indonesia animal protein initiation edited...indonesia industry focus animal protein page 4 strategy...

ed-JS / sa- YM

Join the bandwagon Having recovered from day-old-chick (DOC) oversupply,

breeding margin is now in an upcycle

Stable Rupiah, limited grandparent stock (GPS) supply improving purchasing power and low raw material costs point towards favourable earnings outlook

Oligopolistic structure and intense competition are a barrier for new entrants

Besides coverage on Japfa Ltd (BUY), we initiate coverage on Charoen Pokphand Indonesia (BUY), Japfa Comfeed Indonesia (BUY), and Malindo Feedmill (HOLD)

Ripe for picking. The valuation in the animal protein sector have largely recovered from Aug-15’s bottom, and are now trading between -1SD and average forward EV/EBITDA multiples. While the depreciation of the Rupiah continued to weigh on 3Q15 earnings, operating profits have bounced from 4Q14/1Q15 lows – driven by both volume and ASP. We expect valuations to move towards their respective historical average multiples (calculated between CY09 and CY13 to remove distortions caused by DOC oversupply in CY14 and CY15). Favourable supply/demand outlook. A nationwide culling of 6m parent stock (PS) has been underway since end Oct-15, and with lower PS population, poultry breeders should see both lower feed costs and stable DOC prices. These, combined with a more stable Rupiah, reduced USD debt exposure, lower capital expenditure, limited supply of GPS (due to avian flu outbreak in the US and parts of Europe) and – in the case of Malindo Feedmill (MAIN) – additional equity injection, should result in sustained earnings recovery over the next twelve months. With the exception of MAIN, we believe this has not yet been fully priced in, despite the recent recovery in share prices. Integration and overcapacity are high entry barriers. The sector is dominated by few players, who have in place a vertically integrated model and an efficient distribution network throughout the archipelago. This structure should remain unchallenged until breeding margins pick up significantly; and over-investment in the recent years would remain a deterrent for new entrants for some time, in our view. JPFA is our IDX-listed pick. We initiate coverage on Charoen Pokphand Indonesia (CPIN), Japfa Comfeed Indonesia (JPFA), and Malindo Feedmill (MAIN), in addition to our existing coverage of Japfa Limited (JAP). Our top IDX-listed pick is JPFA which remains undervalued relative to its FY16F EBITDA, and offers 37% upside potential. We reiterate our BUY rating for SGX-listed JAP, which has 78% potential upside. Risks to our call. While we believe the likelihood is low, we remain watchful on any steep depreciation of the Rupiah, disease outbreak, another miscalculated over-investment leading to a repeat of the overcapacity situation, as well as spikes in both raw material costs and interest rates.

JCI : 4,464.18 STI : 2,861.19 Analyst Ben Santoso +65 6682 3707 [email protected] Indonesian Research Team STOCKS

Source: DBS Bank, DBS Vickers *prices as at close of 7 Dec15 Assumptions

Source: DBS Bank, DBS Vickers

DBS Group Research . Equity 10 Dec 2015

Indonesia Industry Focus

Animal Protein

Refer to important disclosures at the end of this report

Price * Mkt Cap Target Price Performance (%)

LCY US$m LCY 3 mth 12 mth Rating

Rp Charoen Pokphand 2,850 3,338 3,550 N.A N.A BUY Japfa Comfeed 452 344 620 32.6 (58.7) BUY Malindo Feedmill 1,355 217 1,300 17.8 (43.0) HOLD S$ Japfa Ltd 0.48 601 0.90 69.5 (13.8) BUY

14 15F 16F 17F 18FCharoen Pok phand IndonesiaPoultry feed (Rp/kg) 7,274 6,831 7,243 6,944 6,976 DOC (Rp/chick) 3,450 3,993 4,233 4,487 4,622 J apfa Comfeed IndonesiaPoultry feed (Rp/kg) 5,929 6,061 6,426 6,163 6,194 DOC (Rp/chick) 3,960 4,085 4,207 4,334 4,464 Broiler (Rp/kg live) 14,547 16,001 16,481 16,976 17,485 Malindo F eedmillPoultry Feed (Rp/kg) 6,199 6,222 6,582 6,317 6,350 DOC (Rp/chick) 3,210 3,941 4,059 4,181 4,306 Broiler (Rp/kg live) 16,149 16,658 17,157 17,672 18,202

Raw materials cost assumpt ionsDomestic corn (Rp/kg) 2,271 2,396 2,603 2,553 2,603 Imported corn (Rp/Kg) 2,293 2,419 2,627 2,577 2,627 Imported soybean meal (Rp/kg) 6,269 5,288 5,275 4,871 4,786


Animal Protein

Peer comparison

Source: Companies, Bloomberg Finance LP, DBS Bank, DBS Vickers

Prices as at closing of 8 Dec15


Animal Protein

Page 2

Shr Cap Mkt Cap Price TP % 14-16 EPSAnimal protein B'berg code FYE (m) (US$ m) LCY (LCY) (LCY) Upside Rcmd 14A 15F 16F 14A 15F 16F 14A 15F 16F 14A 15F 16F 14A 15F 16F CAGR (%)Charoen Pokphand Indonesia CPIN IJ Equity 12/2014 16,398.0 3,363.9 IDR 2,850 3,550 24.6 BUY 107 92 136 26.8 30.9 21.0 4.3 4.3 3.4 18.4 16.8 11.4 1.6% 1.1% 1.0% 13.0Malindo Feedmill MAIN IJ Equity 12/2014 2,238.8 224.0 IDR 1,390 1,300 (6.5) HOLD -23 82 125 NM 16.9 11.1 2.3 2.3 1.8 36.5 17.8 8.4 1.4% 0.0% 0.0% NMJapfa Comfeed Indonesia JPFA IJ Equity 12/2014 10,660.5 346.8 IDR 452 620 37.2 BUY -13 25 35 NM 17.9 12.9 1.0 1.0 0.9 6.8 8.2 5.8 2.2% 1.2% 0.8% NMThai Union Group TU TB Equity 12/2014 4,771.8 2,468.9 THB 18.6 22.4 20.4 BUY 1.17 1.34 1.47 15.9 13.8 12.7 2.0 2.0 1.7 11.7 10.6 9.0 3.0% 3.3% 3.7% 12.0Simple average 21.3 19.9 14.4 2.4 2.4 1.9 18.3 13.3 8.6 2.1% 1.4% 1.4% 12.5

Shr Cap Mkt Cap Price TP % 14-16 EPSConsumer foods B'berg code FYE (m) (US$ m) LCY (LCY) (LCY) Upside Rcmd 14A 15F 16F 14A 15F 16F 14A 15F 16F 14A 15F 16F 14A 15F 16F CAGR (%)Indofood CBP Sukses Makmur ICBP IJ Equity 12/2014 5,831.0 5,109.9 IDR 12,175 13,500 10.9 HOLD 538 604 692 22.6 20.2 17.6 5.0 5.0 4.1 18.1 15.3 13.3 1.8% 2.0% 2.3% 13.4Mayora Indah MYOR IJ Equity 12/2014 894.3 1,678.6 IDR 26,075 25,400 (2.6) HOLD 1,128 1,195 1,401 23.1 21.8 18.6 5.8 5.8 4.3 21.0 13.7 12.1 0.6% 0.7% 0.8% 11.4Tiga Pillar Sejahtera Food AISA IJ Equity 12/2014 3,218.6 338.2 IDR 1,460 n/a n/a n/a 121 142 156 12.1 10.3 9.3 1.3 1.2 1.1 9.8 9.2 7.8 0.6% 0.7% 0.7% 13.8Simple average 19.3 17.4 15.2 4.1 4.0 3.2 16.3 12.7 11.0 1.0% 1.1% 1.3% 12.9

Shr Cap Mkt Cap Price TP % 14-16 EPSDairy B'berg code FYE (m) (US$ m) LCY (LCY) (LCY) Upside Rcmd 14A 15F 16F 14A 15F 16F 14A 15F 16F 14A 15F 16F 14A 15F 16F CAGR (%)YuanShengTai Dairy Farm 1431 HK Equity 12/2014 3,908.7 297.6 HKD 0.6 n/a n/a n/a 0.13 0.14 0.17 4.4 4.1 3.5 0.4 0.4 0.3 3.0 1.8 1.6 0.0% 0.0% 0.0% 12.8China Modern Dairy Holdings 1117 HK Equity 12/2014 5,304.8 1,464.8 HKD 2.1 3.10 44.9 BUY 0.23 0.25 0.28 9.2 8.5 7.8 0.0 0.0 0.0 10.7 9.8 8.5 0.5% 0.0% 0.5% 9.0China Huishan Dairy Holdings*6863 HK Equity 03/2015 13,474.7 4,989.9 HKD 2.9 n/a n/a n/a 0.07 0.09 0.10 43.5 31.2 28.4 2.9 2.7 2.6 33.0 24.1 18.9 0.6% 0.8% 0.9% 23.7Inner Mongolia Yili Industrial 600887 CH Equity12/2014 6,064.8 13,985.7 CNY 14.8 n/a n/a n/a 0.78 0.92 1.08 19.1 16.1 13.8 4.2 3.7 3.1 37.8 12.2 10.1 2.9% 3.0% 3.6% 17.8Simple average 19.1 15.0 13.4 1.9 1.7 1.5 21.1 12.0 9.8 1.0% 1.0% 1.2% 15.8

Shr Cap Mkt Cap Price TP % 14-16 EPSIntegrated food producers B'berg code FYE (m) (US$ m) LCY (LCY) (LCY) Upside Rcmd 14A 15F 16F 14A 15F 16F 14A 15F 16F 14A 15F 16F 14A 15F 16F CAGR (%)Charoen Pokphand Foods CPF TB Equity 12/2014 7,742.9 4,113.8 THB 19.1 22 15.2 HOLD 1 0 1 23.9 69.7 22.7 1.2 1.2 1.2 11.2 13.7 11.3 3.9% 3.4% 2.2% 2.5Charoen Pokphand Indonesia CPIN IJ Equity 12/2014 16,398.0 3,363.9 IDR 2,850 3,550 24.6 BUY 126 164 199 22.7 17.4 14.3 3.8 3.2 2.8 11.5 14.5 12.3 1.0% 1.3% 1.6% 25.8Indofood Sukses Makmur INDF IJ Equity 12/2014 8,780.4 3,207.4 IDR 5,075 7,275 (6.5) BUY 371 472 551 13.7 10.7 9.2 1.7 1.5 1.4 8.9 8.3 7.2 4.0% 3.8% 4.7% 21.8Simple average 23.3 43.5 18.5 2.5 2.2 2.0 11.4 14.1 11.8 2.5% 2.3% 1.9% 14.1

EPS (LCY) PE (x) P/BV (x) Div Yield (%)

