Japfa

[specuvestor]

It’s strange that their guidance didn’t factor in the cyclical nature ever since their IPO

If mgt is clueless I think OPMI should build in more margin of error

After reading all post about this company. It feels more confusing than before.
Recently a lot share buyback? Any care to comment on its value?

Japfa's management believes the market is grossly undervaluing their shares. According to them the very bad Q1-3 profits are part of the cyclical nature of the poultry business and the market is overreacting to the results.

[karlmarx]

Japfa is an okay business, but its leverage and currency exposure makes it unattractive for any long-term consideration.

1) The group's largest contributor to profit is the sale of day-old-chicks (DOC) and poultry feed, in Indonesia. Its poultry businesses in the rest of SEA are too small to be considered important. So a large extent of the group's prosperity depends on Indonesian policies concerning the broiler industry. Charoen Pokphand (CP) -- one of the largest Thai agribusiness and conglomerate -- commands the highest market share for sale of DOC at about 40%. Japfa is second with about 25%, with the remaining being fragmented smaller players. Given their combined market share, CP and Japfa could easily raise or lower broiler prices, by expanding or contracting operation. If prices are too low, consumers will benefit but the smaller poultry farmers will suffer. If prices are too high, the poultry farmers will be happy but consumers will be upset. So the government (certain sections, at least) -- assuming it acts in the interest of its general population -- will want prices to be stable and inflation to be minimal. For this to happen, the market for broiler can only be allowed to expand as fast as the income of the general population. Therefore, even if Japfa has the financial means to expand capacity, such actions may not be viewed kindly by the (non-interested) authorities if the broiler market is deemed to be adequately supplied. It will therefore be safer for investors to assign a small growth rate to Japfa's poultry business.

The news suggests CP and Japfa may have some of the regulators in their pockets. But it seems they won't have such an easy time, perhaps until they are able to get KPPU on their side as well.

http://www.thejakartapost.com/news/2016/...rdict.html
http://www.businesstimes.com.sg/companie...es-verdict

2) The other large contributor to Japfa is the production of raw milk in China. While the revenues appear small, the margins are large. Prior to IPO, Japfa was able to sell its milk at high ASPs but it is now more subdued. Management's tacit acknowledgement of more stable ASPs can also be seen from the 5-year off-take deal with Yili, just 1 year after IPO when it said in its prospectus they do not enter into contract that are longer than a year. Like broiler prices in Indonesia, I do not think that Chinese government will want milk prices that is rising faster than what the general population perceive is a fair price. Recent history has shown that China is willing to use price controls to manage food inflation. If ASPs are expected to be stable, the only way for Japfa to grow will be to expand production. And according to the growth in their numbers of milking cows, it seems they have been doing this in a big way since pre-IPO. Just last month, Japfa bought out its equity partner Black River (Cargill subsidiary) in the China raw milk business by paying US$263m for the 38% stake. Japfa had until September 2018 to either IPO the milk business -- AustAsia Investment Holdings -- or buy out Black River's stake. By making its choice in the latter when it still had time to do the former, it seems Japfa views the milk businesses to be a key driver of profits. The financial results since IPO confirms this as well.

3) The expansion of its poultry, milk, and to a lesser extent its cattle and swine businesses, incurs enormous debts which amount to about US$1.15b against an equity of US$780m. This includes a new US$280m 3-year term loan to finance the AIH acquisition. There was some effort to manage its debt by selling shares in Japfa Comfeed in 2016, but its not much to make a difference. While USD loans are cheaper compared to IDR, the enormous USD debts (about half of all its debt) could potentially cripple Japfa if IDR devalues against USD. As USD interest rates are rising, there is a higher possibility of this (slowly) happening. Indonesia has been building up its forex reserves since 1997, so maybe if could protect itself better against currency attacks.

[Kaimin]

Japfa is an okay business, but its leverage and currency exposure makes it unattractive for any long-term consideration.

