Post on 23-Mar-2020
Fri, 23 Aug2013
Equi ty Research Fufeng Group (546 HK) Corn processing/ China
The Clouds Faded
We initiate coverage of Fufeng Group with a BUY rating and 12-month
target price of HK$4.60 based a blending DCF/PER model.
We expect MSG ASP to recover in 2HFY13 as consolidation is near to
close; Xanthan gum stands out driven by dynamic demand from shale
gas in US.
We forecast Fufeng’s net profit to grow at a CAGR of 40% for FY12-15E
Bottom out opportunity is emerging We expect the market consolidation is
near to close as an Oligarchy has been formed and most competitors are running
toughly with minimal profit or even loss. We expect MSG ASP will rebound in
2HFY13 but with an under controlled recovering profitability in industry-wide. The
potential competitors who weed out in last round consolidation may not enter
again but reward survivors would maintain Oligarchy with even larger market
share in long term.
Xanthan gum stands out Sales volume reached ~30kt in 1HFY13 and GPM
peaked to 58.7% (vs. 39.2% in 1HFY12) with ASP of RMB26,120/t, driven by
dynamic demand from oil exploration area. The company has 65kt order for FY13
and it also has locked price ~RMB 26,000/t, suggesting the earnings from
Xanthan gum will continue to be encouraging in 2HFY13. However, we expect
ASP will drop back to 21,000/t given the downside risk of recovering supply of
Guar gum. The far lower than competitors’ anti-dumping duties will lift up Fufeng’s
market share in US market.
We expect that financial burden will relief with lower gearing ratio, backed by
the slow-down CAPEX in the mid-term and fund-raising from rights issue. We
believe, in the longer run, Fufeng’s margins will above industry average
figures thanks to i) its cost advantage from well-picked plant location; ii) high
margin products contribution.
Valuation Based on a blending DCF/PER model, we estimate a target price of
HK$4.60 per share, which implies FY14/15E PER of 9.0/6.5x and suggests 39%
potential upside. We give a BUY rating on Fufeng.
Tracy Sun
Analyst
+852 2135 0214
tracy.sun@oriental-patron.com.hk
Initial Coverage
BUY
Close price: HK$3.31
Target Price: HK$4.60 (+39%)
Key Data
HKEx code 546
12 Months High (HK$) 4.11
12 Month Low (HK$) 2.20
3M Avg Dail Vol. (mn) 5.87
Issue Share (mn) 2,087.56
Market Cap (HK$mn) 6,909.83
Fiscal Year 12/2012
Major shareholder (s) Li Xuechun (46.11%)
Source: Company data, Bloomberg, OP Research
Closing price are as of 23/8/2013
Price Chart
1mth 3mth 6mth
Absolute % 16.1 22.1 -4.6
Rel. MSCI CHINA % 13.9 25.0 1.7
Company Profi le
Fufeng is a leading Chinese manufacturer
corn-based biochemical products. It is
China’s largest MSG producer in China and
Xanthan gum producer in the world.
Exhibit 1: Forecast and Valuation Year to Dec (RMB mn) FY11A FY12A FY13E FY14E FY15E
Revenue 8,399 11,112 11,945 12,826 13,910
Growth (%) 30.9 32.3 7.5 7.4 8.5
Net Profit 604 427 558 852 1,178
Growth (%) (37.5) (29.4) 30.7 52.7 38.3
Diluted EPS (RMB) 0.336 0.246 0.267 0.407 0.563
EPS growth (%) (37.5) (29.4) 30.7 52.7 38.3
Change to previous EPS (%) n.a. n.a. n.a. n.a. n.a.
Consensus EPS (HK$)
ROE (%) 17.7 11.2 11.5 15.2 17.7
P/E (x) 7.9 10.7 9.9 6.5 4.7
P/B (x) 1.5 1.2 1.1 1.0 0.8
Yield (%) 3.6 0.0 3.0 4.6 6.4
DPS (HK$) 0.120 0.000 0.100 0.153 0.211
Source: Bloomberg, OP Research
0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5
Aug/12 Nov/12 Feb/13 May/13 Aug/13
HK$546 HK MSCI CHINA
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 2 of 30
Table of Contents
Valuation ...................................................................................................................................................... 3
Investment thesis ......................................................................................................................................... 5
Financial forecast ........................................................................................................................................18
Key Risks ....................................................................................................................................................20
Industry landscape: MSG demand is resilient .............................................................................................21
Company overview .....................................................................................................................................23
Financial Summary .....................................................................................................................................27
Fri, 23 Aug 2013
Fufeng Group (546 HK)
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Valuation
Based on a blending DCF/PER model, we estimate a fair value of HK$4.60 per
share, which implies FY14/15E PE of 9.0/6.5x and suggests 39% potential upside.
We give a BUY rating on Fufeng.
DCF model
Given its cash flow-generation business nature and long-term development
company, we use DCF-based methodology to derive the 12-month target
price of HK$4.60 for Fufeng. We use WACC of 12.6%, based on the
assumptions are: i) risk free rate of 3%, based on the annual yield on
China’s 10-year government bond; ii) market risk premium of 8.5%; iii) beta
of 1.17 to factor in the stock volatility relative to the Hang Seng index; iv) 2%
terminal growth rate from 2023E forward, in line with our long-term growth
assumption for China consumer players.
We also conduct sensitivity analysis to quantify how target price change in
different scenarios of WACC and terminal growth rate.
