South China Research
SOUTH CHINA TODAY
Contents
30 JULY 2007
Fu Ji Food & Catering Services (1175) – BUY
Calendar
Huge capacity for volume expansion
2
Economic data, company events, results, announcements and new issues
7
CHART OF THE DAY
China COSCO (1919)
VOLUME FILTER Company SCMP Sun Hung Kai & Co GZI Transport Lee & Man Paper Esprit China COSCO Xinao Gas Great Eagle China Oilfield Services ASM Pacific
TOP FIVE GAINERS AND LAGGARDS Company
Price Change Volume Change HK$ % m shares +% 2.81 -7.3 2.8 701.8 11.50 +3.0 15.2 355.2 5.38 -2.2 1.6 193.6 34.70 -5.1 8.4 173.0 104.90 -3.5 6.7 172.2 13.58 +6.8 74.1 172.0 10.54 -4.5 3.8 166.3 28.50 -1.7 4.0 162.6 10.72 -8.4 37.0 159.2 68.65 -5.2 1.4 138.2
The Volume Filter is a tool to spot stocks where there is an increase in trading activity, which may not always be apparent by a change in the share price. The last column in the table shows the percentage change in volume on the last trading day, relative to the average for that stock over the preceding month. The table shows the top 10 gainers by volume change, drawn from the members of Hang Seng Composite Index.
Price HK$
YTD % chg
Gainers China Shipping Container - H China COSCO - H China Coal Energy - H CITIC Resources Pacific Basin Shipping
6.51 13.58 14.46 5.49 11.56
+210.0 +208.0 +186.3 +141.9 +135.9
Laggards Hutchison Telecom Int’l EganaGoldpfeil Melco Int’l COFCO Int’l Solomon Systech
9.73 2.74 12.00 5.18 0.83
-50.4 -37.7 -34.9 -34.1 -31.4
SALES Hong Kong
Tony Ng Sam Lok Carina Chiu Paul Lok
(852) (852) (852) (852)
2820 2820 2820 2820
6288 6363 6352 6353
Note: All prices in this report are based on the 27 July 2007 close
London
Peter Wong Hamish Calder Michael Hope-Lewis
(44) (44) (44) (44)
(0) (0) (0) (0)
20 7491 9226 7767 246 138 20 7491 9226 20 7491 9226
South China Research
Initial Coverage
Fu Ji Food & Catering Services (1175) HK$23.55 (HSI: 22,570.41)
30 JULY 2007
BUY
Target price: HK$25.05 (12-mth) Target price sensitivity – based on average PER since IPO -2STD -1STD Mean +1STD +2STD FY08 HK$5.90 HK$12.28 HK$18.66 HK$25.05 HK$31.40 FY09 HK$7.51 HK$15.64 HK$23.75 HK$31.90 HK$40.00
Huge capacity for volume expansion •
Valuation has become more attractive after the recent correction
•
We initiate coverage with a Buy and a target price that suggests a 6% upside
•
Fu Ji Food will benefit from the strong institutional catering trend in China
•
Production capacity will double in the coming year to cater for future growth
•
New Chinese restaurants would erode margin in the near term
•
Expansion plan to be financed by convertible bonds
EARNINGS DATA
SHARE PRICE CHART
Year to 31 Mar Net profit HK$m Change % EPS HK$ Change % Consensus EPS HK$ DPS HK$ PER X Yield % EV/EBITDA X
2007A 360.5
2008F 492
2009F 626
2010F 787
0.713
0.952
1.212
1.524
– 0.206 33.0 0.9 24.2
1.047 0.300 24.7 1.3 18.2
1.411 0.410 19.4 1.7 14.3
1.663 0.530 15.5 2.3 11.4
+38.5 +21.9
+36.5 +33.5
+27.2 +27.3
+25.7 +25.7
SHARE INFORMATION Issued shares 3-year EPS CAGR Net debt/equity BVPS Average daily T/O ROE 12-mth high/low Major shareholder Exchange rates
516.56m +28.8% 26.6% HK$3.68 HK$38.8m 19.4%
Market cap HK$12,165m PEG 0.86X Ent. value HK$12,660m Price/BVPS 6.40X Estimated free float 44.8% ROA 10.7% HK$29.20/HK$11.50 Wei Dong, Chairman – 55.2% RMB1 = HK$1.0355 US$1 = HK$7.800
HK$ 30.0 28.0 26.0 24.0 22.0 20.0 18. 0 16.0 14.0 12.0 10.0
Fu Ji Food HSI (rebased)
m shrs 10.0 5.0 0.0 Jul Aug Sep Oct Nov Dec Jan FebMar Apr May Jun Jul
1mth Change in share price -13.4% Relative to HSI -16.7%
3mths -1.9% -10.8%
6mths +30.8% +17.6%
12mths +61.3% +20.9%
Anthony Teoh (852) 3103 2111 Email:
[email protected] IMPORTANT: This report and the information and opinions provided or expressed herein have been prepared by South China Research Limited for itself, its parent, holding, subsidiary, or other associated companies for the information of its or their respective clients only, and has been compiled with reasonable care using data, information, or sources believed to be true, reliable, and accurate at the time of publication. No representation or warranty whatsoever, whether express or implied, is made to the accuracy or completeness or otherwise of this report or any of the contents thereof. South China Research Limited, its