1) The group's largest contributor to profit is the sale of day-old-chicks (DOC) and poultry feed, in Indonesia. Its poultry businesses in the rest of SEA are too small to be considered important. So a large extent of the group's prosperity depends on Indonesian policies concerning the broiler industry. Charoen Pokphand (CP) -- one of the largest Thai agribusiness and conglomerate -- commands the highest market share for sale of DOC at about 40%. Japfa is second with about 25%, with the remaining being fragmented smaller players. Given their combined market share, CP and Japfa could easily raise or lower broiler prices, by expanding or contracting operation. If prices are too low, consumers will benefit but the smaller poultry farmers will suffer. If prices are too high, the poultry farmers will be happy but consumers will be upset. So the government (certain sections, at least) -- assuming it acts in the interest of its general population -- will want prices to be stable and inflation to be minimal. For this to happen, the market for broiler can only be allowed to expand as fast as the income of the general population. Therefore, even if Japfa has the financial means to expand capacity, such actions may not be viewed kindly by the (non-interested) authorities if the broiler market is deemed to be adequately supplied. It will therefore be safer for investors to assign a small growth rate to Japfa's poultry business.

The news suggests CP and Japfa may have some of the regulators in their pockets. But it seems they won't have such an easy time, perhaps until they are able to get KPPU on their side as well.

http://www.thejakartapost.com/news/2016/...rdict.html
http://www.businesstimes.com.sg/companie...es-verdict

2) The other large contributor to Japfa is the production of raw milk in China. While the revenues appear small, the margins are large. Prior to IPO, Japfa was able to sell its milk at high ASPs but it is now more subdued. Management's tacit acknowledgement of more stable ASPs can also be seen from the 5-year off-take deal with Yili, just 1 year after IPO when it said in its prospectus they do not enter into contract that are longer than a year. Like broiler prices in Indonesia, I do not think that Chinese government will want milk prices that is rising faster than what the general population perceive is a fair price. Recent history has shown that China is willing to use price controls to manage food inflation. If ASPs are expected to be stable, the only way for Japfa to grow will be to expand production. And according to the growth in their numbers of milking cows, it seems they have been doing this in a big way since pre-IPO. Just last month, Japfa bought out its equity partner Black River (Cargill subsidiary) in the China raw milk business by paying US$263m for the 38% stake. Japfa had until September 2018 to either IPO the milk business -- AustAsia Investment Holdings -- or buy out Black River's stake. By making its choice in the latter when it still had time to do the former, it seems Japfa views the milk businesses to be a key driver of profits. The financial results since IPO confirms this as well.

3) The expansion of its poultry, milk, and to a lesser extent its cattle and swine businesses, incurs enormous debts which amount to about US$1.15b against an equity of US$780m. This includes a new US$280m 3-year term loan to finance the AIH acquisition. There was some effort to manage its debt by selling shares in Japfa Comfeed in 2016, but its not much to make a difference. While USD loans are cheaper compared to IDR, the enormous USD debts (about half of all its debt) could potentially cripple Japfa if IDR devalues against USD. As USD interest rates are rising, there is a higher possibility of this (slowly) happening. Indonesia has been building up its forex reserves since 1997, so maybe if could protect itself better against currency attacks.

1) Taking segments by revenue (which is more appropriate given the volatile profit margins of the business) "Other Protein" i.e. swine in Vietnam is the 2nd largest segment giving ~20% of revenue. 

2) What you said about the expansion of poultry only through income growth is true, but government intervention is not why margins are so thin. Indonesia is a low income country and poultry has elastic demand (with many substitutes like lamb and beef), and breeding chickens has a low barrier of entry. Combined with the short life cycle of a chicken this makes it both low margin and volatile. The Indonesian government hasn't done anything to drive down the price, but they have culled parent stock to drive up the price. 

