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Charoen Pokphand Foods

Shrimp in the black in 2Q14 BUY

Charoen Pokphand Foods Plc (CPF)

Shrimp. CPF expects to reach breakeven for Thai shrimp in 2Q14, with gross margin in the positives after -6.5% in 9M13 and -13.2% in 3Q13, battered by a severe shortage of shrimp. CPF and other major operators have been working on ways to avoid EMS and this has gradually increased survival rate at both corporate and independent farms. When shrimp price does start to head down, it will be good news for the industry as it will indicate resolution of shrimp shortage. In November, shrimp price was Bt275/kg, unchanged from October. The industry is working to increase shrimp production to breakeven of 4,000-5,000 tons/month. CPF has reached over 2,000 tons/month to date.

Broiler. Saha Farms has reportedly been granted Bt2.7bn by a creditor which we estimate will be enough to maintain production at 600,000-800,000 chickens per week or one fourth its capacity of 2.5mn. This level should not have a great impact on the industry. The outlook for the broiler business in 2014 should be better as markets in Asia are beginning to allow import of Thai fresh broiler products. Singapore is first, announcing last week that it has opened its markets and the industry expects Japan to follow suit.

Overseas. The lead performer in 9M13 was CPP (Hong Kong), with net profit of US$125mn and though this is down 23% YoY, it is far better than the contraction of 44% YoY in 6M13. China operations are strong with a gross margin of 15%, but the best turnaround was seen in Vietnam when it reported a net profit of Bt400mn in 3Q13 after a loss of Bt800mn in 1H13. This was made possible by the hearty recovery in the swine business after an oversupply in 1H13 (>50% of sales from swine), while shrimp feed also showed strong improvement. The most disappointing overseas business unit was Turkey with a loss of Bt800mn in 9M13, as the country is in the midst of a recession and there is fierce competition in the local broiler business. CPF expects losses to come down in 2014 after a revamp of management.

3Q13 recap. Total sales were Bt105bn, +8% YoY. Within this, Vietnam sales growth was highest at 26% YoY, followed by 6percent sales growth in China sales, 7% in other overseas business and 6percent for Thai operations. Thai livestock business (broiler and swine) in 3Q13 reported sales of Bt35bn, +19% YoY with a gross margin of 14.5%, up from 8.8% in 3Q12. Sales for its Thai aqua business were Bt7.2bn, -31%YoY, 6% of total sales, with a sorry gross margin of -13.2percent from +19.5% in 3Q12. Overseas livestock sales amounted to Bt51bn, +8%YoY, with gross margin improving to 12.2percent from 11.8% in 3Q12. Overseas aqua business contributed Bt12bn, +21%YoY, with a gross margin of 8.8% compared to 11.4% in 3Q12. These gave CPF a 3Q13 gross margin of 10.8%, down from 11.7% in 3Q12, with operating margin at 3.3% compared to 4.3% in 3Q12. We maintain our BUY with a target price of Bt35.




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