EPS (LCY) PE (x) P/BV (x) EV/EBITDA (x) Div Yield (%)

EV/EBITDA (x)

PE (x) P/BV (x) Div Yield (%)

EPS (LCY) PE (x) P/BV (x) EV/EBITDA (x) Div Yield (%)

EV/EBITDA (x)EPS (LCY)


Animal Protein

Analyst Ben Santoso +65 6682 3707 [email protected] Indonesia Research Team

Table of contents

Peer comparison 2

Strategy and stock picks 4 Time to accumulate 4 Our coverage 4 The business model 5 Valuation methodology 5 A surprisingly resilient ASP post CY15 Lebaran 6 Declining exposures to USD borrowings 6 Key risks to our call 7

The players 8

Poultry feed competitive landscape 8 Poultry breeding competitive landscape 8 Cow feedlot competitive landscape 9 Aquaculture competitive landscape 9 Dairy competitive landscape 9

Supply and demand drivers 10 The battle for market shares 10 Drivers for poultry supply/demand/price 10 The 6m parent stock (PS) cull to address oversupply 11 Drivers for poultry feed supply/demand/price 11 Drivers for beef supply/demand/price 12 Feed dominates cost of beef 13 Policies to boost domestic beef supply 13 Drivers for dairy supply/demand/price 13

Appendix 1: Industry overview 15 Appendix 2: 3QCY15 results review 18

Stock profiles 19 Charoen Pokphand Indonesia 20 Japfa Comfeed 21 Japfa Limited 22 Malindo Feedmill 23

Disclaimer 24


Animal Protein

Strategy and stock picks

Time to accumulate

We initiate coverage on Indonesian animal protein sector with a favourable view of prospective earnings over the next twelve months. Selectively, we believe there is upside from current market valuations – even after recent share price recovery. We believe the sector is in a structural up-cycle, based on the following drivers: 1. Stabilisation of the Rupiah. The sector – which at the

end of 2014 had collectively accumulated debt exposure of US$1.1bn– has since gradually reduced this amount to US$830m by end Sep-15. With USD/IDR exchange rate now expected to settle at Rp14,070 by the year end, the sizeable unrealized FX losses booked at end Sep-15 should notably shrink by year-end. Unlike the slump in CY14/15, we anticipate the Rupiah’s pace of depreciation to moderate in CY16, which would help to contain any spikes in imported raw materials costs. A relatively stable Rupiah should hence translate into stable end-product prices, and lead to normalised demand growth.

2. Continued weakness in soybean meal and corn

prices. USD-based raw materials account for more than 80% of poultry producers’ costs, with corn and soybean meal making up the bulk. We believe global oversupply of grains and oilseeds will continue to cap their prices through CY17, and this should help keep boost demand and profitability of poultry producers as Indonesia’s economy recovers.

3. Parent stock (PS) culling and lower FY15F

grandparent stock (GPS) import quota. The government’s mandate to cull 6m PS nationwide starting Oct-15 will lead to: (1) reduced oversupply, which had previously been managed through arbitrary culling of unhatched eggs; (2) less feeding costs for poultry breeders next year; and (3) higher broiler and day-old-chick (DOC) prices – as purchasing power is restored. The government had reduced CY15F GPS import quota by 8%, but limited availability of viable GPS from avian flu-stricken USA and parts of Europe may slow DOC supply recovery through CY17F.

Our coverage

Our coverage includes: 1. Charoen Pokphand Indonesia (CPIN IJ)

The group is the largest vertically integrated producer of poultry feed, day-old-chicks, and packaged frozen food in Indonesia – commanding market shares of 43% in poultry feed and 43% in DOC (as at Sep-15). We expect CPIN’s EBITDA to expand by 25% CAGR between FY15F and FY18F.

CPIN’s expansion plans are expected to decelerate over the next few years given recent oversupply issues and to address its USD debt exposure in the light of Rupiah’s weakness. We view this as a good step to raise the group’s ROA which had gradually declined from FY09 to FY14 due to heavy expansion. On our estimates, CPIN’s ROA should recover to 15% in FY18F vs. 6.7% in FY15F.

2. Japfa Comfeed Indonesia (JPFA IJ) JPFA is a leading industrialised and vertically integrated poultry player, cattle feedlots, aqua feed and consumer food producer in Indonesia. The group is the second largest poultry feed and DOC producer with roughly 19% and 24% market share, respectively (as at end FY14). The low base should boost JPFA’s EBITDA by 19% CAGR between FY15F and FY18F. The group has borne the brunt of the Rupiah depreciation over the past two years with its exposure through US$225m notes due 2018. While the group has repurchased US$18m of the notes, we continue to expect higher share of borrowing costs (relative to peers) until the notes mature. Having the highest USD debt exposure, JPFA is trading at an excessive discount to peers. In addition, the counter’s forward EV/EBITDA remains significantly below its own average multiple, despite being the second largest player. Since FY13, we note that the group has been able to defend its market share (against new entrants). JPFA is our top IDX-listed pick in the sector – offering 37% upside.

3. Japfa Limited (JAP SP) As a 57% shareholder of JPFA, SGX-listed JAP is additionally engaged in production of animal feed and DOC in Vietnam, Myanmar, and India; a vertically integrated swine farm and consumer products in Vietnam; consumer food and fresh milk brands in Indonesia; as well as dairy farms in China. We expect JAP’s EBITDA to expand by 25% CAGR between FY15F and FY18F, driven by raw milk volume growth, DOC and recovery in broiler prices in Indonesia, soft raw material prices, and a low base.

4. Malindo Feedmill (MAIN IJ) MAIN produces animal feeds and breeds commercial DOCs. The group is the third largest poultry feed and DOC producer in Indonesia with roughly c.6% and 8% market share (as at end of FY14). We expect MAIN's EBITDA to grow by 28% CAGR between FY15F and FY18F, benefiting from the low base, soft raw material prices and recent rights issue. Since FY13, MAIN has also


Animal Protein

launched its own branded frozen food products, which we expect to contribute 3% of the group revenue by FY18F. Given YTD losses in its breeding and consumer products’ divisions, MAIN’s net gearing ratio had expanded from 94% at end-Dec13 to 135% at end-Dec14. By mid-Aug-15, the group was prompted to call for additional equity injection through rights issue (completed on 26 Nov-15); it had cut its capital expenditure at the beginning of the year. Based on the rights price of Rp1,200/share, MAIN should pare down its borrowings, and reduce its net gearing ratio to 72% by the end of this year (assuming Rp245bn of net debt repayments) and to lower its USD exposure to US$1m. The nationwide PS culling would benefit MAIN the most, as it sells half of its PS output to third parties. Hence, a reduction in PS sold to third parties should leave the group’s own DOC production relatively unscathed. This is why we expect MAIN to book relatively stronger earnings growth relative to peers.

The business model

The animal protein industry derives the majority of its cash flow from sales of poultry feed, which has fixed gross margins (10-15%), ignoring raw material price movements. Feed sales volumes (from stocks within our coverage) have expanded by 4% CAGR between CY12 and CY15F, and is expected to register 5% CAGR growth between CY15F and CY18F. This is principally led by population growth and shift in consumption patterns due to urbanisation and rising middle class population. Poultry feed is typically paired with DOCs, when sold to grow-out farmers (i.e. covering both independent and partnership formats), who in turn sell the live broilers to large distributors, direct to wet markets, or back to the protein producers’ slaughter houses. An analysis of estimated gross profit from each company’s different segments revealed that cash flow generation from sales of feed remains the backbone, while sales of DOCs and broilers have a high degree of volatility. The recent losses in the DOC segment (as reported by all players under coverage) were hence “cross-subsidised” by the feed segment. Cash flow has been supported by cutbacks in capital spending and arbitrary cuts in both production and capacity. Had there not been any government-mandated cut in DOC production capacity, we believe all breeders would have undertaken their own culling to guard against further deterioration in cash flow, even though the pace would have been slower.

Segmental gross profit breakdown CY15F

Source: Companies, DBS Bank estimates Valuation methodology

We peg our valuation methodology to average historical EV/EBITDA multiple (calculated from FY09 to FY13 to avoid distortions in FY14/15F). Our definition of EBITDA is gross profit less selling, and G&A expenses, plus depreciation. Most intangible amortisation is insignificant, and is not added back in our calculations. Our valuation methodology excludes changes in fair value of biological assets (for SGX-listed JAP) and FX gains (losses).

The sector is currently trading at 12.0x forward EV/EBITDA – which lies somewhere between -1SD (9.3x) and average (13.4x) forward EV/EBITDA multiple, having recovered from the bottom at end of Aug-15. With favourable earnings outlook, we expect the counters’ share prices to maintain their current trajectory in the medium term. In this sector, CPIN has the highest average historical EV/EBITDA multiple, followed by MAIN and JPFA. Yet, relative to its historical average, at current level JAP has the highest upside (78%), followed by JPFA (37%), CPIN (25%) and MAIN (-4%).

Rp bn Poultry fe e d DOC Broi le r Proce sse d food Othe rs Tota l

Charoen Pokphand Indonesia 3,627 -18 n/a 968 31 4,608

Japfa Comfeed Indonesia 2,437 -51 427 n/a 811 3,624

Malindo Feedmill (EBIT) 313 -142 -21 -42 -6 101

Japfa Limited (US$ m) 192 11 21 49 253 525

FY15F


Animal Protein

Compared to regional peers, Indonesian poultry players are now trading at lower EV/EBITDA multiples, principally due to the drop in purchasing power and DOC oversupply over the last two years. We believe prospective EBITDA recovery over the next few quarters would be the main re-rating catalyst. A surprisingly resilient ASP post-CY15 Lebaran

3Q15 results revealed that ASPs for both DOCs and broilers post Lebaran did not drop as much as previous years. All three players reported a slight 5% q-o-q improvement in DOC ASP (vis-à-vis the 30% q-o-q plunge in 3Q14), as well as sequentially higher broiler ASP (vs. flat q-o-q in 3Q14). We understand breeders have since the beginning of the year curbed supply through arbitrary disposal of un-hatched DOC eggs (i.e. between 10% and 40%) to address the oversupply situation and prevent prices from falling further. Despite the sequential ASP improvement however, DOC breeders continued to report weak 3Q15 margins, as higher realised feed cost (on translation of weak Rupiah) continued to raise breakeven costs.

All three players also reported higher net gearing ratios for the same reason, although cash balances remained adequate –given capital spending curbs since the beginning of the year. A summary of 3Q15 results is summarised in Appendix 2 at the end of this report. Declining exposure to USD borrowings

The stocks under our coverage have a combined market capitalisation of US$4.2bn, and total debt exposure of US$1.1 bn in FY14 – of which 40% is short term and 60% is long term. The industry has USD debt exposure amounting to US$830m (as at end Sep-15), of which 30% is due for repayment over the next twelve months. While the Rupiah has recovered and stabilized since Sep-15, we expect a milder pace of depreciation over the next few years. As the case since Sep15, we expect poultry companies to continue to pare down USD debt exposure, hedge USD operating liabilities and maintain a certain amount of USD cash on hand.