Exhibit 2: Sensitivity analysis of TP to WACC and Perpetual Growth rate (%)
Sensitive Analysis Perpetual growth rate (%)
4.6 1.0% 1.5% 2.0% 2.5% 3.0%
WACC (%)
11.6% 5.00 5.20 5.40 5.60 5.90
12.1% 4.70 4.80 5.00 5.20 5.40
12.6% 4.30 4.50 4.60 4.80 5.00
13.1% 4.00 4.10 4.30 4.40 4.60
13.6% 3.70 3.80 3.90 4.10 4.20
14.1% 3.40 3.50 3.60 3.80 3.90
Source: OP research
PER model
In order to offer a sanity check, we evaluated Fufeng’s valuation with
relative valuation. We also derive our 12-month price of HK$4.60 from a
PER based methodology. The FY14 PER is 9x, based on a 5% premium to
the peers of corn processing listed on the Hong Kong Stock Exchange,
which are trading at average of 8.6X PER for FY14E . We think Fufeng
deserves a premium valuation to its peers as i) leading market position; ii)
higher profit margins than peers who focus more on upper-stream
corn-processed products with low ROE.
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 4 of 30
Re-rating is emerging
Given at the end of industry consolidation, we expect the margins will
recovery led by MSG ASP increase, along with stock valuation re-rating. For
long-term investors, we believe the stock’s valuation in 2008 and 2009 could
be a good reference. Historically, Fufeng used to lift up its MSG ASP and
the margins rebounded significantly after twice industry restruction in 2008
and 2009. Fufeng’s valuation experienced two year re-rating and peaked
to16X PER till the start of another industry consolidation happening on 2011.
Applying this metric to FY13E and FY14E, we believe share-price value
could start to emerge.
Exhibit 3: Fufeng’s PER band, 2008-2013
Source: Bloomberg, OP research
-4.00
-2.00
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
18.00
20.00
Jan/08 Sep/08 May/09 Jan/10 Sep/10 May/11 Jan/12 Sep/12
(X)Fufeng Group Ltd
+2std.
avg.
-2std.
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 5 of 30
Investment thesis
Bottom out opportunity is emerging
Consolidation is near the end, Oligarchy has been formed
Thanks to its cost advantage (more detail please refer to our following
investment thesis of Cost advantage), Fufeng initiatively hosted an industry
consolidation since early of 2011.The company aggressively expanded its
capacity in Northeast plant with lower ASP of MSG to phase out its
competitors. Since 2011, the MSG industry has faced over capacity problem,
along with the cost of raw material hike, and the overall industry suffered
huge margin pressure. The number of players in this universe reduced to 13
with 2.5mnt total industry capacity and 2.1mnt actual production volume so
far, according to the management. Even possessed a distinct cost
advantage, Fufeng’s MSG segment can only reach breakeven level in
1HFY13. Other players, like China Agri (606 HK, NR) had already shut
down its MSG plant for several months, according the management.
We want to highlight that the market consolidation is close to the end as i)
an Oligarchy has been formed. The top leaders Fufeng and Meihua (600873
CH, NR) totally accounted for over 70% market share by sales volume; ii)
except for Fufeng and Meihua, most competitors are running toughly with
loss. In the near-to-mid term, in our view, the unattractive profitability
industry-wise will not motivate another round of expansion; iii) positive
signal for industry’s healthy development is emerging, led by the active
cooperation between major players to shut down the total capacity since Jul,
2013.
Exhibit 4: Fufeng’s leadship in MSG industry, 2006-1H2013
Source: Company data, OP research
1.8%4.1%
7.9%
20.0%
25.0%
35.0%
40.0%
50%
0%
10%
20%
30%
40%
50%
60%
2006 2007 2008 2009 2010 2011 2012 1H2013
Fri, 23 Aug 2013
Fufeng Group (546 HK)
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Exhibit 5: China MSG market share breakdown, by capacity
Source: China Fermentation industry Associate, OP research
Fufeng
Meihua
Lianhua
Shenghua
Linghua
XuehuaOthers
XinleWuyi
Hongmei COFCO
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 7 of 30
MSG ASP is recovering after consolidation
At the close of each consolidation, ASP of MSG is witnessed a significant
turnaround historically.
Looking at the past, MSG’s ASP is quite volatile mainly due to the industry
restruction. Once capacity phases out as of industry integration, we would
see an ASP increment driven by supply shortage. For example, after an
irrational expansion in 2006, the government led two round industry
consolidations to weed out the players who have capacity lower than 30kt
and 100kt in 2007 and 2009, respectively. After industry consolidation, the
total number of players squeezed to 30+ from 70+ in 2006. Facing the rising
demand with supply constrains, Fufeng lift its ASP by 8/13%yoy in
2008/2009 that brought GPM jump to15.7/29.6% in 2008/2009 from 8.9% in
2007, along with 554/215% surged in net profit.
Using history as reference, we anticipate the ASP is to recover from
2HFY13, given the consolidation is close to the end. After initiatively
shutting down part of MSG capacities in the summer plant maintenance
period by key players, the total supply shrunk to 1.8mnt which were lower
than domestic demand of 2mnt. Thanks to the miss-match in supply and
demand, the ASP of MSG rebounded by ~11% to RMB 6,720/t in late Jul,
from RMB6,030/t in Jun, 2013.
Exhibit 6: Fufeng’s MSG ASP 1Q2006-2015E
Source: Company data, OP research
4,000
5,000
6,000
7,000
8,000
9,000
10,000 After 2007 consolidation
After 2009 consolidation
We expectthe ASP will
rebound
(RMB/tonnes)
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 8 of 30
ASP to be hike with low-single digit
As a typically upstream player, MSG industry profitability is very sensitive to
ASP change. Significantly recovery profitability may motivate another round
of expansion and further drop down industry profitability again. After
recently rebound in ASP of MSG, some smaller players in Shandong
province intended to restart production. In order to stabilize market position,
Fufeng actively cut the MSG’s price again to RMB 6,500/t in early Aug.
Thus we expect an under controlled recovering profitability in industry-wide
with modest hike of MSG ASP (i.e. low-single digit growth) in the coming 5
years. Based on this scenario case, the potential competitors who weed out
in last round consolidation may not enter into again but reward survivors
would maintain Oligarchy with even larger market share in long term.
