Event: Yurun Foods (1068.HK) released its 2013 interim results.
Different from the popular perception:
Gross profit margin returned to strong in 2013. Although sales revenue fell 17.8 per cent year-on-year to HK $10.303 billion, gross profit rose 56.3 per cent to HK $419 million, gross margin rose 2.0 per cent year-on-year and 4.0 percentage points to 4.1 per cent, and reported net profit turned positive to HK $18 million. Although there was a significant decline in HK $107 million in the first half of 12, it was significantly better than the loss of HK $712 million in the second half of 12.
Rely on new sales channels to improve sales and product structure. In the first half of 13 years, Yurun took the initiative to reduce the proportion of third-party dealers and increase the proportion of direct sales channels: in upstream product sales, the proportion of third-party dealers decreased to 50.5% from 57.6% in the same period last year. In the same period, the proportion of direct sales of food and beverage chains and supermarkets increased from 25.7% to 28.5%. Customized products, priced about 3% higher than those sold to third parties, will be supplied directly to new channels, while domestic sales (for downstream meat production) can help digest low-end meat. Therefore, we expect gross profit margin and sales volume to continue to rise in the second half of 13 years.
Capacity expansion slows down and focuses on operating rate and production efficiency. There was no new capacity for upstream slaughtering in the first half of 13 years, maintaining an annual capacity of 56.65 million head a year, while the deep processing capacity of downstream meat products increased by only 0.2 per cent. Capital expenditure for 13 years fell to 343 million from HK $1.435 billion in the same period last year, and we expect it to continue to decline in the second half of the year. As a result, the period of rapid capacity expansion and heavy capital investment has passed (capital expenditure of more than HK $5 billion / 2 billion in 11 / 12).
Agricultural industry integration is the core investment theme. Government goal 1) reduce the number of designated licensed slaughtering sites to 2400, which is now about 16000, because the highly decentralized agricultural industry is the main cause of many virus outbreaks and food safety incidents; 2) improve food quality standards and promote the consumption of chilled meat and small packaged meat The two varieties now contribute only 20% of the market share of meat products to replace hot-cut meat with more than 60% market share and lack of disinfection measures.
Valuation and target price: we maintain a positive view of Yurun as the beneficiary of industry consolidation in the largest pork consumer market. We also believe that it is significant for the new management to return from production capacity to focus on the changes brought about by profit margins. We maintain our overweight rating, target price of HK $7.2 and profit forecast. Key assumptions: 1) 13-year slaughtering gross profit margin; 2) upstream slaughtering volume may be reduced due to the active reduction of frozen meat sales.
Catalyst: slaughtering volume and gross profit recovery, government policies to support agricultural industry integration. Risks: slow recovery of gross profit margin, food safety issues.