Poultry groups’ USD debt exposure/net gearing

Source: Companies, DBS Bank estimates No significant impact from corn import restrictions

Since Aug-15, in an effort to encourage local production, Indonesia’s Agriculture Ministry required corn procurement to be placed through the government for both imports and domestic purchases (to eliminate various trade layers or middlemen). This implies that all feed producers had to import corn through the government instead of direct procurement. Local corn prices have since crept up. According to Kontan newspaper (dated 21 Oct15), local corn prices have risen from Rp3,000 - Rp3,200/kg in Aug-15 to Rp4,000-Rp4,200 in Oct-15 and c.Rp5,600 in Nov-15. The impact on CPIN and JPFA should be minimal. Despite their significant requirements (i.e. c.60% of their corn requirements are sourced locally), both groups have established vast supply

networks that should enable them to procure reasonably priced local corn through bulk purchases. MAIN could see some impact, as the group may have to adjust their corn procurement from higher import content (currently c.80%) and to increase local corn import content (from c.20% currently). We have assumed that the group will increase their local corn content to 30% this year and 40% in FY16F. On our estimates, this shift would result in less than 0.5% increase in DOC and broiler cost of production, as we expect average local corn prices to remain comparatively lower than landed cost of imported corn. Any spike in local corn prices – arising from this policy – would have a more adverse impact on smaller players which may lack scale.

USD de bts a s of

30 Se p15 (US$ m)

FY15F USD de bts

(US$ m)

FY16F USD de bts

(US$ m)

USD de bt ma turing in ne xt 12mths

(US$ m)

FY15F re a l i se d a nd unre a l i se d FX impa c t

on P&L (LCY M)

FY16F re a l i se d

a nd unre a l i se d FX impa c t

on P&L (LCY M)

FY15F ne t

ge a ring

FY16F ne t

ge a ring

Charoen Pokphand Indonesia 189 209 191 19 -465,600 -41,900 48% 34%

Japfa Comfeed Indonesia 210 215 215 0 -402,743 -37,093 126% 118%

Malindo Feedmil 1 1 1 0 -80,570 -163 72% 82%

Japfa Limited 430* 361 411 0 -38 -8 66% 62%

Tota l (US$ m) 830 786 817 19 -107 -14

* estimated


Animal Protein

Local corn production/corn import volume FY10 – FY14

Source: BPS, Ministry of Trade, Kontan Newspaper Government mulling DOC price ceiling

On 2 Dec-15, the Indonesian Agriculture Ministry was reported to be considering to make a proposal on a price ceiling on DOCs to the Trade Ministry, in an effort to prevent further price spikes which would hurt poultry farmers’ livelihood. The price spikes on DOCs (to >Rp6,000/chick) may have been partly due to the higher mortality rate due to water deficit in Java, as well as culling of 2m PS as part of the 6m culls that was agreed upon in Sep-15. Breeders had discarded 10-40% of unhatched DOC eggs to stabilise prices prior to the agreement, and the initial stage of culling had further tightened supply. The current situation may be temporary in our view – as breeders should no longer need to discard unhatched eggs. As production rebuilds, we expect the remaining culling target to be maintained. Subject to the proposed ceiling level and a black market, we do not anticipate an adverse impact on DOC breeders’ profitability, as DOC’s breakeven cost remains significantly below current levels. We also believe ongoing efforts to reduce oversupply underline the government’s action to address breeders’ profitability.

Key risks to our call

Outbreak of diseases. Outbreak of diseases affecting livestock would have a material effect on animal protein producers’ operations and financial positions. While all companies have instituted strict bio-security measures to reduce the risk of these events occurring, there can be no assurance that they are immune. Additionally, an outbreak (such as bird flu) would likely have an adverse impact on demand. Intense competition. Excess capacity and intense competition in Indonesia may continue to result in DOC oversupply and slower-than expected increase in ASP. Movements in raw material costs and currencies. All companies under our coverage are exposed to volatile movements in raw material costs and currencies. For example, weakness in Rupiah and consumer purchasing power caused delays in passing on raw material costs. Changes in government regulations, licensing as well as other interventions, price/volume controls across various jurisdictions may adversely affect animal protein producers’ profitability. For example, required reduction in DOC supply to control post-Eid oversupply would temporarily affect financial performance. Also, a reduction in quota and/or restrictions in importation of live cattle could adversely affect beef feedlot operations. Vulnerable to liquidity and credit risks. Animal protein companies may require further funding to expand;,are hence vulnerable to liquidity and credit risks. Any plans for more equity funding would dilute existing shareholders stakes.

0

2.5

5

7.5

10

12.5

15

17.5

20

0.0

2.5

5.0

7.5

10.0

12.5

15.0

17.5

20.0

2010 2011 2012 2013 2014

Local Corn Production (m MT) Corn Import (m MT)


Animal Protein

The players

Poultry feed competitive landscape

Producers of animal protein in Indonesia – similar to other countries throughout Asia – are dominated by a few large integrated companies, such as: 1. Charoen Pokphand (including CP Prima), 2. Japfa (including Austasia), 3. Leong Hup (including Malindo), 4. CJ Feed (part of CJ Cheil Jedang) 5. New Hope The regional presence of these groups enables them to take the most efficient model and apply it in different localities. Other mid-size producers such as Great Giant (Gunung Sewu), Wonokoyo, Patriot, Cibadak, and other local players, have primarily a domestic presence. Indonesia’s poultry feed capacity as at end CY14 is estimated at 15m MT p.a. – of which 80% is shared between Charoen Pokphand Indonesia, Japfa Comfeed Indonesia, Malindo Feedmill, Sierad Produce, and CJ Feed. The top four players have have combined market share of c.80%. CY14 poultry feed capacities of largest players (MT)

Source: Companies, DBS Bank estimates Integrated players such as Charoen Pokphand Indonesia, Japfa Comfeed Indonesia and Malindo Feedmill have three channels to sell their feed: internal sales, partnership and open market sales To package the feed with day-old chicks (DOC) to farmers, we understand CJ Feed also forms partnerships with local breeders (such as Patriot). CJ Feed’s presence is strengthened by the fact that the group is the largest supplier of amino acids (e.g. lysine), a key ingredient of poultry feed.

Poultry feed market share (CY14)

Source: CPIN company presentation

Over time, the larger groups have gained market share at the expense of smaller players. We believe the transformation is a function of scale and efficiency, as consumer demand expanded rapidly and tastes/preferences shifted. We expect this trend to continue. Poultry breeding competitive landscape

The top 5 players in DOC breeding control c.84.7% of the industry’s total parent stock population, also indicating concentration within the industry. The oversupply issues since 3Q14 had pushed DOC prices lower, although prices have started to recover since 2Q15. We understand smaller farmers have been exiting this business in 4Q14 (by putting their farms up for sale to the bigger players). However, by 2Q15, recovery in DOC had prompted many smaller farmers to withdraw their intentions to quit the business. Industry parent stock (PS) population estimate (CY15)

Source: Tempo Magazine

Company Est. parent stock Share

Charoen Pokphand I'sia 17,734,356 50.6%

Japfa Comfeed I'sia 6,408,108 18.3%

Bibit Indonesia (Malindo) 2,620,800 7.5%

CJ Feed + Patriot 1,782,000 5.1%

Wonokoyo 1,149,120 3.3%

Taat Indah Bersinar 1,008,720 2.9%

Hybro Indonesia 936,000 2.7%

Missouri 843,840 2.4%

Cibadak Indah Sari Farm 840,924 2.4%

Expravet Nasuba 625,680 1.8%

Reza Perkasa 516,708 1.5%

Satwa Borneo Jaya 432,000 1.2%

Karya Indah Pertiwi 180,000 0.5%

Total 35,078,256 100.0%

Top 5 Share 84.7%

Charoen Pokphand

34%

Japfa Comfeed

24%

Malindo Feedmill

8%

Wonokoyo5%

Others29%

5,400,000

4,092,600

1,260,000

787,500 600,000

Charoen Pokphand Indonesia

Japfa Comfeed

Malindo Feedmill

(Leong Hup)

Sierad Produce

(Great Giant)

CF Feed (CJ Cheil Jedang)


Animal Protein

Cow feedlot’s competitive landscape

There are roughly 30 importers of live feeders into Indonesia. Among the largest are Santosa Agrindo (including 2 subsidiaries: Santori and Austasia Stockfeed – all part of Japfa group), Great Giant Livestock, and Pasir Tengah. Feeders for intensive fattening have historically been imported primarily from Australia, given the close proximity and the fact that it remains free of Foot and Mouth Disease (FMD). It typically takes 90 to 180 days for feeders to reach the desired weight of 500-600 kg from 250 kg when imported. The local cow population is typically slaughtered at only 170kg (basis for government’s calculation of local beef demand). In addition to having industrial-scale feedlots in Indonesia, importers have also been acquiring Australian ranches; Japfa now owns 555k ha, while we understand Great Giant Livestock has 200k ha. Top feeder importers based on 4Q15 quota

Source: Kontan Newspaper Aquaculture’s competitive landscape

Aquaculture in Indonesia is primarily shrimp farming. Shrimp farming is dominated by Central Proteina Prima (CPRO IJ), which also has a significant market share in Indonesia’s aquaculture feed sector. The group controls 52-55% of Indonesia aquaculture feed market, with 40-42% market share in fish feed and 55-60% market share in shrimp feed. Japfa Comfeed also has aquaculture operations, although the scale is insignificant relative to Japfa’s entire operations.

Dairy’s competitive landscape

Cheese According to Euromonitor, Kraft is the dominant market leader in Indonesia, controlling 61% in terms of sales value in 2014. This can be attributed to its early entry, wide product variety and aggressive marketing. Drinking milk According to Euromonitor, drinking milk products in Indonesia is dominated by five players - Nestle, Frisian Flag, Ultrajaya, Indolakto and Fonterra. These five players account for 78% of the market for drinking milk. However, competition is also intensifying with various competitors emerging such as Kalbe Farma, Nutrifood Indonesia, Danone Dairy Indonesia, Sari Husada and Greenfields Indonesia (Japfa). Yoghurt According to Euromonitor, the two main players in the yoghurt market are Yakult Indonesia Persada and Danone Dairy Indonesia. In 2014, Yakult Indonesia commanded 38% market share while Danone Dairy had 34% market share. Other diary products According to Euromonitor, Frisian Flag Indonesia and Indolakto remain the leading players in ‘other dairy products’. Frisian Flag Indonesia with its Frisian Flag brand registered a share of 35% in 2014 (based on sales value), closely followed by Indolakto, with its brands Indomilk and Enaak, with a combined share of 34%. Nestlé Indonesia sits in third position with a share of 16%.

