Академический Документы
Профессиональный Документы
Культура Документы
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM04 Dec 2016
TECH03:54&PM HKT
COMML JOINT STOCK BN Disseminated 05 Dec 2016 12:15 AM HKT
Asia Pacific Equity Research
05 December 2016
Initiation
Neutral
COFCO Meat Holdings 1610.HK, 1610 HK
Price: HK$1.64
The pen is full. Initiate coverage at Neutral
Price Target: HK$1.90
We initiate coverage of COFCO Meat with a Neutral rating and a Dec-17 China
price target of HK$1.90. A subsidiary of COFCO Group, COFCO Meat operates Consumer
a vertically integrated value chain including feed & hog production, slaughtering, AC
production and sale of fresh pork and processed meat products. Near-term Ebru Sener Kurumlu
(852) 2800-8521
earnings benefits from high hog prices and benign input costs (we expect COFCO
ebru.sener@jpmorgan.com
Meat to post a profit in FY16E vs a loss in FY15), and ongoing market-share Bloomberg JPMA KURUMLU <GO>
gains given the fragmented market should sustain strong volumes. But the
George Hsu
company is likely to face some earnings volatility over the next two years as
(852) 2800-8559
profits are very sensitive to hog prices, which peaked in 1H16. Although we see george.hsu@jpmorgan.com
15% potential upside to our price target, we are concerned about downside risks to
Shen Li, CFA
estimates should hog prices soften beyond our base estimates.
(852) 2800 8523
Investment positives: (1) Near-term earnings benefits from cyclically high shen.w.li@jpmorgan.com
hog prices and benign input costs: i) China hog prices were in an upcycle Daisy Lu
since mid-2015, reaching a cyclically high level in 1H16; ii) input costs are (852) 2800-8593
benign, with corn prices down and the hog-to-corn ratio at a cyclically high daisy.y.lu@jpmorgan.com
level in 2016. (2) Solid long-term growth drivers for volume and margins: J.P. Morgan Securities (Asia Pacific) Limited
(i) leading player in a consolidating market, securing volume growth;
Price Performance
(ii) achievable cost savings via efficiency improvements; (iii) longer hog price
2.2
cycles at higher levels, with diminishing intervention in corn markets;
2.0
(iv) growing downstream business, given a strong brand and vertical
integration. (3) Diversified shareholder structure and strong support from the HK$ 1.8
1.4
Investment risks: (1) Continuing earnings volatility due to hog price cycles; Dec-15 Mar-16 Jun-16 Sep-16 Dec-16
(2) earnings highly sensitive to hog and corn prices; (3) Chinas pork per capita 1610.HK share price (HK$)
consumption already at high levels, with risk of long-term growth flattening; HSI (rebased)
YTD 1m 3m 12m
(4) risk from rising US imports, which could cap the price of pork in China; and Abs -18.0% -1.2% -18.0% -18.0%
(5) food safety and regulatory risks. Rel -22.0% -0.6% -17.0% -19.8%
Valuation: Given the earnings volatility we use a DCF valuation and arrive at a
valuation of HK$9.2b and a Dec-17 PT of HK$1.9, based on a hog-to-corn ratio
of 6.5:1 (16-year average hog-to-corn ratio in China). This equates to a 2017E
P/E of 9.6x vs China pork names trading in a range of 9-15x.
COFCO Meat Holdings (Reuters: 1610.HK, Bloomberg: 1610 HK)
Rmb in mn, year-end Dec FY14A FY15A FY16E FY17E FY18E Company Data
Revenue (Rmb mn) 3,746 5,056 7,239 8,363 9,967 Shares O/S (mn) 4,877
Net Profit (Rmb mn) (349) 210 618 1,513 1,078 Market Cap (Rmb mn) 7,101
EPS (Rmb) (0.09) 0.05 0.13 0.31 0.22 Market Cap ($ mn) 1,031
DPS (Rmb) - - - - - Price (HK$) 1.64
Revenue growth (%) 0.3% 35.0% 43.2% 15.5% 19.2% Date Of Price 01 Dec 16
EPS growth (%) 338.8% (160.0%) 136.0% 144.7% (28.7%) Free Float(%) -
ROCE (4.3%) 1.3% 14.7% 11.5% 10.3% 3M - Avg daily vol (mn) -
ROE (21.1%) (0.9%) 20.9% 14.3% 12.7% 3M - Avg daily val (HK$ mn) -
P/E (x) NM 27.1 11.5 4.7 6.6 3M - Avg daily val ($ mn) -
P/E(Recurring) NM NM 8.8 8.4 7.8 HSI 2,2878.23
P/BV (x) 2.4 2.1 1.4 1.1 0.9 Exchange Rate 7.76
EV/EBITDA (x) 164.9 26.6 5.8 5.4 4.7 Price Target End Date 31-Dec-17
Dividend Yield - - - - -
Recurring Profit (Rmb mn) (286) (22) 810 841 911
Recurring EPS (Rmb) (0.07) (0.01) 0.17 0.17 0.19
Recurring EPS Growth 240.5% (92.2%) (3003.9%) 3.7% 8.4%
Source: Company data, Bloomberg, J.P. Morgan estimates.
See page 52 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single
factor in making their investment decision.
www.jpmorganmarkets.com
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Key catalyst for the stock price: Upside risks to our view: Downside risks to our view:
Hog price changes, and the ratio of hog (1) Near-term earnings benefits from cyclically high (1) Continuing earnings volatility due to hog price
prices to feed prices, will remain the key hog prices and benign input costs cycle
share price drivers in the near term (2) Solid long-term growth drivers for volume and (2) Earnings highly sensitive to hog and corn prices
margins (3) Chinas pork per capita consumption already at
(3) Diversified shareholder structure and strong high levels, with risk of long-term growth flattening
support from parent company likely to offer (4) Risk from rising US imports, which could cap the
operational synergies price of pork in China
(5) Food safety and regulatory risks
Key financial metrics FY14A FY15A FY16E FY17E Valuation and price target basis
Revenues (LC) 3,746 5,056 7,239 8,363 Given the earnings volatility we use a DCF valuation and
Revenue growth (%) 0.3% 35.0% 43.2% 15.5% arrive at a valuation of HK$9.2b and a Dec-17 PT of HK$1.9,
EBITDA (LC) (24) (14) 288 1,316 based on hog-to-corn ratio of 6.5:1 (which is the 16-year
EBITDA margin (%) -0.6% -0.3% 4.0% 15.7% average hog-to-corn ratio in China). This equates to a 2017E
Tax rate (%) -1.0% 4.5% 5.0% 5.0% P/E of 9.6x vs China pork names trading in a range of 9-15x.
Net profit (LC) (349) 210 618 1,513
Recurring EPS (LC) (0.07) (0.01) 0.17 0.17
EPS growth (%) 240.5% na na 3.7% COFCO Meat - Share price (HK$)
DPS (LC) - - - - 2.5
BVPS (LC) 0.60 0.68 1.05 1.36
Operating cash flow (LC mn) (370) 381 597 1,101 2.2
Free cash flow (LC mn) (907) (268) (569) 32 1.9
Interest cover (X) 0.4 2.6 9.4 10.3
Net margin (%) -9.3% 4.1% 8.5% 18.1% 1.6
Sales/assets (X) 0.6x 0.7x 0.8x 0.8x 1.3
Debt/equity (%) 142.9% 91.7% 47.5% 36.6%
Net debt/equity (%) 55.0% 85.0% 13.0% 13.6% 1
31-Oct-16
2-Nov-16
4-Nov-16
6-Nov-16
8-Nov-16
10-Nov-16
12-Nov-16
14-Nov-16
16-Nov-16
18-Nov-16
20-Nov-16
22-Nov-16
24-Nov-16
26-Nov-16
28-Nov-16
30-Nov-16
2-Dec-16
ROE (%) -21.1% -0.9% 20.9% 14.3%
Key model assumptions FY14A FY15A FY16E FY17E
Sales Growth 0.3% 35.0% 43.2% 15.5%
Gross Margin 3.2% 2.3% 5.1% 16.4%
Operating Margin -4.7% 1.4% 13.0% 11.9%
Source: Bloomberg, Company and J.P. Morgan estimates. Source: Bloomberg
Comparative metrics
CMP Mkt Cap P/E EV/EBITDA P/BV YTD
LC $Mn FY16E FY17E FY16E FY17E FY16E FY17E Stock perf.
