• Wilmar International sees great potential in the central kitchen business which is a good complementary business to its agri-based food ingredient products. The first Central Kitchen Food Park in Hangzhou is in the trial production stage.
• While consumer packs and soybean crushing in China remain challenging, palm and sugar operations should be able to partly mitigate this weakness. Both palm and sugar operations are enjoying good ASPs and processing margins.

Accelerating the Construction of Central Kitchen

• Based on Wilmar International (SGX:F34)’s and Yihai Kerry Arawana’s (YKA) 2021 annual reports, central kitchen operations are gaining greater momentum as management is expediting the construction of Central Kitchen Food Park (CKFP) in China.
• The first CKFP facility in Hanzhou (investment cost: about RMB400m) is completed and is in the trial production stage. This CKFP is targeting institutions such as schools, elder care homes and commercial canteens. Its competitive advantage against its peers would be its efficient and low cost model with housing ingredient supplies, food operators and distribution within an operation complex.
• Four more CKFPs are under construction, they are located in Langfang, Xi’an, Chongqing and Zhoukou. Management also mentioned that the success of the CKFP model in China will be duplicated into other countries that Wilmar International has integrated operations in such as India and Indonesia.

Expansion Into CKFP Is Also a Strategy to Reduce the Earnings Impact From Highly-volatile Commodity Prices

• This is particularly critical for its operations in China under YKA, where raw material costs make up 88-90% of its cost of production. Particularly in 2021 when the fluctuation of raw material prices was high and the high prices cannot be easily passed down to customers. This led to a 41% decline in profit before tax (PBT) from the food products division in 2021.
• The consumer packs business is likely to remain challenging in 2022 and expect the better contributions from its medium and bulk packs to mitigate the weaker PBT contribution from consumer packs.

Soybean Crushing Still Challenging

• The back-to-back soybean crushing margins in China are still challenging with high soybean (the feedstock) prices not being able to be covered by the sales of soybean meal and soybean oil in China. China’s domestic soybean meal consumption is weak due to poor hog and poultry margins.
• At the same time, soybean oil consumption is shrinking and its price in China is not keeping up with the rise in international prices. Thus, there will be negative impacts on soybean crushing margin.

Maintain Earnings Forecast for Wilmar

• We are forecasting a net China operations and a blended 11x P/E for the non-China operations.

Source: UOB Kay Hian Research - 31 Mar 2022