Company Group Import quota

(heads)

PT Pasir Tengah Widodo Makmur 22,400

PT Great Giant Livestock Gunung Sewu 20,800

PT Santosa Agrindo Japfa Comfeed 10,800

PT Agrisatwa Jaya Kencana Independent player 8,800

PT Agro Giri Perkasa Consolidated Pastoral 8,540

PT Sadajiwa Niaga Indonesia Independent player 8,000

PT Austasia Stockfeed Japfa Comfeed 7,200

PT Citra Agro Buana Semesta Independent player 5,600


Animal Protein

Supply and demand drivers The battle for market share

It is not hard to see Indonesia’s young population and expanding middle class as the prime target markets for animal protein producers. Demand for animal protein remains typically income elastic in a country with GDP per capita below US$5,000. Yet, despite a myriad of regulations designed to match supply and demand, the plunge in DOCs and live broiler prices in CY14/15 revealed that demand has lagged the over-investment in capacity over the last few years, resulting in losses for independent poultry farmers across the country.

The Indonesian poultry industry’s established networks are supported by the producers’ ability to push for the lowest possible food conversion ratio and the most efficient transportation model (though not the lowest) throughout the archipelago. We believe the prevailing market – and over-capacity in DOC production – favours the current structure, which is dominated by a few efficient players. This would be a deterrent for new entrants for some time to come, in our view.

DOC prices vs. cost of production 2011 – 2015 (Rp/bird)

Source: Pinsar, Arboge.com, DBS Bank estimates Drivers for poultry supply/demand/price

A majority of Indonesian poultry producers’ revenue comes from sales of DOCs and broilers. Poultry breeders generally rely on large distributors for their DOC output. These distributors typically broadcast their DOC prices from various breeders, take orders, and subsequently pick up and deliver the DOCs to farmers for roughly Rp200/chick. Pricing points for DOCs depend on various brands/grades among different breeders. Both DOCs and broiler prices have historically been volatile – due to seasonal factors. Retail prices in wet markets also depend on middlemen, who buy live broilers from the farmers (i.e. at farm-gate prices) and deliver them to the retailers (i.e. wet markets). The middlemen’s involvement fills the gap left by both farmers and retailers in terms of distribution. As a result, more often than not, prices at the retail level remain largely controlled by these distributors. Efforts by large commercial farms to put in place direct selling methods have been unsuccessful due to uncompetitive practices.

Over the past two years, supply has outpaced demand – thereby causing DOC prices to plummet. A combination of over-investment (i.e. over-importation of GPS, despite being regulated by government quota system) and weaker purchasing power (due to lower commodity prices, higher cost of living due to subsidy removal and weaker Rupiah) led to 20-30% oversupply in DOC in CY14. DOC oversupply in CY15 would have reached 30-40% if there was no culling of PS. To address the oversupply, most breeders had discarded 10-40% of their unhatched DOC eggs to prevent prices from collapsing any further. The Indonesian Breeder Association (GPPU) estimated that there will be total stock of 3.3bn DOC broilers this year, against domestic demand of only 2.4bn, implying that the industry is oversupplied by c.35%.

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2,000

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7,000

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11

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-11

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1

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-11

Jan-

12

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-12

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13

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-13

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3

Oct

-13

Jan-

14

Apr

-14

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4

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-14

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15

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-15

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5

DOC prices (Rp/chick)

DOC cost (Rp/chick)

10,000

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24,000

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22,000

24,000

Jan-

11

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-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

Oct

-12

Jan-

13

Apr

-13

Jul-1

3

Oct

-13

Jan-

14

Apr

-14

Jul-1

4

Oct

-14

Jan-

15

Apr

-15

Jul-1

5

Broiler prices (Rp/kg l ive)

Broi ler cost (Rp/kg l ive)


Animal Protein

Culling 6m parent stock (PS) to address oversupply

In early CY15, the government cut the GPS import quota by 8% to 665,000 units. However, the impact of this reduction is unlikely to be felt until 4Q15, at the earliest. Industry sources reckoned that total DOC production may drop by 20-30% in CY16, as a result of this regulation. To address the oversupply in early CY15, we understand that most breeders had already discarded 10-40% of unhatched DOC eggs, while Japfa had also culled its non-performing PS to cut losses. Following an independent survey undertaken by the Agriculture Ministry in Aug-15, the government had mandated a cull of 6m PS in Sep-15 – of which 50% was assigned to CPIN (having the largest market share). Physical culling of c.2m PS had taken place in late Oct15, and another 2m will be undertaken from 7 Dec-15. The remaining 2m is expected to take place in the following months (i.e. spilling over into 2016). Drivers for poultry feed supply/demand/price

Poultry feed supply is driven by capacity expansion based on demand from its distribution areas. Generally, new capacity of 300 MT/day (or roughly 90,000-100,000 MT p.a.) would be added whenever existing capacity exceeds 80%. Demand is also gauged by the expansion undertaken by competitors. On the other hand, demand expansion comes from rise in farmer numbers from year to year

The poultry feed business works on a “cost plus margin” business model, using mostly imported raw materials. Hence, import cost and the Rupiah rate dictate local feed prices. The recent government policy restricting corn imports had also pushed domestic corn cost higher than imported costs. To be competitive, feedmills generally must: 1. be located near corn producing regions and seaports to

be competitive 2. have low Food Conversion Ratio (FCR) 3. package their sales with DOC The investment cost for 100k MT p.a. feedmill is approximately US$7m and US$10m for 150k MT p.a. While theoretically anyone can build a feedmill, not everyone has the expertise to be a DOC breeder. Poultry feed prices are based on average realised cost of inventory (typically 3 months), although there are timing considerations in passing on raw material costs. Feed raw materials typically consist of: 1. Corn (c.47-50% by volume) 2. Soybean meal (c.25-28% by volume) 3. Fiber (c.15% by volume) 4. Palm/fish oil (c.2.5% by volume) 5. Other ingredients (c.10% by volume) 6. Direct labour costs and overhead costs are included in

COGS

International corn and soybean prices (US$/MT) vs. USD/IDR Dec11-Sep15

Source: Company, DBS Bank, Bloomberg Finance L.P

5,000

7,000

9,000

11,000

13,000

15,000

200

400

600

800

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1,400

Dec-

11

Feb

-12

Ap

r-12

Jun

-12

Au

g-1

2

Oct

-12

Dec-

12

Feb

-13

Ap

r-13

Jun

-13

Au

g-1

3

Oct

-13

Dec-

13

Feb

-14

Ap

r-14

Jun

-14

Au

g-1

4

Oct

-14

Dec-

14

Feb

-15

Ap

r-15

Jun

-15

Au

g-1

5

Corn Prices (US$/MT) - LHS

Soyban Prices (US$/MT) - LHS

USD/IDR - RHS


Animal Protein

Approximately 60% of the corn requirements are sourced locally. Likewise, c.60% of Indonesia’s local corn output is consumed by the animal feed industry. While local pricing is approximately 30% less to account for moisture content, local pricing has generally followed international prices (until recently). Soybean meal is imported (primarily from Brazil and Argentina). Indonesia does not have the right climate for large acreages of soybeans nor does it have a viable crushing industry that can produce soybean meal.

Since Aug-15, the Indonesian government required all corn purchases to be placed through the government both for imports (to encourage local production) and for domestic purchases (to eliminate various trade layers or middlemen). This implies that all feed producers have to purchase corn through the government instead of direct procurement, even though importation is still allowed as long as the government is involved.

International vs. local corn prices

Source: Indonesia Agriculture Ministry, Index Mundi, World Bank We understand input costs have been consistently dropping in FY15, reflecting the declines in international corn and soybean prices. However, as of most of the raw materials are imported, the weak IDR reverses some of the benefit from the declining commodity prices. We continue to see further downtrend in feed prices (in USD terms), on expectations of continued weakness in global corn and soybean prices next year. Subject to the depreciation of the Rupiah, this should help to alleviate the poor margins YTD in commercial grow-outs. Drivers for beef supply/demand/price

According to BMI Research, domestic beef production is dominated by imports of live cattle. Beef demand is estimated at 653.982 MT (equivalent to 3.84m cattle) in CY15 while the domestic supply is 416.090 MT (2.44m cattle) resulting in a deficit of 237.890 MT (1.39m cattle equivalent). In reaction to Australia’s temporary export ban to Indonesia in CY11, Indonesia is now seeking to diversify its import sources away from Australia as well to promote the domestic cattle industry. At the same time, the Indonesian government is pushing for diversification of origin countries away from Australia, such as

Mexico (thus far). We have heard that there is an intention to revise Law no. 41/2014 to allow importation of feeders from FMD-free zones within FMD countries. Importation of feeders is regulated through quotas, which are meant to control population and maintain price stability. In early CY15, the government changed its annual quota into a quarterly quota. A significant drop in 3Q15’s quota (to 50,000 from 250,000 in 2Q15) led to a spike in beef prices in Sep-15 due to lack of visibility in 4Q15 import quotas and insufficient domestic cattle supply. This in turn prompted the government to allow importation of live cattle for slaughter through Permentan No. 42/2015 to ease prices. However, this conflicted directly with Law no. 41/2014 which prohibits importation of live cattle for slaughter. The government had subsequently reversed the ministerial decree, raised 4Q15 quota to 200,000 and plans to return to the annual quota system to give more clarity and time for the industry players to prepare for the import process. In addition to chronic undersupply in Indonesia, there is currently an undersupply of feeders in the US (due to the prolonged drought in some states) and China (due to increased demand from higher income levels). While prices of

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-10

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11

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1

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11

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-11

No

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12

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12

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-12

No

v-1

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-13

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13

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3

Jul-

13

Sep

-13

No

v-1

3

Jan

-14

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14

May-1

4

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14

Sep

-14

No

v-1

4

Jan

-15

Mar-

15

Domestic corn prices -retail (Rp/kg)

Int'l corn prices (FOB Mexico) -ex. freight/insurance/other costs

(Rp/kg)


Animal Protein

Australian feeder cattle have slowly increased from US$2.70/kg last year to US$2.85/kg currently, feeder cattle prices in the US have come off from a high of US$5.32/kg in CY14, as consumers shifted to pork. Cattle importers (including Indonesian) have progressively been acquiring Australian ranches with Japfa currently owning 555k ha (with carrying capacity of 45k cattle of mainly Brahman cross) and Great Giant reportedly owning 200k ha. Recently, Sidney Kidman & Co, one of the largest cattle farms in Australia was also put up for sale, due to be finalized at the end of this year. Twelve bidders, mostly foreign firms, have been shortlisted. Feed dominates cost of beef

