Analysts Anisah Abdul Rahman Zamawi Lead Analyst, Equity Research anisah.arz @u.nus.edu Ayoj Nepal Analyst, Equity Research Poh Tze Wee Darryl Analyst, Equity Research Wee Jian Yong Calvin Analyst, Equity Research

Basic Information Last Closed Price THB31.25 12M Target Price THB39.80 +/- Potential +27.4% Bloomberg Ticker CPF:TB GICS Sector Consumer Staple GICS Sub-Industry Food & Staples Retailing

1Y Price v Relative Index

Company Description Charoen Pokphand Foods Public Company Limited is a Thailand-based company engaged in the operation of agro-industrial and integrated food businesses. It operates and invest in 14 countries, export to more than 30 countries across all 5 continents.

Key Financials Market Cap 238.10B Basic Shares O/S 7.74B Free Float 3.81B 52-Wk High-Low THB16.40 - THB33.50 Fiscal Year End 31-Dec-15

(THB M) FY14A FY15A FY16E FY17E Revenue 426039 42135 460743 494867 Gr Rate (%) 13.4 13.8 15.1 25.0 EBITDA 24408 37803 41138 43297 Margin (%) 5.73 8.97 8.93 8.75 Net Income 10562 11059 15299 14738 Margin (%) 2.48 2.62 3.32 2.98 ROA 2.70 2.43 3.39 3.36 ROE 9.29 9.46 11.03 11.24 EV/EBITDA 16.96 10.91 12.50 11.87 P/E Ratio 19.06 12.20 18.11 16.35 D/E Ratio 119.49 148.38 - -

Key Executives Adirek Sripratak President & CEO Paisan Chirakitcharern

Chief Financial Officer

A Shrimply Good Stock

We are initiating coverage of CPF with a Buy rating and a THB39.50 12M price target. 2Q16 Earnings Review 2Q16 net earnings growth of 34.7% y-o-y and 6.7% q-o-q to Bt4bn,

despite the one-off recognition of an additional tax expense of Bt1.3bn arising from the change in corporate income tax calculation for the period 2010 to 2015

Core earnings of 2Q16 was a turnaround compared to a core loss of Bt53m in 2Q15.

The turnaround in core earnings y-o-y was driven by i) decent revenue growth of 12.6% to Bt116.8bn, including consolidation of the investment in Cambodia and the Svernaya and Woyskovitsy business in Russia, much stronger gross margins (+3.9ppts to 17.4%) and lower SG&A to sales (-1.5ppts to 9.9%).

Investment Thesis Tailwind on margins due to strong turnaround in industry from a)

china’s increasing profitable meat consumption b) strong rebound in its shrimp business and c) Increase in Japan’s demand for chicken and stable prices of raw materials.

Aggressive expansion to create sustainable growth drivers. Well-positioned to ride on Asia’s booming Halal food market due

to established market presence in Indonesia and Malaysia and greater international reach for halal food products.

Competitive advantage in food business

Catalysts Increasing swine prices due to growth in regional demand for pork,

largely due to China’s rising middle class while raw prices remain stable.

Continual recovery of the regional shrimp industry from the EMS outbreak. - Gross profit margin increases

Acquisitions of Russian integrated poultry business in 3Q15 for THB17.1B

Valuations Our 12-month price target from date of coverage is THB39.80, reflecting 14.6x our 2017E EPS of THB2.72. Our 14.6x multiple represents a 27% premium — appropriate, in our view, given an industry just recovery from disease outbreak, as well as the company’s aggressive expansion pans. Investment Risks High debt and high CAPEX can pose risk in the event of an interest

rate hike - Subject to current and predicted environment in capital markets.

Infections and diseases in poultry, swine and shrimps - reemerging epidemics or unmanageable bacteria.

Raw material price swings - topographic conditions and severe climate changes affects the cost of production for the company.

