yurun_food_(1068_hk)_29_mar_2011

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China/Hong Kong

Consumer Staples

Please read the analyst certification and other important disclosures on last page

China Yurun Food (1068 HK) 29 March 2011

Firing on all cylinders

Company Rating:

Sector Rating:

Outperform(maintained)

Underweight(maintained)

Blow-out FY10 results. China Yuruns reported FY10 net profit of

RMB2.73b (up 56% YoY) is 22% and 16% higher than our and

consensus estimates, respectively, on strong slaughtering volume

growth (up 54% YoY), good SG&A control, lower-than-expected taxes

and high government grants.

High upstream growth to sustain. FY11F is guided to see 25-30%slaughtering volume growth. This target appears conservative,

considering managements track record of consistently

underestimating upstream growth as well as rapid capacity add in

FY10. Our new base case looks for 41% growth in FY11F. Continued

surprises on the capacity and production growth front suggest

government subsidy and negative goodwill recognition will also

remain high.

Favorable pricing environment continues. Management estimates

hog prices will increase 15% in FY11F, which creates a favorable

pricing environment for Yuruns upstream operation.

Too cheap to miss, but watch for near-term placement risk. We

revise up our EPS estimates by 34% and 46% in FY11-12F. The

stock is on 12x FY11F PE following the changes. Even stripping outsubsidy and goodwill recognition, the stock is on only 16x, while

normalized EPS CAGR is projected to be exceptional, at 35%

through FY13F. Our new target price is based on 17x PE, implying a

PE/G ratio of 0.7x (lowered from 1.0x to reflect general F&B

de-rating). At the results presentation, the company stated that it will

rely on operating cash flow and debt financing to satisfy its capex

needs (estimated at HK$2.5-3.0b in FY11F). The Chairman stated his

intention to list his personal property business this year and also that

he is not considering reducing his interest. Yet we do not think

placement risk will completely diminish and note that the lock-up

period will expire in May 2011.

Forecasts and valuation

Year to 31 Dec 2009 2010 2011F 2012F 2013F

Revenue (HK$m) 13,870 21,473 33,074 46,468 60,704

Rev forecast change (%) 24 33

Net profit (HK$m) 1,745 2,728 3,648 4,586 5,477

NP forecast change (%) 34 46

EPS (HK$) 1.089 1.565 2.010 2.527 3.019

EPS (YoY, %) 46 44 28 26 19

Core EPS (HK$) 0.749 1.049 1.483 1.985 2.550

Core EPS (YoY, %) 35 40 41 34 28

PER (x) 21.7 15.1 11.8 9.4 7.8

Yield (%) 1.3 1.7 2.3 2.9 3.4

FCF yield (%) (2.6) (1.1) 3.3 2.9 9.7

ROAE (%) 20.5 26.1 24.3 25.7 23.9

Source: Company data, CCBIS estimates

Price: HK$23.65

Target: HK$34.50

(up from HK$31.80)

Trading data

52-week range HK$18.28 34.40

Market capitalization (m) HK$42,911/US$5,503

Shares outstanding (m) 1,814

Free float (%) 75

3M average daily T/O (m share) 8.4

3M average daily T/O (US$ m) 26.6

Expected return (%) 1 year 48.2

Closing price on 29 March 2011

Stock price and HSCEI

18

20

22

24

26

28

30

32

34

29-Mar-10 29-May-10 29-Jul-10 29-Sep-10 29-Nov-10 29-Jan-11 29-Mar-11

HK$

Yurun HSCEI (rebased)

Source: Bloomberg

Forrest Chan, CFA(852) 2532 [email protected]

Sze Pan Pan(852) 2532 [email protected]

Timothy Sun

(852) 2532 [email protected]

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Further details and analysis

Yuruns reported FY10 net profit of RMB2.73b (up 56% YoY) is 22% and 16%

higher than our and the Bloomberg consensus estimate, respectively. Even

excluding government grants and negative goodwill that were once again amajor surprise, underlying earnings of RMB1.83b (up 52%) would still have

beaten our forecast of RMB1.51b by 21%, on strong slaughtering volume

growth, good SG&A control and lower-than-expected taxes.

