2018 results in line with our expectations
Fufeng Group announced 2018 results: Revenue rose 5.6% YoY toRmb13.8bn. Net profit attributable to shareholders rose 33.5% YoY toRmb1.85bn, or Rmb0.72 per share. Profit growth was mainly due toone-off net gain from the disposal of two pieces of land in Baoji.
Trends to watch
MSG prices buoyed by low inventory. The overhauls and productionhalts due to environmental protection in 2H18 led to lower capacityutilization and a 260,000t decline in industry annual output. Itresulted in tumbling stockpiles and tight short-term supply in early2019. Year to date, MSG prices in major markets have rallied Rmb50–100/t to Rmb8,200–8,400/t. As small capacities continue to exit themarket, the industry has become more concentrated. We estimateevery Rmb100/t rise in pre-tax MSG price would increase thecompany’s EPS by Rmb0.04.
Margins enhanced by falling corn prices – a raw material for MSGprocessing. Year to date, corn prices have slipped Rmb60/tnationwide and Rmb90/t or 3–5% in Heilongjiang province.
Longjiang Phase Two production complex （300kt capacity for starchsugar and 200kt for lysine） started operating; expect amino acidprices to bottom up in 2019. Lysine and threonine prices fell 17% and37% respectively in 2018, and have dropped by another 6% and 4%YTD to record lows of Rmb7,460/t and Rmb7,350/t. There is limiteddownside and the price may bottom in 2H19 which will improve theperformance of the amino acids sector.
Earnings forecast
We maintain 2019 and 2020 earnings forecasts of Rmb0.51 andRmb0.55.
Valuation and recommendation
Stock is trading at 7.2x 2019e and 6.6x 2020e P/E. We maintain ourHOLD rating and HKD5.4 target price, which offers 31% upside.
Risks
A sharp rise in raw material prices; lower MSG prices; decline invaluation.