According to Frost & Sullivan, in CY13, feed cost accounted for approximately 54% of the total input cost, followed by labour cost. The labour cost associated with rearing cows is higher than for rearing chickens due to the bigger animal size. Beef cost of production breakdown (2013)

Source: Frost & Sullivan

Policies to boost domestic beef supply

The Indonesian government’s push to raise domestic supply of beef and to reduce dependence on feeder cattle imports from Australia was also included in new Plantation Law – which lists cattle breeding projects within oil palm plantations in Indonesia as one way. President Joko Widodo, who took office in Oct-14, has also set a target for Indonesia to be self-sufficient in various food staples, including beef, within five years. While not a new idea, the cattle-oil palm integration has never been seriously implemented in Indonesia for various reasons. According to Universitas Gajah Mada (UGM) study (CY14), Indonesia will consume 639,858 MT of beef in CY15. Of this amount, domestic herd will produce 355,980 MT of beef, leaving 283,878 MT of imported beef to meet the requirements, representing 44% of total demand, equivalent to 1,802,400 cattle for slaughter. Even including culling of local breeding heifers, dairy cows and buffaloes, there remains

a deficit of 860,655 cattle for slaughter (21% of total beef demand). Yet, to become self sufficient, Indonesia needs close to 3m heads of breeders. Nine years from now, the study expects Indonesian beef demand to reach 1,045,098 MT (5.6% CAGR), where domestic supply will provide 437,675 MT (2.3% CAGR). This means Indonesia would still need to import 607,423 MT of beef (8.8% CAGR) or 58% of total demand – equivalent to 3,856,654 cattle for slaughter. Including culling of local breeding heifers, dairy cows and buffaloes, this deficit is equal to 2,698,784 cattle for slaughter (41% of total beef demand). To replace imports, the UGM study recommended that Indonesia should import breeding cattle to reduce the need of importing beef and feeder cattle for slaughter. The need to import breeding cattle has recently been further emphasized by shortages of feeders in China, which is looking to open its doors to Australian imports. This may create potential challenges for Indonesia, given the substantial price difference. China is looking to import feeders for US$3.80/kg live, while Indonesia currently imports at US$2.85/kg live. The current beef deficit in Indonesia offers an opportunity for Indonesian oil palm planters to enter the business – subject to commitment, suitability, and profitability. As a large importer, Indonesia would need to act to diversify suppliers and ensure the security of its beef supply ahead of large importation demand from China. Drawing lessons from Malaysia, a supportive regulatory environment is a prerequisite to ensure that: (a) incentives are given, (b) there are integrated regulations across all provinces/ministries promoting cattle farming (not just in plantations), as well as disease control. Drivers for dairy supply/demand/price

According to the Frost & Sullivan report, Indonesia’s per capita consumption of dairy products in CY13 was 14.6kg, having expanded 6.9% CAGR from 12kg in CY10. Yet, domestic supply of raw milk continues to struggle to meet demand for dairy products. In CY13, only 17% of the demand for dairy products was met by domestic supply. Indonesia’s total raw milk production was estimated at 817,360 MT in CY10. In CY11, production plummeted due to loss of dairy cows for beef supply. Although it subsequently recovered to 652,649 MT in 2012, it remained below the 2010 level.

Feed Cost54%

Labor Cost22%

Utilities Cost3%

Others21%


Animal Protein

Indonesia’s dairy consumption vs. domestic production

(MT)

Source: Frost & Sullivan

According to Euromonitor, dairy production in Indonesia mainly consists of four major categories, namely drinking milk products, yoghurt and sour milk products, cheese, as well as other dairy products. The market shares of the key dairy products in Indonesia are presented below: 1. Drinking milk products: Drinking milk products mainly

include fresh milk (also known as pasteurised milk), UHT milk (also known as long-life milk), and flavoured milk drinks. In volume terms, this category had the largest share (44.6%) in CY13. This category is the main driver of growth in the dairy industry.

2. Yogurt and sour milk products: In CY13, this category accounted for 21.1% share in volume terms. The segment is expected to grow further to contribute 24% volume by CY18.

3. Cheese: Processed and unprocessed cheese and other similar products fall into this category. Cheese is not popular in Indonesia compared to western countries. In CY13, cheese accounted for only 1.5% share by volume.

4. Other dairy products include chilled and shelf stable desserts, chilled snacks, coffee whiteners, condensed/ evaporated milk, cream, fromage frais and quark. The share of this segment has been stable throughout the years. According to Frost & Sullivan, Frisian Flag is the market leader in this segment, controlling 38.4% of the market in CY13.

Dairy consumption in Indonesia – CY13

Source: Frost & Sullivan In Indonesia, the dairy retail market is dominated by traditional/ general trade channels. However, in the past few years, modern retail channels have been developed to keep up with rapid expansion. Based on the Frost & Sullivan research, between CY03 and CY08, the number of traditional/general trade channels expanded by 9.2% while supermarkets expanded by 75.3%. Continuous growth in Indonesia’s middle/upper income segment, urbanisation, and infrastructure improvements are expected to sustain growth in modern retail distribution. Hypermarkets, minimarkets and supermarket are better equipped with refrigeration, which increases the shelf-life of fresh milk. This, combined with increased health awareness is expected to fuel demand for fresh milk.

2,876 3,133

3,325

3,648

3,968

794 675 562 634 695

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500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2010 2011 2012 2013 2014

Total Consumption Domestic Production

Cheese, 1.50%

Yoghurt & sour milk products, 21.10%

Drinking milk products, 44.60%

Others, 55.40%


Animal Protein

Appendix 1: Industry overview

What’s it worth?

As whole, we estimate the animal protein industry in Indonesia generates around US$21bn of sales annually: Poultry feed: US$7bn Broiler meat US$4bn Aquaculture: US$3bn Beef: US$6bn Dairy US$1bn These numbers exclude duck, swine, egg, lamb, and domestic shrimp markets. Likewise, we do not follow duck, layers, or egg prices in our analysis. Poultry industry overview

According to Frost & Sullivan, poultry meat is a leading source of protein in Indonesia, accounting for approximately 87% of total meat consumption. Affordability and dietary restrictions (88% of the population are Muslims) explain the significant share. Beef is not as popular, as it is more expensive. A minority of the population also consumes pork as their major protein, due to taste and affordability. Consumption of major protein in Indonesia (2012)

Source: Frost & Sullivan Relatively low disposable income per capita

Compared to other Southeast Asian countries, Indonesia has one of the lowest GDP per capita. In 2014, Indonesia’s annual GDP per capita dropped to US$3,524 – mainly reflecting the Rupiah’s depreciation against the US Dollar. We expect GDP to rebound and the Rupiah to stabilise in CY16F, which we believe should give rise to higher poultry meat consumption.

Poultry consumption/capita vs. GDP/capita CY11F-18F

Source: Frost & Sullivan, IMF, DBS Bank estimates Growth potential in Indonesia

Frost & Sullivan’s research revealed that Indonesia still has relatively lower meat consumption per capita compared to other Southeast Asian countries. However, demand is rapidly increasing. Data from the Indonesian Ministry of Agriculture suggests that per capita protein consumption has increased to 8 kg in 2012 from 4.8 kg in 2009, representing CAGR of 18.6%. The projections done by Frost & Sullivan also indicate strong demand expansion over the next three years. Chicken consumption per capita p.a. – CY12

Source: Frost & Sullivan Beef industry overview

Frost & Sullivan had estimated that the Indonesian beef industry, by sales value, was worth Rp56.2tr in 2013. Since 2009, the industry’s sales value has grown by 18.7% CAGR; although in volume terms the industry has expanded by 10.1% CAGR over the same period. Approximately 13.3% of

8.00 8.50

46.00

14.00

Indonesia Vietnam Malaysia Thailand

6.9

8

8.9

10

11.5

13

14.4

15.93,688

3,744

3,667

3,524

3,424

3,435

3,480

3,520

3,100

3,200

3,300

3,400

3,500

3,600

3,700

3,800

6

8

10

12

14

16

2011 2012 2013E 2014E 2015E 2016E 2017E 2018E

GD

P p

er

cap

ita

(USD

)

Per

cap

ita c

on

sum

pti

on

(k

g/a

nn

um

)

Per capita poultry

GDP per capita (USD) - RHS

Poultry86%

Beef8%

Pork5%

Others1%


Animal Protein

beef consumption is met by direct imports. Beef is not as popular as poultry meat, as it is more expensive. Beef is commonly consumed in major religious festivals, such as the Eid. In CY12, beef consumption accounted for aproximately 8% of overall meat consumption in Indonesia. Beef consumption/capita vs. total production CY10-14

Source: Frost & Sullivan Cattle feed for the beef industry contributed less than 3% of the whole animal feed industry in CY10 (according to Frost & Sullivan). The major feed ingredients are cassava, rice rean, wheat polar, wheat brand, molasses, coconut cake, and soybean meal. Like poultry feed, the majority of the raw materials for cattle feed are imported and made up 85% of feed cost. This in turn drives up the price of beef feed cost. Feeder imports are regulated by quotas, but this system is plagued with price spikes. A drop in 3Q15’s quota (to 50k from 250k in 2Q15) led to beef prices spiking up in Sep-15 due to insufficient domestic supply. Aquaculture industry overview

Indonesia’s main fishery export commodity is shrimp, which is suitable for cultivation. Other forms of aquaculture include tilapia, pangeus and other types of freshwater fish. Indonesia is one of the largest exporters of shrimp; especially after the outbreak of EMS (Early Mortality Syndrome) in China (2009), Vietnam (2010), Malaysia (2010), Thailand (2012) and Cambodia (2013). According to industry sources, the Thai shrimp farming industry has largely recovered, but only up to 70% of pre-outbreak volume. According to Ministry of Trade, the Indonesian Fish and Shrimp export value grow by 9.2% CAGR between CY10 - CY14, while Global Aquaculture Alliance (non-profit trade association) is projecting that Indonesia’s shrimp cultivation will expand by 10.7% CAGR between CY12 and CY15F.

Fish and shrimp exports CY10 – 14 (US$ m)

Source: Indonesian Ministry of Trade Dairy industry overview

Economic development of a country leads its level of dairy consumption. According to Frost & Sullivan, growth drivers for the dairy industry in Indonesia are typically based on a combination of social and economic factors leading to strong purchasing power, growing population and rising urbanisation. Better health awareness and improved distribution networks are also key driving forces in the overall development of the dairy industry Total dairy production volume (k MT)

Source: Frost & Sullivan Indonesia depends heavily on imports, mainly from Australia and New Zealand, to meet its domestic demand for dairy products. In 2013, approximately 83% of the demand (in terms of volume consumed) for dairy products was met by imports. Expanding domestic milk output has therefore become one of national objectives for import substitution.

