Investment suggestion
Fufeng Group announced its 2017 results: operating income was 13 billion yuan, an increase of 10.4% over the same period last year; net profit was 1.38 billion yuan, an increase of 26.5% over the same period last year, corresponding to earnings per share of 0.54 yuan, which was in line with our expectations. We expect monosodium glutamate prices to be weak in 2018, downgrading the company to neutral and lowering the target price to HK $5.4.
The reasons are as follows:
The supply and demand environment of monosodium glutamate industry deteriorated in 2018. Fufeng has increased 150000 tons of production capacity through technological transformation, and the total domestic production capacity has reached 3 million tons (a total of 2.85 million tons of monosodium glutamate at the end of 2017), with a supply growth rate of 5.2%. At the same time, the increase in the operating rate of Ipin in Chifeng has led to an increase in marginal production, which has increased from 20% to 70% at present, and there is a possibility of further increase in the future. Downstream demand growth is only stable 2%, it is difficult to support the rise in monosodium glutamate prices.
Raw material prices go up to squeeze the gross margins of monosodium glutamate and other amino acids. The price difference between monosodium glutamate and corn in the first and fourth quarters of 2017 was 3530x2933ppm, respectively. At present, it has narrowed to 3065 yuan, down 23% from the previous month and 13% from the same period last year. We expect the comprehensive gross profit margin for the whole year to fall by 0.9 percentage points to 22%.
What is the biggest difference between us and the market? According to the forecast of the CICC agricultural group, the corn price center is expected to rise by 8% for the whole of 2018. Fufeng's revenue will grow rapidly because of starch sugar, threonine and other new production capacity, but profit growth will slow down in the short term due to the pressure of product prices and costs.
Potential catalyst: prices of major products rise, corn prices fall.
Profit forecast and valuation
Considering the downward price of monosodium glutamate and the decline of gross profit margin, we reduce the price assumption of monosodium glutamate to 6700 yuan / ton (including tax). We lowered our 2018 earnings per share forecast by 15% to 0.57 yuan, and introduced the 2019 earnings per share forecast of 0.66 yuan. The company's current share price corresponds to 6.8 times 2018 earnings and 5.9 times 2019 earnings. We downgraded the company to neutral and lowered our target price by 13% to HK $5.4, corresponding to 7.5 times 2018 earnings and 6.5 times 2019 earnings.
Risk.
The prices of major products have declined; corn prices have risen rapidly; and the valuation center has moved down.