• Japfa (SGX:UD2) entered third sales and purchase agreement (SPA) in 10 days to divest of its stake in AustAsia Investment Holdings (AIH), its China raw milk business.
• A milk supply agreement is tagged to each SPA, where AIH will supply raw milk to the new investors on a five-year rolling basis, renewable annually.
• Japfa will retain a 62.5% stake in AIH and continue to pursue its ambitions to become China’s largest independent raw milk producer.

3 New Investors for Japfa's AustAsia Investment Holdings in 10 Days

• On 7 Sep 2021, Japfa announced the divestment of 5% of its stake in AIH to GGG Holdings Limited, the nominated affiliate of New Hope Dairy (002946 SZ), subject to authorities’ approval. This marks the third divestment in 10 days and a total divestment of a 12.5% stake in AIH to three investors for a total consideration of US$146m, representing a 1.59x price-to-book valuation.
• The divestment is a follow-up to Japfa’s recent exercise to add strategic milk processors as shareholders of AIH in 2020, where Meiji Holdings (2269 JT) came on board as a strategic partner with a 25% equity stake for a consideration of US$254.4m.

Locking in Demand for Next Five Years

• As part of the respective SPAs, Japfa enters into a milk supply agreement with raw milk to the investors at prevailing market prices in return.
• Given the persistent shortage of raw milk in China, we do not foresee any early termination of the agreements.

Strengthened Financial Position, No Capital Expansion Plans for Now

• Proceeds from divestments will be used for general working capital in July.

Strong Aspirations Supported by Well-thought-out Plans

• Japfa believes it is currently the largest independent ADD call for Japfa and target price of S$1.06 pegged to 10x FY22F EPS with business anchored on China raw milk in the short term.

• Upside risk includes healthier margins while downside risks are otherwise.

Source: CGS-CIMB Research - 8 Sep 2021