0.5

1

1.5

2

2.5

400,000

420,000

440,000

460,000

480,000

500,000

520,000

2010 2011 2012 2013 2014

National Beef Production Beef Consumption(kg/capita)

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

2010 2011 2012 2013 2014

9.2% CAGR

100

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2010 2011 2012 2013 2014


Animal Protein

Generally, dairy cows prefer a cool and dry climate over a warm and humid climate. At higher elevations, Java is suitable for dairy farming. In 2013, almost 99% of dairy cows in Indonesia were located in Java, with over 50% in East Java. Consumer food overview

Recent earnings results revealed a divergence between poultry sales and processed food segment, which showed some resilience, albeit from a small base. Charoen Pokphand’s entry into the convenient store sector since 2011 (now with c.250 stores across Jakarta) and distribution of cold storage in wet markets represent a new trend to undercut the traditional live bird sales in urban centres, in our view. We believe this trend will continue, so long as Indonesia’s purchasing power remains supportive. The processed food segment for poultry products represents a growing opportunity in a relatively resilient segment: A & B class consumers – with all players (CPIN, JPFA, Great Giant, CPRO, MAIN) fighting for market shares (MAIN being the latest entrant). Euromonitor estimates that the frozen poultry processed food market would grow by 8% CAGR in CY15F – CY19F. Frozen processed poultry is estimated to continue to make the largest contribution towards frozen processed food over the forecast period, as well as register the fastest growth.

According to Euromonitor, frozen poultry food experienced 10.4% CAGR volume growth between CY09 – CY14. The market leader is Primafood International, a subsidiary of Charoen Pokphand Indonesia. Its leading brand is Fiesta. Two close competitors are So Good (Japfa’s subsidiary) with So Good brand and Sierad Produce with Belfoods and Delfarm brands. Frozen poultry food market share in Indonesia (2014)

Source: Euromonitor

Primafood Int'l (CP)

37%

So Good Food (Japfa)

32%

Sierad Produce

16%

Others15%


Animal Protein

Appendix 2

3QCY15 results review and remarks/changes to forecasts

Company Results vs forecasts

3QCY15 results highlights Realised DOC vol.

Realised DOC ASP

Remarks

Charoen Pokphand Indonesiai

n/a Charoen Pokphand 3Q15 core net profit came in Rp669bn, implying +29.8% y-o-y and +6.8% q-o-q; 9M15 net income of Rp1,250bn (83% of our FY15 estimate). The robust y-o-y growth is primarily driven by recovery in DOC (3Q15 DOC revenue is +28% y-o-y) prices y-o-y. GPM and OPM improved slightly to 17%/12% from 16%/11% in 2Q15

n.a n.a We expect the company to book FY15F earnings of Rp1.510bn (-13.5% y-o-y) which implies 4Q15 earnings of Rp260bn. We expect FY15F GPM/ OPM of 15.4%/10%, higher than 14.2%/9% in FY14.

Japfa Comfeed Indonesia

n/a Japfa Comfeed posted strong 3Q15 net profit of Rp125bn, supported by recovery of broiler and poultry feed revenues. 3Q15 EBITDA (net of elimination) grew by 101% y-o-y and 90% q-o-q to Rp852bn. This takes 9M15 core net income to Rp466bn (91% of our FY15F earnings). As DOC and broiler prices continue to improve in 4Q15, we expect Japfa Comfeed will be able to reach our estimate.

160m chicks

c.Rp4,400 /kg

We expect FY15F earnings to decline by 37% y-o-y to Rp216bn due to Rp408bn FX losses. We expect higher FY15F GPM/OPM of 15%/5.5% compared to 14%/5.2% in FY14 due to softer raw material prices.

Japfa Limited Above Excluding changes in biological asset fair values, Japfa Limited (JAP) booked 3Q15 earnings of 14.1m (+17% y-o-y; -1% q-o-q) – ahead of expectations. This brought 9M15 core net income to US$30.0m (-26% y-o-y) – representing 84% of our initial FY estimates. 3Q15 EBITDA (net of elimination) came in at US$89.7m (+52% y-o-y; -44% q-o-q) – also ahead of US$71-76m expected range.

458m chicks

Rp4,378 /kg

FY15F/16F earnings raised by 25%/6%, after we imputed higher Rupiah exchange rates, higher DOC/broiler ASP, notes buyback, as well as lower raw material prices.

Malindo Feedmill

n/a Removing FX losses, Malindo posted 3Q15 core net income of Rp39.7bn. This is the first time the company posted a positive core net income since 2Q14. The recovery is supported by improvement in contributions from the breeder and broiler segments at the EBIT level, by108%/31% q-o-q respectively. Nevertheless, we still estimate that the group will post a net loss of Rp21.4bn at the end of the year as 9M15 earnings (incl FX losses) is still negative Rp71bn. We expect Malindo to swing back into profit in FY16F.

50.5m chicks

Rp4,000 /kg

As volatility in DOC/broiler prices still persist, we expect Malindo to book Rp37bn net loss in FY15F; as FX losses continue to pressure group earnings. In our estimation, MAIN should book Rp34bn profit in 4Q15 as DOC/broiler prices start to recover. For FY15F, we estimate GPM/OPM of 10.6%/3.8% for Malindo.


Animal Protein

STOCK PROFILES


Charoen Pokphand Indonesia

Charoen Pokphand Indonesia (BUY; Rp2,850; CPIN IJ; Price Target : Rp 3,550)

Forecasts and Valuation General Data

FY Dec (Rpbn) 2014A 2015F 2016F 2017F Revenue 29,150 29,830 33,395 35,590 Issued Capital (m shrs) 16,398 EBITDA 2,829 3,114 4,322 5,835 Mkt. Cap (Rpbn/US$m) 46,734 / 3,338 Pre-tax Profit 2,107 2,013 2,969 4,567 Major Shareholders Net Profit 1,747 1,511 2,229 3,428 Central Agromina Pt (%) 55.5 Net Pft (Pre Ex.) 1,747 1,511 2,229 3,428 Free Float (%) 44.5 EPS (Rp) 107 92.1 136 209 3m Avg. Daily Val (US$m) 1.2 EPS Pre Ex. (Rp) 107 92.1 136 209 EPS Gth (%) (31) (14) 48 54 EPS Gth Pre Ex (%) (31) (14) 48 54 Diluted EPS (Rp) 107 92.1 136 209 Net DPS (Rp) 46.0 31.7 27.5 40.5 Price Relative

BV Per Share (Rp) 666 727 835 1,004 PE (X) 26.8 30.9 21.0 13.6 PE Pre Ex. (X) 26.8 30.9 21.0 13.6 P/Cash Flow (X) 40.7 18.5 17.8 11.1 EV/EBITDA (X) 18.4 16.8 11.4 8.3 Net Div Yield (%) 1.6 1.1 1.0 1.4 P/Book Value (X) 4.3 3.9 3.4 2.8 Net Debt/Equity (X) 0.5 0.5 0.2 0.1 ROAE (%) 16.7 13.2 17.4 22.7 Consensus EPS (Rp): 124 159 194

Income Statement (Rpbn)

Balance Sheet (Rpbn)

FY Dec 2014A 2015F 2016F 2017F FY Dec 2014A 2015F 2016F 2017F Revenue 29,150 29,830 33,395 35,590 Net Fixed Assets 9,058 10,497 10,856 11,179 Cost of Goods Sold (25,016) (25,222) (27,922) (28,628) Invts in Associates & JVs 0.0 0.0 0.0 0.0 Gross Profit 4,134 4,608 5,473 6,962 Other LT Assets 1,794 1,839 1,885 1,932 Other Opng (Exp)/Inc (1,506) (1,621) (1,796) (1,916) Cash & ST Invts 885 3,138 4,074 4,361 Operating Profit 2,628 2,987 3,677 5,047 Inventory 4,333 4,223 4,676 4,794 Other Non Opg (Exp)/Inc (260) (443) (17.5) 59.6 Debtors 3,159 2,897 3,243 3,457 Associates & JV Inc 0.0 0.0 0.0 0.0 Other Current Assets 1,632 1,537 1,457 1,513 Net Interest (Exp)/Inc (261) (532) (690) (539) Total Assets 20,862 24,132 26,191 27,236 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 Pre-tax Profit 2,107 2,013 2,969 4,567 ST Debt 1,487 1,543 1,549 1,543 Tax (360) (503) (742) (1,142) Creditor 1,591 1,527 1,691 1,734 Minority Interest 0.15 1.29 1.91 2.94 Other Current Liab 1,389 1,314 3,515 2,031 Preference Dividend 0.0 0.0 0.0 0.0 LT Debt 4,723 7,098 4,957 4,668 Net Profit 1,747 1,511 2,229 3,428 Other LT Liabilities 729 717 771 790 Net Profit before Except. 1,747 1,511 2,229 3,428 Shareholder’s Equity 10,926 11,916 13,695 16,459 EBITDA 2,829 3,114 4,322 5,835 Minority Interests 17.6 16.3 14.4 11.5 Sales Gth (%) 13.6 2.3 12.0 6.6 Total Cap. & Liab. 20,862 24,132 26,191 27,236 EBITDA Gth (%) (27.7) 10.1 38.8 35.0 Opg Profit Gth (%) (32.7) 13.7 23.1 37.3 Non-Cash Wkg. Capital 6,145 5,816 4,170 5,999 Net Profit Gth (%) (31.0) (13.5) 47.5 53.8 Net Cash/(Debt) (5,325) (5,504) (2,432) (1,850) Effective Tax Rate (%) 17.1 25.0 25.0 25.0

Cash Flow Statement (Rpbn Segmental Breakdown

FY Dec 2014A 2015F 2016F 2017F FY Dec 2014A 2015F 2016F 2017F Pre-Tax Profit 2,107 2,013 2,969 4,567 Revenues (Rpbn) Dep. & Amort. 461 570 662 728 Poultry feed 22,262 21,950 24,485 24,883 Tax Paid (360) (503) (742) (1,142) DOC 3,147 3,658 3,818 4,556 Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 Processed chicken 2,871 3,128 3,866 4,778 Chg in Wkg.Cap. (1,059) 452 (257) 75.0 Others 871 1,095 1,226 1,373 Other Operating CF 0.0 0.0 0.0 0.0 Total 29,150 29,830 33,395 35,590 Net Operating CF 1,149 2,531 2,632 4,229 Capital Exp.(net) (3,702) (2,002) (1,041) (1,072) Gross profit (Rpbn) Other Invts.(net) 0.0 0.0 0.0 0.0 Poultry feed 3,688 3,627 4,046 4,111 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 DOC (438) (18.1) 106 918 Div from Assoc & JV 0.0 0.0 0.0 0.0 Processed chicken 880 968 1,197 1,479 Other Investing CF 115 (16.0) (16.4) (16.8) Others 4.21 30.8 124 454 Net Investing CF (3,586) (2,018) (1,057) (1,089) Total 4,134 4,608 5,473 6,962 Div Paid (754) (521) (450) (664) Chg in Gross Debt 3,707 2,309 (233) (2,198) Gross profit Margins (%) Capital Issues 0.0 0.0 0.0 0.0 Poultry feed 16.6 16.5 16.5 16.5 Other Financing CF (56.4) (38.7) 53.8 19.3 DOC (13.9) (0.5) 2.8 20.1 Net Financing CF 2,896 1,749 (630) (2,843) Processed chicken 30.7 31.0 31.0 31.0 Currency Adjustments 0.0 0.0 0.0 0.0 Others 0.5 2.8 10.1 33.1 Chg in Cash 459 2,262 945 297 Total 14.2 15.4 16.4 19.6 Source: Company, DBS Bank, DBS Vickers