3) DBS predicts the protein market in Indonesia will double in 5 years on the growth of its middle class and disposal income, a CGAR of about 15%. An impressive return, which is reflected in Japfa's growing yoy revenue despite dropping prices. In 9M ended 2017 revenue was up 2.3%, which shows robust growth in sales. The growth in just PT Japfa Tbk was up 5.2%. 

4) I agree with you on the debt. Japfa is leveraged to the tits and even during the super low interest rate environment it's interest was 8%, which reflects the lender's perception of high risk in Japfa. BBB bond rates during the time was just 3.6%. It also has negative FCF for the past five years average. Rising interest rates are also going to be a large risk. The only good thing is that the Fed is raising interest rates slower than anticipated.

[karlmarx]

I have no doubt that demand for chicken and beef in Indonesia will increase. The question is whether Japfa will be able to profit from it, and if so, by how much. And whether it will be busted by devaluation of IDR or negative cashflows before it generates a meaningful return for shareholders.

The 'Other Protein' segment includes operations from India and Myanmar as well. On the Vietnam operations, poultry farming's revenue in 2013 was US$253m, whereas swine farming was only US$33m. While the number of productive swine has since doubled, its significance as a revenue contributor in relation to the group should still be the same. It is therefore intriguing that management seems to be placing a greater proportion of blame for the group's poor results on the swine segment. The Indonesian poultry segment which also suffered similar amounts of reduced profits had no explanation.

What is of interest as well is that according to the IPO prospectus, 2/3 of the swine and poultry farms in Vietnam have not obtained the necessary licenses required, which makes them in breach of regulations. I'm not sure whether these issues has been resolved, and if not, whether it is another source of risk.

[karlmarx]

For those interested in the animal feed business, and Charoen Pokphand's story, over 30 pages:

https://asia.nikkei.com/Features/Dhanin-...bal-vision

[Kaimin]

Japfa has released it's unaudited results for Q4. The Q4 results are mostly in line with Q1's terrible performance compared to the previous quarter. Since Feb Japfa has also been buying back some shares. Their last share purchase before this was in August last year.

Shares bought back: 1,805,800
Total sum:               $SGD 858,792

For some reason the Q4 results don't add up for the PATMI (profits after taxes, minority interest). Adding up the PATMI of all the four divisions it's 0.5 million USD, but in the group total the PATMI is 20.9 million USD. That would mean a 663% increase in PATMI for Q4. Anyone can explain this?  


1) PT Japfa Tbk Q4 PAMTI without forex was down 66% from last year's Q4 to 5.5 million USD, close to the the 60% decrease in Q1. But Q4 revenue was up by a whopping 20% versus 4.1% in Q1. This suggests selling prices are still low - or decreasing from Q1 (I'd say normal) but Japfa is increasing it's market share. 

2) Animal Protein Other is still in the black, with a -9.5 million PATMI loss (forex doesn't apply).

3) Dairy is the one bright spot. PATMI w/o Forex increased 56% to 9.3 million. Dairy now contributes the bulk of their profit, 50% more than Japfa Tbk. Seems like diversification paid off.

4) Consumer foods recorded another loss of -12.5 million USD, twice the PATMI of Japfa. I have no idea what management is doing here, it hasn't recorded a proft since 2015 and is a massive drag on earnings.

[Kaimin]

A number of chicken traders in Bandung, West Java announced a plan to go on strike for three days starting on Friday on account of a lack of supply and price increase of the commodity, tempo.co reported on Thursday.


“The price started to increase before Christmas Day,” said Euis, a chicken trader at Kardon Market in Bandung on Thursday.

Euis and other chicken traders had informed their customers about the plan. She said some customers had purchased a three-day stock ahead of the planned strike.
The traders were forced to halt operations because the suppliers had informed them that they would not supply the traders.

The price of broiler chicken normally stood between Rp 35,000 (US$2.5) and Rp 36,000 per kilogram, while it currently reached Rp 39,000 per kg. Euis expressed the hope that the government would soon seek a solution to reduce the price.