parent, holding, subsidiary or, other associated companies and its or their directors, officers, associates, representatives, or employees accordingly do not accept any responsibility or liability whatsoever for any direct or consequential loss or damage of whatsoever nature arising from or as a result of the use, publication, or distribution in whole or in part of this report or any of its contents. The information and opinions contained in this report are or may be subject to change or revision without any notice. South China Research Limited, its parent, holding, subsidiary, or other associated companies or its or their respective directors, officers, associates, representatives, or employees may have positions or otherwise be directly or indirectly interested in the securities mentioned in this report or may buy, sell, or deal or offer to buy, sell, or deal in or with such securities from time to time, whether as principal for its or their own account or as agent or in any other capacity for or on behalf of another person. This report is not, and is not intended to be, nor constitutes any offer or solicitation for the purchase or sale or other dealing in the securities mentioned herein. Copyright protection and other rights exist or subsist in this report, which may accordingly not be used for any other purpose, nor sold, distributed, published, or reproduced in any manner without the express consent of South China Research Limited. This publication is approved for distribution in the UK by South China Securities (UK) Ltd, a firm authorized and regulated by the FSA.
FU JI FOOD & CATERING SERVICES PROFIT FORECASTS Year to 31 March
2007A RMBm 932.3 232.9 34.2 -------1,199.4 (504.1) -------695.3 28.9 (97.8) (29.4) (24.9) (67.1) -------505.0 (94.4) -------410.6 (26.8) -------383.8 (35.7) -------348.1 ====
2008F RMBm 1,363 283 52 -------1,698 (718) -------980 35 (145) (43) (36) (95) -------696 (135) -------561 (38) -------523 (48) -------475 ====
2009F RMBm 1,840 340 70 -------2,250 (985) -------1,265 45 (195) (57) (48) (125) -------885 (180) -------705 (35) -------670 (65) -------605 ====
2010F RMBm 2,349 406 90 -------2,845 (1,255) -------1,590 60 (250) (72) (61) (157) -------1,110 (240) -------870 (30) -------840 (80) -------760 ====
HK$m
360.5
492
626
787
% % %
58.0 42.1 29.0
57.7 41.0 28.0
56.2 39.3 26.9
55.9 39.0 26.7
Catering services Chinese restaurants Convenience food Turnover Cost of materials consumed Gross profit Other revenue Staff costs Operating lease rental Fuel and utility costs Other operating expenses EBITDA Depreciation & amortization EBIT Net interest income/(expenses) Profit before tax Tax Net profit Net profit Gross margin EBITDA margin Net margin
Initiating coverage with a Buy – Fu Ji Food has performed strongly since its IPO in December 2004, supported by its stellar earnings performance and its unique integrated supply chain. We believe that the development of China’s institutional catering industry will support its 28.8% EPS CAGR between FY07 and FY10, as its aggressive capacity expansion program will drive future earnings. We set our target price at HK$25.05, which is based on its average PER plus one standard deviation, equivalent to 26.3X FY08 EPS. With a potential upside of 6.4%, we initiate coverage with a Buy recommendation. Strong outsourcing trend – Although the contract catering market in China is already expanding at 30% per annum, there is still plenty of room for growth, as market penetration is only around 10% compared to the global average of 64%. Competition is moving away from price and towards quality, where Fu Ji Food has developed a significant advantage with its unique integrated supply chain. The company has been able widen its gap with smaller caterers in terms of quality and cost. This should enable the company to retain its customers. Production capacity will double by 2H08 – Fu Ji Food has a production capacity of 850,000 meals per day at the end of March 2007 and plans to boost its capacity to 1.6m meals per day by 2H08. As the company only produced an average of 567,500 meals per day in FY07, there remains plenty of room for volume growth. We are projecting a 3-year CAGR of 36% to 1.43m meals per day in FY10, resulting in an annual turnover of RMB2,349m.