We conservative project the ASP of MSG will stay at RMB6,500/t in 2HFY13,
bringing whole year ASP to RMB6,400/t. Along with muted growth, the ASP
will further revert to ~RMB 6,700/t and ~RMB 7,000/t in FY14E and FY15E.
According to our model, a 1% increase in ASP of MSG will boost 6/5% of
net profit in FY13E and FY14E. Thus, we are eyeing a strong bounce of
bottom line of FY13/14 led by MSG recover from 2HFY13.
Exhibit 7: Net profit sensitivity analysis to MSG price
% Change of MSG price % Change of FY13E net profit % Change of FY14E net profit
-5% -28% -24%
-3% -17% -15%
-1% -6% -5%
0% 0% 0%
1% 6% 5%
3% 17% 15%
5% 28% 24%
Source: OP research
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 9 of 30
Xanthan gum stands out
Largest Xanthan gum producer in the world
Fufeng is the largest Xanthan gum producer in the world and the effective
capacity has 46.5kt with 33% market share in 2012. The completion of
Xinjiang plant phase II in Jul has led the total annual capacity to 70kt with
~60% market in 2013.
Exhibit 8: Xanthan Gum Capacity registered a 27% CAGR in 2008-2013E
Source: Company data, OP research
Solid growth will continue
Xanthan gum sales volume reached 29,978t in 1HFY13, accounting for 46%
of our full year forecast in FY13. Driven by dynamic demand from oil
exploration area, the ASP surged by 41.2%to RMB 26,120/t with 58.7%
GPM in 1HFY13 (vs. 39.2% in 1HFY12).
The company has 65kt order for FY13 and it also has locked price ~RMB
26,000/t, suggesting the earnings from Xanthan gum will continue to be
encouraging in 2HFY13. The management also shared with us that ASP for
June and July kept on the upward trend.
Xanthan gum has higher entry barriers due to its sophisticated technology
used in the fermentation industry and capital intensive nature. Given long
production track record (usually 3 years) requirement from large customers,
we expected it would take some time for new competitors to seize a place
and bring down pricing in the foreseeable future. We conservatively reckon
the whole year sales volume to 65kt in FY13, with ASP of RMB 26,000/t. We
expect sales volume will register a 12% CAGR in 2012-2015E on the back
of decent growth in demand from US shale gas production. However, we
expect ASP will drop to a comfortable level of 21,000/t in FY14E and future
cut to 20,000/t in FY15E given the downside risk of recovering supply in
Guar gum after price softened.
We expect Xanthan gum will well above 35% GPM in long term as i) its cost
21,000
32,000
38,000
44,000
52,000
70,000
0
20,000
40,000
60,000
80,000
2008 2009 2010 2011 2012 2013E
(tonnes)
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 10 of 30
advantage due to well-picked plant location in Inner Mongolia and Xinjiang
which has abundant corn and coal supply; ii) high entry barriers as
mentioned above.
Exhibit 9: Xanthan Gum GPM and ASP (RMB/t), 2008-2015E
Source: Company data, OP research
Exhibit 10: Shale gas production and supply in US, 2010-2020E
Source: EIA, OP research
21,547 21,622
21,853
20,328 19,987
19,085 18,545
17,935 18,501
22,410
26,120 26,000
21,000
20,000
34% 35% 35%38% 39% 38% 37%
35%39%
52%
59%57%
46%42%
0%
10%
20%
30%
40%
50%
60%
70%
14,000
16,000
18,000
20,000
22,000
24,000
26,000
28,000
ASP GPM
4
5
6
7
8
9
10
11
12
2010 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E
(trillion cubic feet)
Fri, 23 Aug 2013
Fufeng Group (546 HK)
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Exhibit 11: Shale gas leads growth in total gas production through 2040 to
reach half of U.S. output.
Source: EIA, OP research
Exhibit 12: Guar gum price, 2013
Source: Bloomberg, OP research
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
5/2013 6/2013 7/2013 8/2013
(INR/quintal)
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 12 of 30
Competitive advantage approved by Lowest anti-dumping duties
According to the management, USDC announced its final decision on
anti-dumping duties for Xanthan gum on 18 May. The final duty reduced to
12.9%, significantly lower than Zhongxuan’s 127% who has 40kt capacity.
The management attributes its lower tax rate to: i) its full-integrated
producer status (i.e. Fufeng produced Xanthan gum using corn while
Zhongxiong uses starch as its key raw material), ii) as a listed company,
Fufeng has detailed information disclosure on Xanthan gum segment; in
comparison, Zhongxuan’s information is less transparent as of its private
company nature; iii) Fufeng’s diversified product portfolio has led to a diluted
cost construction.
According to management, only 4.5k/6k tonnes Xanthan gum was exported
to America, accounting for ~11/12% of FY11/12 sales volume. We expect
the new tariff to force US customers to turn to Fufeng given lower tariff rate
than Zhongxuan, and lift up Fufeng’s market share in US market.
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 13 of 30
Balance sheet reverts to healthier
Financing restruction briefs gearing burden
In Nov 2012, Fufeng issued a syndicated loan of US$150mn with an interest
rate of LIBOR plus 4% to re-purchase the Covetable Bond, leading to the
total debt/EBITDA for the full year was 3.5x, translating into 105% net
gearing ratio in the end of FY12.
Thanks to recent successful right issue, the net gearing ratio dropped to 87%
after the net fund-raising with ~RMB500mn. According to the management,
RMB200mn of the proceeds is used for repayment of existing short-term
band loan and the rest is for general working capital purpose.
We believe Fufeng’s liquidity position is manageable. The company has
completed the RMB600mn Mid-term notes with 5.11% effective interest rate
issued on April, with RMB400mn of the proceeds used to reduce its
short-term bank loan with 6.2% effective interest rate, and the rest is for
general working capital purpose.