According to Trade Ministerial Regulation No. 27/2017, the price ceiling for chicken was Rp 32,000.
Meanwhile, National Chicken Breeders Association secretary-general Sugeng Wahyudi said the price increase of chicken had been caused by an increase in production costs. (bbn) 

http://www.thejakartapost.com/news/2018/...eases.html

[Kaimin]

Key points:

1) Income up 700% from 2.1m to 16.7m. Two main reasons are a large improvement of PT Japfa (Indonesia) operating margin increase from 3.9% to 9.8%. For comparison the record highs of 2016 operating margin were around 15%. Animal protein other's (Vietnam) loss shrunk from -6.5m to -1.6m, management claims due to cost improvement from swine, lower feed raw material costs and higher poultry ASPs. Hard to tell whether it's because of these or because of improving swine prices, the truth is probably somewhere inbetween. News and reports put recent swine prices at 27,000-35,000 VND, breakeven is around ~38,000. Management says swine prices up 11% from last year's Q1. Losses WILL INCREASE in Q2 by a lot since the Tet holiday is over. Last year losses tripled from Q1 to Q2 because Tet ended.

2) Continued all around revenue growth from taking market share, and increasing profit of Dairy segment (in part due to a large acquisition). 

3) Management is expecting dairy (which is 25% of profit) prices to decrease. Operating margin dropped from 22% to 19%. 
"Loss from changes in fair value of biological assets was US$14.2 million in 1Q 2018 as compared to US$11.7 million in 1Q 2017. The loss from changes in fair value of biological assets was mainly due to the lower raw milk prices at the end of the quarter, which is used in the valuation of future income flows from the China dairy cattle herd."

Consolidation is playing out as expected - delivering mid to high single digit revenue growth when ASPs are down and low double digits when ASPs recover. It's a given below breakeven prices for Vietnamese pork won't continue forever, but how long is the question. It's not going to see the price highs of 2016 until the Vietnamese government/Japfa negotiates some kind of quality control scheme. IMO in the long term Japfa is going to come out ahead. Big players like CP and Japfa had the edge in production cost, funding and most importantly the quality control developing/developed economies want in their food products. There was a part in one of Graham's books written by a famous living investor about how a period of industry consolidation can produce losses but will inevitably yield big profits. If Japfa doesn't go bankrupt, which I think is likely, it's almost a mathematical certainty it'll come out richer and more profitable than ever.

Vested.

[karlmarx]

US pork imports stuck at Chinese ports as Beijing ramps up inspections amid trade row
Wednesday, 09 May, 2018, 4:35pm

China has ramped up inspections of pork shipped from the United States, importers and industry sources said, the latest American product to be hit by a potentially costly slowdown at Chinese ports in the past couple of weeks.

Some industry watchers said Beijing was sending a defiant warning to Washington in response to sweeping US trade demands made on China last week.

The stepped-up checks have even hit China’s WH Group, the world’s largest pork company and owner of Smithfield Foods in the United States, and come amid increasing scrutiny of other US agricultural goods, including fruit and logs.
...
http://www.scmp.com/news/china/diplomacy...jing-ramps

Looks familiar? It looks like Vietnam is not the only one to be penalised in its pork trade with China. But what has Vietnam done to offend China?

Vietnam asks Beijing to remove military equipment from South China Sea to maintain ‘peace and responsibility’

http://www.scmp.com/news/asia/east-asia/...-china-sea

Vietnam ‘scraps South China Sea oil drilling project under pressure from Beijing’

http://www.scmp.com/news/china/diplomacy...ng-project

For about a thousand years, Vietnam has been under the thumb of China, being subject to military invasions, tributary demands, and more recently growing trade deficit. In the 1980s, there was also the issue of Cambodia. Today, the biggest issue between them is territorial disputes in South China Sea. Just as China has laid claim to the Spratly and Paracel Islands, China has been exploiting resources (fishing and oil) in Vietnam's territorial waters. In recent years, there has been several clashes between their navies resulting in Vietnamese deaths, but Vietnam does not retaliate. Vietnam appears to be the only country which remains to be persistent in its claims; the reason is that exploiting resources from the SCS has given a huge boost to its economy. Philippines, which was very vocal, has also back down, and in return received Chinese investments.