WH GROUP LTD 6.3 12,014 12.6x 11.4x 6.9x 6.2x 1.9x 1.7x 51.2%
GUANGDONG WENS-A 35.1 22,689 11.2x 11.6x 10.3x 13.3x 4.0x 3.2x -3.4%
HENAN SHUAN-A 22.5 10,834 16.4x 14.8x 10.9x 9.6x 4.3x 4.0x 22.1%
MUYUAN FOODSTU-A 24.8 3,776 12.2x 12.3x na na 3.9x 2.9x 7.5%
CHUYING AGRO -A 5.3 2,396 15.0x 12.0x na na 3.0x 2.4x -6.1%
Source: Bloomberg, Company and J.P. Morgan estimates.
2
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Table of Contents
Investment Positives................................................................4
Near-term earnings benefits from cyclically high hog prices and benign input costs..4
Solid long-term growth drivers for volume and margins...........................................8
Diversified shareholder structure and strong support from parent company likely to
offer operational synergy.......................................................................................11
Investment Negatives and Risks...........................................13
Earnings volatility due to hog price cycle and hog-to-corn ratio..............................13
Chinas pork per-capita consumption already at high levels, risk to long-term growth
.............................................................................................................................16
Risk of increasing imports from US, which might cap pork prices in China ............16
Food safety and regulatory risks ............................................................................17
Synergies not being achieved as planned, and key shareholder COFCO retreats......17
Third-party channel risk ........................................................................................17
Preferential tax treatment may not continue ...........................................................17
Higher volatility in headline earnings due to biological asset revaluation and
goodwill impairments............................................................................................18
Impact of weather and outbreaks of diseases ..........................................................18
Valuation .................................................................................19
Overview of Chinas Pork Industry .......................................23
Chinas pork market size .......................................................................................23
Chinas pork industry value chain..........................................................................29
Hog price cycle and seasonality.............................................................................30
Company Overview ................................................................35
Company history and description...........................................................................35
Operational Review ................................................................38
Segment overview.................................................................................................38
Production capacity and expanded plan..................................................................40
Distribution network and customer profile .............................................................45
Financials................................................................................46
Investment Thesis, Valuation and Risks ..............................50
3
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Investment Positives
Near-term earnings benefits from cyclically high hog prices
and benign input costs
Company description: China hog prices have been in an upcycle since mid-2015, reaching a cyclically
COFCO Meat, a subsidiary of high level in mid-2016
COFCO Group and founded in Chinas hog production cycle and thus hog prices have an inherent cycle that used to
2009, has an integrated model with be shorter, at around three years, and now is getting a bit longer (most recently four
operations across the entire pork to five years). However, the most recent cycle was still relatively short compared to
industry value chain, including those in some developed markets, such as the US. These cycles are due to the
i) hog production (#4 market player), fragmented structure of the industry, where small farmers react to changes in hog
ii) slaughtering and fresh pork (#8), prices too harshly by either culling sows or raising too many hogs.
iii) processed meat production,
sales and distribution (#9), Chinas hog prices entered an upcycle in mid-2015, as explained below. Chinas sow
iv) international trade, importing and stock starting to decrease from early 2014, given lackluster hog prices in 2013 that led
selling frozen meat and byproducts
to the culling of sows and pushed small farmers out of the business. The declining sow
in China (#2)
stock led to a decline in hog production that has driven up hog prices since mid-2015.
The sow stock did not pick up until Oct 2016, as the China governments stricter
The company had hog production
capacity of 2.3m heads as of end- environmental protection rules have encouraged industry consolidation and restricted
2015 and plans to expand annual the expansion of smaller hog farms, causing the pork shortage to climb further in 2016,
hog production capacity to 5.5m as per Ministry of Agriculture forecasts. There were also floods in China in June/July
heads by 2020 that led to the death of several tens of thousands of sows or hogs and thus kept hog
prices at elevated levels. Some smaller players hence had held back their volume in Jul-
Sep in hope to sell at higher prices in later months. But given the continuing price
correction during 3Q16 as several local governments increased their pork inventory
releases to rein in the hog-corn-ratio, these smaller players suddenly changed their
price outlook and put their stock to the market in Oct, therefore, driving a sharp price
decline during the month. However, given the market is still running short of supply,
the price stabilized in late Oct and picked up in Nov.
Chinas hog prices were at cyclically high levels in 2Q16 and have started coming
down since July, but the pace is moderate given that sow stock in China remains low.
We expect hog prices to decline further in 2017, as sow stock is expected to increase
gradually, although it still remains low until Oct-2016.
Source: NDRC.
4
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Figure 2: The trend of sow stock and pig stock Figure 3: The trend of sow stock and hog prices
55,000 480,000 55,000 25
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Oct-12
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Jul-14
Oct-14
Jan-15
Apr-15
Jul-15
Oct-15
Jan-16
Apr-16
Jul-16
Oct-16
Number of stock sow (LHS, '000 heads) Number of pig stock (RHS, '000 heads) Number of stock sow (LHS, '000 heads) Hog price (RHS, Rmb/kg)
COFCO Meat derives 91% of its EBIT from hog production and is a beneficiary of
hog price increases, especially when feed costs are benign. We expect a c18%
increase in hog prices in China in FY16 and 25% growth for COFCO Meats hog
production, given the company has some sales in higher-priced piglets in 2016, and
thus we expect COFCO Meat to deliver strong earnings growth in 2016, with
recurring net profit (excluding fair value adjustments in biological assets) of
Rmb810m vs a 2015 net loss of Rmb22m. COFCO Meat delivered Rmb268m in net
profit in 4M16, benefitting from surging hog prices. For headline net profit, which is
impacted by fair value adjustments in biological assets, we expect COFCO Meat to
post Rmb618m in FY16 vs Rmb210m in FY15.
We expect hog prices in China to come down c11% y/y (and down 10.5% y/y for
COFCO Meat given still some more sales in higher-priced sows and piglets) in 2017.
And with flat corn prices (which we explain in the next section), we expect c4% y/y
growth in COFCO Meats recurring net profit in FY17 thanks to continuing volume
growth and continuing efficiencies in the cost structure.
5
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
OP per kg (Rmb)
Hog production 1.2 5.6 4.1 2.9
Fresh pork (0.0) (0.1) (0.0) 0.0
Processed meat 0.4 (1.2) (0.5) 0.2
International trade (adjusted) (0.2) (0.0) 0.1 0.2
Recurring OPM
Hog production 7.9% 30.4% 24.9% 19.3%
Fresh pork -0.1% -0.6% -0.3% 0.1%
Processed meat 1.2% -3.3% -1.4% 0.7%
International trade (adjusted) -1.2% -0.2% 0.4% 0.8%
Source: MoA, J.P. Morgan estimates, Company reports.
Input costs are benign, with corn prices down and the hog-to-corn ratio at a
high level in 2016
Corn is typically the main feed for the hog-raising business. Therefore, the hog-price-
to-corn-price ratio (which we refer as the hog-to-corn ratio in this report) is key to
upstream profitability in the hog and pork business. Given that COFCO Meat derives
91% of EBIT from upstream production, the hog-to-corn ratio is the main parameter
for profitability, in our view, until the downstream business reaches a scale that
impacts overall earnings.
Chinas government launched a policy in 2007 to support the prices of some
agriculture products (corn, soybean, cotton) by building up national reserves with
targeted purchase prices and limits on the quantity of imports. This policy drove
Chinas domestic corn prices to over an 80% premium to the US initially, widening
to over 100% in 2014 and 2015. In September 2015, the government revised down
its purchase prices, the first decline since 2007, when the corn reserve policy was
initiated, with an aim to clear the governments corn reserve inventory and suppress
domestic corn prices, which were the most expensive in the world.
The change in reserve policy in 2015 was planned to reduce governments reserve
inventory and leave the market to determine its fair prices. Industries (feeds, ethanol)
that use corn as an input cost and that had been making losses had been complaining
about the policy distortion. The policy change was welcomed by these industry
players. Corn prices have declined from Rmb2.5-2.6/kg in 2014 to around
Rmb1.9/kg at current level, and the gap to the US is narrowing compared to 2014-15,
though it is still over 80% higher than in the US. We expect corn prices to decline to
cRmb2/kg for 2016 and stay stable in 2017.
6
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Figure 4: China and US average corn price comparison (US$/kg) Figure 5: Chinas corn prices (Rmb/kg)
0.45 2.7
0.39 0.40
0.40 0.37
0.35 2.5
0.33
0.35 0.30
0.30 0.28 2.3
0.24
0.25 0.27
0.27 2.1
0.20 0.23
0.15 1.9
0.17 0.16
0.10 0.15 0.15 0.14
1.7
0.05
1.5
-
May-09
Nov-09
May-10
Nov-10
May-11
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
Nov-14
May-15
Nov-15
May-16
Nov-16
2009 2010 2011 2012 2013 2014 2015 YTD2016
China corn price (US$/kg) US corn price (US$/kg)
Source: USDA, NDRC.
Source: USDA, NDRC.
Based on historical data and our calculations, COFCO Meat was making losses at a
hog-to-corn ratio of 5:1 during 2014. The hog production business turned profitable
in 2015, when the hog-to-corn ratio was 6.3:1. We estimate the current breakeven
hog-to-corn ratio at 6.0:1. For 2016, we expect the average hog-to-corn ratio to be at
the cyclically high level of 8.7:1 and it will gradually trend down to 7.2:1 in 2018.
Figure 6: Recurring EBIT (with breakdown by segment) and its relationship to the hog-to-corn ratio (Rmb mn)
1,200 10
1,000
8.7 9
800
7.8
8
600
7.2
400 7
6.3
200 5.9
6
- 5.1
2013 2014 2015 2016E 2017E 2018E 5
(200)
(400) 4
Hog production EBIT (LHS) Fresh pork EBIT (LHS) Processed meat EBIT (LHS)
International trade EBIT (LHS) Other adjustments (LHS) Hog/Corn ratio (RHS)
Source: J.P. Morgan estimates, Company reports. Note: Other adjustments are those income/expenses booked under segments but not included in reported overall recurring EBIT
7
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
COFCO Meat has plans to increase capacity to 5.5m heads by 2020, with higher
growth in 2016-17 and moderating growth in the later years. We expect capacity to
grow to around 3.5m heads in 2016, 4.1m in 2017 and 4.6m in 2018. In terms of
production volume (for finishing hogs only), we expect 1.7m heads in 2016, 2.3m
heads in 2017 and 3.3m heads in 2018.
Figure 7: Pork production and consumption in China Figure 8: Chinas pork shortage vs hog prices
60.0 1.4 20.0
18.0
1.2
57.0 16.0
1.0 14.0
54.0 0.8 12.0
10.0
0.6 8.0
51.0
0.4 6.0
48.0 4.0
0.2
2.0
45.0 - -
2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
Production (m tons) Consumption (m tons) Short of supply (LHS, m tons) Hog price (RHS, Rmb/kg)
Source: MoA, J.P. Morgan estimates. Source: MoA, J.P. Morgan estimates.
Figure 9: Chinas hog production share by hog farm size (heads) Figure 10: Consolidating number of slaughtering houses in China
100% 25,000 23,430
4% 6% 7% 9% 10%
19,938
22% 20,000
80% 26%
29%
32% 33% 14,720
15,000
60%
10,000+ 9,985
500-10,000 10,000
40% 6,447
74% 1-500
68% 63% 3,979 3,301
59% 57% 5,000 2,740 2,235 1,933
1,785
20%
-
2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
0%
2007 2009 2011 2013 2015 Number of licensed slaughtering houses in China
8
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Such efficiency improvements will lead to better profitability over the long run, in
our view. If the above efficiencies were to be achieved now, the current breakeven
hog-to-corn ratio of 6.0:1 could improve to 5.7:1, based on our estimates.
24.0
110.0
23.5
110.1
109.0
23.0
105.0
22.5 105.9
22.0 100.0
101.8
21.5
97.8
21.0 96.4 95.0
2013 2014 2015 2016E 2017E 2018E
Piglets weaned per sow per year (LHS)
Average finishing weight (kg per head, RHS)
9
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Longer hog price cycles at higher levels each time, with diminishing
intervention in corn markets
Chinas hog price cycle has trended up over the past 16 years, which we believe is
attributable to a combination of rising household income, rising labor costs and
strong demand for pork products. Besides, with increasing market consolidation as
smaller players, who are the source of price fluctuations, exit the market, the price
cycle is gradually getting longer (from 3 years to 4-5 years). The governments
ceasing to intervene in corn prices in 2015 has relieved some pressure for upstream
players on the cost side.
The chilled fresh pork business is accelerating in China, and COFCO Meat has more
exposure to chilled products. Chilled fresh pork and frozen fresh pork comprised
10% and 12% of total pork consumption in 2010, respectively, and have grown to
25% and 20%, respectively, in 2015. We believe this trend is driven by demand for
safer and higher-quality pork products and a stronger preference for the modern retail
channel, given better hygiene and a more comfortable environment. We believe
COFCO Meat, with its strong brand equity and expanding channel coverage, will
reap the fruits of such a preference shift.
The downstream business was loss-making and accounted for -1% of EBIT as of
4M16. We expect this to improve gradually and break even by 2018. We also believe
further growth is likely.
10
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Figure 13: China fresh pork consumption volume by category Figure 14: China fresh pork consumption volume by channel
100% 100% 3% 1%
14% 18%
80% 80% 9%
55% 17%
Others
60% 77% 60%
Warm fresh pork Hotels & restaurants
Frozen fresh pork Modern retailers
40% 40% 68%
20% Chilled fresh pork 56% Wet markets
Retail stores
20% 20%
12%
25%
10% 6% 8%
0% 0%
2010 2015 2010 2015
More importantly, parent company COFCO Group should be able to strengthen the
companys supply chain and build connections with global counterparts for its
international businesses.
11
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
COFCO
100%
COFCO (HK)
100%
China Foods
MIY
(Holdings)
67% 33%
COFCO Meat
Source: Company reports. Note: MIY indicates Mitsubishi, Itoham and Yonekyu.
COFCO
100%
COFCO (HK)
100%
China Foods
(Holdings)
100%
Other
Mainfield MIY KKR Baring Temasek Boyu
shareholders
COFCO Meat
Source: Company reports. Note: MIY indicates Mitsubishi, Itoham and Yonekyu.
12
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Figure 17: Operating profit by segment (Rmb M) Figure 18: Total sales (internal + external) split by segment, 2015
200
150 29%
32%
100 Hog production
(100) 34%
(150)
Source: Company reports.
Source: J.P. Morgan estimates, Company reports.
We expect COFCO Meat to deliver a c25% increase in hog prices in FY16 (4M16 up
>50% y/y), above the China average increase of c18% that we estimate for FY16, as
the company has been selling some high-value sows and piglets this year given the
shortage in the market and already delivered an ASP increase above the China
average in 4M16.
We expect China average hog prices to come down c11% in FY17, as we expect
China hog production to see a 1.5% increase (with sow stock starting to go up in later
FY16, helping hog production move up gradually in 2H17) and a further 3% increase
in FY18. With demand growth estimated at 1% in FY17 and 2% in FY18, that leaves
us with a pork supply shortage of 0.8m tons in FY17 and 0.2m tons in FY18. Given a
supply shortage in China in FY17, we expect hog prices to go down only 11% on the
back of increased production vs FY16 output.
13
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Figure 19: Pork production and consumption in China Figure 20: Chinas pork shortage vs hog prices
60.0 1.4 20.0
18.0
1.2
57.0 16.0
1.0 14.0
54.0 0.8 12.0
10.0
0.6 8.0
51.0
0.4 6.0
48.0 4.0
0.2
2.0
45.0 - -
2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E
Production (m tons) Consumption (m tons) Short of supply (LHS, m tons) Hog price (RHS, Rmb/kg)
Source: MoA, J.P. Morgan estimates. Source: MoA, J.P. Morgan estimates.
The table below summarizes the impact on financials and the reference valuation
range if hog price declines are worse than our estimate or less than our estimate.
For COFCO Meat, our assumptions for hog prices are +25% y/y in FY16 and -10.5%
y/y in FY17; for corn prices are -10% y/y in FY16 and flat in FY17; and for soybean
meal prices are -5% y/y in FY16 and flat in FY17.
Table 3: Sensitivity analysis to changes in hog, corn and soybean meal prices, FY17E (assumes all others unchanged)
Base case
To hog prices 0% -5% -10.5% -15% -20%
Sales 8% 4% 0% -3% -7%
Op profits excl. biological asset adj. 48% 25% 0% -21% -44%
Recurring profits 53% 28% 0% -23% -48%
Valuation reference (HKD bn) 10.8 10.0 9.2 8.4 7.6
Implied 2017E P/E 7.4 8.2 9.6 11.5 15.5
To corn prices -10% -5% 0% 5% 10%
Sales 0% 0% 0% 0% 0%
Op profits excl. biological asset adj. 12% 6% 0% -6% -12%
Recurring profits 14% 7% 0% -7% -14%
Valuation reference (HKD bn) 9.4 9.3 9.2 9.0 8.8
Implied 2017E P/E 8.7 9.1 9.6 10.2 10.8
To soybean meal prices -10% -5% 0% 5% 10%
Sales 0% 0% 0% 0% 0%
Op profits excl. biological asset adj. 8% 4% 0% -4% -8%
Recurring profits 8% 4% 0% -4% -8%
Valuation reference (HKD bn) 9.3 9.2 9.2 9.1 9.0
Implied 2017E P/E 9.0 9.3 9.6 9.9 10.3
Source: J.P. Morgan estimates.
14
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Table 4: Sensitivity analysis to changes in hog, corn and soybean meal prices, FY16E (assumes all others unchanged)
Base case
To hog prices 5% 15% 25% 35% 45%
Sales -10% -5% 0% 5% 10%
Op profits excl. biological asset adj. -55% -27% 0% 27% 55%
Recurring profits -60% -30% 0% 30% 60%
Valuation reference (HKD bn) 6.3 7.7 9.2 10.6 12.0
Implied 2016E P/E 16.9 12.0 10.0 8.9 8.2
To corn prices -2% -5% -10% -15% -18%
Sales 0% 0% 0% 0% 0%
Op profits excl. biological asset adj. -9% -5% 0% 5% 9%
Recurring profits -9% -6% 0% 6% 9%
Valuation reference (HKD bn) 8.8 8.9 9.2 9.3 9.5
Implied 2016E P/E 10.6 10.3 10.0 9.6 9.4
To soybean meal prices -1% -3% -5% -7% -9%
Sales 0% 0% 0% 0% 0%
Op profits excl. biological asset adj. -2% -1% 0% 1% 2%
Recurring profits -3% -1% 0% 1% 3%
Valuation reference (HKD bn) 9.0 9.1 9.2 9.2 9.2
Implied 2016E P/E 10.1 10.0 10.0 9.9 9.8
Source: J.P. Morgan estimates.
China has a market stabilization mechanism in place that would like to see the hog-
to-corn ratio in the range of 5.5-8.5:1, where the median is 7:1. At the same time, the
last-16-year average hog-to-corn ratio is 6.5x. Therefore, we believe 6.5:1 should
represent a sustainable long-term hog-to-corn ratio over the cycle.
Source: NDRC.
15
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Figure 22: Meat consumption mix by country, 2015 Figure 23: Meat per-capita consumption, 2015 (kg)
100% 5% 0% 2% 0% 0% 100
5% 0
Figure 24: China and US average hog price comparison (US$/kg) Figure 25: China and US average pork price comparison (US$/kg)
3.00 2.83 4.00
2.65 3.74
3.44 3.32
2.38 2.46 2.45 3.50 3.28 3.28
2.50 2.20 3.04
3.00
2.00 1.75 2.31
1.64 2.4x 2.50 2.20 2.1x 2.4x
3.1x
1.50 2.00
1.58 2.17
1.47 1.42 1.91
1.00 1.32 1.50 1.73 1.82
1.21 1.67
1.02 1.55 1.55
0.93 0.92 1.00 1.21
0.50
0.50
- -
2009 2010 2011 2012 2013 2014 2015 YTD2016 2009 2010 2011 2012 2013 2014 2015 YTD2016
China hog price (US$/kg) US hog price (US$/kg)
China pork price (US$/kg) US pork price (US$/kg)
16
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
17
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
18
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Valuation
COFCO Meat is a pork company and operates a vertically integrated value chain,
from feed production, hog production and slaughtering to the production, distribution
and sale of fresh pork and processed meat products, and the import and sale of frozen
meat products.
Given the earnings volatility related to hog price cycles and given that the peer group
has a wide valuation multiple range, as it comprises different businesses and regions,
we use DCF as the main valuation metric.
Our DCF valuation points to P/E of c10x for both 2016E and 2017E. This compares to:
Global protein players trading at a 2016E P/E range of 9-45x and 2017E P/E
range of 6-22x.
China pork players trading at a 2016E P/E range of 10-16x and 2017E P/E range
of 9-15x.
Chine F&B names trading at a 2016E P/E range of 15-48x and 2017E P/E range
of 15-39x.
19
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Source: Bloomberg.
We also ran a sensitivity analysis on our DCF range based on various terminal
growth rates and WACC. Below is the sensitivity analysis for the low and high ends
of the DCF valuation range.
Table 8: Sensitivity of terminal growth rate and WACC for low end (HK$ bn)
Terminal growth
WACC 1% 2% (JPM assumption) 3%
8.5% 9.9 10.9 12.2
9.7% (JPM assumption) 8.5 9.2 10.0
10.5% 7.7 8.2 8.8
Source: J.P. Morgan estimates.
As we find a strong correlation between ROIC generation and the EV/IC ratio for
global protein names (as seen in the chart below), we also compared implied EV/IC
for our DCF valuation range with the EV/IC of global and Chinese protein names.
20
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
R = 0.9051 Muyuan
40.0%
30.0%
Shuanghui
Pilgrim's Pride
Chuying
20.0%
Hormel Foods
New Hope
10.0% WH Group Sanderson Farms
Tyson
Nippon Meat BRF
0.0% CPF Maple Leaf Foods
JBS
-10.0%
0.0x 1.0x 2.0x 3.0x 4.0x 5.0x 6.0x 7.0x 8.0x 9.0x
Global protein players with market caps above US$1bn trade in a 2016E EV/IC
range of 1.3-5.0x. Our DCF valuation range implies a 2016E EV/IC of 1.6-2.0x for
COFCO Meat.
21
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
22
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
100 100
45.9 41.9
42.9 38.5
80 80
ROW ROW
60 9.4 60 14.8
8.6 USA 13.6 USA
China China
40 40
0 0
2010 2015 2010 2015
23
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
30
25
20
32 33
15
23
10
15
12 11
5
-
World China US Europe Japan Brazil
Source: OECD.
Figure 30: Meat consumption mix by country, 2015 Figure 31: Per-capita meat consumption, 2015 (kg)
100% 5% 5%
0% 2% 0% 0% 100
0
Figure 32: Chinas meat retail price trend (Rmb/kg) Figure 33: Chinas meat retail price change y/y
80.0 50% 46%
Meat retail price in China Meat retail price chg y/y in China
70.0
40%
60.0
30%
50.0 30%
40.0 23%
20% 21% 21% 20% 20%
30.0 20%
24
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
China has been the largest driver of global growth over the past five years
Per USDA and NBS data, the worlds pork production/consumption grew 8.5%/8.3%
during 2010-15, with China contributing 48% of global production growth and 56%
of global consumption growth. Chinas pork consumption grew c9% during 2010-15
vs the rest of the worlds 7%, and its pork production grew c8% vs the rest of the
worlds 9%.
Figure 34: China contributed 56% of global consumption growth Figure 35: China contributed 48% of global production growth during
during 2010-15 (metric tonnes M) 2010-15 (metric tonnes M)
112 114
3.0 111
112 112
110 3.3
0.7 110
108 4.8
36% 4.2 1.2
108
106 8% 38%
106 14%
104
102 104 103
102 56% 102 48%
100 100
98 98
2010 China USA ROW 2015 2010 China USA ROW 2015
Figure 36: Chinas hog production share by hog farm size (head) Figure 37: US hog production share by hog farm size (head)
100% 4% 100%
6% 7% 9% 10%
22%
80% 26% 80%
29%
32% 33%
67% 71% 72%
60% 60% 74% 75%
10,000+ 10,000+
500-10,000 500-10,000
40% 40%
74% 1-500 1-500
68% 63% 59% 57%
20% 20% 28% 25% 25% 23% 22%
0% 0% 5% 4% 3% 3% 3%
2007 2009 2011 2013 2015 2004 2006 2008 2010 2012
25
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Figure 38: Number of slaughtering houses is consolidating in China Figure 39: Processed meat products consumption breakdown in
China
25,000 23,430 100%
19,938
20,000 80% 34% 34% 35% 35% 36% 37% 39% 41% 42% 43% 44%
14,720
15,000 60%
9,985
10,000 40%
6,447 66% 66% 65% 65% 64% 63% 61% 59% 58% 57% 56%
3,979 3,301
5,000 2,740 2,235 1,933 20%
1,785
- 0%
2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
Number of licensed slaughtering houses in China HTMP (ham sausage, canned pork) LTMP (hams, sausages, bacon)
Warm fresh pork sold through the wet market channel traditionally represented the
majority. However, the growth of chilled fresh pork has accelerated, given
continuing urbanization and rising awareness of food safety and hygiene
requirements. Warm fresh pork comprised 78% of total fresh pork consumption in
2010 in China, but retreated to 55% in 2015, whereas chilled fresh pork and frozen
fresh pork comprised 10% and 12% in 2010, respectively, and grew to 25% and 20%
in 2015, respectively. We believe this trend was driven by demand for safer and
higher-quality pork products and a stronger preference for the modern retail channel,
given its better hygiene and more comfortable environment.
26
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Figure 40: China fresh pork consumption volume by category Figure 41: China fresh pork consumption volume by channel
100% 100% 3% 1%
14% 18%
80% 80% 9%
55% 17%
Others
60% 78% 60%
Warm fresh pork Hotels & restaurants
Frozen fresh pork Modern retailers
40% 40% 68%
20% Chilled fresh pork 56% Wet markets
Retail stores
20% 20%
12%
25%
10% 6% 8%
0% 0%
2010 2015 2010 2015
In China, GP dollar (defined by J.P. Morgan as ex-factory pork prices minus hog
prices, ignoring labor and other production costs) increased from Rmb3/kg in 2000 to
Rmb6/kg in Nov 2016. We believe this reflects a combination of rising household
income, labor cost inflation and strong demand for pork products. GP margin
(defined by J.P. Morgan as GP dollar over pork price) averaged 25-30% with
relatively little volatility.
25.0
20.0
15.0
10.0
5.0
-
Mar-00
Aug-00
Jan-01
Jun-01
Nov-01
Apr-02
Sep-02
Feb-03
Jul-03
Dec-03
May-04
Oct-04
Mar-05
Aug-05
Jan-06
Jun-06
Nov-06
Apr-07
Sep-07
Feb-08
Jul-08
Dec-08
May-09
Oct-09
Mar-10
Aug-10
Jan-11
Jun-11
Nov-11
Apr-12
Sep-12
Feb-13
Jul-13
Dec-13
May-14
Oct-14
Mar-15
Aug-15
Jan-16
Jun-16
Nov-16
27
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
28
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
The hog raising process takes 10-12 months and comprises four key stages:
(1) breeding and gestation; (2) farrowing; (3) nursery; and (4) fattening.
29
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
30
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Source: USDA.
31
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Figure 47: Chinas hog farms are fragmented, output >10,000 heads Figure 48: US hog farms are highly concentrated, with output
accounts for 10% of total >10,000 heads accounting for 75% of total
100% 4% 100%
6% 7% 9% 10%
22%
80% 26% 80%
29%
32% 33%
67% 71% 72%
60% 60% 74% 75%
10,000+ 10,000+
500-10,000 500-10,000
40% 40%
74% 1-500 1-500
68% 63% 59% 57%
20% 20% 28% 25% 25% 23% 22%
0% 0% 5% 4% 3% 3% 3%
2007 2009 2011 2013 2015 2004 2006 2008 2010 2012
The revised policy sets an ideal hog-to-corn price ratio at 5.5-8.5:1, which is
categorized as the green zone. When the hog-to-corn price ratio rises to near 9:1 or
falls to near 5:1, the government will intervene in the market in order to bring the
ratio back to the desired range (either increase meat inventories to support market
prices or release government inventories to drive down pork prices). See the table
below for more details about the mechanism.
The hog-to-corn ratio has remained above 8:1 YTD and is currently at around 9:1.
The ratio has already decreased from its cyclically high level of close to 10:1 in
May/June because the NDRC required local governments to release their pork
reserves and increase frozen pork imports.
Table 12: Major action points set by policy in China to stabilize hog prices amid hog price volatility
Hog-to-corn price ratio Actions
Green Zone: 5.5-8.5:1 Government will timely release information on hog production and market prices. Reserve of frozen pork is 10,000 tonnes, but
this amount may be adjusted to supply and demand.
Blue Zone: 8.5-9.0:1 or 5.0-5.5:1 NDRC will release early warnings for farmers to adjust their production.
Yellow Zone: 9.0-9.5:1 or 4.5-5.0:1 If the ratio falls in the yellow zone for some time (typically one month), NDRC will hold a conference for a proposal of
releasing/building up frozen pork reserves, and MoC will help implement.
Red Zone: Higher than 9.5:1 or lower If the ratio falls in the yellow zone for some time (typically one month), NDRC will hold a conference for a proposal of
than 4.5:1 releasing/building up frozen pork reserves, and MoC will help implement. If reserves hit 250,000 tonnes, government will restrict
imports/exports.
Other cases: hog price rises or drops N/A
abnormally
Source: NDRC, MoA, MoF, MoC.
32
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Jul-01
Jul-02
Jul-03
Jul-04
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jul-11
Jul-12
Jul-13
Jul-14
Jul-15
Jul-16
Mar-00
Nov-00
Mar-01
Nov-01
Mar-02
Nov-02
Mar-03
Nov-03
Mar-04
Nov-04
Mar-05
Nov-05
Mar-06
Nov-06
Mar-07
Nov-07
Mar-08
Nov-08
Mar-09
Nov-09
Mar-10
Nov-10
Mar-11
Nov-11
Mar-12
Nov-12
Mar-13
Nov-13
Mar-14
Nov-14
Mar-15
Nov-15
Mar-16
Nov-16
Hog/corn ratio -1 Stdev +1 Stdev Mean
Source: NDRC.
The change in reserve policy in 2015 was planned to reduce the governments
reserve inventory and leave the market to determine its fair price. Industries (feeds,
ethanol) that use corn as input cost and make losses had been complaining about the
policy distortion. The policy change was welcomed by these industry players. Corn
prices have declined from Rmb2.5-2.6/kg in 2014 to around Rmb1.9/kg currently,
and the gap to the US is narrowing, though it is still over 80% above that in the US.
We expect corn prices to decline to Rmb2/kg (-10% y/y) in 2016 and stay stable in 2017.
Figure 50: China and US average corn price comparison (US$/kg) Figure 51: Chinas corn prices (Rmb/kg)
0.45 2.7
0.39 0.40
0.40 0.37
0.35
0.33 2.5
0.35 0.30
0.30 0.28
2.3
0.24
0.25 0.27
0.27 2.1
0.20 0.23
0.15 1.9
0.17 0.16
0.10 0.15 0.15 0.14
0.05
1.7
- 1.5
2009 2010 2011 2012 2013 2014 2015 YTD2016
May-09
Nov-09
May-10
Nov-10
May-11
Nov-11
May-12
Nov-12
May-13
Nov-13
May-14
Nov-14
May-15
Nov-15
May-16
Nov-16
33
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Given the price differential, Chinas pork imports, mostly from the US, grew c130%
y/y in 1H16, to 0.76m tons, which is around 3% of Chinas total pork production
volume of 24.73m tons during the period, per Ministry of Agriculture data. However,
we believe there will be a limit for such imports, as only frozen pork can be
imported. Further, consumers tend to prefer chilled fresh pork, and the demand for
such products is increasing (up 150%+ over 2010-15).
Figure 52: China and US average hog price comparison (US$/kg) Figure 53: China and US average pork price comparison (US$/kg)
3.00 2.83 4.00
2.65 3.74
3.44 3.32
2.38 2.46 2.45 3.50 3.28 3.28
2.50 2.20 3.04
3.00
2.00 1.75 2.31
1.64 2.4x 2.50 2.20 2.1x 2.4x
3.1x
1.50 2.00
1.58 2.17
1.47 1.42 1.91
1.00 1.32 1.50 1.73 1.82
1.21 1.67 1.55 1.55
1.02 1.00
0.93 0.92 1.21
0.50
0.50
- -
2009 2010 2011 2012 2013 2014 2015 YTD2016 2009 2010 2011 2012 2013 2014 2015 YTD2016
China hog price (US$/kg) US hog price (US$/kg) China pork price (US$/kg) US pork price (US$/kg)
34
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Company Overview
Company history and description
COFCO Meat, a subsidiary of COFCO Group, was founded in 2009 with
engagement in pork businesses. The company operates a vertically integrated value
chain from feed production, hog production and slaughtering to the production,
distribution and sale of fresh pork and processed meat products, and the import and
sale of frozen meat products. COFCO Meat has 47 hog farms (24 new projects are
under construction and are expected to be completed by end of 2016), two
slaughtering plants and two processed meat plants.
The company had hog production capacity of 2.3m heads as of end-2015 and plans to
expand annual hog production capacity to 5.5m heads by 2020.
In May 2014, COFCO Meat announced the formation of a strategic partnership with
a consortium of investors composed of KKR, Baring, Hopu and Boyu, which held
20%, 9%, 8.2% and 7.8% of total issued shares, respectively. In September 2015,
Hopu sold its entire stake in COFCO Meat to Temasek. After the IPO, the public will
hold 25% of the outstanding shares while the pre-IPO shareholders stake will be
decreased by 25% proportionally.
Figure 54: China hog production market share by production volume Figure 55: Chinas fresh pork market share by sales revenue, 2015
of finishing hogs, 2015
3.0% 2.5%
2.6%
2.5% 2.0% 1.9%
2.0%
1.5%
1.2%
1.5%
1.0%
1.0% 0.5% 0.5%
0.5% 0.3% 0.2% 0.2% 0.2%
0.5% 0.3% 0.3% 0.1% 0.1%
0.2% 0.2%
0.0%
0.0% A B C D E F G COFCO I J
A B C COFCO MEAT E MEAT
35
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Fig 56: Chinas processed meat market share by sales revenue, 2015 Fig 57: Chinas meat imports market share by import volume, 2015
9.0% 8.5% 6.0%
8.0% 5.0%
5.0%
7.0%
6.0% 4.0%
5.0% 3.2%
4.0% 3.0%
2.2% 2.1%
3.0% 2.0%
2.3% 2.0%
2.0% 1.6%
1.0% 0.9% 0.8%
1.0% 1.0%
0.2% 0.1% 0.1% 0.1%
0.0%
A B C D E F G H COFCO J 0.0%
MEAT A COFCO MEAT C D E
COFCO
100%
COFCO (HK)
100%
China Foods
MIY
(Holdings)
67% 33%
COFCO Meat
Source: Company reports. Note: MIY is a consortium of Mitsubishi, Itoham and Yonekyu.
36
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
COFCO
100%
COFCO (HK)
100%
China Foods
(Holdings)
100%
Other
Mainfield MIY KKR Baring Temasek Boyu
shareholders
COFCO Meat
Source: Company reports. Note: MIY indicates Mitsubishi, Itoham and Yonekyu.
37
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Operational Review
Segment overview
COFCO Meat has an integrated model, with operations across the entire pork
industry value chain. This includes: (1) hog production (#4 market player),
(2) slaughtering and fresh pork (#8), (3) processed meat production, sales and
distribution (#9), (4) international trade, importing and selling frozen meat and
byproducts in China (#2).
38
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Figure 61: Sales revenue breakdown by segment Figure 62: Sales volume breakdown by segment
100% 100%
Source: Company reports, J.P. Morgan. Source: Company reports, J.P. Morgan.
39
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
40
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Sales volume (000 kg) 90,211 97,849 118,994 180,369 255,230 361,192
y/y growth 8.5% 21.6% 51.6% 41.5% 41.5%
Average finishing weight (kg per head) 96.4 97.8 101.8 105.9 109.0 110.1
y/y growth 1.5% 4.1% 4.0% 3.0% 1.0%
ASP (Rmb per kg) 14.2 12.6 14.7 18.4 16.4 15.1
y/y growth -11.2% 16.3% 25.0% -10.5% -8.0%
Hog/corn ratio (JPM estimates) 5.9 5.1 6.3 8.7 7.8 7.2
Capacity
Hog production (000 heads)
Hog production capacity 1,340 1,590 2,290 3,500 4,060 4,600
y/y growth 18.7% 44.0% 52.8% 16.0% 13.3%
Hog production volume 936 1,001 1,169 1,704 2,341 3,279
y/y growth 6.9% 16.8% 45.7% 37.4% 40.1%
Utilization rate* 69.8% 62.9% 51.0% 48.7% 57.6% 71.3%
Profitability (Rmb M)
Operating profit 60 (120) 138 1,007 1,045 1,057
OPM 4.7% -9.7% 7.9% 30.4% 24.9% 19.3%
41
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Capacity
Fresh pork
Slaughtering capacity (000 hogs) 2,000 2,000 2,000 2,000 2,600 2,800
Production volume (000 hogs) 966 1,087 1,263 1,571 1,961 2,510
Utilization rate 48.3% 54.3% 63.1% 78.5% 75.4% 89.6%
Sales volume (000 tons) 94.5 102.9 127.8 162.1 206.7 267.6
y/y growth 8.9% 24.2% 26.8% 27.5% 29.5%
ASP (Rmb per kg) 15.7 14.6 16.5 19.9 17.9 16.6
y/y growth -6.8% 12.6% 20.6% -9.7% -7.3%
On top of hog production (Rmb per kg) 1.5 2.0 1.8 1.5 1.5 1.5
Profitability (Rmb M)
Operating profit (10) (7) (1) (20) (10) 5
OPM -0.6% -0.5% -0.1% -0.6% -0.3% 0.1%
42
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
43
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Capacity
Processed meat
Annual production capacity (tons) 17,000 17,000 17,000 17,000 18,000 20,000
Annual production volume (tons) 7,913 8,623 9,974 10,200 10,800 12,000
Utilization rate 46.5% 50.7% 58.7% 60.0% 60.0% 60.0%
Sales volume (000 tons) 7.5 8.4 9.5 9.8 10.4 11.5
y/y growth 10.7% 14.2% 2.6% 5.9% 11.1%
ASP (Rmb per kg) 36.0 34.8 34.5 35.9 33.9 32.6
y/y growth -3.3% -0.8% 3.9% -5.4% -3.9%
On top of fresh pork (Rmb per kg) 20.3 20.2 18.1 16.0 16.0 16.0
Profitability (Rmb M)
Operating profit (11) (0) 4 (11) (5) 3
OPM -4.1% -0.2% 1.2% -3.3% -1.4% 0.7%
44
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Sales volume
International Trading (000 tons) 72.8 75.1 107.2 118.0 129.1 140.4
y/y growth 3.2% 42.8% 10.1% 9.4% 8.8%
Pork 21.0 23.9 60.3 65.1 69.0 73.1
y/y growth 13.8% 152.0% 8.0% 6.0% 6.0%
Poultry 26.0 31.8 26.5 27.8 29.2 30.6
y/y growth 22.4% -16.8% 5.0% 5.0% 5.0%
Beef 19.3 14.7 18.1 22.6 28.2 33.8
y/y growth -23.7% 22.6% 25.0% 25.0% 20.0%
Mutton & Lamb 6.5 4.7 2.5 2.6 2.7 2.9
y/y growth -27.9% -47.4% 5.0% 5.0% 5.0%
ASP (Rmb per kg) 22.8 21.4 18.2 18.2 18.3 18.5
y/y growth -6.3% -14.8% 0.0% 0.6% 1.1%
Profitability (Rmb M)
Operating profit 40 2 (74) 33 9 22
OPM 2.4% 0.1% -3.8% 1.5% 0.4% 0.8%
Normalized operating profit (24) (4) 9 22
Adjusted OPM -1.2% -0.2% 0.4% 0.8%
Source: J.P. Morgan estimates, Company reports.
45
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Financials
We expect COFCO Meat to deliver 43% y/y sales growth in FY16 thanks to a
combination of higher capacity and increasing hog prices (up 25% y/y). We expect
adjusted GPM (excluding fair value adjustment to biological assets) to increase to
c19%, given rising hog prices and decreasing corn prices, with the hog-to-corn ratio
at 8.7x in FY16E, based on our estimates. We expect the ratio to decline to 7.8x and
7.2x in FY17 and FY18, respectively.
On profitability, we expect COFCO Meat to record a c21% ROE in FY16 (vs -1% in
FY15), driven mainly by a significant increase in net margin and also sales growth.
In 2017-18, we expect ROE to normalize at around low-to-mid teens.
For free cash flow, we expect COFCO Meat to remain negative in FY16 and FY17
and turn positive in FY18, with FCF/EBITDA of 52% in FY18.
46
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Gross profits excl. biological asset adj. 363 194 472 1,369 1,470 1,570
Adjusted GPM 9.7% 5.2% 9.3% 18.9% 17.6% 15.7%
Improvement y/y (bps) 9.6% -1.3% -1.8%
Operating profits excl. biological asset adj. 15 (176) 70 942 998 1,036
y/y growth na na 1236.8% 5.9% 3.9%
Adjusted OPM 0.4% -4.7% 1.4% 13.0% 11.9% 10.4%
Improvement y/y (bps) -1.1% -1.5%
OP excl. biological asset and one-offs 15 (176) 120 905 998 1,036
y/y growth na na 652.1% 10.2% 3.9%
Other income 29 39 58 38 60 69
Other gains and losses (2) (24) (128) (1) (0) (0)
Gain/(loss) arising from agricultural produce 23 (78) 250 600 (100) (50)
Gain arising from changes in fair value 152 105 456 209 873 267
Finance costs (105) (138) (133) (137) (137) (137)
47
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Current liabilities
Accounts and bills payables 177 280 244 376 441 579
Other payables 438 710 661 941 958 1,157
Borrowings 1,754 3,200 2,053 2,053 2,053 2,053
Loans from holding company 814 6 907 907 907 907
Others 994 1,075 496 77 77 77
Total current liabilities 4,177 5,270 4,362 4,355 4,437 4,774
Non-current liabilities
Long-term borrowings 266 283 370 370 370 370
Deferred income 30 38 61 61 61 61
Total non-current liabilities 296 322 431 431 431 431
Shareholders equity
Share capital & reserves 389 2,325 2,644 5,107 6,620 7,699
Total liabilities and equity 4,999 8,029 7,438 9,894 11,488 12,904
Source: J.P. Morgan estimates, Company reports.
48
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Financing activities
Interest paid (128) (161) (132) (137) (137) (137)
New borrowings 760 1,462 (933) - - -
Issue of new shares - 1,671 59 1,845 - -
Others 158 (71) (92) - - -
Cash flow from financing activities 790 2,903 (1,098) 1,707 (137) (137)
49
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Valuation
Given the earnings volatility we use a DCF valuation and arrive at a valuation of
HK$9.2b and a Dec-17E PT of HK$1.9, based on hog-to-corn ratio of 6.5:1 (which is
the 16-year average hog-to-corn ratio in China). This equates to a 2017E P/E of 9.6x
vs China pork names trading in a range of 9-15x.
Upside risks include: (1) better-than-expected hog price, (2) deeper corn price
corrections, and faster-than-expected efficiency improvements.
50
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
51
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Analyst Certification: The research analyst(s) denoted by an AC on the cover of this report certifies (or, where multiple research
analysts are primarily responsible for this report, the research analyst denoted by an AC on the cover or within the document
individually certifies, with respect to each security or issuer that the research analyst covers in this research) that: (1) all of the views
expressed in this report accurately reflect his or her personal views about any and all of the subject securities or issuers; and (2) no part of
any of the research analyst's compensation was, is, or will be directly or indirectly related to the specific recommendations or views
expressed by the research analyst(s) in this report. For all Korea-based research analysts listed on the front cover, they also certify, as per
KOFIA requirements, that their analysis was made in good faith and that the views reflect their own opinion, without undue influence or
intervention.
Important Disclosures
Lead or Co-manager: J.P. Morgan acted as lead or co-manager in a public offering of equity and/or debt securities for COFCO Meat
Holdings within the past 12 months.
Client: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients: COFCO Meat Holdings.
Client/Investment Banking: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as investment
banking clients: COFCO Meat Holdings.
Investment Banking (past 12 months): J.P. Morgan received in the past 12 months compensation for investment banking services
from COFCO Meat Holdings.
Investment Banking (next 3 months): J.P. Morgan expects to receive, or intends to seek, compensation for investment banking
services in the next three months from COFCO Meat Holdings.
Other Significant Financial Interests: J.P. Morgan owns a position of 1 million USD or more in the debt securities of COFCO Meat
Holdings.
Company-Specific Disclosures: Important disclosures, including price charts and credit opinion history tables, are available for
compendium reports and all J.P. Morgancovered companies by visiting https://jpmm.com/research/disclosures, calling 1-800-477-0406,
or e-mailing research.disclosure.inquiries@jpmorgan.com with your request. J.P. Morgans Strategy, Technical, and Quantitative
Research teams may screen companies not covered by J.P. Morgan. For important disclosures for these companies, please call 1-800-477-
0406 or e-mail research.disclosure.inquiries@jpmorgan.com.
Price(HK$)
0
Oct Oct Oct Oct Nov Nov Nov Dec Dec Dec
16 16 16 16 16 16 16 16 16 16
Source: Bloomberg and J.P. Morgan; price data adjusted for stock splits and dividends.
The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire
period.
J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated
Explanation of Equity Research Ratings, Designations and Analyst(s) Coverage Universe:
J.P. Morgan uses the following rating system: Overweight [Over the next six to twelve months, we expect this stock will outperform the
52
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
average total return of the stocks in the analysts (or the analysts teams) coverage universe.] Neutral [Over the next six to twelve
months, we expect this stock will perform in line with the average total return of the stocks in the analysts (or the analysts teams)
coverage universe.] Underweight [Over the next six to twelve months, we expect this stock will underperform the average total return of
the stocks in the analysts (or the analysts teams) coverage universe.] Not Rated (NR): J.P. Morgan has removed the rating and, if
applicable, the price target, for this stock because of either a lack of a sufficient fundamental basis or for legal, regulatory or policy
reasons. The previous rating and, if applicable, the price target, no longer should be relied upon. An NR designation is not a
recommendation or a rating. In our Asia (ex-Australia) and U.K. small- and mid-cap equity research, each stocks expected total return is
compared to the expected total return of a benchmark country market index, not to those analysts coverage universe. If it does not appear
in the Important Disclosures section of this report, the certifying analysts coverage universe can be found on J.P. Morgans research
website, www.jpmorganmarkets.com.
Coverage Universe: Sener Kurumlu, Ebru: Ajisen China Holdings Ltd (0538.HK), Beijing Yanjing Brewery - A (000729.SS), Belle
International Holdings Ltd. (1880.HK), China Foods Ltd (0506.HK), China Mengniu Dairy Co. Ltd. (2319.HK), China Resources Beer
(0291.HK), Chow Tai Fook Jewellery Company Ltd. (1929.HK), Esprit Holdings (0330.HK), Golden Eagle Retail Group Ltd (3308.HK),
Hengan International Group Ltd (1044.HK), Inner Mongolia Yili Industrial Group - A (600887.SS), Li & Fung (0494.HK), Lifestyle
International Holdings (1212.HK), Shanghai Jahwa - A (600315.SS), Tibet Water Resources Ltd (1115.HK), Tingyi (Cayman Islands)
Holding Corp (0322.HK), Tsingtao Brewery - A (600600.SS), Tsingtao Brewery - H (0168.HK), Uni-President China Holdings Ltd
(0220.HK), Want Want China Holdings Ltd (0151.HK)
Equity Valuation and Risks: For valuation methodology and risks associated with covered companies or price targets for covered
companies, please see the most recent company-specific research report at http://www.jpmorganmarkets.com, contact the primary analyst
or your J.P. Morgan representative, or email research.disclosure.inquiries@jpmorgan.com.
Equity Analysts' Compensation: The equity research analysts responsible for the preparation of this report receive compensation based
upon various factors, including the quality and accuracy of research, client feedback, competitive factors, and overall firm revenues.
Registration of non-US Analysts: Unless otherwise noted, the non-US analysts listed on the front of this report are employees of non-US
affiliates of JPMS, are not registered/qualified as research analysts under NASD/NYSE rules, may not be associated persons of JPMS,
and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public
appearances, and trading securities held by a research analyst account.
Other Disclosures
J.P. Morgan ("JPM") is the global brand name for J.P. Morgan Securities LLC ("JPMS") and its affiliates worldwide. J.P. Morgan Cazenove is a marketing
name for the U.K. investment banking businesses and EMEA cash equities and equity research businesses of JPMorgan Chase & Co. and its subsidiaries.
All research reports made available to clients are simultaneously available on our client website, J.P. Morgan Markets. Not all research content is
redistributed, e-mailed or made available to third-party aggregators. For all research reports available on a particular stock, please contact your sales
representative.
Options related research: If the information contained herein regards options related research, such information is available only to persons who have
received the proper option risk disclosure documents. For a copy of the Option Clearing Corporation's Characteristics and Risks of Standardized Options,
please contact your J.P. Morgan Representative or visit the OCC's website at http://www.optionsclearing.com/publications/risks/riskstoc.pdf
53
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
Exchange and is regulated by the Financial Services Board. Hong Kong: J.P. Morgan Securities (Asia Pacific) Limited (CE number AAJ321) is regulated
by the Hong Kong Monetary Authority and the Securities and Futures Commission in Hong Kong and/or J.P. Morgan Broking (Hong Kong) Limited (CE
number AAB027) is regulated by the Securities and Futures Commission in Hong Kong. Korea: This material is issued and distributed in Korea by or
through J.P. Morgan Securities (Far East) Limited, Seoul Branch, which is a member of the Korea Exchange(KRX) and is regulated by the Financial
Services Commission (FSC) and the Financial Supervisory Service (FSS). Australia: J.P. Morgan Australia Limited (JPMAL) (ABN 52 002 888 011/AFS
Licence No: 238188) is regulated by ASIC and J.P. Morgan Securities Australia Limited (JPMSAL) (ABN 61 003 245 234/AFS Licence No: 238066) is
regulated by ASIC and is a Market, Clearing and Settlement Participant of ASX Limited and CHI-X. Taiwan: J.P.Morgan Securities (Taiwan) Limited is a
participant of the Taiwan Stock Exchange (company-type) and regulated by the Taiwan Securities and Futures Bureau. India: J.P. Morgan India Private
Limited (Corporate Identity Number - U67120MH1992FTC068724), having its registered office at J.P. Morgan Tower, Off. C.S.T. Road, Kalina,
Santacruz - East, Mumbai 400098, is registered with Securities and Exchange Board of India (SEBI) as a Research Analyst having registration number
INH000001873. J.P. Morgan India Private Limited is also registered with SEBI as a member of the National Stock Exchange of India Limited (SEBI
Registration Number - INB 230675231/INF 230675231/INE 230675231) and Bombay Stock Exchange Limited (SEBI Registration Number - INB
010675237/INF 010675237). Telephone: 91-22-6157 3000, Facsimile: 91-22-6157 3990 and Website: www.jpmipl.com. For non local research reports,
this material is not distributed in India by J.P. Morgan India Private Limited. Thailand: This material is issued and distributed in Thailand by JPMorgan
Securities (Thailand) Ltd., which is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and
Exchange Commission and its registered address is 3rd Floor, 20 North Sathorn Road, Silom, Bangrak, Bangkok 10500. Indonesia: PT J.P. Morgan
Securities Indonesia is a member of the Indonesia Stock Exchange and is regulated by the OJK a.k.a. BAPEPAM LK. Philippines: J.P. Morgan Securities
Philippines Inc. is a Trading Participant of the Philippine Stock Exchange and a member of the Securities Clearing Corporation of the Philippines and the
Securities Investor Protection Fund. It is regulated by the Securities and Exchange Commission. Brazil: Banco J.P. Morgan S.A. is regulated by the
Comissao de Valores Mobiliarios (CVM) and by the Central Bank of Brazil. Mexico: J.P. Morgan Casa de Bolsa, S.A. de C.V., J.P. Morgan Grupo
Financiero is a member of the Mexican Stock Exchange and authorized to act as a broker dealer by the National Banking and Securities Exchange
Commission. Singapore: This material is issued and distributed in Singapore by or through J.P. Morgan Securities Singapore Private Limited (JPMSS)
[MCI (P) 193/03/2016 and Co. Reg. No.: 199405335R], which is a member of the Singapore Exchange Securities Trading Limited and/or JPMorgan Chase
Bank, N.A., Singapore branch (JPMCB Singapore) [MCI (P) 089/09/2016], both of which are regulated by the Monetary Authority of Singapore. This
material is issued and distributed in Singapore only to accredited investors, expert investors and institutional investors, as defined in Section 4A of the
Securities and Futures Act, Cap. 289 (SFA). This material is not intended to be issued or distributed to any retail investors or any other investors that do not
fall into the classes of accredited investors, expert investors or institutional investors, as defined under Section 4A of the SFA. Recipients of this
document are to contact JPMSS or JPMCB Singapore in respect of any matters arising from, or in connection with, the document. Japan: JPMorgan
Securities Japan Co., Ltd. and JPMorgan Chase Bank, N.A., Tokyo Branch are regulated by the Financial Services Agency in Japan. Malaysia: This
material is issued and distributed in Malaysia by JPMorgan Securities (Malaysia) Sdn Bhd (18146-X) which is a Participating Organization of Bursa
Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission in Malaysia. Pakistan: J. P. Morgan Pakistan
Broking (Pvt.) Ltd is a member of the Karachi Stock Exchange and regulated by the Securities and Exchange Commission of Pakistan. Saudi Arabia: J.P.
Morgan Saudi Arabia Ltd. is authorized by the Capital Market Authority of the Kingdom of Saudi Arabia (CMA) to carry out dealing as an agent,
arranging, advising and custody, with respect to securities business under licence number 35-07079 and its registered address is at 8th Floor, Al-Faisaliyah
Tower, King Fahad Road, P.O. Box 51907, Riyadh 11553, Kingdom of Saudi Arabia. Dubai: JPMorgan Chase Bank, N.A., Dubai Branch is regulated by
the Dubai Financial Services Authority (DFSA) and its registered address is Dubai International Financial Centre - Building 3, Level 7, PO Box 506551,
Dubai, UAE.
54
This document is being provided for the exclusive use of QUANG NGUYEN DANG at VIETNAM TECH &
COMML JOINT STOCK BN
have an interest or holding in any of the securities discussed in this report please see the Important Disclosures section above. For securities where the
holding is 1% or greater, the holding may be found in the Important Disclosures section above. For all other securities mentioned in this report, JPMSS
and/or its affiliates may have a holding of less than 1% in such securities and may trade them in ways different from those discussed in this report.
Employees of JPMSS and/or its affiliates not involved in the preparation of this report may have investments in the securities (or derivatives of such
securities) mentioned in this report and may trade them in ways different from those discussed in this report. Taiwan: This material is issued and
distributed in Taiwan by J.P. Morgan Securities (Taiwan) Limited. India: For private circulation only, not for sale. Pakistan: For private circulation only,
not for sale. New Zealand: This material is issued and distributed by JPMSAL in New Zealand only to persons whose principal business is the investment
of money or who, in the course of and for the purposes of their business, habitually invest money. JPMSAL does not issue or distribute this material to
members of "the public" as determined in accordance with section 3 of the Securities Act 1978. The recipient of this material must not distribute it to any
third party or outside New Zealand without the prior written consent of JPMSAL. Canada: The information contained herein is not, and under no
circumstances is to be construed as, a prospectus, an advertisement, a public offering, an offer to sell securities described herein, or solicitation of an offer
to buy securities described herein, in Canada or any province or territory thereof. Any offer or sale of the securities described herein in Canada will be
made only under an exemption from the requirements to file a prospectus with the relevant Canadian securities regulators and only by a dealer properly
registered under applicable securities laws or, alternatively, pursuant to an exemption from the dealer registration requirement in the relevant province or
territory of Canada in which such offer or sale is made. The information contained herein is under no circumstances to be construed as investment advice in
any province or territory of Canada and is not tailored to the needs of the recipient. To the extent that the information contained herein references securities
of an issuer incorporated, formed or created under the laws of Canada or a province or territory of Canada, any trades in such securities must be conducted
through a dealer registered in Canada. No securities commission or similar regulatory authority in Canada has reviewed or in any way passed judgment
upon these materials, the information contained herein or the merits of the securities described herein, and any representation to the contrary is an offence.
Dubai: This report has been issued to persons regarded as professional clients as defined under the DFSA rules. Brazil: Ombudsman J.P. Morgan: 0800-
7700847 / ouvidoria.jp.morgan@jpmorgan.com.
General: Additional information is available upon request. Information has been obtained from sources believed to be reliable but JPMorgan Chase & Co.
or its affiliates and/or subsidiaries (collectively J.P. Morgan) do not warrant its completeness or accuracy except with respect to any disclosures relative to
JPMS and/or its affiliates and the analyst's involvement with the issuer that is the subject of the research. All pricing is indicative as of the close of market
for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change
without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any
financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and are not
intended as recommendations of particular securities, financial instruments or strategies to particular clients. The recipient of this report must make its own
independent decisions regarding any securities or financial instruments mentioned herein. JPMS distributes in the U.S. research published by non-U.S.
affiliates and accepts responsibility for its contents. Periodic updates may be provided on companies/industries based on company specific developments or
announcements, market conditions or any other publicly available information. Clients should contact analysts and execute transactions through a J.P.
Morgan subsidiary or affiliate in their home jurisdiction unless governing law permits otherwise.
55