A slow-down CAPEX in short-term to release its financing cost
The company incurred ~RMB1.8bn of CAPEX in FY12 which was over
target of RMB1.3bn, as earlier-than-expected schedule for construction of
sulphuric acid and liquid ammonia capacities. Fufeng plans ~RMB800mn of
CAPEX for FY13, of which RMB520mn has already used for its Xinjiang
plants and the remaining is for maintenance. The CAPEX of FY14/15E is
projected to ~RMB600mn, of which RMB150mn is for production lines
upgrade. Fufeng’s reluctance to expand in XGM capacity and await the ASP
recovery is the main reason of slow-down CAPEX till FY15E, in our view.
Exhibit 13: Net gearing ratio and CAPEX, 2007-2015E
Source: Company data, OP research
0%
20%
40%
60%
80%
100%
120%
0
500
1,000
1,500
2,000
2,500
2007 2008 2009 2010 2011 2012 2013E 2014E 2015E
CAPEX(RMB mn) Net gearing ratio
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 14 of 30
Cost advantage
Well-picked plant location
According to China Fermentation industry Association, geographically,
approximately 31% of China MSG was provided in Shandong province and
14% in Inner Mongolia. In comparison, Fufeng’s around 21/28% of MSG
capacity is located in Shaanxi/Inner Mongolia, and 46% in HulunBuir.
Therefore, Fufeng mainly purchases corn and coal from Inner Mongolia,
Northeast and Shaanxi whose price are largely discounted to Shandong.
Exhibit 14: Corn and Coal procurement breakdown by region
Source: Company data, OP research
Corn/coal, as two major raw materials, made up ~57/11%of MSG’s COGS
and~42/26% of Xanthan gum. Historically, corn price of Shaanxi/Inner
Mongolia/ Northeast were 5/8/10% lower than Shandong and coal price of
Shaanxi/Inner Mongolia/Hulunbeir were 40/62/68% discounted to Shandong.
Even offsetting by higher freight expense, the attractive procurement price of
corn and coal leading to Fufeng cost advantage over those competitors who
based in Shandong.
Shaanxi21%
Inner Mongolia28%
Northeast46%
Xinjiang5%
Fri, 23 Aug 2013
Fufeng Group (546 HK)
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Exhibit 15: China corn price, 2009-2013
Source: Wind, OP research
Exhibit 16: China coal price, 2008-2012
Source: Company data, OP research
1,300
1,500
1,700
1,900
2,100
2,300
2,500
2,700
Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13
Shandong Inner Mongolia Northeast Shaanxi
0
100
200
300
400
500
600
700
800
1HFY08 2HFY08 1HFY09 2HFY09 1HFY10 2HFY10 1HFY11 2HFY11 1HFY12 2HFY12
Shandong Shaanxi Inner Mongolia Hulunbeir
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 16 of 30
Not labor intensive industry
Thanks to its high automation level and economic scale, only~4/8% of
COGS in both MSG and Xantham is related to labor cost. Meanwhile, the
labor cost of Fufeng’s production bases is also lower than in the coastal
cities. We believe Fufeng’s low labor intensive nature will bring it less
sensitive to labor cost hike in the coming years, which is a major bottleneck
for other manufactory industry, in comparison.
Exhibit 17: MSG and Xanthan Gum COGS breakdown, 2012
Source: Company data, OP research
Corn kernels57%
Liquid ammonia7%
Sulphuric acid2%
Coal11%
Depreciation5%
Employee benefits4%
Others14%
MSG COGS breakdown
Coal26%
Corn kernels42%
Soybean7%
Depreciation6%
Employee benefits8%
Others11%
Xanthan Gum COGS Breakdown
Fri, 23 Aug 2013
Fufeng Group (546 HK)
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High margin products contribution
We believe the company’s margin will hold well driven by the contribution from
high margin products besides MSG and Xanthan gum in the future.
Historically, Fufeng successfully promoted its new product Xanthan Gum in 2006
after three years’ research. In 2012, Xanthan Gum has grown to 10% of its total
revenue and 30% of its total gross profit in FY12. Back on its successful historical
launch of new products, we believe the company’s Threonine, lysine and
branched-chain amino will be new profit catalysts in the next few years.
The company produced Threonine, lysine and branched-chain amino acid
products starting from 2010. We expect the production capacity of Threonine,
lysine and branched-chain amino acid will reach to 10kt, 20kt and 3kt in FY13E,
respectively, accounting for 2.5% of total revenue. These products enjoy the
same production chain as other products, but with more sophisticated
fermentation technology led to high gross profit margin.
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 18 of 30
Financial forecast
We forecast Fufeng could enjoy the net profit growth at a CAGR of 40% in
FY12-FY15E, driven by i) MSG ASP under controlled recovery; ii) gross profit
margin expanding led by product mix upgrade and MSG margin expanding; but iv)
a modest volume upside as of capacity expansion slowdown.
Revenue to rise at a CAGR of 8% in FY12-FY15E led by a 7% CAGR in
sales of MSG segment and a 11% CAGR in sales of Xanthan gum
Based on slowdown CAPEX guidance, it appeared to us the high growth era
of MSG is behind us but a muted volume growth in the coming 2-3 years
after an irrational expansion. We project the sales volume of MSG to grow at
a 5% CAGR in FY12-15E on back of production line upgrade and utilization
rate improvement.
As we mentioned above, as a typical upper-stream player, MSG industry
profitability is very sensitive to ASP change. Significantly recovery
profitability may motivate another round of expansion and further drop down
industry profitability again. Thus we are eyeing an under controlled
recovering profitability in industry-wide with modest rebound of MSG ASP
(i.e. low-single digit growth) in the coming 2-3 years.
As discussed, we conservatively project the ASP of MSG will stay at
RMB6,500/t in 2HFY13, bringing whole year ASP to RMB6,400/t. Along with
muted growth, the ASP will further revert to ~RMB 6,720/t and ~RMB
6,990/t in FY14E and FY15E.
