SATS Limited (SATS) announced last Friday that its wholly-owned subsidiary, Singapore Food Industries (SFI), has entered into two conditional JV agreements (JVAs) with a wholly-owned Chinese subsidiary of Wilmar International Ltd (Wilmar), Yihai Kerry Investments (YKI), to supply high quality and safe food to the Chinese market.

The JVAs will see:

1) SFI and YKI subscribe 60% and 40%, respectively, to incorporate an investment holding company (JV Co) with an expected capital of RMB230m in China, and

2) SFI and YKI subscribe 60% and 40%, respectively, to incorporate another JV as an operating company in China with an expected capital of RMB200m, which will become a wholly-owned subsidiary of JV Co.

We believe the proposition of proving high quality and safe food to the Chinese market is certainly a sound one, especially in a country plagued with scandals of unsafe food. Therefore, over the longer-term, we believe SATS will benefit from such collaboration.

As we do not expect any material impact for now, maintain HOLD on SATS with an unchanged FV of S$3.78. Separately, we have a BUY on Wilmar with a fair value of S$3.27.

Source: OCBC Research - 25 Jan 2016