Abundant supply of hog throughout 2010 allowed the company to better utilize

its significant capacity growth, which underpinned slaughtering volume growth

of 54% to 15m head in FY10 as well as upstream sales volume growth of 60%.

Such growth rates were ahead of our estimate of c.40%, and clearly indicate

rapid market share gains by Yurun. Its slaughtering capacity increased from

25.6m head as at end-2009 by 39% to 35.6m head as at end-2010, ahead of

our estimate of 30m, and is planned to further reach 42.6m by end-2011. The

longer-term capacity target of Yurun continues to be aggressive: 70m head by

end-2015.

FY11F is guided to see 25-30% upstream slaughtering volume growth. The

target seems too conservative, in our view, considering managements track

record of consistently underestimating upstream growth. Our new base case

looks for 41%, followed by 35% in FY12F and 27% in FY13F (newly introduced

estimates).

In our view, Yuruns remarkable upstream business development shows that

Chinas hog slaughtering industry is going through an accelerating policy-driven

consolidation that benefits the larger players with better ability to add capacity

and penetrate the modern retail channel. The recent clenbuterol scandal

involving its major competitor Shuanghui (000895 CH, Not Rated) has not yettainted Yuruns reputation and Yurun management is hopeful the incident turns

out to be a catalyst for faster industry consolidation, a positive for Yurun, as the

government tightens regulations.

We estimate that the average hog price in China rose by 2.8% YoY in 2010.

Gross profit margins of chilled meat and frozen meat products were largely

stable at 11.3% (FY09: 11.5%) and 7.2% (FY09: 6.3%). Management estimates

hog prices will increase 15% in FY11F (1H: 20%, 2H: 10%), which will create a

favorable pricing environment for Yuruns upstream operations provided that

hog supply remains abundant. We previously established in our initiation report

(Gold in the meat on 1 March 2010) that there is some positive correlation

between hog prices and the unit dollar margin of Yuruns upstream products

higher hog prices typically benefit the companys gross profit. A 10% hog price

increase is assumed in our new financial projections, providing upside risk.

Production volume of Yuruns downstream unit grew 15%, largely in line with

our forecast. Brand strength and R&D excellence continue to support gross

margin of this operation amidst cost fluctuations. Low temperature meat

products (LTMP) and high temperature meat products (HTMP) improved from

29.0% and 21.4% in FY09 to 29.9% and 22.7% in FY10, respectively. We

forecast 14.0% volume growth for downstream in FY11F, as 30,000 tons of

capacity is planned to come online this year. Growth should improve to the

high-teens in FY12F upon commencement of a 100,000-tonne downstream

facility in Nanjing.

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Another major factor supporting the earnings surprise is stringent SG&A control.

SG&A expense as percentage of sales fell, from 6.0% in FY09 to only 5.1% in

FY10. Management noted that staff efficiency and productivity have improved

as measured on production volume per employee. We believe operating

leverage and scale economies have also contributed. Our expectation forsustainable high top-line growth justifies a further decline in the SG&A expense

ratio we assume for the forecast years.

Yurun recognized RMB713m (FY09: RMB426m, our estimate: RMB600m) of

government subsidy as income in FY10F, equivalent to 26% of its net profit.

There was further negative goodwill recognition of RMB186m (FY09:RMB119m,

our estimate: RMB133m), 7% of net profit. For the first time, management made

an effort to be more transparent on the significant amount of government grants

it receives every year. According to the company disclosure, over 93% of the

government grants for FY10 was related to Yuruns contribution to

industrialization of local agriculture when it invested in additional slaughtering

capacity, through either greenfield projects, M&A activity or expansion of

existing facilities. Foreseeing fast capacity growth to continue, management

guided that the high level of subsidy will be sustainable in FY11F. Likewise, we

do not expect negative goodwill to decline materially over the forecast years.

