What’s new: Yurun Foods stated that FY12 results will come in substantiallower than the previous year.
Profit warning in line with expectation. We forecast a recurrent loss ofHKD681M, compared with HKD1,096 M in FY11, mainly on lower slaughteringvolume and a drop in GPM. We expect slaughtering volume of 13.61M heads inFY12, down 11% YoY from 15.32M (but 6.97M heads in 2H12, up 6% yoy), andFY12 GPM of 3.5%, compared to 6.6% in FY11.
Long-term outlook is positive. We expect slaughtering volume to reach 30Mheads in 2015 (implying a 30%+slaughter volume CAGR for 2013–15), partiallyhelped by its parent company’s expected more-than 10M heads hog breedingcapacity by 2015 and Yurun Foods’ plan to purchase 5M heads (15% of its totalpurchasing volume) under a Continued Connected Transaction framework. Inaddition, further policies supportive to the hog industry have been announced,such as the plan to reduce number of slaughterers from 19,000 to 3,000 by2015, and the recent increase in MoF subsidy for hog breeding insurancepremium (hog farm owners would pay ~80% less insurance premium after thesubsidy). Yurun’s management is targeting a 60% utilization rate by 2015.
Consequently we expect to recover as EOS-effect will kick in, and expect a highearnings growth rate going forward, assuming it continues with its expansionplan.
Valuation and TP: We maintain our view that, for long-term investors, YurunFoods is currently at a historical trough in terms of both valuation and earningsgrowth. We believe loss of recurrent business in 2H12 has largely reduced andYurun will turn to positive earnings in FY13 based on a 20% growth inslaughtering volume in FY13 and GPM recovers to FY11 level in 2H13. Wemaintain Outperform rating with TP HKD8.5 on FY12-14 EPS forecasts fromrecurrent business of HKD HKD-0.375/0.136/0.352 (including other incomeHKD0.18/0.41/0.63). The stock is traded at 0.7x FY13P/B, risks of poor FY12results and corporate governance have been priced in, and its earnings recoveryis highly elastic. Long-term consolidation of agro-industry is a focus ofgovernment, and we expect to see more supporting policies in the future.
Key Assumptions: 1) average hog price increase 5% in FY13; 2) slaughteringvolume growth rate picks up to 20% and GPM recovers to 7.3% in FY13 (8.6%in FY11); 3) other income reduced by 50% yoy as capacity expansionmoderates.
Catalyst: re-rating would come from continuous slaughtering volume growthand margins recovery, other positive catalysts include government policiessupporting agricultural industrialization, increase hog supply, further increaseof shareholding of management or principal shareholder. Risks: Slowerrecovery of volume and margin, decrease of hog supply, corporate governanceissues.