The pain drags on
Huge loss to continue in 2H12 with low visibility ofrecovery in 2013-14
Cash position to deteriorate significantly for thecompany’s persistence of huge capex spending in 2013-2014
FULLY VALUED with TP cut to HK$3.00
No visible recovery ahead. We think the market has lostconfidence in Yurun’s recovery, which is not visible at allcurrently. Even if Yurun is able to start recovering in 2H13,improvement might be limited to topline growth only. Itwould likely take longer for the margins to normalise. Itseems the company’s incredibly low gross margins in 1H12had continued in 2H12.
Failed to improve margins under favourable cost
environment. In 2H12, the hog price in China has inclinedmildly and steadily (from Rmb14/kg to 16/kg), which shouldbe positive to slaughterers and meat processors. That wasevidenced by Shuanghui’s positive profit alert. Shuanghuiexpected its net profit to grow by 119%-128% in FY12, dueto a favourable cost environment. Comparatively, Yurun isexpected to lose c.HK$1.2bn in FY12, as it failed to improvethe margins under favourable cost environment in 2H12.
The company said it plans to cut the cash bonuses awardedto distributors to improve its gross margin. But in our view,this is akin to killing the goose that lays the golden eggs.Deteriorating cash position. Yurun’s cash position mightfurther deteriorate as the company insists on HK$9bn capexin 2012-2015. Meantime, the overhang in corporategovernance remains the key risk for Yurun. We cut ourearnings of FY12/13/14 by 53%/125%/2% for lower salesand margin assumptions. Since we expect Yurun to losemoney again in FY13, we roll over our valuation base toFY14. We also shift our valuation metric from P/E toEV/EBITDA, taking into account Yurun’s continual heavycapex spending ahead. New TP is HK3.0, premised on 8xEV/EBITDA, a 10% discount to F&B average. Maintain FULLYVALUED.