- The conflict between Russia and Ukraine has elevated global commodity price hikes, with some of them surging by >50% y-o-y in Mar 2022
- While selected agri-commodity prices rise more moderately in China, palm oil price surges >70% in Mar 2022. Sensitivity analyses suggest substantial earnings impacts across instant noodle players
- Stay selective: we prefer upstream plays like China Modern Dairy and COFCO Joycome in short-run; the downstream operators with strong pricing power should post firm prospects on a 12-month horizon
Major shock to agricultural commodities. Russia and Ukraine, the breadbasket of Europe, mark an important force in the agricultural sector. High global commodity prices, along with COVID-19 resurgence and logistics disturbance, have surged further following sanctions being imposed on Russia and register strong double-digit growth (see page 4). Certain commodities in China, including corn, raw milk, sugar, wheat, and soybean meal, have seen much milder increases, perhaps except for palm oil and some packaging raw materials like aluminium that climb 72% and 30% respectively in China during Mar 2022.
Negatively impacted sectors. Food processors like Tingyi, UPC and Nissin Foods have lately warned that higher palm oil prices may have already offset the companies’ price hikes over the past 12 months. Palm oil, up >55% y-o-y in 1Q22, normally takes up <10% of cost of goods sold. Based on our sensitivity analyses, we estimate FY22 earnings of UPC and Tingyi could be impacted by 1%-3% for every 5% increase in palm oil price. As such, we lowered the gross margin of UPC/Nissin Foods by 0.7ppt/0.8ppt to 31.9%/30.9% for FY22F and will review earnings of Tingyi.
Stay selective. On the back of rising agri-commodity prices, upstream players like China Modern Dairy (1117.HK, Buy) and COFCO Joycome (1610.HK, Buy) may benefit better from the uptrend. We believe mid-downstream processors could face higher cost pressure in 1H22 and affect near-term sentiment. However, we maintain BUY on China Mengniu and Yili, as we expect these leading dairy companies could find ways to largely offset the cost impacts through passing on the costs to consumers as well as further product-mix enhancement.