1、REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 1 of 13 Impressive earnings growth and attractive yield We initiate coverage on Thai Vegetable Oil (TVO) with a BUY rating based on projected recurring net profit growth of 59.1%, 25.3%, and 11.3% for 2010-12F, respectively. In our view, the k
2、ey reasons to invest are: a) 50% increase in crushing capacity to come online at midyear; b) potential margin expansion due to uptrend in soybean and its derivative products; c) attractive dividend yield of 8.1%. New capacity ready to commence by midyear TVO is scheduled to increase its crushing cap
3、acity by 50% to 6,000 TPD beginning in mid 2010. This additional soybean meal should replace imported soybean meal due to its superior quality and the lower risk exposure for importers. Meanwhile, the additional soybean oil will be sold to existing industrial customers, with the remainder exported.
4、Soybean price mini rally cannot be ruled out Soybean crushers like TVO will benefit from the uptrend in soybean and derivative product prices due to inventory gain. We believe at the current soybean price, upside risks outweigh the downside risks. Key reasons for upside risks are: a) severe weather
5、conditions due to the presence of El Nino, which could affect the upcoming soybean crops; b) extraordinary demand from China due to major trade and sporting events in 2010. Target price of Bt23.4 We estimate recurring net profit growth of 59.1%, 25.3%, and 11.3% for 2010-12F, respectively. However,
6、please note that net profit growth for 2010 of -10.3% YoY is a result of the one-off reversal of the inventory loss in 2009. We derive our target price of Bt23.4 from 2010 PER of 13x. This is based on 2011-13 Cagr for earnings growth of 16.2% and PEG of 0.8x on conservative basis. For key risks, see
7、 p. 2. Financial and Valuation FY Ended 31 Dec 2007 2008 2009 2010E 2011E Revenues (Btm) 18,230 23,575 22,487 25,190 31,664 Net profit (Btm) 1,256 750 1,625 1,458 1,822 EPS (Bt) 2.01 1.00 2.01 1.80 2.25 EPS growth (%) 53% -50% 101% -10% 25% Dividend (Bt) 1.30 1.30 1.75 1.47 1.70 BV (Bt) 5.36 4.51 6.
8、00 6.13 7.68 FY Ended 31 Dec 2007 2008 2009 2010E 2011E PER (x) 9.15 15.33 9.17 10.22 8.17 EV/EBITDA (x) 7.05 7.48 12.35 8.18 6.55 PBV (x) 3.16 3.72 2.88 2.82 2.27 Dividend yield (%) 7.07 7.07 9.51 8.01 9.21 ROE (%) 42.5 24.3 42.3 29.7 32.6 Net gearing (%) 71.6 127.2 40.2 61.7 45.2 Share data Reuter
9、s / Bloomberg TVO.BK/TVO TB Sector Food b) potential margin expansion due to the uptrend in soybean and its derivative products, e.g. soybean meal and soybean oil prices; c) attractive dividend yield of 8.1%. TVO is scheduled to commence additional soybean crushing capacity of 2,000 tonnes per day (
10、TPD) (capex of Bt1.5bn) at midyear, up from the existing 4,000 TPD or equivalent to a 50% increase. This should be a platform for earnings growth for the next three years for the company. We believe there is still ample room in the domestic soybean meal market, whose growth tags along with food expo
11、rts and the animal farming industry. In addition, Thailand still relies on imported soybean meal due to insufficient local supply. For the soybean oil market, we believe that the consumer bottled soybean oil growth potential looks limited. Industrial usage (food exporters, chili paste, and the petro
12、chemical industry) presents a better growth opportunity. In addition to capacity expansion, soybean crushers like TVO usually benefit from an uptrend in soybean and soybean products due to inventory gain. Soybean transportation from the US and South America usually takes 45 days, with price apprecia
13、tion during the time of transportation leading to a better gross margin. For 2010, we believe soybean and derivative products should trade in the low range bound (USD9-11 per bushel for soybean) due to abundant soybean supplies from major producers, e.g. the US, Brazil, and Argentina. However, we al
14、so believe there is upside risk for soybean and product prices to move higher due to: a) severe weather conditions from the presence of El Nino, which could affect the upcoming soybean crops; b) extraordinary demand from China due to major trade and sporting events in 2010. We estimate recurring net
15、 profit growth of 59.1%, 25.3%, and 11.3% for 2010-12F, respectively. However, please note that net profit growth for 2010 of -10.3% YoY is the result of a one-off reversal of the inventory loss in 2009. EBITDA of Bt2.2bn and Bt2.7bn for 2010-11F should be the main sources of funding for capacity ex
16、pansion. Meanwhile, the proceeds from the PO and expected warrant conversion should be used as working capital. We derive our target price of Bt23.4 from 2010 PER of 13x. This is based on 2011-13 Cagr for earnings growth of 16.2% and PEG of 0.8x. At our target price, TVO equates to 2010 PER of 13x,
17、PBV of 3.8x, RoE of 29.7%, and offers a dividend yield of 6.3%. With TVOs share price highly correlated with soybean prices, we believe the current soybean price between USD9-9.5 per bushel presents limited downside risk. Key risks include the volatility of soybean and derivative products prices, FX