We expect Fufeng to achieve Xanthan gum volume of 64.8kt in FY13, with
ASP of RMB 25,500/t. However, we expect ASP will drop to 21,000/t and
20,000/t in FY14E and FY15E, respectively, given the downside risk from
recovering supply of Guar gum.
Exhibit 18: Sales volume and ASP assumptions for key products
Sales volume (tonne) FY13E FY14E FY15E
MSG 918,750 945,000 997,500
Fertilizers 1,038,800 1,060,000 1,060,000
Starch sweeteners 130,900 169,400 177,870
Corn oil 35,000 38,500 40,425
Xanthan Gum 64,750 70,000 73,500
ASP (RMB/tonne)
MSG 6,400 6,720 6,989
yoy% -10% 5% 4%
Fertilizers 909 955 1,003
yoy% 5% 5% 5%
Starch sweeteners 3,241 3,339 3,439
yoy% 3% 3% 3%
Corn oil 10,509 10,825 11,150
yoy% 5% 3% 3%
Xanthan Gum 25,500 21,000 20,000
yoy% 25% -18% -5%
Source: OP research
Fri, 23 Aug 2013
Fufeng Group (546 HK)
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We expected the blended GPM expand to 16.7 % in FY13E supported by
10.3% GPM of MSG and 56.8% of Xanthan gum. We do not expect the
Xanthan Gum’s high GPM in FY13E to be sustainable as the downside risk
we mentioned before. We reckon the GPM will further expand to 18.1/19.7%
in FY14E/15E as of relative stable raw material price and ASP hike of MSG.
Thanks to the financing restruction as we discussed, we expect finance
cost/sales ratio will lower to 2.1/1.7/1.2% in FY13E/FY14E/FY15E, from
2.2% in FY12.
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 20 of 30
Key Risks
Raw material price significant hike is the biggest downside risk
As we mentioned above, corn kernel as the major raw material, made up
~57%of MSG’s COGS and~42% of Xanthan gum. Fufeng’s corn kernel
procurement price was closely related to spot market as it purchased corn
kernels locally in the spot market. Thus the price of corn Kernels may be
affected by market demand and supply, domestic government policy,
climate and other natural disaster. According to our sensitivity analysis, a 1%
increase in corn kernel price may cause net profit to decline 5% in FY13E
and 4% in FY14E.
Exhibit 19: MSG gross profit margin and Corn Kernels price
Source: Company data, OP research
High earning sensitive to the change of ASP MSG
As a typically upper-stream corn process player, Fufeng’s profit is very
sensitive to MSG ASP. Based on our sensitivity analysis, a 1% increase in
ASP of MSG may boost net profit 6% in FY13E and 5% in FY14E. Price of
MSG may be affected by industry consolidation, market supply and demand,
unexpected outbreak of serious contagious diseases (e.g. H7N9).
MSG industry could be adversely affected by unproven perception of MSG
MSG products have a long history of safe and common use in foods by
customers, however, there are opinions that consumption of MSG could
result in adverse reactions, such as headaches. The unproven perception of
MSG may adversely affect the future growth of MSG products.
0%
5%
10%
15%
20%
25%
30%
35%
0
500
1,000
1,500
2,000
2,500
1Q06 4Q06 3Q07 2Q08 1Q09 4Q09 3Q10 2Q11 1Q12 4Q12
Corn Kernels price (RMB/tonne) GPM (%)
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 21 of 30
Industry landscape: MSG demand is resilient
According to China Fermentation Association, consumption per cap of MSG is
only 500 grams per year in mainland China, far behind other Asia countries who
have similar cuisine culture which implies strong growth potential in the future.
Exhibit 20: MSG consumption still at nascent stage in Mainland China
(Garms/Year/Cap)
Source: China Fermentation Industry Association, OP research
MSG is widely used in the food processing and catering industry, according to
China Fermentation Association. China catering industry has registered a 16.4%
CAGR in 2001-2012, while MSG sales volume grew at a CAGR of 11.1% during
the same time.
The Ministry of Commerce, in the 12th Five-Year Plan, has set target that China’s
catering industry reaches to RMB3,700bn by 2015, implying 16.7% CAGR in
2012-2015E. We expect the demand for MSG is resilient and expected to
maintain at high-single digits CAGR in 2012-2015E, mainly driven by catering
industry’s decent growth.
Exhibit 21: MSG are mainly used in Food processing and catering sector
Source: China Fermentation Industry Association, OP research
0 500 1,000 1,500 2,000 2,500
Mainland China
Taiwan
South Korea
Hong Kong
Japan
Food processing
Household consumption
catering
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 22 of 30
Exhibit 22: MSG sales volume grew at a 11.2% CAGR in 2001-2012
Source: China Fermentation Industry Association, OP research
Exhibit 23: China’s catering industry will maintain 16.7% CAGR in
2012-2015
Source: China Fermentation Industry Association, OP research
0
50
100
150
200
250
300
350
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
(10kt)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
(RMB bn)
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 23 of 30
Company overview
Vertically integrated business model
Fufeng is a leading Chinese manufacturer of corn-based biochemical
products. Its highly vertically integrated production process starting from the
production of cornstarch, to the production of corn-based biochemical
products, such as glutamic acid, MSG, Xanthan gum, starch sweeteners
and other high-end products. Its vertical integration offer Fufeng a
competitive cost structure and flexible production planning.