Equity Research Department 4 November 2016

Charoen Pokphand Foods PCL BUY: THB39.80 (+27.4%)

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CPF Close S&P Rebased

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Figure 1. Revenue by Products, FY15

Source: CP Foods Investor Relations Report 2015 Figure 2. Revenue by Geography, FY15

Source: CP Foods Investor Relations Report 2015 Figure 3. CP Foods Physical Store

Source: Charoen Pokphand Foods

Company Overview

Charoen Pokphand Foods Public Company Limited is a Thailand-based company engaged in the operation of agro-industrial and integrated food businesses. The businesses are divided into two segments: the livestock business segment, which comprises chicken, duck and pigs, and the aquaculture business segment, which consists of shrimp and fish. The integrated businesses incorporate the manufacture of animal feed, animal breeding and animal farming; meat processing, the manufacture of semi-cooked meat and fully-cooked meat; food products and ready meal products, as well as the meat and food retailer and restaurant businesses. The company is bolstered by positive trends in the near future such as strong near term headwinds such as high swine prices due to limited supply, shortages in parent broiler stock resulting in rising broiler prices, favorable prices of raw materials due to better weather, sustainable improvement and turnaround in domestic shrimp operation and CPF’s restructuring strategy. CPF is aggressively expanding its outreach in South East Asia and Russia. 2Q16 core earnings was boosted by consolidation of the investment in Cambodia and the Svernaya and Woyskovitsy business in Russia and the strong recovery of the domestic shrimp operations In the long term, CPF aims to expand its production bases internationally with intention to leverage its expertise in domestic integrated and modern agro-industrial technology in countries with high potential in development of farming standards and commercial farming efficiency in order to promote the production of meats and foods that met the international food safety standards. 2Q16 Earnings Review 2Q16 net earnings growth of 34.7% y-o-y and 6.7% q-o-q to Bt4bn,

despite the one-off recognition of an additional tax expense of Bt1.3bn arising from the change in corporate income tax calculation for the period 2010 to 2015

Core earnings of 2Q16 was a turnaround compared to a core loss of Bt53m in 2Q15.

The turnaround in core earnings y-o-y was driven by i) decent revenue growth of 12.6% to Bt116.8bn, including consolidation of the investment in Cambodia and the Svernaya and Woyskovitsy business in Russia, much stronger gross margins (+3.9ppts to 17.4%) and lower SG&A to sales (-1.5ppts to 9.9%).

Industry Outlook

Food sales growth in Asia will likely exceed global gains through at least 2020, according to Euromonitor, as diets in emerging markets converge with those in developed nations. The region's spending increase will likely be underpinned by higher wages and rising populations. Food and agribusiness have a massive economic, social, and environmental footprint—the $5 trillion industry represents 10 percent of global consumer spending, 40 percent of employment, and 30 percent of greenhouse-gas emissions. Although sizable productivity improvements over the past 50 years have enabled an abundant food supply in many parts of the world, feeding the global population has reemerged as a critical issue. If current trends continue, by 2050, caloric demand will increase by 70 percent, and crop demand for human consumption and animal feed will increase by at least 100 percent. Protein Demand Increases Amid Near-Term Hurdles: Midyear Outlook

52.00%

12.00%

36.00%

Feed Food Farm

61.00%

39.00%

International Thailand

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Figure 4. Farms lead revenue growth