18、, and the freight rate possibly adversely affecting the margin. An influx of imported soybean meal could also hurt sales volume. Delays in expansion projects and a reduction of the soybean meal and soybean oil import tariff would also alter our earnings estimates. REFER TO DISCLOSURE SECTION AT THE
19、END OF THE NOTES page 3 of 13 Brief history The Vitayatanagorn family set up an oil extraction plant in Nakhon Chaisiri in 1967 to produce soybean oil with a crushing capacity of 50 tonnes per day. As domestic demand for refined vegetable oil grew, the business expanded and became known as Thai Vege
20、table Oil Co Ltd (TVO). Seeing the enormous potential for soybean meal products, TVO decided to use soybean as its sole raw material. Expansion continued and TVO now has a soybean crushing capacity of up to 4,000 tonnes per day and refining capacity of 800 liters per day. TVO is currently the countr
21、ys biggest soybean oil producer. China-Thai Vegetable Oil Co, a 65%-owned subsidiary in China that produces mainly rapeseed oil, has a daily refining capacity of 500 tonnes. The Vitayatanagorn family remains the main shareholder of TVO, which was listed in 1990. Figure 1: Company structure Thai Vege
22、table OIlProdigyThai Vegetable Oil InternationalThai Edible OIlChina-Thai Vegetable Oil (Wuhan)43%65% 14%100%Source: Company Data, KT ZMICO research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 4 of 13 Soybean Industry Global soybean market On the supply side, the key soybean producers a
23、nd exporters in the world are the US, Brazil, and Argentina. Factors that influence soybean price movement from the supply side are: a) planted areas; b) weather conditions effect on crop yield; c) harvesting season; d) price movement of related and substitute products like crude oil and palm oil. T
24、he soybean calendar begins in September when the first US soybean harvest reaches the market. However, soybean analysis begins in March when US farmers decide on the planting acreage ratio between soybean and corn. The planting process begins in June with the actual planting acreage data moving soyb
25、ean prices again. From the June planting to the September harvest, weather conditions are the key factor affecting soybean prices. The US harvest usually ends in December, with the market then shifting its attention to Brazil in January. The Brazil soybean harvest comes in as early as January and fi
26、nishes by April, with the focus then shifting to Argentina soybean production which is finished by late May or June. On the demand side, China is the biggest importer of soybean. Its fast growing economy has led to higher meat consumption, which demands more animal feed. In addition, the disruption
27、of Chinese soybean production due to floods, earthquakes, and drought has also led to higher imports of soybean. Figure 2: Global soybean tradeBreaking a vicious cycle Soybean exporters Soybean importers 25.630.4 31.534.938.625.923.525.430.025.67.29.613.85.6 7.05.17.98.86.49.90204060801002005/06 200
28、6/07 2007/08 2008/09 2009/10FUnited States BrazilArgentina Othersm, tonnes28.3 28.737.841.1 42.513.915.315.113.2 13.021.925.025.2 22.924.30204060801002005/06 2006/07 2007/08 2008/09 2009/10FChina EU- 27 Othersm, tonnesSource: Company, KT ZMICO research Figure 3: Stock-to-use ratio and soybean prices
29、 5.57.212.310.09.37078635170024681012142005/06 2006/07 2007/08 2008/09 2009/10F0102030405060708090Soybean price Stock-to-Use (days) (RHS)USD/bushel daysInverse relationship between soybean prices and stock-to-use ratio Source: USDA, KT ZMICO research REFER TO DISCLOSURE SECTION AT THE END OF THE NOT
30、ES page 5 of 13 Structural change for new era of higher soybean prices We believe soybean prices have established a new trading range between USD8-16 per bushel, after trading between USD4-11 per bushel for 30 years. The key structural changes in this new era of higher soybean prices include: a) soy
31、bean consumption economies, i.e., China and India, growing faster than ever, leading to a rise in soybean demand; b) rising crude oil pushing the cost of planting, including fertilizer and transportation costs; c) rise in crude oil prices leading to an unprecedented rise in demand for bio-diesel (US
32、 blends soybean oil to make bio-diesel, whereas other countries use other vegetable oils); d) rising demand for corn-based ethanol in the US leading to higher corn prices, with the potential for more farm land being switched to corn. This has resulted in lower supply of soybean. Figure 4: Expect hig
33、her trading band of soybean prices Historical Soybean Price020040060080010001200140016001800Jan-75Jan-77Jan-79Jan-81Jan-83Jan-85Jan-87Jan-89Jan-91Jan-93Jan-95Jan-97Jan-99Jan-01Jan-03Jan-05Jan-07Jan-09US cent/bushelEstablish new trading rangeSource: Bloomberg, KT ZMICO research Betting on short-term
