• ASPs for JAPFA (SGX:UD2)’s three key segments have risen significantly since 4Q19: which is positive for its EPS:
  1. Vietnam’s swine price has exceeded its 5-year high of VND80,000/kg level due to the African swine fever,
  2. China’s raw milk price has exceeded its 5-year high of Rmb3.8/kg, and
  3. Indonesia’s broiler price recovered to an ASP of Rp18,451/kg in 4Q19 vs IDR16,813/kg in 4Q19.
• We raise our 2020 and 2021F EPS by 38% and 31% respectively.
• Upgrade to BUY with a 60% higher SOTP-based target price of $0.80.

What’s New

Vietnam’s swine price has exceeded its 5-year high due to the ASF.

• We believe the development of African swine fever (ASF) in Vietnam is somewhat similar with China, where the number of affected cases will reach its peak in the first six months and then start to improve. This is also in line with Japfa’s base-case scenario. Also, we understand that the affected swine is within Japfa’s expectation of < 25% of its total swine population. We estimate that on a net basis, the profitability of Japfa’s Vietnam swine segment should benefit, as the spike in swine ASP should more than offset the volume decline.
• We expect core profit of this segment to reach US$28m in 2020, up from only US$3m in 2019.

China’s raw milk price has exceeded its 5-year high due to undersupply.

• Dairy used to be Japfa’s most stable segment due to the stability of raw milk ASP in China. However, the ASP has exceeded its 5-year high since late-3Q19. We believe this is attributable to the undersupply in the market due to a prolonged low ASP environment, which has not incentivised the building of new dairy farms.

Signs of ASP recovery in Indonesian broiler due to government policy.

• In 3Q19, the Indonesia’s Ministry of Agriculture put in place additional culling measures, including orders to 45 poultry breeding companies to cull fertilised eggs and parent stock breeding chickens. Since then, we have seen a sustained recovery in broiler ASP throughout 4Q19.

Earnings Revision / Risk

• We raise our 2019, 2020 and 2021 net profit forecasts by 8%, 38% and 31% respectively after raising our net profit forecasts significantly for Japfa’s Vietnam swine segment and marginally for the China dairy segment on higher-than-expected ASPs which will lead to higher operating margins.
• Risks include:
  1. unfavourable forex rates,
  2. demand-supply imbalance for key proteins,
  3. prices and availability of feed raw materials,
  4. competition, and
  5. animal disease outbreak.

Valuation / Recommendation

• Upgrade to BUY with a higher SOTP-based target price after the EPS revision, which implies a 2020F PE of 13x.

Share Price Catalyst

• Better-than-expected prices for Indonesia poultry, China dairy and Vietnam swine products.
• Reversal of rupiah weakness.

Source: UOB Kay Hian Research - 20 Jan 2020