Source: Bloomberg Data Figure 5. World’s largest halal food markets

Source: Bloomberg data Figure 6. Muslim demographics by region

Source: Bloomberg Figure 7. CPF’s Gross Profit Margin

Source: Company Filings, Bloomberg Data

Consumers in Asian emerging markets are eating more beef, chicken, pork and dairy products. This reflects those countries' rising wages and growing populations as their diets converge with those of mature markets. China's share of global pork consumption rose to 51% in 2015 from 45% in 2007, according to the U.S. Department of Agriculture. A surge in Chinese pork prices may stall additional near-term gains as shoppers switch to other forms of protein including chicken, beef, seafood and dairy. Processed-meat sales in India may surge 12% a year through 2020, according to Passport, as more shoppers with rising incomes try non-vegetarian protein sources. Japanese shoppers may add more imported beef and pork to their shopping lists as a surging yen helps make them cheaper. China Poised to Surpass Japan as World's Largest Pork Importer A projected surge in demand for protein in emerging markets, especially pork in China, would create opportunities for companies to grow in core production and supporting industries such as breeding, animal-health testing, feed, and vaccines. For example, beef and other livestock production in Argentina and Brazil is expected to grow strongly to meet global demand. With annual spending of $300 billion, China is the world’s largest consumer of meat, two-thirds of which is pork. Protein consumption there is expected to grow 3 to 4 percent a year, mostly as a result of increasing demand from a rising middle class. While levels have risen dramatically, the Chinese continue to trail Western diets in protein consumption. The government has made a strong commitment to modernize the sector, moving from what is largely backyard farming to sophisticated commercial agribusiness. China's pork imports are jumping as it turns to the EU and other major exporters to fill the void from a domestic production shortfall. The surge in purchases from abroad could halt Japan's long-running reign as the world's top importer of pork, even as the strong yen boosts its purchases this year. WH Group, the world's largest pork processor, may rely more on its U.S. subsidiary, Smithfield Foods, to feed China's king-sized appetite. With opportunity come risks. Rising protein prices in emerging markets, government intervention, and environmental concerns could slow demand. Moreover, not every part of the protein value chain is doing well; livestock producers are struggling because of a poor feed-to-meat/dairy price ratio, and primary processors are suffering from high feedstock costs and low capacity utilization. Halal Products Take Off in Asia, Home to Most of World's Muslims Halal-certified sales will likely outpace global total food sales for the next several years, fueled by population growth and rising incomes in Indonesia, Bangladesh and Pakistan. The market is already a $1 trillion-a-year business, according to ITC. Asia accounts for 1 billion, or about 62% of the world's 1.6 billion Muslims. The next largest is the Middle East-North Africa region at about 20%. Sub-Saharan Africa ranks third at around 15%, according to Pew Research Center data. These regions will likely serve as the engine driving most halal food demand growth in coming years. As disposable incomes rise, shoppers in these domains may be willing to pay more for halal products in emerging categories, such as dairy, snacks and ready meals. La Nina May Take a Bite Out of Food Budgets: Midyear Outlook La Nina's return may pressure Asian household budgets in 2H into 2017, as rising raw-material costs spur foodmakers to boost prices. More than 30% of household expenditure goes toward food in Indonesia, Vietnam

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Figure 8. CPF’s acquisition of Russian poultry business

Source: CPF website Figure 9. Thailand pork broiler prices

Source: Bloomberg Data Figure 10. Thailand aquaculture gross margin

Source: Bloomberg data Figure 11. Thai raw materials prices (Baht/kg)

Source: Bloomberg data

and the Philippines, making consumers in these markets the most likely to trade down to less-expensive local brands. Ready-meal and noodle makers may find it most difficult to pass along higher input costs given shoppers' willingness to switch to private labels in these categories.

Investment Thesis

1. Tailwind on margins due to strong turnaround in industry from a) china’s increasing profitable meat consumption b) strong rebound in its shrimp business and c) Increase in Japan’s demand for chicken and stable prices of raw materials

Margins set for growth due to strong turnaround in industry supported by lower costs

Earnings to be driven by increasing livestock margins underpinned by increasing demand for pork from the Chinese market, supported by the emerging middle class, and widened by falling domestic supply in China. (Projected 26% increase: US Dept. of Agriculture)

There is strong recovery in shrimp production (increased by 13% in 2015, reaching 260,000 tonnes) and lower cost structure due to the downsizing of CP’s production facilities. This results in lower fixed costs and increased cost efficiency and operating leverage.

CPF poultry business is poised to improve significantly due to the strong demand from Japan and the ban of grandparent chickens from the US.

50% of the company’s COGS derived from the feed’s raw materials and this cost bound to stay low due to high soybean yields created in South America by La Nina effect and a 9-year high stock-to-use ratio of 12.5% in the US.