Exhibit 24: Diversified product range
Source: Company, OP Research
Corn refinery
By-products
Corn germ Corn bran Corn protein
Corn oil
Starch sweeteners
Maltose
syrupCrystallised
glucose syrup
Crystallised
glucose
Corn kernels
Corn starch
Corn starch
syrup
Synthetic
ammonia
Waste
residue
Fertilisers BricksCompound
Seasonings
MSG
Glutamic
acidThreonine Pharmaceuticals
Xanthan
gum
Fermentation Tank
Fermentation Technology
Coal
Electricity
Steam
Xanthan Gum
segment
MSG segment
+Yeast
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 24 of 30
Capacity review
Exhibit 25: Capacity Overview and Forecast, 2006-2015E
(tonnes) 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E
MSG
Junan, Shandong 33,333 75,000 65,000 80,000 90,000 90,000 - - - -
Baoji, Shaanxi
16,667 100,000 150,000 150,000 300,000 300,000 300,000 300,000
Hohhot, Inner Mongolia
90,000 125,000 300,000 300,000 300,000 300,000 300,000 300,000
Hulun Buir, Northeast
66,667 408,333 450,000 450,000 450,000
Xinjiang
- -
Total 33,333 75,000 171,667 305,000 540,000 606,667 1,008,333 1,050,000 1,050,000 1,050,000
Glutamic acid
Junan, Shandong 50,000 40,000
Baoji, Shaanxi 120,000 120,000 135,000 150,000 240,000 240,000 240,000 240,000 240,000 240,000
Hohhot, Inner Mongolia 10,000 120,000 140,000 200,000 220,000 220,000 240,000 240,000 240,000 240,000
Hulun Buir, Inner Mongolia - - - - - 53,333 306,667 370,000 370,000 370,000
Xinjiang - - - - - - -
- -
Total 180,000 280,000 275,000 350,000 460,000 513,333 786,667 850,000 850,000 850,000
Xanthan Gum
Junan, Shandong 5,333 8,000 8,000 8,000 8,000 8,000 - - - -
Baoji, Shaanxi
- -
Hohhot, Inner Mongolia
3,333 13,000 24,000 30,000 36,000 42,000 42,000 42,000 42,000
Hulun Buir, Inner Mongolia
- -
Xinjiang
4,500 23,000 23,000 23,000
Total 5,333 11,333 21,000 32,000 38,000 44,000 46,500 65,000 65,000 65,000
Fertilizers
Junan, Shandong
90,000 5000 60,000 60,000 60,000 60,000 60,000 60,000 60,000
Baoji, Shaanxi
200,000 200,000 200,000 300,000 300,000 300,000 300,000 300,000 300,000
Hohhot, Inner Mongolia
200,000 200,000 200,000 200,000 283,333 300,000 300,000 300,000 300,000
Hulun Buir, Inner Mongolia
398,333 400,000 400,000 400,000
Xinjiang
- -
Total
490,000 405,000 460,000 560,000 643,333 1,058,333 1,060,000 1,060,000 1,060,000
Starch sweeteners
Junan, Shandong
40,000 40,000 40,000 52,000 - - - - -
Baoji, Shaanxi
- -
Hohhot, Inner Mongolia
100,000 60,000 60,000 78,000 140,000 140,000 140,000 140,000 140,000
Hulun Buir, Inner Mongolia
- - - - -
Xinjiang
- -
Total
140,000 100,000 100,000 130,000 140,000 140,000 140,000 140,000 140,000
Source: Company data, OP research
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 25 of 30
Production base
Exhibit 26: Production bases
Source: Company data, OP research
Company shareholder structure.
Exhibit 27: Shareholding & corporate structure
Source: Company, OP Research
Xinjiang BaseIM
Base
Baoji
Base
Hulunbeir
Base
Headquarters
in Beijing
Shandong
Base
Shenhua
Pharmaceutical
Li Xuechun
(Chairman)
30 management
team membersPublic
46.11% 20.60% 33.29%
Incorporated in Cayman Islands
Compound
seasoning, corn oil,
high-end amino acid
products
Shandong
Base
MSG, fertilisers,
corn refined
products
Baoji
Base
MSG, xanthan gum,
fertilisers, starch
sweeteners,
threonine, corn
refined products
Inner Mongolia
Base
Pharmaceuticals
Shenhua
Pharmaceutical
MSG, threonine,
fertilisers, corn
refined products
Hulunbeir
Base
Xanthan gum,
high-end amino
acid products
Xinjiang
Base
Junan, Shandong Baoji, Shanxi Hohhot, Inner Mongolia Jinhu, Jiangsu Zhalantun, Hulunbeir Urumqi, Xinjiang
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 26 of 30
Management team
Exhibit 28: Management team
Name Age Position Profile and professional experience
Li Xuechun 61 Founder, Chairman and
Executive Director
Mr. Li is responsible for the strategic planning and formulation of overall corporate development
policy of the Group
Mr. Li first joined Shandong Furui Brewery Group in 1982 as the factory manager.
Mr. Li established the Group starting by set up Shandong Fufeng in June 1999
Mr. Li has 31 years of experience in the fermentation industry
Wang Longxiang 51 Executive Director and
general manager
Mr. Wang is responsible for the overall management of the Group’s daily operations.
Mr. Wang joined the Group in 2005 and has over 21 years of experience in the fermentation industry
Feng Zhenquan 43 Executive Director and
vice general manager
Mr Feng is in charge of the operations of Hulunbeir Fufeng.