Yurun resorted to equity financing twice in FY10 and its cash flow situation

remains a major investor concern. Capex for FY10 outweighed operating cash

flow of HK3.0b, coming in at HK$3.4b, which was substantially above the

previously guided budget of about HK$2.0b, in part explained by accelerated

capacity growth towards end-2010. Management earmarks HK$2.5-3.0b for

capex in FY11F and expects to achieve positive free cash flow. Our financial

projections suggest that this is achievable assuming managements capex

estimate is accurate, thanks to strong operating cash flow growth expected for

FY11F.

Cash flow projections

(2,000)

(1,000)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2005 2006 2007 2008 2009F 2010F 2011F 2012F 2013F

HK$m

Operating cash flow Free cash flow Net cash flow

Source: CCBIS estimates

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Hog prices

6

7

8

9

10

11

12

13

14

15

16

6-J

an

-10

3-F

eb

-10

3-M

ar

-10

31

-Mar

-10

28

-Apr

-10

26

-May

-10

23

-Jun

-10

21

-Ju

l-10

18

-Aug

-10

15

-Sep

-10

13

-Oc

t-10

10

-Nov

-10

8-D

ec

-10

5-J

an

-11

2-F

eb

-11

2-M

ar

-11

RMB/kg

(20)%

(10)%

0%

10%

20%

30%

40%

50%

60%

Hog price (LHS) YoY change (RHS)

Source: NDRC, MOFCOM

Historical corn to hog price ratios

4

5

6

7

8

9

10

2000 2001 2002 2003 2004 2006 2007 2008 2009 2011

Source: NDRC

Live pig inventory and sow to live pig ratios

410,000,000

420,000,000

430,000,000

440,000,000

450,000,000

460,000,000

470,000,000

480,000,000

Jan

-09

Fe

b-0

9

Mar

-09

Apr

-09

May

-09

Jun

-09

Ju

l-09

Aug

-09

Sep

-09

Oc

t-09

Nov

-09

Dec

-09

Jan

-10

Fe

b-1

0

Mar

-10

Apr

-10

May

-10

Jun

-10

Ju

l-10

Aug

-10

Sep

-10

Oc

t-10

Nov

-10

Dec

-10

Jan

-11

Fe

b-1

1

Heads

9.6%

9.8%

10.0%

10.2%

10.4%

10.6%

10.8%11.0%

11.2%

11.4%

Number of live pigs (LHS) Sow to live pig volume ratio (RHS)

Source: NDRC, MOFCOM

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Key changes in assumptions and earnings drivers

Year to December 2010 2011F 2012F 2013F

Upstream sales volume (000 tons)

Old 1,161 1,492 1,864 -

New 1,280 1,808 2,438 3,106

Upstream sales volume YoY (%)

Old 40 29 25 -

New 54 41 35 27

Downstream sales volume (000 tons)

Old 175 199 227 -

New 177 201 239 277

Downstream sales volume YoY (%)

Old 14 14 14 -

New 15 14 19 16

YoY change in hog price (%)

Old 0 10 5 -

New 3 10 5 3SG&A expense ratio (%)

Old 6.1 6.1 6.1 -

New 5.1 4.5 4.3 4.1

Government subsidies (HK$ m)

Old 600 650 700 -

New 713 800 800 700

Negative goodwill (HK$ m)

Old 133 127 121 -

New 186 157 184 150

Tax rate (%)

Old 7.5 9.0 11.0 -

New 6.5 7.5 9.0 11.0

Source: CCBIS estimates

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Key assumptions

Year to December 2005 2006 2007 2008 2009 2010 2011F 2012F 2013F 1H09 2H09 1H10 2H10

Slaughtering division chilled pork

Production volume (000 ton) 202 243 301 417 593 971 1,437 2,012 2,615 273 320 421 550