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FU JI FOOD & CATERING SERVICES PRODUCTION CAPACITY Local distribution & processing centres 1. Sunqiao, Shanghai 2. Suzhou 3. Shenzhen 4. Songjiang, Shanghai 5. Kunshan, Suzhou 6. Hangzhou 7. Wuxi 8. Beijing 9. Tianjin 10. Qingdao 11. Yantai Total daily capacity sets of meals Utilization rate % Number of meals sold per day Average selling price RMB/set Daily sales RMBm Annual sales RMBm
FY05A 000
FY06A 000
FY07A 000
FY08F 000
FY09F 000
FY10F 000
50 50 50 – – – – – – – – ------150 97.2 100.0 6.50 0.65 236.8
150 150 100 150 150 – – – – – – ------700 50.0 350.0 4.49 1.57 573.9
150 150 100 150 150 150 – – – – – ------850 66.8 567.5 4.50 2.55 932.3
150 150 100 150 150 150 150 150 150 150 – ------1,450 57.2 830 4.50 3.74 1,363
150 150 100 150 150 150 150 150 150 150 150 ------1,600 70.0 1,120 4.50 5.04 1,840
150 150 100 150 150 150 150 150 150 150 150 ------1,600 89.4 1,430 4.50 6.44 2,349
Source: company, South China Research
Catering services for railway passengers – Fu Ji Food has started providing catering services to railway passengers at certain stations since April 2007. The average selling price is RMB15 per meal due to higher quality requirements. However, we estimate that the margin for this project would be similar to that of the company’s conventional catering business. Fu Ji Food has a market share of about 50% among all express train services in China, which carries about 500,000 passengers per day. Going forward, the company is planning to provide catering services to the 300,000 railway transport employees and extend its services to rest areas along highways and schools in northern China. New restaurants to erode margin – The Chinese restaurant business accounted for 19.4% of the group’s revenue in FY07. Fu Ji Food currently operates six Chinese restaurants, including three opened in FY07 that target medium-to-high income customers. The company plans to open three new restaurants in FY08 and is currently constructing one by itself at a cost of RMB600m. The new restaurants are expected to erode gross margin due to their high start-up costs. Hence, we are projecting decline profit margins in the next three years. Convertible bonds to finance expansion plans – The average investment cost for a regional distribution and processing centre (RDPC) is approximately RMB350m, which comprises RMB70m for land, RMB200m for building and RMB80m for equipment. For a local distribution and processing centre (LDPC) the average investment cost would be around RMB80m. The HK$600m convertible bond issued in October 2005 has been fully utilized for the construction of the RDPC in Jiading, Shanghai, which will support six LPDCs in the Yangtze River Delta region. The RMB1.0bn convertible bond issued in 2006 was earmarked for the new RDPC in Beijing and the upgrading of existing facilities at its four sourcing and initial processing centres (SIPCs) in Shandong, Jiangsu and Zhejiang. HISTORY OF CONVERTIBLE BOND ISSUANCE
