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Charoen Pokphand Food

Sales of investment in CPP to strengthen capital base HOLD

Charoen Pokphand Food Plc (CPF)

We have a positive outlook that the sales of investment in CPP

would strengthen CPF’s capital base. End-2014 D/E ratio is expected

to drop below 1x, in line with CPF’s target.

- CPF sells investment in CPP

CPF has approved to sell 6.02 billion shares of CPP to ITOCHU at

HKD1.1/share, totaling HKD6.62bn (or B27.4bn). The sell of investment is

preliminarily expected to be completed in September 2014. After completion

of the transaction, CPF’s shareholding in CPP would decrease from 74.18%

to 50.43% of CCP's total paid-up share capital.

- Stronger capital base

We have a positive outlook on the sales of investment. As CPF previously

acquired CPP in late-2011 at HKD0.9/share, it would gain B4.15bn profit

from the sales of investment (booked in the shareholders’ equity of the

consolidated financial statement); the profit would be used on debt

repayment (in line with CPF’s plan). End-2014 D/E ratio is expected to

decrease from 1.30x to 0.92x. However, as a result of the disposal of

investment, we slash CPF’s earnings by 1.2% in 2014 and 3.7% in 2015

(under the assumption that the transaction is completed at the end of

3Q14); B1.5bn profit from CPP would be excluded from CPF’s FY2014-2015

earnings, thus negating benefit from a decrease in interest expense. Under

the new forecast, CPF’s net profit is estimated to grow by 32.1%yoy in 2014

and 31.9%yoy in 2015.

- New fair value is B29

Under the new forecast, end-2014 BVS is expected to rise by 3.6% as a

result of B4.15bn profit from sales of investment. Thus, FY2014 fair value is

revised up from B28 to B29 (GGM, 1.80x PBV, 15.8% long-term ROE),

granting only 5.2% upside from the current share price. We recommend

HOLD for dividend.

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