2021 results largely in line with market expectations
Fufeng’s 2021 revenue and attributable net profit rose 29.1% and 103.3% YoY to Rmb21.54bn and Rmb1.28bn （or Rmb0.51/sh）， largely in line with market expectations. We attribute the strong earnings growth to: 1） rising sales volume and prices of threonine and lysine due to overseas production suspension caused by COVID-19; 2） steady growth of high-end amino acid products along with diversification strategy; 3） success in passing on corn-related cost pressure for products such as monosodium glutamate （MSG）。
By segment, revenue of food additive, animal nutrition, high-end amino acid and colloid reached Rmb10.39bn, Rmb7.62bn, Rmb1.42bn and Rmb1.04bn, accounting for 48.2%, 35.4%, 6.6% and 4.8% of the total.
Their respective gross margin was 13.7% （-2.0ppt YoY）， 18.0% （+4.6ppt）， 41.5% （+3.8ppt） and 32.7% （+10.6ppt）。
Trends to watch Improving competitive landscape for amino acid products; earnings likely to remain high. Market ASPs for threonine and lysine are about Rmb11,750/t and Rmb12,200/t now, respectively down 7% and up 11% compared with average price in 2021. The Ministry of Agriculture and Rural Affairs in March 2021 released a document calling for replacement of corn and soymeal by alternative grains in animal feed1. We expect higher use of mixed meals, which may increase the addition of amino acid products. In addition, we think that the rebounding hog inventory will also effectively boost the usage of amino acids. For supply, AMD suspended its production lines for solid lysine in 2021, while Meihua Group’s 300,000t/yr lysine capacity started operating, implying limited additional capacity. We expect gross profit of amino acid products to stay high thanks to optimizing competitive landscape.
Prices staying high for raw materials such as corn; upbeat on gradual earnings recovery for MSG. Data from sci99.com shows the oligopoly of the MSG market remains stable, with the top-3 names accounting for about 80% of production capacity and about 90% of output and sales volume.
Sector supply is slightly higher than demand, and Fufeng’s capacity is the highest in the sector. For demand, food processing and additives account for about 50% of downstream MSG demand, while restaurants represent 30-40%. MSG demand is relatively weak due to headwinds from COVID-19 conditions. MSG market price is Rmb10,125/t, about the 75th percentile of the past decade. In addition, the price spread between MSG and corn is Rmb4,013/t, and has been expanding recently. We are upbeat that outdated production capacity will likely exit the market gradually as high raw material prices may weigh on their funding. In addition, we think that MSG demand will likely recover along with economic growth. We thus expect the gross profit of MSG to bottom out and rebound. Fufeng has 160,000t/yr capacity of synthetic ammonia in operation and about 300,000t/yr under construction. We are upbeat about earnings enhancement from improving integrated operations.
Financials and valuation We maintain 2022 net profit forecast at Rmb1.32bn, and introduce
2023 forecast at Rmb1.47bn. Fufeng is trading at 5.1x and 4.6x 2022- 2023e P/E. We maintain OUTPERFORM and TP at HK$3.60 （5.9x and 5.3x 2022-2023e P/E with 15.8% upside）。
Risks
Sharp rise in raw-material prices such as corn and coal; deteriorating competitive landscape.