2. Aggressive expansion to create sustainable growth drivers

CPF is expanding aggressively overseas by focusing on high-growth markets in Japan, Russia, South Korea and Cambodia. CPF seeks to further expand its overseas sales contribution to 70-75% within the next five years to keep its leading position and leverage its portfolio geographically.

Entered the poultry business in Russia to create a production base for business expansion in the future. Used unlevered cash financing of $680M to acquire 100% investment in Stesha LLC who held 80% stake in S&W, an integrated poultry business in Russia.

Already runs livestock feed and swine farming business in Russia. Relatively fragmented poultry market in Russia with no dominant players. Opportunity to leverage on its existing presence to create a multi-species protein business, allowing it to strengthen its foothold in Russia, where demand for meat is high but localized production is low.

Cutting-edge agro-industrial technology gives CPF an edge over the numerous small-scale enterprises that do not have the economies-of-scale that CPF has.

3. Well-positioned to ride on Asia’s booming Halal food market with established market presence in Indonesia and Malaysia

Asian countries such as Indonesia and Malaysia will likely serve as the engine driving most halal food demand growth in coming years.

The Indonesian Halal food market is valued at 190 billion. From 2009 to 2050, Indonesia demand for poultry is expected to rise by a factor of 14 with a value of over US$30 billion.

CP Holdings Malaysia is the first poultry processing company in South-East Asia and Malaysia to be awarded the ISO 22000:2005 certification in Food Safety Management. CP hopes to establish

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Figure 12. CPF’s Vertical Integration

Source: CPF Annual Report 2015 Figure 13. Range of CP Foods products

Source: CPF website Figure 14. CPF return on equity trend

Source: Annual Report, NUS Investment Society Estimates Figure 15. Extended DuPont Equation

Ratio 2016E 1 Tax Burden 80% 2 Interest

Burden 58.9%

3 Operating Margin

5.1%

4 Total Asset Turnover

0.7x

5 Equity Multiplier

5.5x

Source: Annual Report, NUS Investment Society Estimates

Malaysia as a Halal food products hub and export their products to other Muslim countries.

4. Competitive advantage in food business

CP is the largest feed manufacturer in the world and has a vertically integrated production chain for swine, poultry and seafood products.

In comparison, CP closest competitor, Thai Union and GFPT, sells only seafood products and chicken products respectively.

Also, CPF has multiple brands that carry different grades of seafood and poultry products sold at different price points.

This gives it a competitive edge as it is unlikely to be adversely affected by the any downturn in a specific income segment, and are poised to benefit from a general increase in demand.

As the sole operator of 7-Eleven convenience stores (CVS) in Thailand, CP has a strong competitive advantage as this allows CPF to distribute its ready-meal products with high profit margins in all 7- Eleven outlets.

CP ALL plans to increase its CVS outlets to 10,000 by 2018. This will further enhance the accessibility of CP’s processed food products and boost their sales.

Moreover, CP has an extremely strong market presence in Asia, especially China as its founders were Chinese immigrants.

Strong guanxi with the Chinese government gives it a competitive advantage against its largest global competitors in a country with surging demand for chicken and seafood products due to the economic liberalization and massive rural-urban migration.

Catalysts

Increasing swine prices due to growth in regional demand for pork, largely due to China’s rising middle class while raw prices remain stable. - Operating margin increases

Continual recovery of the regional shrimp industry from the EMS outbreak. - Gross profit margin increases

Acquisitions of Russian integrated poultry business and CP Cambodia.

Significant growth in the halal food markets of Asia, particularly in Malaysia and Indonesia

Financial Analysis

Overview: The financial condition chart above reveals CPF’s prospects moving 6 years forward, highlighting our assumptions (refer to appendix for more details). Emphasis has been placed on the revenue forecasts due to strong drivers during the forecasted period which links to subsequent expenses as well.