47

67

87

107

127

147

167

187

207

1,260.0

1,760.0

2,260.0

2,760.0

3,260.0

3,760.0

4,260.0

4,760.0

5,260.0

5,760.0

Dec-11 Dec-12 Dec-13 Dec-14 Dec-15

Relative IndexRp

Charoen Pokphand Indonesia (LHS) Relative JCI INDEX (RHS)


Japfa Comfeed Indonesia

Japfa Comfeed Indonesia (BUY; Rp452; JPFA.IJ; Price Target : Rp 620) Forecasts and Valuation General Data

FY Dec (Rpbn) 2014A 2015F 2016F 2017F Revenue 24,459 24,167 26,495 27,890 Issued Capital (m shrs) 10,661 EBITDA 1,688 1,488 2,190 2,656 Mkt. Cap (Rpbn/US$m) 4,819 / 344 Pre-tax Profit 543 330 942 1,362 Major Shareholders Net Profit 332 216 615 890 Japfa Pte Ltd (%) 57.5 Net Pft (Pre Ex.) 332 216 615 890 Free Float (%) 42.5 EPS (Rp) 31.2 20.2 57.7 83.4 3m Avg. Daily Val (US$m) 0.13 EPS Pre Ex. (Rp) 31.2 20.2 57.7 83.4 EPS Gth (%) (44) (35) 185 45 EPS Gth Pre Ex (%) (44) (35) 185 45 Diluted EPS (Rp) 31.2 20.2 57.7 83.4 Net DPS (Rp) 9.98 5.57 3.62 10.3 Price Relative

BV Per Share (Rp) 456 472 526 599 PE (X) 14.5 22.3 7.8 5.4 PE Pre Ex. (X) 14.5 22.3 7.8 5.4 P/Cash Flow (X) 3.1 6.3 9.9 4.4 EV/EBITDA (X) 6.8 8.2 5.8 4.7 Net Div Yield (%) 2.2 1.2 0.8 2.3 P/Book Value (X) 1.0 1.0 0.9 0.8 Net Debt/Equity (X) 1.2 1.3 1.2 1.0 ROAE (%) 6.9 4.4 11.6 14.8

Income Statement (Rpbn) Balance Sheet (Rpbn)

FY Dec 2014A 2015F 2016F 2017F FY Dec 2014A 2015F 2016F 2017F Revenue 24,459 24,167 26,495 27,890 Net Fixed Assets 6,362 6,907 7,131 7,169 Cost of Goods Sold (21,033) (20,543) (22,378) (23,232) Invts in Associates & JVs 5.00 6.00 7.00 8.00 Gross Profit 3,426 3,624 4,116 4,658 Other LT Assets 659 787 931 1,199 Other Opng (Exp)/Inc (2,150) (2,297) (2,519) (2,726) Cash & ST Invts 780 556 266 547 Operating Profit 1,276 1,327 1,597 1,931 Inventory 5,134 4,816 5,246 5,446 Other Non Opg (Exp)/Inc (55.1) (383) (16.6) 63.5 Debtors 1,243 1,205 1,322 1,391 Associates & JV Inc 0.0 0.0 0.0 0.0 Other Current Assets 1,553 1,591 1,764 1,913 Net Interest (Exp)/Inc (678) (614) (639) (633) Total Assets 15,730 15,862 16,659 17,665 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 Pre-tax Profit 543 330 942 1,362 ST Debt 2,213 2,226 3,727 5,134 Tax (158) (82.6) (235) (340) Creditor 2,004 1,831 1,795 1,863 Minority Interest (52.5) (31.9) (91.1) (132) Other Current Liab 699 373 439 479 Preference Dividend 0.0 0.0 0.0 0.0 LT Debt 4,742 5,240 3,776 2,327 Net Profit 332 216 615 890 Other LT Liabilities 782 706 768 797 Net Profit before Except. 332 216 615 890 Shareholder’s Equity 4,864 5,028 5,605 6,384 EBITDA 1,688 1,488 2,190 2,656 Minority Interests 426 458 549 680 Sales Gth (%) 14.2 (1.2) 9.6 5.3 Total Cap. & Liab. 15,730 15,862 16,659 17,665 EBITDA Gth (%) (4.2) (11.9) 47.2 21.2 Opg Profit Gth (%) (29.2) 4.0 20.3 20.9 Non-Cash Wkg. Capital 5,226 5,409 6,098 6,409 Net Profit Gth (%) (44.2) (35.1) 185.0 44.6 Net Cash/(Debt) (6,175) (6,911) (7,237) (6,914) Effective Tax Rate (%) 29.1 25.0 25.0 25.0 Cash Flow Statement (Rpbn Segmental Breakdown

FY Dec 2014A 2015F 2016F 2017F FY Dec 2014A 2015F 2016F 2017F Pre-Tax Profit 543 330 942 1,362 Revenues (Rpbn) Dep. & Amort. 468 544 609 661 Poultry + aqua feed 11,909 11,260 14,002 13,321 Tax Paid 0.0 0.0 0.0 0.0 DOC 1,220 1,423 1,352 1,566 Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 Broiler 8,925 10,083 9,575 11,388 Chg in Wkg.Cap. 753 (22.8) (827) (574) Others 2,405 1,401 1,565 1,615 Other Operating CF (193) (84.8) (238) (343) Total 24,459 24,167 26,495 27,890 Net Operating CF 1,571 766 486 1,106 Gross profit (Rpbn) Capital Exp.(net) (1,600) (1,089) (833) (699) Poultry + aqua feed 1,356 2,721 3,036 3,082 Other Invts.(net) (7.0) (1.3) (1.4) (1.4) DOC 20.0 (51.0) 234 232 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 Broiler 152 427 199 729 Div from Assoc & JV 0.0 0.0 0.0 0.0 Others 1,898 527 648 615 Other Investing CF 19.3 5.87 (1.2) (1.2) Total 3,426 3,624 4,116 4,658 Net Investing CF (1,588) (1,084) (836) (701) Gross profit Margins (%) Div Paid (106) (59.4) (38.6) (110) Poultry + aqua feed 11.4 24.2 21.7 23.1 Chg in Gross Debt (443) 43.7 3.97 (4.5) DOC 1.6 (3.6) 17.3 14.8 Capital Issues (124) 17.7 0.0 0.0 Broiler 1.7 4.2 2.1 6.4 Other Financing CF (291) 103 94.9 (8.5) Others nm 37.6 41.4 38.1 Net Financing CF (965) 105 60.2 (123) Total 14.0 15.0 15.5 16.7 Currency Adjustments 0.0 0.0 0.0 0.0 Chg in Cash (983) (213) (289) 281

Source: Company, DBS Bank, DBS Vickers

28

48

68

88

108

128

148

168

188

208

267.3

767.3

1,267.3

1,767.3

2,267.3


Relative IndexRp

Japfa Comfeed Indonesia (LHS) Relative JCI INDEX (RHS)


Japfa Ltd

Japfa Ltd (BUY; S$0.50; JAP SP; Price Target : S$ 0.90) Forecasts and Valuation General Data

FY Dec (US$m) 2014A 2015F 2016F 2017F Revenue 2,947 2,818 3,084 3,466 Issued Capital (m shrs) 1,765 EBITDA 255 238 324 444 Mkt. Cap (S$m/US$m) 882 / 626 Pre-tax Profit 73.7 103 184 293 Major Shareholders Net Profit 31.2 44.5 79.3 126 Rangi Management Limited (%) 52.6 Net Pft (Pre Ex.) 71.4 44.5 79.3 126 Morze International Limited (%) 16.0 EPS (S cts) 2.49 3.56 6.33 10.1 Tasburgh Limited (%) 7.2 EPS Pre Ex. (S cts) 5.70 3.56 6.33 10.1 Free Float (%) 24.2 EPS Gth (%) (91) 43 78 60 3m Avg. Daily Val (US$m) 0.31 EPS Gth Pre Ex (%) (76) (38) 78 60 Diluted EPS (S cts) 2.49 3.56 6.33 10.1 Net DPS (S cts) 0.0 0.0 0.0 0.0 Price Relative

BV Per Share (S cts) 52.8 60.2 66.5 76.6 PE (X) 20.1 14.1 7.9 5.0 PE Pre Ex. (X) 8.8 14.1 7.9 5.0 P/Cash Flow (X) 5.0 4.4 3.8 2.9 EV/EBITDA (X) 6.5 7.1 5.6 4.5 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 0.9 0.8 0.8 0.7 Net Debt/Equity (X) 0.7 0.6 0.6 0.5 ROAE (%) 5.8 6.3 10.0 14.1 Earnings Rev (%): 0 0 0 Consensus EPS (S cts): 3.52 6.20 9.86

Income Statement (US$m)

Balance Sheet (US$m)

FY Dec 2014A 2015F 2016F 2017F FY Dec 2014A 2015F 2016F 2017F Revenue 2,947 2,818 3,084 3,466 Net Fixed Assets 834 886 941 1,073 Cost of Goods Sold (2,441) (2,293) (2,471) (2,713) Invts in Associates & JVs 0.0 0.0 0.0 0.0 Gross Profit 506 525 613 753 Other LT Assets 310 409 507 591 Other Opng (Exp)/Inc (315) (319) (343) (379) Cash & ST Invts 287 180 218 239 Operating Profit 191 206 270 374 Inventory 598 536 578 634 Other Non Opg (Exp)/Inc 1.62 (33.5) (13.4) (0.3) Debtors 151 136 149 168 Associates & JV Inc 0.0 0.0 0.0 0.0 Other Current Assets 148 179 182 225 Net Interest (Exp)/Inc (79.2) (69.4) (72.5) (80.4) Total Assets 2,327 2,326 2,575 2,929 Exceptional Gain/(Loss) (40.2) 0.0 0.0 0.0 Pre-tax Profit 73.7 103 184 293 ST Debt 476 414 516 622 Tax (14.5) (20.7) (36.8) (58.7) Creditor 233 201 217 238 Minority Interest (28.0) (38.1) (67.8) (108) Other Current Liab 25.0 28.3 37.1 48.9 Preference Dividend 0.0 0.0 0.0 0.0 LT Debt 507 468 445 428 Net Profit 31.2 44.5 79.3 126 Other LT Liabilities 91.4 89.7 88.0 86.4 Net Profit before Except. 71.4 44.5 79.3 126 Shareholder’s Equity 662 754 833 960 EBITDA 255 238 324 444 Minority Interests 332 370 438 546 Sales Gth (%) 9.3 (4.4) 9.4 12.4 Total Cap. & Liab. 2,327 2,326 2,575 2,929 EBITDA Gth (%) 12.3 (6.6) 36.0 37.0 Opg Profit Gth (%) (5.1) 7.7 30.8 38.6 Non-Cash Wkg. Capital 639 621 655 740 Net Profit Gth (%) (25.3) 42.6 78.0 59.5 Net Cash/(Debt) (697) (702) (744) (811) Effective Tax Rate (%) 19.7 20.0 20.0 20.0

