Uptrend since 2H
Fufeng’s 1H13 net profit of Rmb206.3m dropped 24.8% yoy and was 18% lower than our expectation, mainly due to sluggish MSG price. We expect xanthan gum will be the key earnings driver for FY13 and gross profit margin (GPM) of MSG segment will slightly rebound in 2H13.
We cut FY13/14 earnings by 8%/18% to reflect lower MSG price and higher expenses ratios, but raised FY15 earnings thanks for margin recovery. Maintain Outperform as we expect the MSG segment to gradually bottom out from 2H13 onwards. The DCF-based target price is slightly raised to HK$4.0 (WACC 12.1%).
Xanthan gum shine
Xanthan gum’s sales volume rose 10.6% yoy to 28.4kt and ASP rallied 41.2% yoy to Rmb26.1k/t, while GPM also reached a record high of 58.7%. Xinjiang Plant Phase 2 was in place in Jul, leading to annual capacity of 70kt. Fufeng expects global demand to be 140kt in 2013 and its own sales volume to be 65kt. The sector’s entry barrier is high as large customers usually ask for a 3-year production track record. Fufeng expects the ASP to stay at ~Rmb26k/t for 3-4 months and then slightly decline due to more supplies. We expect ASP to be Rmb25.5k/t for FY13, implying Rmb25k/t for 2H.
MSG to gradually rebound
Fufeng, along with major competitors, have shut down part of MSG capacities in the summer plant maintenance period since Jul to improve ASP and GPM. But Fufeng plans to maintain the ASP within a reasonable range to maintain market share and prevent smaller players from getting back to the industry. Fufeng will review the market and then decide whether to restart production in its Baoji plant (300kt capacity) in Sep. We conservatively expect ASP to stay at Rmb6.6k/t in 2H13, slightly higher than the current Rmb6.5k/t. We expect GPM for MSG segment to rebound slightly by 0.9%pt to 10.7% in 2H13.
New focus on amino acid
Fufeng expects to deeply penetrate in to high-end amino acid market. We expect this segment to contribute more to the bottom line from FY14 and it has the potential to become the third major profit contribution after xanthan gum in the future.
Publish date: 13/08/13