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ASP increased to offset the raising raw material price

■ Fufeng reported 1H21 revenue of Rmb9.5bn, up 16.6% yoy, and net profit of Rmb591m, up 55.8% yoy, in line with our expectation.
■ Facing the raising raw material prices, Fufeng managed to pass the pressure to its customers by increasing the selling prices. Fufeng also limited its production volume to deal with more intense competition in 1H21.
■ Management expects the competition situation in 2H21F to be better than 1H21.
■ Reiterate Add with an unchanged DCF-based TP of HK$3.9.

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Results in line with high-end products supported margin

Fufeng reported 1H21 revenue of Rmb9.5bn, up 16.6% yoy, driven by revenue growth in high-end amino acid (52.0% yoy), animal nutrition (37.6% yoy), food additives (5.6% yoy) and others (21.8% yoy), but offset by a revenue fall in colloid (28.0% yoy). Revenue contribution of the five segments were 7.2%, 36.4%, 47.2%, 5.0% and 4.2% (1H20: 5.5%, 30.8%, 52.1%, 4.8%, and 6.7%), respectively. The 1H21 gross margin improved by 0.5% pt yoy to 18.5%, driven mainly by higher ASP and higher revenue contribution from animal nutrition and high-end amino acid, but offset by raw material prices increase. The price of
corn, coal, liquid ammonia and sulphuric acid increased by 52.8%, 17.4%, 26.5% and 128.4% yoy, respectively, in 1H21. Gross margin for food additives, animal nutrition, high-end amino acid, colloid and others were 13.4%, 17.7%, 44.8%, 38.1%, and 19.2% (1H20: 17.0%, 14.0%, 37.6%, 24.2%, and 23.0%), respectively. Its operating margin was up by 0.8% pt to 7.7% in 1H21. Net profit for the period was Rmb591m, up 55.8% yoy, in line with our expectation.

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ASP increased and limit production volume

Facing the raising raw material prices, Fufeng managed to pass the pressure to its customers through increasing the selling prices. Fufeng limited its production to deal with the intense competition in 1H21. In 1H21, the ASP of Fufeng’s MSG was Rmb7,176 per ton, up 18.7% yoy. Fufeng increased its MSG price but the increase did not fully offset the raw material price increase. Sales volume of MSG in 1H21 decreased by 8.9% yoy. MSG revenue grew by 8.1% yoy in the period. The ASP for starch sweeteners was up 39.1%
yoy, but sales volume fell by 32.2% yoy in 1H21 because of the catering industry was affected by the pandemic. 1H21 revenue from starch sweeteners grew by 5.7% yoy. The ASP for threonine increased by 40.1% yoy in 1H21, and sales volume grew by 22.4% yoy, driving up product revenue growth of 71.5% yoy. About 80% of Fufeng’s threonine sales was export sales. Sales volume of xanthan gum slide by 43.3% yoy with an ASP up of 22.9% yoy, because of the weak global oil industry amid global pandemic.

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Explore overseas expansion and cost saving projects

Fufeng will invest Rmb1bn into its chemical facilities, which will help it to reduce production costs. Management also reiterated its global expansion plans to build production facilities in the top three corn production areas in the world, but the plan is now delayed by the global pandemic. With higher contribution of its high-end amino acid products, Fufeng will continue to step up recruiting research and development talents to enhance the development in more high-end amino acid products.

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Reiterate Add with an unchanged DCF-based TP of HK$3.9

We fine-tuned our earnings forecasts for FY21–23F.