Last week hog and pork prices stood at RMB 16.89/kg (+9.1% vs. 2011 average)and RMB 25.11/kg (+8.1%), respectively. Prices should remain resilientthroughout most of 2013 (excl. mild post-CNY retreat) on improvedsupply/demand dynamics. Mgmt’s FY13 slaughtering volume growth target of20% will be supported by macroeconomic improvements, industryconsolidation, and sales channels development.
Yurun Group has started to expand upstream pig-breeding farms, which shouldcomplement the listco’s midstream slaughtering operation. We expect theparent’s pig-breeding capacity to exceed 10M heads by 2015, and under a hogsupply agreement Yurun Foods’ utilization rate will gradually improve.
Industrialization of agricultural production will enable sector leaders to furtherintegrate value chains and achieve economies of scale. The China MeatAssociation argues that the gov will take measures to reduce the proportion ofhigh-temperature meat sold in open markets to less than 50% (currently over80%), and increase the proportion of chilled meat to 30% (currently under10%). The MOC aims to control slaughtering licenses and reduce the number ofslaughterers.
This may be a historical trough in terms of both valuation and earnings growthfor LT investors. We have increased our 2013 ASP growth forecasts to 5%(previously 0%) and with margins to improve on higher utilization rates wehave raised our 2013-14 EPS forecasts to HK$ 0.56/0.69 (prev. HK$ 0.53/0.66).
We upgrade our rating to Outperform and raise our TP to HK$ 8.5 (from HK$6.5). The stock is trading at 11.5x 13E P/E and 0.7x 13E P/B, and the risks ofpoor FY12 results and corporate governance have been priced in.