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Improved Margins from FY16 onwards Aquaculture business in Thailand has been hit due to the outbreak of a serious shrimp disease in 2012. Margins from Thai aquaculture business are set to on continue a stable growth since a strong recover in 2H15. This is expected to contribute to overall margins of CPF. 2016E Free Cash Flow projected to be positive after 3 years of negative FCFs CP Foods’ free cash flows has suffered due to the low EBIT from poor market conditions. The shrimp EMS outbreak (from 2012) had negatively impacted CPF’s cash flows but in light of the recent lowering of raw materials prices and higher poultry and pork prices as well as CPF’s 1H16 results exceeding expectations all indicate that 2016 will be the first year that CPF arrives at a positive free cash flow. Improving Return on Equity CPF has had below industry ROE at 9.4% vs 14.61%. This was largely due to the Thailand Aquaculture business of CPF, that was hit heavily during the shrimp disease outbreak in 2012. With the recovery from this event, CPF’s 1H16 results reflect a promising ROE of 16.1%, close to that of its peers. Operating Margins Previously CPF faced low operating margins below the industry average. However, with an integrated business model and strong earnings drivers, the operation margins have been improving. The expected ROE for FY16 is 7.6% and is expected to hold that position, placing CPF well with its peers. Asset Turnover Asset turnover for CPF is currently at 0.9x. CPF has a large appetite for expansion and are thus acquiring assets since FY14 in the near term. As a result, CPF’s asset turnover is slightly below its peers. Interest Burden CPF has a high amount of debt, which is used to fund acquisitions and its expansion strategy with significant interest burden of 85.7%. Tax Burden CPF pays a tax bill of 20%, which is the corporate tax rate in Thailand. This is a reasonable amount and the tax rate is not expected to change in the near future. Leverage CPF has high leverage due to its expansion strategy. However, free cash flows are positive and cost of debt is reasonable and this should have limited impact on the financials of CPF.

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Valuations

Valuation Price Target: THB39.80

Figure 16. WACC Buildup

Cost of equity 5.6%

Risk free rate 2.15%

Beta 0.67

Equity risk premium 5.1%

Cost of debt 4.4%

Risk Free Yield 2.2%

A+ Corporate Rating 5.4%

Tax rate 20.0%

Market cap ( THB '000 000 ) 241,969

Total debt (THB '000 000) 320,538

WACC 4.4%

Source: Bloomberg, Damodaran, NUS Investment Society Estimates Figure 12. Sensitivity Tables

Source: NUS Investment Society Estimates

DCF Model A discounted cash flow analysis was used to estimate intrinsic value of CPF’s share price due to concerns with its cash flow generation capabilities. The primary model is forecasted over 5 years. The model is driven by product sales, segmented geographically into Thailand, other Asian countries and International – each with 3 product types (Food, Feed, Farm). On the cost front, the COGS and CapEx of CPF serve as crucial perimeters for projections due to the company’s current plans of expansion. Three cases were formulated, with the base case consisting of guidance from historical performance, annual report, industry outlook, along with investor day presentations. The DCF is most sensitive to the following factors, derivation of which are explained below. The 5 year DCF model is expanded into 8 year model in order to gauge long term cash flow generation capability of CPF. Weighted Average Cost of Capital (WACC) To calculate Beta, linear regression of CPF’s stock price were run against the S&P 500 for time frame of 12 months on a weekly basis and then averaged and adjusted. CAPM was used to estimate Cost of Equity, while a risk free rate and a historical average of cost of debt (from the investor relation reports) was used. Revenue Growth Revenue growth for CPF is based primarily on increasing sales in the 3 segments: Thailand, other Asian countries and its International operations. CPF, as a market leader in Thailand’s food industry, has consistently maintained market dominance and will continue to do so with Thailand’s recent domestic protectionist policies. CPF is on a cautious expansionary quest as it still needs to recover from its earnings drop from 2012’s EMS disease outbreak, yet CPF’s appetite for expansion coupled with a food market on the uptrend is likely to result in increased margins for CPF. At the end of the day, CPF’s management continuously emphasizes a sustainable growth model which we estimate to happen within 8 years – first a 5 year CAGR of 14.97% in light of a positive market outlook slowing to an approximate constant CAGR of 13.91%. Terminal Growth As the food industry stabilizes, a consumer staple such as CPF that has established its brand presence allows for stability in growth – resulting in a terminal growth rate equal to Thailand’s expected GDP growth, which is accounted for in the 8 year DCF model.

