• Effective stake in China JV to reduce to 21%
• Singbridge a strategic partner
• Re-engage closer to S$4.70 or lower

JV Operates Integrated Pig Farming in China

Pursuant to its Apr 17 announcement on the proposed joint investment with Charoen Pokphand Group (CP) in Jilin Zhong Xin Cheng Food (Jilin JVCo), SATS Limited (SATS) announced last week that Singbridge will also participate in the investment in Jilin JVCo through a JV agreement with SATS. Jilin JVCo was established in 2010 to develop and operate a large scale integrated pig farm with abattoir and feed production facilities in Jilin Province, China.

Based on the Apr 17 announcement, CP and SATS will own 65% and 35% stakes in Jilin JVCo, respectively. However, with this latest update, CP will continue to own a 65% direct stake in Jilin JVCo while SATS and Singbridge will participate through their JV’s (SGIPF) 35% stake in Jilin JVCo. SATS and Singbridge will hold 60% and 40% of SGIPF, respectively. Under this structure, SATS’ effective stake in Jilin JVCo will reduce from 35% to 21%.

Strong Strategic Partners Strengthen Presence in China

In our view, while SATS’s effective stake is reduced, having two strong strategic partners on board is certainly positive over the longer-term. Singbridge is experienced in investing into China, and has an ongoing project with the Jilin City Government to develop a sustainable model food zone in Jilin tailored for quality and safe food production in China and the region.

CP, on the other hand, has a vertically integrated feed to farm to food operation business with extensive distribution network providing safe food to consumers. Coupled with SATS’s expertise in operating efficient central kitchens, we believe the three partners will be able to tap on each other’s expertise to grow the Jilin JVCo sustainably, providing safe food, which is likely to be in high demand given growing focus and awareness on safe food supply.

Maintain HOLD

Given the huge market size in China and the high demand for safe food distribution, we see positive growth potential for SATS as it strengthens its position through the restructuring of its JV in China. That said, given that this JV is still in the early stage, we maintain our HOLD rating with an unchanged FV of S$5.12. We will look to re-engage closer to S$4.70 or lower.

Source: OCBC Research - 16 Jun 2017