YoY (%) 20 24 39 42 64 48 40 30 58 31 54 72

Unit cost (RMB/ton) 8,548 7,670 13,532 15,704 12,391 12,098 13,308 13,974 14,393 11,100 13,350 10,897 13,125

YoY (%) (10) 76 16 (21) (2) 10 5 3 (37) (7) (2) (2)

Gross profit (RMB/ton) 1,210 1,086 1,621 1,668 1,610 1,541 1,648 1,707 1,744 1,499 1,686 1,444 1,630

YoY (%) (10) 49 3 (4) (4) 7 4 2 (19) 10 (4) (3)

Implied ASP (RMB/ton) 9,758 8,755 15,154 17,372 14,001 13,640 14,957 15,681 16,137 12,599 15,036 12,341 14,755

YoY (%) (10) 73 15 (20) (3) 10 5 3 (35) (5) (2) (2)

Slaughtering division frozen pork

Production volume (000 ton) 189 200 223 197 236 309 371 426 490 89 147 143 166

YoY (%) 6 12 (12) 20 31 20 15 15 (6) 44 61 13

Unit cost (RMB/ton) 7,653 6,959 11,172 12,456 8,134 9,514 10,465 10,988 11,318 7,939 8,171 9,097 9,962

YoY (%) (9) 61 11 (35) 17 10 5 3 (38) (33) 15 22

Gross profit (RMB/ton) 621 556 789 560 547 738 800 820 840 552 538 643 827YoY (%) (10) 42 (29) (2) 35 8 2 2 (36) 92 16 54

Implied ASP (RMB/ton) 8,274 7,515 11,961 13,016 8,681 10,252 11,265 11,808 12,158 8,491 8,710 9,740 10,789

YoY (%) (9) 59 9 (33) 18 10 5 3 (37) (30) 15 24

Processed meat division LTMP


YoY (%) 22 13 30 21 11 14 20 18 28 15 11 12

ASP (RMB/ton) 15,246 14,995 19,206 20,309 19,395 19,691 20,600 21,000 21,400 19,391 19,162 19,929 19,657

YoY (%) (2) 28 6 (5) 2 5 2 2 (8) (2) 3 3

Unit cost (RMB/ton) 11,679 11,081 13,751 14,623 13,770 13,804 14,519 14,852 15,097 13,884 13,490 13,970 13,779

YoY (%) (5) 24 6 (6) 0 5 2 2 (10) (3) 1 2

Processed meat division HTMP


YoY (%) 0 (4) (4) (42) 50 10 10 0 (32) (49) 26 73

ASP (RMB/ton) 9,385 8,845 10,788 11,219 13,065 12,272 13,000 13,200 13,400 11,473 14,452 11,650 12,817

YoY (%) (6) 22 4 16 (6) 6 2 2 (2) 34 2 (11)

Unit cost (RMB/ton) 7,733 7,138 8,986 9,334 10,269 9,486 9,863 10,041 10,183 9,121 11,259 9,204 9,767

YoY (%) (8) 26 4 10 (8) 4 2 1 (5) 23 1 (13)

Other assumptions

Government subsidy (HK$m) 14 37 123 99 426 713 800 800 700 230 196 461 252

Negative goodwill (HK$m) 0 39 50 193 119 186 157 184 150 119 0 133 53

SG&A expense as % of revenue 5.9 7.1 6.2 6.6 6.0 5.1 4.5 4.3 4.1 6.8 5.4 6.1 4.4

Effective interest rate on bank deposit (%) 2.9 2.3 4.5 7.2 2.0 2.5 2.0 2.0 2.0 - - - -

Effective interest rate on debt (%) 6.3 43.4 3.9 4.8 4.6 5.0 5.0 5.0 5.0 - - - -

Effective tax rate (%) 2.1 1.1 5.6 8.2 7.5 6.5 7.5 9.0 11.0 8.9 6.3 6.1 6.8

HK$/RMB 0.952 0.978 1.026 1.122 1.135 1.148 1.166 1.166 1.166 1.141 1.142 1.141 1.142Source: Company, CCBIS estimates