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Figure 12. Investment Risk Matrix

Source: NUS Investment Society Estimates

Relative Valuation Using P/B, P/E, EV/EBITDA, EV/EBIT, CPF is interestingly undervalued relative to its smaller peers such as Thai Union. Given CPF’s competitive advantage of an established brand image, continued strong market dominance in China due to long forged guanxi and greater economic forecasts, we remain optimistic about the outlooks of CPF being able able to keep up with growth expectations. Using comparables as sanity checks, CPF has comparatively high growth prospects is undervalued compared to peers. Relative Valuation was primarily focused on P/E multiple. This is due to:

1) Compact spread from 1st to 4th quartile of peer group P/E 2) Similar trends in historical multiple movements 3) Importance of P/E as a comparable against other agribusiness

retailers, excluding exceptional items, goodwill and amortization.

This analysis leads to an intrinsic value of THB39.50 for CPF, a 20.3% upside to the current trading price. We remain confident that this valuation re-affirm our Buy recommendation and validates our view of upcoming 12-month period.

Investment Risks

Market Risks M1: Outbreak of infections and diseases in poultry, swine and shrimp Company may have additional risks from re-emerging epidemics or other unmanageable bacteria found in Thailand and in foreign countries, which shall have direct impacts on the efficiency of farming and may bring about panic and may reduce the confidence in consumption of meats. M2: Raw material price swings Topographic conditions and severe climate changes in the past periods of time have affected the suitability of the cultivation areas, numbers of areas and harvesting period; as a result, the quantity and quality of agricultural products shall have significant volatility. Business Risks B3: Aggressive Acquisitions However, with the company’s expansion also comes the risk of the acquisitions to be unsuccessful due to several reasons, namely the inability to integrate its business to the citizen’s needs or differing regulations that could hinder full expansion. Failed expansions would cost the Company a large chunk of the cost of acquiring companies overseas as well as wasted resources setting up business in that specific area which would prove a setback for the Company’s positive growth so far in FY16. Credit Risk C4: High debt and high capex can still pose risk if not handled prudently The Company selected to repay a portion of its debts with floating interest rates. This means it may have risks from changes in interest rates which may be increased. As of December 31, 2015, the Company had its loans with the floating interest rates amounted to 19% of the total amount of loans; provided that, in case, the interest rates were increased, as a result, the Company would have to bear more interest burdens.

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Disclaimer

This research material has been prepared by NUS Invest. NUS Invest specifically prohibits the redistribution of this material in whole or in part without the written permission of NUS Invest. The research officer(s) primarily responsible for the content of this research material, in whole or in part, certifies that their views are accurately expressed and they will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this research material. Whilst we have taken all reasonable care to ensure that the information contained in this publication is not untrue or misleading at the time of publication, we cannot guarantee its accuracy or completeness, and you should not act on it without first independently verifying its contents. Any opinion or estimate contained in this report is subject to change without notice. We have not given any consideration to and we have not made any investigation of the investment objectives, financial situation or particular needs of the recipient or any class of persons, and accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of the recipient or any class of persons acting on such information or opinion or estimate. You may wish to seek advice from a financial adviser regarding the suitability of the securities mentioned herein, taking into consideration your investment objectives, financial situation or particular needs, before making a commitment to invest in the securities. This report is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. The research material should not be regarded by recipients as a substitute for the exercise of their own judgement. Any opinions expressed in this research material are subject to change without notice.

© 2016 NUS Investment Society

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Appendix:

Scenario Assumptions:

Pro Forma Financial Statements

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11

Revenue

Expenses

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NWC

DCF:

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Ratios:

Extended Du Pont Analysis: