Charoen Pokphand Food Plc (CPF)

Rough time already gone… recovery signal of meat price seen

CPF's management's vision of the business in 2013 aims at 15% YoY growth of total

sales due to the following supports. 1) The domestic businesses (45% of total

revenue) has recovered, especially the animal farming business (both broilers and

live hogs) that had faced B10bn of net loss in 2012 because the selling prices were

low as a result of domestic oversupply problem. Nevertheless, the mentioned problem

has considerably eased at present after the production has met the demand, so the

recovery signal of meat product prices is seen since late-2012 - present. For the

shrimp business, it might not be so bright in 2013 because of an EMS outbreak which

has damaged Thai shrimp farms; however, CPF has already get a solution prepared,

so this problem would only be temporary and cause quite limited effects for the

company. 2) CPF has focuses on the growth of international businesses (55%

of total revenue), seeing potential business growth in China, Vietnam and India.

These are countries with the economic growth in a high level while there's not much

consumption. Moreover, the company has strengthened its brand until it has become

accepted by most people. Accordingly, CPF is advantageous for its aggressive

operation. In terms of the CAPEX during 2013-2016 assigned at B50bn, the targeted

total revenue in 2016 would increase to B700bn (the normal level of net margin is

5%) which would raise the net profit in 2016 to B35bn or a significant growth of 86%

from 2012 if things go as planned. For the investment budget, it would be from the

operating cash flow and loan from the financial institution. Considering the debt to

equity ratio at end-2012 at 1.1x and the operating cash flow of around B20bn/year,

this is projected to be enough for the average CAPEX of B15bn/year.



Survives record low in 4Q12 already, believing in return of business growth in 2013

The company's 2013 net profit (extraordinary item not included) is likely to recover

outstandingly once again due to the following reasons. 1) The total sales are

projected to grow by 15% YoY, in line with CPF's management which would be mainly

from increasing both domestic and international selling prices of meat. 2) The

profitability is projected to improve from the prior year. This could be seen from the

gross margin that has increased to 14.78percent from 11.57% in 2012 after the pressure

from the raw material cost (60% of total selling cost) has eased, especially the

soybean meal price that tends to slow down continuously after the production in

South America has been launched more into the market (especially the soybean meal

Brazil that is projected to increase from the preceding year to hit the record high). In

terms of corn price ( a raw material mostly obtained in Thailand), it is projected to get

more stable since the production gets close to the domestic demand. Combined with

the international corn price that is likely to weaken, the average gross profit margin in

2013 would be able to improve from 2012.



Reiterate "BUY"… share price substantially reflects negative factors, recovery signal evident

We reiterate our recommendation of "BUY" for CPF. The fair value in 2013 (based on

17x PER) stands at B38.38. We're convinced that the current share price has already

surpassed correction, substantially reflecting negative factors. Thus, this is considered

a good chance to accumulate for investment. Moreover, CPF has announced to pay

2H12 dividend yield at B0.50/share or 1.5% (semiannually), going XD on 3 May 2013.

The payment is due on 23 May 2013.