Mr. Feng was appointed as a director of Shandong Fufeng in May 2002
Mr. Feng has over 19 years of experience in the fermentation industry
Xu Guohua 44 Executive Director and
vice general manager
of the Group
Mr. Xu is responsible for Shenhua Pharmaceutical and the research and development of the Group
Mr. Xu joined the Group in June 1999
Mr. Xu has over 22 years of experience in the fermentation industry
Li Deheng 44 Executive Director and
vice general manager
of the Group
Mr. Li is responsible for the general operation of production and purchasing of the Group
Mr. Xu joined the Group in January 2001
Mr. Li has over 12 years of experience in business management
Chen Yuan 43 Executive Director and
the chief financial officer
Mr. Chen is responsible for financial management, capital markets, corporate development and
investor relations matters, and assists the Group to develop strategic planning and long-term
development plan
Mr. Chen joined the Group in September 2010
Mr. Chen has over 20 years of experience in the corporate finance, corporate development and
investor relations sector
Li Guangyu 34 Executive Director and
a vice general manager
Mr. Chen is responsible for the project of Hulunbeir Plant of the Group
Mr. Li has over 7 years of experience in the fermentation industry
Source: Company data, OP research
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 27 of 30
Financial Summary
Year to Dec FY11A FY12A FY13E FY14E FY15E
Year to Dec FY11A FY12A FY13E FY14E FY15E
Income Statement (RMB mn)
Ratios
MSG Segment 7,563 10,046 10,294 11,356 12,440
Gross margin (%) 18.1 14.7 16.7 18.1 19.7
Xanthan Gum 836 1,066 1,651 1,470 1,470
Operating margin (%) 9.3 6.6 7.7 9.7 11.4
Turnover 8,399 11,112 11,945 12,826 13,910
Net margin (%) 7.2 3.8 4.7 6.6 8.5
YoY% 31 32 7 7 8
Selling & dist'n exp/Sales (%) (5.0) (5.1) (5.8) (5.5) (5.5)
COGS (6,880) (9,474) (9,945) (10,501) (11,170)
Admin exp/Sales (%) (4.4) (4.0) (4.1) (3.9) (3.4)
Gross profit 1,520 1,637 2,000 2,325 2,740
Payout ratio (%) 30.3 0.0 30.0 30.0 30.0
Gross margin 18.1 14.7 16.7 18.1 19.7
Effective tax (%) (15.7) (13.0) (17.0) (17.0) (17.0)
Other income 118 129 146 158 169
Total debt/equity (%) 104.2 117.3 86.6 64.1 37.5
Selling & distribution (421) (570) (689) (702) (761)
Net debt/equity (%) 87.0 104.7 68.4 50.5 26.1
Admin (374) (440) (493) (495) (466)
Current ratio (x) 1.04 0.75 1.02 1.22 1.20
Other opex (64) (21) (40) (43) (97)
Quick ratio (x) 0.69 0.50 0.67 0.81 0.78
Total opex (859) (1,032) (1,222) (1,240) (1,324)
Inventory T/O (days) 41 43 46 46 45
Operating profit (EBIT) 778 735 924 1,243 1,585
AR T/O (days) 56 67 68 64 63
Operating margin 9.3 6.6 7.7 9.7 11.4
AP T/O (days) 119 114 116 104 101
Provisions 0 0 0 0 0
Cash conversion cycle (days) (22) (5) (1) 7 8
Finance costs (62) (245) (252) (217) (166)
Asset turnover (x) 0.85 0.93 0.96 1.02 1.09
Profit after financing costs 716 490 672 1,026 1,419
Financial leverage (x) 2.89 3.15 2.57 2.24 1.92
Associated companies & JVs 0 0 0 0 0
EBIT margin (%) 9.3 6.6 7.7 9.7 11.4
Pre-tax profit 716 490 672 1,026 1,419
Interest burden (x) 0.92 0.67 0.73 0.83 0.90
Tax (112) (64) (114) (174) (241)
Tax burden (x) 0.84 0.87 0.83 0.83 0.83
Minority interests 0 0 0 0 0
Return on equity (%) 17.7 11.2 11.5 15.2 17.7
Net profit 604 427 558 852 1,178
YoY% (37) (29) 31 53 38
Year to Dec FY11A FY12A FY13E FY14E FY15E
Net margin 7.2 3.8 4.7 6.6 8.5
Balance Sheet (RMB mn)
EBITDA 1,134 1,257 1,532 1,870 2,171
Fixed assets 6,298 7,626 7,756 7,707 7,691
EBITDA margin 13.5% 11.3% 12.8% 14.6% 15.6%
Intangible assets & goodwill 0 0 0 0 0
EPS (RMB) 0.336 0.246 0.267 0.407 0.563
Associated companies & JVs 0 0 0 0 0
YoY% (37) (29) 31 53 38
Long-term investments 0 0 0 0 0
DPS (RMB) 0.096 0.000 0.080 0.122 0.169
Other non-current assets 29 40 40 40 40
Non-current assets 6,327 7,666 7,796 7,747 7,731
Year to Dec FY11A FY12A FY13E FY14E FY15E
Cash Flow (RMB mn)
Inventories 1,180 1,415 1,596 1,637 1,793
EBITDA 1,134 1,257 1,532 1,870 2,171
AR 1,739 2,340 2,122 2,395 2,428
Chg in working cap (669) (73) (274) (339) 33
Prepayments & deposits 30 69 69 69 69
Others (7) (40) 11 15 19
Other current assets 0 0 0 0 0
Operating cash 458 1,144 1,268 1,546 2,223
Cash 584 481 884 762 761
Interests paid (148) (284) (252) (217) (166)
Current assets 3,533 4,305 4,671 4,864 5,050
Tax (62) (100) (114) (174) (241)
Net cash from operations 248 760 902 1,154 1,815
AP 2,631 3,304 2,992 2,968 3,189
Tax 54 47 47 47 47
Capex (2,228) (1,816) (758) (602) (598)
Accruals & other payables 0 0 0 0 0
Investments 0 0 0 0 0
Bank loans & leases 394 2,358 1,558 958 958
Dividends received 0 0 0 0 0
CB & othe debts 310 50 0 0 0
Sales of assets 0 0 0 0 0