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Profit and loss projections (HK$m)

Year to December 2006 2007 2008 2009 2010 2011F 2012F 2013F 1H09 2H09 1H10 2H10

Total revenue (external sales) 4,621 8,635 13,024 13,870 21,473 33,074 46,468 60,704 5,834 8,036 8,693 12,779

Upstream chilled pork 2,082 4,678 8,130 9,421 15,198 25,057 36,779 49,204 3,926 5,495 5,930 9,268

Upstream frozen pork 1,471 2,736 2,878 2,325 3,635 4,870 5,870 6,951 863 1,462 1,590 2,045

Downstream LTMP 1,159 1,753 2,644 3,081 3,525 4,271 5,225 6,282 1,536 1,545 1,747 1,778

Downstream HTMP 225 277 302 208 296 350 391 397 90 117 116 180

Intersegment elimination (315) (808) (930) (1,164) (1,181) (1,474) (1,797) (2,130) (581) (583) (689) (492)

Total revenue (YoY, %) 87 51 6 55 54 40 31 (3) 15 49 59

Upstream chilled pork 125 74 16 61 65 47 34 5 25 51 69

Upstream frozen pork 86 5 (19) 56 34 21 18 (39) 1 84 40

Downstream LTMP 51 51 17 14 21 22 20 21 13 14 15

Downstream HTMP 23 9 (31) 42 18 12 2 (32) (31) 28 54

Upstream subtotal 109 48 7 60 59 43 32 (7) 19 57 63

Downstream subtotal 47 45 12 16 21 22 19 16 8 15 18

Revenue mix (%) (before intersegment elimination)

Upstream chilled pork 42.2 49.5 58.3 62.7 67.1 72.5 76.2 78.3 61.2 63.8 63.2 69.8

Upstream frozen pork 29.8 29.0 20.6 15.5 16.0 14.1 12.2 11.1 13.4 17.0 16.9 15.4

Downstream LTMP 23.5 18.6 18.9 20.5 15.6 12.4 10.8 10.0 23.9 17.9 18.6 13.4

Downstream HTMP 4.6 2.9 2.2 1.4 1.3 1.0 0.8 0.6 1.4 1.4 1.2 1.4

Upstream subtotal 72.0 78.5 78.9 78.1 83.1 86.6 88.4 89.4 74.6 80.7 80.1 85.2

Downstream subtotal 28.0 21.5 21.1 21.9 16.9 13.4 11.6 10.6 25.4 19.3 19.9 14.8

COGS (after intersegment elimination) (3,910) (7,415) (11,334) (11,710) (18,375) (28,621) (40,433) (52,960) (4,858) (6,852) (7,348) (11,027)

Gross profit 711 1,220 1,690 2,161 3,098 4,453 6,035 7,744 976 1,185 1,345 1,752

YoY (%) 72 38 28 43 44 36 28 19 36 38 48

Gross margin (%) 15.4 14.1 13.0 15.6 14.4 13.5 13.0 12.8 16.7 14.7 15.5 13.7

Gross margin by product (%)


Upstream frozen pork 7.4 6.6 4.3 6.3 7.2 7.1 6.9 6.9 6.5 6.2 6.6 7.7

Downstream LTMP 26.1 28.4 28.0 29.0 29.9 29.5 29.3 29.5 28.4 29.6 29.9 29.9

Downstream HTMP 19.3 16.7 16.8 21.4 22.7 24.1 23.9 24.0 20.5 22.1 21.0 23.8



Gross profit mix (%) (before intersegment elimination)


Upstream frozen pork 15.3 14.8 7.3 6.8 8.4 7.8 6.8 6.2 5.7 7.6 7.8 8.9Downstream LTMP 42.5 40.8 43.8 41.3 34.0 28.3 25.3 23.9 44.7 38.6 38.8 30.3