34、upside risk After marking a 34-year high at USD16.5 per bushel in Jul08, soybean prices fell to USD8 per bushel during the financial crisis. For 2010, the market has priced in an increase in soybean supplies from Brazil and Argentina, causing soybean prices to trade at the low range bound. However,
35、we believe there are some key factors that could reverse global soybean fundamentals. First, the El Nino phenomenon is still present. El Nino often makes it hotter and dryer than usual in Asia and wetter than normal in the Americas. Since its onset in Jun09, thus far the world has witnessed severe d
36、rought in India, a typhoon in the Philippines, and snowstorms in the US. We believe more severe weather conditions cannot be ruled out. Figure 5: El Nino phenomenon Breaking a vicious cycle Historical El Nino therefore, the growth of the industry follows the animal farming industry (local consumptio
37、n and food exports). The key competitor of locally crushed soybean meal is imported soybean meal. However, the main importers are direct users such as big animal feed producers, poultry and swine farming operators, and farming associations. Their main purpose is to secure enough supply for their own
38、 operations, not to compete with local crushers. Soybean oil demand/supply is currently at equilibrium, which is the key factor for crushers when it comes to considering capacity expansion. Figure 6: Domestic soybean meal market vicious cycle Local consumption of soybean meal Breakdown 0.00.51.01.52
39、.02.53.03.54.01998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Locally produced soybean mealThailand - soybean meal importm, tonnes0%20%40%60%80%100%1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009Thailand - soybean meal import Locally produced soybean mealSource: OAE, KT ZMICO
40、research REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 7 of 13 Operations Through crushing soybean seeds, TVO obtains refined soybean oil and protein-rich soybean meal. The latter, which is used mostly in animal feed for the livestock industry, accounts for almost 60% of the companys reve
41、nue. The feed industry, including poultry and swine farming associations and feed producers, represents 40% of TVOs soybean meal product, with the remainder marketed directly to farms. Half of the refined soybean oil is bottled and sold under the “A-ngoon” brand and the rest is sold in bulk for indu
42、strial usage, i.e., canned food, chili paste, house paint, etc. TVO has a 60-65% market share among local producers in terms of soybean imports and soybean meal and oil produced in Thailand. Its consumer soybean oil under the “A-gnoon” brand is also the leading brand with a 50% market share in the s
43、oybean consumer market. Soybean seeds represent 88-90% of product costs for TVO. Because of insufficient domestic seed, the company imports around 80-85% of its raw material from the US, Brazil and Argentina. The import price is normally cheaper than the domestic price as the government protects loc
44、al soybean farmers. Rapeseed oil is used mainly in the Chinese operation due to its abundance in China and its higher oil content. However, the plant is designed to use a range of oilseeds. Figure 7: Soybean value chain and revenue breakdown Breaking a vicious cycle Soybean value chain Revenue break
45、down Soybean(15% local, 85% import)Soybean Meal(45% protein content)Soybean OilFeed Industry (40%)Direct to Farm (60%)Consumer (A-gnoon) (50%)Industrial Usage (50%)100kg.78kg.18-20kg.2008Soybean meal55%Soybean oil27%Other4%Export3%TVO China11%Source: Company, KT ZMICO research Key factors determinin
46、g profit The key factors determining the companys profitability include strong procurement of soybean and margin management. In addition to local soybean, the company buys soybean in the international market directly from farmers and through traders. The company has set up a soybean procurement team
47、 which does fundamental and technical analysis, and makes visits to key soybean growing areas in the US and Brazil. There is a strong correlation between soybean products, e.g. soybean meal and soybean oil, and soybean. Prices of soybean meal and soybean oil usually move along with soybean instantan
48、eously. The spread between soybean products prices and soybean prices is referred to as the “crush margin”. However, due to the 45-day shipping period from the Americas, there is a deviation in the crush margin of Thai crushers. This means that the cost of soybean 45 days ago will be sold at todays
49、soybean meal and soybean oil prices in Thailand. Therefore, Thai crushers enjoy an extraordinary gross margin on the price uptrend on soybean and soybean products. REFER TO DISCLOSURE SECTION AT THE END OF THE NOTES page 8 of 13 Figure 8: Soybean and derivative products prices move in the same direction 050100150200250300350400450500Jan-09Feb-09Mar-09Apr-09May-09Jun-09Jul-09Aug-09Sep-09Oct-09Nov-09Dec-09Jan-10Feb-10Mar-10USDt/tonne02004006008001,0001,2001,4001,6001,800Soybean