Cash Flow Statement (US$m Segmental Breakdown

FY Dec 2014A 2015F 2016F 2017F FY Dec 2014A 2015F 2016F 2017F Pre-Tax Profit 73.7 103 184 293 Revenues (US$m) Dep. & Amort. 62.2 65.8 67.9 70.5 Dairy 224 246 382 492 Tax Paid (37.8) (20.7) (36.8) (58.7) Animal protein 2,513 2,375 2,497 2,737 Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 Consumer foods 211 197 204 236 Chg in Wkg.Cap. (88.4) (20.2) (72.7) (114) Total 2,947 2,818 3,084 3,466 Other Operating CF 0.12 0.02 0.02 0.03 Net Operating CF 125 144 164 220 Capital Exp.(net) (293) (192) (200) (282) EBITDA (US$m) Other Invts.(net) 0.01 (0.1) (0.1) (0.1) Dairy 70.4 55.8 106 153 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 Animal protein 180 212 217 276 Div from Assoc & JV 0.0 0.0 0.0 0.0 Consumer foods 9.10 9.05 9.34 10.1 Other Investing CF (5.9) (2.6) (2.7) (2.7) Total 260 277 333 439 Net Investing CF (299) (195) (202) (285) Div Paid (3.7) 0.0 0.0 0.0 Chg in Gross Debt 68.1 (101) 79.2 87.7 EBITDA Margins (%) Capital Issues 198 47.6 0.0 0.0 Dairy 31.5 22.7 27.7 31.1 Other Financing CF (27.3) (2.2) (2.2) (2.1) Animal protein 7.2 8.9 8.7 10.1 Net Financing CF 235 (56.0) 77.1 85.6 Consumer foods 4.3 4.6 4.6 4.3 Currency Adjustments 0.0 0.0 0.0 0.0 Total 8.8 9.8 10.8 12.7 Chg in Cash 61.6 (107) 38.2 20.6

Source: Company, DBS Bank

34

54

74

94

114

134

154

174

194

214

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1.0

Aug-14 Jan-15 Jun-15 Nov-15

Relative IndexS$

Japfa Ltd (LHS) Relative STI INDEX (RHS)


Malindo Feedmill

Malindo Feedmill (HOLD; Rp1,355; MAIN IJ; Price Target : Rp 1,300) Forecasts and Valuation General Data

FY Dec (Rpbn) 2014A 2015F 2016F 2017F Revenue 4,502 4,707 5,831 6,511 Issued Capital (m shrs) 2,239 EBITDA 110 239 542 607 Mkt. Cap (Rpbn/US$m) 3,034 / 217 Pre-tax Profit (108) (48.4) 196 250 Major Shareholders Net Profit (84.6) (37.1) 147 188 Dragon Amity Ltd (%) 41.3 Net Pft (Pre Ex.) (84.6) (37.1) 147 188 Free Float (%) 58.7 EPS (Rp) (47.2) (16.6) 65.8 83.8 3m Avg. Daily Val (US$m) 0.09 EPS Pre Ex. (Rp) (47.2) (16.6) 65.8 83.8 EPS Gth (%) nm 65 nm 27 EPS Gth Pre Ex (%) nm 65 nm 27 Diluted EPS (Rp) (47.2) (16.6) 65.8 83.8 Net DPS (Rp) 20.0 0.0 0.0 13.3 Price Relative

BV Per Share (Rp) 603 706 772 842 PE (X) nm nm 20.6 16.2 PE Pre Ex. (X) nm nm 20.6 16.2 P/Cash Flow (X) nm 12.3 18.4 17.5 EV/EBITDA (X) 36.5 17.5 8.2 7.5 Net Div Yield (%) 1.5 0.0 0.0 1.0 P/Book Value (X) 2.2 1.9 1.8 1.6 Net Debt/Equity (X) 1.5 0.7 0.8 0.8 ROAE (%) (8.7) (2.8) 8.9 10.4

Income Statement (Rpbn)

Balance Sheet (Rpbn)

FY Dec 2014A 2015F 2016F 2017F FY Dec 2014A 2015F 2016F 2017F Revenue 4,502 4,707 5,831 6,511 Net Fixed Assets 1,577 1,784 2,089 2,203 Cost of Goods Sold (4,180) (4,210) (5,076) (5,646) Invts in Associates & JVs 0.0 0.0 0.0 0.0 Gross Profit 322 497 755 865 Other LT Assets 79.5 80.6 82.6 84.6 Other Opng (Exp)/Inc (307) (316) (360) (411) Cash & ST Invts 310 532 249 130 Operating Profit 15.2 180 396 453 Inventory 610 480 549 580 Other Non Opg (Exp)/Inc (32.9) (78.9) 1.61 2.07 Debtors 464 380 448 475 Associates & JV Inc 0.0 0.0 0.0 0.0 Other Current Assets 491 490 587 774 Net Interest (Exp)/Inc (90.6) (150) (202) (205) Total Assets 3,531 3,748 4,005 4,246 Exceptional Gain/(Loss) 0.0 0.0 0.0 0.0 Pre-tax Profit (108) (48.4) 196 250 ST Debt 1,258 837 837 837 Tax 23.5 11.2 (48.0) (62.1) Creditor 418 349 440 510 Minority Interest 0.22 0.10 (0.4) (0.5) Other Current Liab 66.0 68.8 85.4 97.5 Preference Dividend 0.0 0.0 0.0 0.0 LT Debt 629 833 833 833 Net Profit (84.6) (37.1) 147 188 Other LT Liabilities 81.6 82.5 84.1 85.8 Net Profit before Except. (84.6) (37.1) 147 188 Shareholder’s Equity 1,081 1,581 1,728 1,886 EBITDA 110 239 542 607 Minority Interests (2.7) (2.8) (2.4) (1.9) Sales Gth (%) 7.4 4.6 23.9 11.6 Total Cap. & Liab. 3,531 3,748 4,005 4,246 EBITDA Gth (%) (76.5) 117.5 127.1 11.9 Opg Profit Gth (%) (96.9) 1,086.5 119.4 14.5 Non-Cash Wkg. Capital 1,081 933 1,059 1,222 Net Profit Gth (%) N/A 56.1 N/A 27.4 Net Cash/(Debt) (1,578) (1,137) (1,421) (1,540) Effective Tax Rate (%) N/A N/A 24.5 24.8

Cash Flow Statement (Rpbn Segmental Breakdown

FY Dec 2014A 2015F 2016F 2017F FY Dec 2014A 2015F 2016F 2017F Pre-Tax Profit (108) (48.4) 196 250 Revenues (Rpbn) Dep. & Amort. 127 137 145 152 Poultry feed 3,236 3,329 4,189 4,583 Tax Paid 0.0 0.0 0.0 0.0 DOC 622 685 862 1,043 Assoc. & JV Inc/(loss) 0.0 0.0 0.0 0.0 Broiler 372 402 436 476 Chg in Wkg.Cap. (313) 149 (126) (164) Processed food 55.8 61.4 102 151 Other Operating CF (7.5) 9.27 (50.0) (64.1) Others 254 265 268 284 Net Operating CF (302) 247 165 174 Total 4,502 4,707 5,831 6,511 Capital Exp.(net) (576) (345) (450) (265) EBIT (Rpbn) Other Invts.(net) 0.0 0.0 0.0 0.0 Poultry feed 263 313 481 528 Invts in Assoc. & JV 0.0 0.0 0.0 0.0 DOC (183) (142) 33.9 15.0 Div from Assoc & JV 0.0 0.0 0.0 0.0 Broiler (5.9) (21.1) (31.5) (9.5) Other Investing CF (88.5) 0.0 0.0 0.0 Processed food (44.8) (42.4) (62.0) (82.8) Net Investing CF (664) (345) (450) (265) Others (13.7) 72.8 (25.8) 2.22 Div Paid (35.8) 0.0 0.0 (29.7) Total 15.2 180 396 453 Chg in Gross Debt 914 (219) 0.12 (0.2) EBIT Margins (%) Capital Issues 336 537 0.0 0.0 Poultry feed 8.1 9.4 11.5 11.5 Other Financing CF (20.8) 1.59 1.63 1.67 DOC (29.4) (20.8) 3.9 1.4 Net Financing CF 1,193 320 1.75 (28.2) Broiler (1.6) (5.2) (7.2) (2.0) Currency Adjustments 0.0 0.0 0.0 0.0 Processed food (80.3) (69.0) (60.9) (54.8) Chg in Cash 227 222 (283) (120) Others (5.4) 27.5 (9.6) 0.8 Total 0.3 3.8 6.8 7.0 Source: Company, DBS Bank

87

137

187

237

287

337

810.0

1,310.0

1,810.0

2,310.0

2,810.0

3,310.0

3,810.0

4,310.0


Relative IndexRp

Malindo Feedmill (LHS) Relative JCI INDEX (RHS)


Animal Protein

DBS Bank Ltd recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making. ANALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report. As of 10 Dec 2015, the analyst(s) and his/her spouse and/or relatives who are financially dependent on the analyst(s), do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates have a proprietary position in the securities Charoen Pokphand Foods recommended in this report as of 31 Oct 2015

2. DBS Bank Ltd does not market make in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

3.

Compensation for investment banking services: DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.


Animal Protein

RESTRICTIONS ON DISTRIBUTION

General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), both of which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by DBS Vickers (Hong Kong) Limited which is licensed and regulated by the Hong Kong Securities and Futures Commission.

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Securities Indonesia.

Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.

United Kingdom

This report is being distributed in the UK by DBS Vickers Securities (UK) Ltd, who is an authorised person in the meaning of the Financial Services and Markets Act and is regulated by The Financial Conduct Authority. Research distributed in the UK is intended only for institutional clients.

Dubai

This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United States This report was prepared by DBS Bank Limited. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions

In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Bank Ltd.

12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888

Company Regn. No. 196800306E

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