Downstream HTMP 6.1 3.8 3.0 2.1 2.2 1.9 1.6 1.2 1.9 2.2 1.8 2.4



Government subsidy 37 123 99 426 713 800 800 700 230 196 461 252

Negative goodwill 39 50 193 119 186 157 184 150 119 0 133 53

Other income 13 18 52 80 67 76 79 82 22 58 39 27

(to be continued)

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Profit and loss projections (HK$ m) (continued)

Year to December 2006 2007 2008 2009 2010 2011F 2012F 2013F 1H09 2H09 1H10 2H10

SG&A expense (326) (540) (859) (830) (1,090) (1,478) (1,998) (2,489) (398) (432) (527) (562)

YoY (%) 66 59 (3) 31 36 35 25 3 (8) 33 30

As % of revenue 7.1 6.2 6.6 6.0 5.1 4.5 4.3 4.1 6.8 5.4 6.1 4.4

EBIT 475 872 1,175 1,956 2,974 4,007 5,099 6,187 950 1,006 1,451 1,523

YoY (%) 84 35 66 52 35 27 21 68 65 53 51

EBIT margin (%) 10.3 10.1 9.0 14.1 13.8 12.1 11.0 10.2 16.3 12.5 16.7 11.9

D&A included in COGS and SG&A 46 83 129 179 287 422 524 617 81 98 137 150

YoY (%) 82 55 39 60 47 24 18 29 48 69 53

As % of revenue 1.0 1.0 1.0 1.3 1.3 1.3 1.1 1.0 1.4 1.2 1.6 1.2

EBITDA 520 955 1,304 2,135 3,261 4,429 5,624 6,804 1,031 1,104 1,588 1,673

YoY (%) 83 37 64 53 36 27 21 64 63 54 51

EBITDA margin (%) 11.3 11.1 10.0 15.4 15.2 13.4 12.1 11.2 17.7 13.7 18.3 13.1

Finance income 26 63 137 51 122 135 146 178 26 25 20 101

Finance cost (14) (22) (73) (116) (169) (187) (193) (195) (51) (65) (74) (96)

Share of loss of an equity-accounted investment (1) (1) (1) (0) (0) 0 0 0 (0) (0) (0) (0)

Profit before tax 485 912 1,238 1,891 2,926 3,954 5,052 6,170 925 966 1,398 1,528

Tax (6) (51) (101) (143) (189) (297) (455) (679) (82) (61) (86) (103)

Effective tax rate (%) 1.1 5.6 8.2 7.5 6.5 7.5 9.0 11.0 8.9 6.3 6.1 6.8

Minority interest 1 (2) 1 (3) (9) (10) (12) (14) (2) (2) (3) (6)

Net profit 481 859 1,138 1,745 2,728 3,648 4,586 5,477 841 904 1,309 1,419

YoY (%) 79 32 53 56 34 26 19 37 73 56 57

Net margin (%) 10 10.0 8.7 12.6 12.7 11.0 9.9 9.0 14.4 11.2 15.1 11.1

EPS (HK$) basic 0.33 0.58 0.74 1.09 1.56 2.01 2.53 3.02 - - - -

YoY (%) 76 27 46 44 28 26 19 - - - -

EPS (HK$) diluted 0.33 0.58 0.74 1.07 1.55 1.99 2.51 2.99 - - - -

YoY (%) 79 27 46 44 29 26 19 - - - -

Net profit before subsidy and goodwill 405 686 846 1,200 1,829 2,691 3,602 4,627 492 708 715 1,113

YoY (%) 70 23 42 52 47 34 28 (2) 107 45 57

Adjusted net margin (%) 8.8 7.9 6.5 8.7 8.5 8.1 7.8 7.6 8.4 8.8 8.2 8.7

Subsidy and negative goodwill as % of NP 16 20 26 31 33 26 21 16 41 22 45 22

Source: Company, CCBIS estimates

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Balance sheet projections (HK$m)

