2018 performance is in line with expectations
Fufeng Group released its 2018 results: revenue was 13.8 billion yuan, an increase of 5.6% over the same period last year; net profit attributable to shareholders was 1.85 billion yuan, an increase of 33.5% over the same period last year, corresponding to a profit of 0.72 yuan per share.
The profit growth is mainly due to the one-time net income contributed by the two land sales in Baoji.
Trend of development
Low inventory supports monosodium glutamate prices. Production restrictions on environmental protection in the second half of 2018 led to low capacity utilization, and the annual output of monosodium glutamate in the industry decreased by 260000 tons. Monosodium glutamate stocks fell sharply at the beginning of 2019 and short-term supply tightened. Since the beginning of the year, the price of monosodium glutamate in major markets has risen by 50 yuan-100 yuan per ton to 8200 yuan-8400 yuan per ton. As small-scale production capacity continues to withdraw, the monosodium glutamate market is further integrated. We estimate that every 100 yuan per ton increase in the price of monosodium glutamate before tax will increase the company's earnings per share by 0.04 yuan.
The price of corn, the raw material for monosodium glutamate processing, fell to boost profit margins. Since the beginning of the year, the price of corn has dropped by 60 yuan per ton for the whole year, of which the price of monosodium glutamate in Heilongjiang Province has dropped by 90% per ton, or about 3% by 5%.
The second phase production base of Longjiang (300000 tons of starch sweetener and 200000 tons of lysine) has been put into operation; the price of amino acids is expected to rise in 19 years. The prices of lysine and threonine fell 17 per cent and 37 per cent respectively in 2018 and fell further 6 per cent and 4 per cent year-to-date to record lows of 7460 and 7350 per tonne respectively. We believe that the downward space for lysine and threonine prices is limited and is expected to bottom out and pick up in the second half of 2019, leading to an improvement in the performance of the amino acid sector.
Profit forecast
We maintain earnings per share forecasts of 0.51 yuan and 0.55 yuan per share for 2019 and 2020.
Valuation and suggestion
At present, the company's share price corresponds to 7.2 times / 6.6 times the 20-year price-to-earnings ratio of 2019. Remain neutral, with a target price of HK $5.4, which is 31% upside from the current share price.
Risk
The price of raw materials has risen sharply; the price of monosodium glutamate has fallen; the valuation has moved down.