Date of Issue 14 Oct 2005 10 Oct 2006
Due date
Amount HK$m
Net proceeds HK$m
Conversion price HK$/share
Sep 2010 Oct 2009
600 1,000
577.2 971.5
10.253 17.510
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Status Fully converted HK$128m converted
FU JI FOOD & CATERING SERVICES SALES AND GROSS MARGIN
PRODUCTION CAPACITY AND UTILIZATION
RMBm 3000
% 59
2500 58 2000 1500
57
1000 56
'000 meals/ day 1800 1600
% 100 90 80 70 60 50 40 30 20 10 0
1400 1200 1000 800 600 400 200 0
500 0
55 FY06A
FY07A
FY08F
Sales (RHS)
FY09F
FY05A
FY10F
FY06A
FY07A
FY08F
Number of meals sold (LHS) Utilization rate (RHS)
Gross magin (LHS)
FY09F
FY10F
Production capacity (LHS)
PER CHART
X 40 35 30 25
Mean + 1STDV
20
Mean
15
Mean - 1STDV
10
Mean = 19.6 STDV =6.7
5 0 Dec 04
Jun 05
Dec 05
Jun 06
Dec 06
Jun 07
PEER GROUP COMPARISON Company Tingyi Holdings China Mengniu Dairy China Huiyuan Juice China Agri-Industires China Yurun Food Fu Ji Food & Catering Services Tsingtao Brewery - H Ajisen China Cafe de Coral Weighted average
Bloomberg code 322 HK 2319 HK 1886 HK 606 HK 1068 HK 1175 HK 168 HK 538 HK 341 HK
Source: Bloomberg
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Share price HK$ 9.31 27.85 11.36 4.91 8.83 23.55 17.62 8.60 14.88
Market cap HK$m 52,031 39,711 17,967 17,646 12,820 12,165 11,542 8,987 8,170
Forward PER X 37.2 40.2 46.7 21.1 20.7 24.7 46.3 43.3 18.4 35.1
3-yr EPS CAGR % +22.0 +27.6 +36.2 +15.8 +25.4 +28.8 +19.6 +34.0 +18.4 +25.3
PEG X 1.69 1.46 1.29 1.34 0.81 0.86 2.36 1.27 1.00 1.43
FU JI FOOD & CATERING SERVICES FINAL RESULTS Year to 31 March Turnover Cost of materials consumed Gross profit Other revenue Staff costs Operating lease rentals Depreciation and amortization Fuel and utilty costs Other operating expenses Operating profit Finance costs Profit before tax Tax Net profit Gross margin Net margin
% %
2007A RMBm 1,199.4 (504.1) -------695.3 52.0 (97.8) (29.4) (94.4) (24.9) (67.1) -------433.7 (49.9) -------383.8 (35.7) -------348.1 ====
2006A RMBm 796.7 (344.0) -------452.7 31.9 (56.2) (14.8) (45.5) (13.8) (46.0) -------308.2 (23.1) -------285.1 (33.7) -------251.4 ====
Change % +50.5 +46.5
58.0 29.0
56.8 31.5
+1.2ppt -2.5ppt
+53.6 +62.9 +74.0 +98.6 +107.3 +79.9 +45.9 +40.7 +115.7 +34.6 +5.9 +38.5
South China Financial Holdings Ltd 28/F Bank of China Tower, 1 Garden Road, Central, Hong Kong Tel: (852) 2820 6333 Fax: (852) 2845 5765 URL: http://www.sctrade.com E-mail:
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SOUTH CHINA TODAY CALENDAR Economic Data Date 27/07/07 27/07/07 27/07/07 31/07/07 31/07/07 31/07/07 31/07/07 31/07/07 31/07/07 31/07/07 31/07/07 31/07/07 31/07/07 01/08/07 02/08/07 02/08/07 02/08/07 02/08/07 03/08/07 03/08/07 03/08/07 03/08/07 07/08/07 07/08/07 07/08/07 08/08/07 08/08/07 10/08/07 13/08/07 13/08/07 14/08/07 14/08/07
Country US US US US US US US US US HK HK HK HK US US US US US US US US US US US HK US US US US US US US