Year to December 2006 2007 2008 2009 2010 2011F 2012F 2013F

Inventory 514 682 703 936 1,268 1,711 2,277 2,657

Other investments 2 1 1 7 1 0 0 0

Current portion of lease prepayments 5 15 23 31 47 30 30 30

Amounts due from related companies 4 0 0 0 0 0 0 0

Trade and bills receivables 323 501 445 576 597 762 1,020 1,308

Other receivables 165 207 259 351 593 794 1,069 1,214

Income tax recoverable 0 4 17 0 1 0 0 0

Pledged deposits 2 30 599 759 228 300 300 300

Cash 844 1,966 1,209 2,542 6,124 6,809 7,149 10,029

Current assets total 1,858 3,406 3,256 5,201 8,859 10,406 11,844 15,538

Property, plant and equipment 934 1,779 2,608 5,065 8,037 10,610 12,929 14,960

Investment properties 0 220 221 214 216 217 217 217

Lease prepayments 220 723 1,084 1,407 2,159 2,000 2,400 2,400

Goodwill 0 0 86 86 90 95 95 95Investment in an equity accounted investee 4 4 3 3 26 26 26 26

Non-current prepayments 117 233 1,053 937 953 900 900 900

Deferred tax assets 18 13 11 21 20 10 10 0

Non-current assets total 1,293 2,971 5,066 7,734 11,502 13,857 16,577 18,598

Current bank loans 43 268 1,095 3,108 3,151 3,000 3,000 3,000

Finance lease liabilities 1 0 0 0 1 0 0 0

Trade and bill payables 213 331 485 440 637 1,559 1,543 2,520

Other payables 165 425 418 645 1,180 1,145 1,617 2,118

Income tax payable 7 19 20 19 30 10 10 10

Amount due to related companies 73 0 0 0 0 0 0 0

Current liabilities total 502 1,043 2,018 4,213 4,999 5,714 6 ,170 7,648

Non-current bank loans 0 826 833 24 530 800 900 900

Finance lease liabilities 188 177 178 164 171 190 210 220

Deferred tax liabilities 1 0 57 133 179 200 220 240

Convertible instruments 0 0 0 0 0 0 0 0

Non-current liabilities total 189 1,004 1,068 322 879 1,190 1,330 1,360

Shareholder equity 2,449 4,139 5,215 8,370 14,437 17,304 20,853 25,046

Minority interest 12 192 20 30 46 56 68 82

Total assets 3,151 6,377 8,321 12,935 20,361 24,264 28,421 34,136

Total liabilities and equity 3,151 6,377 8,321 12,935 20,361 24,264 28,421 34,136

Gross debt 43 1,094 1,928 3,132 3,681 3,800 3,900 3,900

Net debt (cash) (801) (872) 719 591 (2,442) (3,009) (3,249) (6,129)

Net gearing (%) Netcash Netcash 14 7 Netcash Netcash Netcash Netcash


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Cash flow projections (HK$m)


EBIT 475 872 1,175 1,956 2,974 4,007 5,099 6,187

D&A 46 83 129 179 287 422 524 617

EBITDA 520 955 1,304 2,135 3,261 4,429 5,624 6,804

Recognition of negative goodwill (39) (50) (193) (119) (186) (157) (184) (150)

Adjustments for other non-cash items 5 25 33 1 (4) (5) 0 0

Operating cash flow before working capital changes due to: 486 930 1,144 2,016 3,071 4,267 5,440 6,654

Inventory (87) (103) 17 (232) (332) (443) (565) (380)

Trade and other receivables (18) (147) 43 (225) (263) (366) (533) (434)

Trade and other payables 17 127 112 176 732 886 457 1,478

Total change in working capital (88) (123) 172 (280) 137 77 (641) 664

Interest received 22 15 22 32 122 135 146 178

Interest paid (1) (16) (66) (107) (169) (187) (193) (195)