If relationship between the two communist countries continue to be poor, I wouldn't expect Vietnamese pork to resume exports to China.

Japfa investors should write-off its pork business in Vietnam, and focus on the performance of its chicken and milk segments, which are after all its largest segments.

[Kaimin]

US pork imports stuck at Chinese ports as Beijing ramps up inspections amid trade row
Wednesday, 09 May, 2018, 4:35pm

China has ramped up inspections of pork shipped from the United States, importers and industry sources said, the latest American product to be hit by a potentially costly slowdown at Chinese ports in the past couple of weeks.

Some industry watchers said Beijing was sending a defiant warning to Washington in response to sweeping US trade demands made on China last week.

The stepped-up checks have even hit China’s WH Group, the world’s largest pork company and owner of Smithfield Foods in the United States, and come amid increasing scrutiny of other US agricultural goods, including fruit and logs.
...
http://www.scmp.com/news/china/diplomacy...jing-ramps

Looks familiar? It looks like Vietnam is not the only one to be penalised in its pork trade with China. But what has Vietnam done to offend China?

Vietnam asks Beijing to remove military equipment from South China Sea to maintain ‘peace and responsibility’

http://www.scmp.com/news/asia/east-asia/...-china-sea

Vietnam ‘scraps South China Sea oil drilling project under pressure from Beijing’

http://www.scmp.com/news/china/diplomacy...ng-project

For about a thousand years, Vietnam has been under the thumb of China, being subject to military invasions, tributary demands, and more recently growing trade deficit. In the 1980s, there was also the issue of Cambodia. Today, the biggest issue between them is territorial disputes in South China Sea. Just as China has laid claim to the Spratly and Paracel Islands, China has been exploiting resources (fishing and oil) in Vietnam's territorial waters. In recent years, there has been several clashes between their navies resulting in Vietnamese deaths, but Vietnam does not retaliate. Vietnam appears to be the only country which remains to be persistent in its claims; the reason is that exploiting resources from the SCS has given a huge boost to its economy. Philippines, which was very vocal, has also back down, and in return received Chinese investments.

If relationship between the two communist countries continue to be poor, I wouldn't expect Vietnamese pork to resume exports to China.

Japfa investors should write-off its pork business in Vietnam, and focus on the performance of its chicken and milk segments, which are after all its largest segments.

Chinese ban on pork imports happened in late 2016, which is much before those articles were posted. It was also not really a ban on imports but a clamping down on illegal imports. Vietnam never had the necessary supply chain system to certify where the meat came from which was a Chinese requirement. So I doubt it's political. 

I would write off the exports to China, as the negotiations which were mentioned mid last year have had no follow up. Japfa is also not mentioned in the supply chain focus the government is now pushing for. But Vietnam is still a very large consumer of pork. I wouldn't write off its entire business.

Genesus Report On SEA Pork
http://www.thepigsite.com/swinenews/4497...east-asia/

Pork prices up to 40,000VND/kg, in some regions 42,000VND/kg. Breakeven is between 36,000-38,000 VND/kg. Notable since there was expectation was for it to drop after the Tet holiday in February. 

Good news on the Indonesian chicken side too. The government's website for chicken prices recorded a high of 36,000 rp/kg. For comparison, in the bumper year of 2016 the highest price was 34,000 rp/kg. On averages, the highest average month price for 2016 (July) was about ~33,000 rp/kg, while for this month it's ~34,000 rp/kg. 

http://www.kemendag.go.id/en/economic-pr...rice-table