Fufeng Group (HKG:0546) Research Report Produced By Royal Bank of Scotland (RBS) (NYSE:RBS)

Fufeng Group (HKG:0546) (PINK:FFNGY) is China's largest glutamic acid and second-largest MSG producer. We forecast an earnings CAGR of 20% for FY10-12, driven by capacity expansion and increasing cost savings. We initiate with a Buy rating and a HK$7.10 target price.

Leading player in glutamic acid and MSG markets

Fufeng is China's largest producer of glutamic acid and the second largest producer of MSG, with respective market shares of 22% and 12% in terms of production volume as at end-2009. Glutamic acid is the primary raw material for MSG and Fufeng self-supplies all of the glutamic acid for its own MSG production. The company is also the world's largest xanthan gum manufacturer, with a 30% share of production volume globally. Given its leading market position, we believe Fufeng is positioned well to benefit from the growing demand for MSG in the domestic food processing and catering business.

New capacity should strengthen leading market position and increase pricing power Fufeng plans to increase its effective capacity in MSG by 77% in FY10, 19% in FY11 and 16% in FY12, as its new factories in Inner Mongolia (completed in December 2009) and northeast China (to be completed in June 2011) start to contribute. We expect Fufeng's market shares in glutamic acid and MSG to increase to 30% and 22% by 2012.

Strong cost advantages over competitors

The strategic location of Fufeng's plants in Shaanxi and Inner Mongolia provides it with cheap raw material (notably corn) and coal supplies, which helps it sustain a higher gross margin than the MSG sector average. Its gross and operating margins of 30.2% and 22.6%, respectively, for FY09, were higher than Vedan's 24.7% and 10.7% and Lianhua's 11.7% and 1.3%. We expect Fufeng's gross margin to dip a bit from 25% in FY10 to 23% in FY11, weighed down temporarily by new glutamic acid and MSG capacities to be completed in June 2011, and then return to the normal level of 24% in FY12.

Buy rating for superior profitability and undemanding valuation Our DCF-based target price of HK$7.10 implies 42% upside potential, with a target FY11F PE of 11.0x. Fufeng's PEs of 7.8x FY10F and 7.0x FY11F, with dividend yields of 5.7% for FY10F and 6.3% for FY11F, seem undemanding to us.

Key forecasts
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                                 FY08A  FY09A  FY10F  FY11F   FY12F
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Revenue (Rmbm)                   3,585  4,633  6,476  8,228  10,407
EBITDA (Rmbm)                    520.7  1,241  1,448  1,695   2,244
Reported net profit (Rmbm)       294.7  928.3  1,028  1,136   1,486
Normalised net profit (Rmbm)(1)  294.7  928.3  1,028  1,136   1,486
Normalised EPS                    0.18   0.56   0.56   0.62    0.81
Dividend per share                0.01   0.22   0.25   0.27    0.36
Dividend yield (%)                0.23   5.04   5.67   6.26    8.19
Normalised PE (x)                 24.6   7.82   7.76   7.03    5.37
EV/EBITDA (x)                     14.6   6.06   5.54   4.58    3.19
Price/book value (x)              4.17   3.03   2.61   2.11    1.66
ROIC (%)                          14.8   37.3   33.6   26.6    32.5
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(1) Post-goodwill amortisation and        year to Dec, fully diluted
pre-exceptional items Accounting
standard: Local GAAP Source:
Company data, RBS forecasts.

For the full Fufeng Research Report, produced by Royal Bank of Scotland (RBS) (NYSE:RBS), please refer to the following link:
http://www.abnnewswire.net/media/en/docs/63227-RBS-Jul-10-100702.pdf

About Fufeng Group Limited

Fufeng Group (HKG:0546) is the world's largest producer of MSG, xanthan gum and a major supplier for a series of bio-fermentation products. The main products of the Group are food additives, animal nutrition, colloid and high-end amino acids. In fiscal 2016, Fufeng generated sales of approximately RMB11.2 billion and profit attributable to shareholders of about RMB1.09 billion. For more information, please visit our website www.fufeng-group.com

 

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