Tax paid (2) (43) (55) (61) (134) (283) (435) (649)

Operating cash flow 418 764 1,217 1,600 3,027 4,009 4,317 6,652

Capex (770) (1,346) (2,064) (2,728) (3,499) (2,608) (3,060) (2,498)Free cash flow after capex (352) (583) (847) (1,127) (472) 1,400 1,257 4,154

Other investing cash flow 2 13 19 21 4 0 0 0

Net proceeds from issue of new shares 0 771 31 1,765 4,411 75 75 75

Other financing cash flow (13) (4) (7) 0 6 19 20 10

Dividend paid (155) (168) (291) (374) (604) (855) (1,111) (1,358)

Net cash flow (518) 30 (1,095) 286 3,345 639 240 2,880


Key financial ratios


ROAE (%) 20.5 26.1 24.3 25.7 23.9 23.0 24.0 23.9

ROAA (%) 16.0 18.0 15.5 16.4 16.4 16.3 17.4 0.0ROIC (%) 30.9 31.2 24.7 26.6 27.6 28.4 29.3 0.0

Average inventory days 43 29 22 26 22 19 18 17

Average receivable days 26 17 13 13 10 8 7 7

Average payable days 17 13 13 14 11 14 14 14

Cash conversion cycle (days) 52 33 22 25 21 13 11 10

Net gearing (%) Net cash Net cash 14 7 Net cash Net cash Net cash Net cash

Gross gearing (%) 2 26 37 37 25 22 19 16


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China Yurun Food (1068 HK)

11

Valuation summary

Stock Share price Market cap 3M average value traded EPS growth (%)# PE(x) PE/G (x) Y

Company code (local currency) (US$m) (US$m) CY11 CY12 CY11 CY12 CY11

China consumer products

Tingyi 322 HK 20.20 14,482 14 10 26 27.6 22.0 2.7 Want Want China 151 HK 6.06 10,274 12 25 26 22.9 18.1 0.9 Hengan 1044 HK 59.75 9,387 24 26 24 23.7 19.1 0.9 CRE 291 HK 30.50 9,387 14 (54) 22 28.2 23.1 NA Tsingtao Brewery 168 HK 38.45 6,628 8 19 16 24.1 20.7 1.3 Yurun Food* 1068 HK 23.65 5,507 27 28 26 11.8 9.4 0.4 Mengniu Dairy 2319 HK 20.40 4,550 15 28 23 18.5 15.0 0.7 Huabao 336 HK 11.58 4,681 7 19 4 19.8 19.0 1.1 Shenguan Holdings 829 HK 8.86 1,889 3 34 28 18.4 14.3 0.5

China Foods 506 HK 4.91 1,759 3 46 26 21.9 17.3 0.5 Uni-president China 220 HK 3.98 1,838 2 20 29 18.8 14.6 1.0 Yashili 1230 HK 2.61 1,179 2 (6) 22 14.0 11.5 NA Vinda* 3331 HK 8.06 969 4 33 31 15.1 11.5 0.5 Bawang Group 1338 HK 2.34 873 3 NA 125 45.6 20.3 NA Ruinian* 2010 HK 5.36 778 3 20 22 11.5 9.4 0.6

Besunyen 926 HK 2.59 559 0 99 31 13.9 10.6 0.1 Dynasty Wines 828 HK 2.73 437 1 30 17 16.5 14.1 0.6 Global Dairy* 1007 HK 2.90 376 1 33 26 7.3 5.8 0.2

Ausnutria 1717 HK 2.55 323 2 65 25 12.6 10.1 0.2

Average ex Bawang Group 23 27 19.6 15.5 0.8 # Calculated in HK dollar terms; * Denotes CCBIS estimates; Source: Bloomberg, CCBIS estimates

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Rating definitions

Outperform (O) expected return 10% over the next twelve months

Neutral (N) expected return between -10% to 10% over the next twelve months

Underperform (U) expected return < -10% over the next twelve months

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