Indicators GDP Annualized (2Q07) Personal Consumption (2Q07) University of Michigan Confidence (July F) Chicago Purchasing Manager (July) Construction Spending (June) Consumer confidence (July) Employment Cost Index (2Q07) Personal Income (June) Personal Spending (June) Money Supply M1 - (June) Money Supply M2 - (June) Money Supply M3 - (June) Retail Sales - Value (June) ISM Manufacturing (July) Factor Orders (June) Initial Jobless Claims (June) Domestic Vehicles Sales (July) Total Vehicles Sales (July) Average Hourly Earnings (July) Average Weekly Hours (July) Change in Nonfarm Payrolls (July) ISM Non-Manufacturing (July) Nonfarm Productivity (2Q07 P) Unit Labour Costs (2Q07 P) Foreign Currency Reserves (July) Consumer Credit (June) Wholesale Inventories (June) Import Price Index (July) Advance Retail Sales (July) Business Inventories (June) Producer Price Index (July) Trade Balance (June)
Consensus +3.2% +1.5% 91.2 58.4 +0.2% 105.0 +0.9% +0.5% +0.2% N/A N/A N/A +10.0% 55.5 +1.0% 310K 12.3m 16.0m +0.3% 33.9 130K 59.0 +2.1% +2.0% N/A US$6.7bn +0.3% +0.9% N/A N/A N/A N/A
Actual +3.4% +1.3% 90.4
Previous +0.6% +3.7% 92.4 60.2 +0.9% 103.9 +0.8% +0.4% +0.5% -29.3% +6.8% +6.8% +10.2% 56.0 -0.5% 301K 11.8m 15.6m +0.3% 33.9 132K 60.7 +1.0% +1.8% US$136.3bn US$12.9bn +0.5% +1.0% -0.9% +0.5% -0.2% -US$60.0bn
Events Date 31/07/07 31/07/07 31/07/07 02/08/07 02/08/07
Company ASM Pacific Coastal Greenland TC International Bank of East Asia Tak Sing Alliance
Code 0522 1124 0515 0023 0126
Events Analyst Meeting Analyst Meeting Company Visit Analyst Meeting Analyst Meeting
Company ASM Pacific HSBC Holdings Hang Seng Bank Lenovo Group Bank of East Asia Chinese Estate Orient Overseas International MTR Corp Pacific Basin Shipping Cathay Pacific Airways Champion REIT China Merchants Bank Swire Pacific Hong Kong Exchanges & Clearing Tencent Holdings CKI Holdings Cheung Kong Hutchison Whampoa Ports Design
Code 0522 0005 0011 0992 0023 0127 0316 0066 2343 0293 2778 3968 0019 0388 0700 1038 0001 0013 0589
Events Interim Results Interim Results Interim Results 1Q08 Results Interim Results Interim Results Interim Results Interim Results Interim Results Interim Results Interim Results Interim Results Interim Results Interim Results Interim Results Interim Results Interim Results Interim Results Interim Results
Results Announcements Date 30/07/07 30/07/07 30/07/07 01/08/07 02/08/07 03/08/07 03/08/07 07/08/07 07/08/07 08/08/07 08/08/07 09/08/07 09/08/07 15/08/07 15/08/07 16/08/07 23/08/07 23/08/07 27/08/07
Ex-dividend Arrangements Books closed
Company
01/08/07 14/08/07 21/08/07 11/09/07
China Resources Enterprise Wheelock & Co Peace Mark Café de Coral
Code
Dividend
Per share
Ex-dividend
Payable date
0291 0020 0304 0341
Special Dividend Final Results Final Results Final Results
HK$0.60 HK$0.10 HK$0.062 HK$0.30
30/07/07 10/08/07 17/08/07 07/09/07
15/08/07 24/08/07 28/09/07 05/10/07
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