Other current liabilities 0 0 0 0 0
Interests received 10 6 8 10 9
Current liabilities 3,388 5,759 4,598 3,973 4,194
Others 94 112 0 0 0
Investing cash (2,124) (1,698) (749) (592) (589)
Bank loans & leases 1,853 2,045 2,645 2,645 1,545
FCF (1,876) (937) 153 562 1,226
CB & othe debts 991 0 0 0 0
Issue of shares 0 0 500 0 0
Deferred tax & others 220 372 372 372 372
Buy-back 0 0 0 0 0
MI 0 0 0 0 0
Minority interests 0 0 0 0 0
Non-current liabilities 3,064 2,417 3,017 3,017 1,917
Dividends paid (358) (42) 0 (84) (128)
Net change in bank loans 149 1,723 (250) (600) (1,100)
Total net assets 3,407 3,795 4,853 5,621 6,671
Others 1,901 (846) 0 0 0
Financing cash 1,692 835 251 (684) (1,228)
Shareholder's equity 3,407 3,795 4,853 5,621 6,671
Share capital 174 176 676 676 676
Net change in cash (184) (103) 403 (122) (2)
Reserves 3,233 3,619 4,177 4,945 5,995
Exchange rate or other Adj 0 0 0 0 0
Opening cash 768 584 481 884 762
BVPS (RMB) 1.78 2.21 2.32 2.69 3.19
Closing cash 584 481 884 762 761
Total debts 3,548 4,453 4,203 3,603 2,503
CFPS (RMB) 0.305 0.280 0.423 0.365 0.364 Net cash/(debts) (2,964) (3,972) (3,319) (2,841) (1,742)
Source: Company, OP Research
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 28 of 30
Exhibit 29: Peer Group Comparison
Company Ticker Price
Mkt
cap
(US$m)
3-mth
avg t/o
(US$m)
PER
Hist (x)
PER
FY1 (x)
PER
FY2 (x)
EPS
FY1
YoY%
EPS FY2
YoY%
3-Yr EPS
Cagr (%)
PEG
(x)
Div yld
Hist (%)
Div yld
FY1 (%)
P/B
Hist (x)
P/B
FY1 (x)
EV/
Ebitda
Hist
EV/
Ebitda
Cur Yr
Net
gearing
Hist (%)
Gross
margin
Hist (%)
Net
margin
Hist (%)
ROE
Hist
(%)
ROE
FY1
(%)
Sh px
1-mth %
Sh px
3-mth %
Fufeng Group Ltd 546 3.31 891 2.3 10.6 9.5 7.3 11.5 30.9 22.2 0.43 N/A 1.5 1.22 1.26 7.7 6.2 104.6 14.7 3.8 8.8 14.1 24.9 23.0
HSI 21,863.51 10.1 10.4 9.6 (3.0) 8.2 4.8 2.20 3.5 3.7 1.39 1.30 13.7 12.5 (0.2) (3.6)
HSCEI 9,932.35 8.2 7.5 6.8 9.8 9.5 9.9 0.76 4.1 4.2 1.20 1.10 14.6 14.7 1.6 (7.6)
CSI300 2,286.93 11.3 9.9 8.5 13.5 17.5 16.1 0.62 2.5 2.6 1.57 1.44 13.9 14.4 0.9 (11.5)
Adjusted sector avg* 13.5 10.0 8.6 43.2 16.0 23.1 0.5 2.7 1.9 0.8 1.1 13.8 8.3 53.3 11.1 1.8 3.5 11.8 5.2 (3.6)
H-Share players
China Agri-Indus 606 HK 3.61 2,444 3.7 12.7 11.2 9.2 13.4 21.1 15.9 0.70 1.8 2.1 0.70 0.65 19.0 10.4 71.8 6.4 1.3 5.0 6.2 0.6 (4.2)
Changshouhua Foo 1006 hk 6.52 482 2.3 13.3 8.9 8.0 49.4 10.9 30.4 0.29 1.5 1.7 1.77 1.54 6.7 6.1 0.0 19.9 7.6 14.2 17.4 4.2 20.7
Global Bio-Chem 809 hk 0.63 265 0.6 N/A N/A N/A N/A N/A N/A N/A N/A N/A 0.21 N/A 15.8 N/A 69.2 12.9 (4.7) (5.6) N/A (6.0) (14.9)
Xiwang Sugar 2088 HK 0.96 125 2.4 N/A N/A N/A N/A N/A N/A N/A 78.1 N/A 0.28 N/A N/A N/A 55.0 6.5 (0.4) (0.7) N/A 35.2 49.3
Global Sweetener 3889 HK 0.49 96 0.0 N/A N/A N/A N/A N/A N/A N/A N/A N/A 0.32 N/A N/A N/A 53.5 7.8 (5.5) (10.1) N/A (1.0) (13.4)
China Starch Hld 3838 hk 0.20 157 0.1 5.7 N/A N/A 66.7 N/A N/A N/A 3.3 N/A 0.50 N/A N/A N/A 0.0 11.8 6.7 11.3 N/A 2.5 (7.3)
A-share players
Henan Lianhua-A 600186 CH 2.95 512 5.2 85.8 N/A N/A N/A N/A N/A N/A N/A N/A 3.66 N/A N/A N/A 64.7 1.0 1.4 5.5 N/A 18.5 (2.3)
Meihua Holding-A 600873 ch 4.93 2,503 7.5 22.4 N/A N/A N/A N/A N/A N/A 4.1 N/A 1.95 N/A N/A N/A 112.5 22.5 8.2 8.2 N/A 17.7 (4.1)
* Outliners and "N/A" entries are in red and excl. from the calculation of averages
Source: Bloomberg, OP Research
Fri, 23 Aug 2013
Fufeng Group (546 HK)
Page 29 of 30
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Oriental Patron (inclusive of OPSL) which are carrying on a business in Hong Kong in investment banking, proprietary trading or market making or agency broking are not a market maker in the securities of the subject companies mentioned in this report. Unless otherwise specified, Oriental Patron does not have any investment banking relationship with the companies mentioned in this report within the last 12 months. As at the date of this report, Oriental Patron do not have any interests in the subject company(ies) aggregating to an amount equal to or more than 1% of the subject company(ies) market capitalization.
Analyst Certification:
The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research analyst’s compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.
Rating and Related Definitions
Buy (B) We expect this stock outperform the relevant benchmark greater than 15% over the next 12 months. Hold (H) We expect this stock to perform in line with the relevant benchmark over the next 12 months. Sell (S) We expect this stock to underperform the relevant benchmark greater than 15% over the next 12 month. Relevant Benchmark Represents the stock closing price as at the date quoted in this report.
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