China / Hong Kong Monthly Chart Book China Food & Beverage Monthly Refer to important disclosures at the end of this report Page 1 DBS Group Research . Equity 11 Jan 2017 Diverging material trends Soft grain prices to keep feedstock costs low HSI: 22,745 Dairy prices could rise, but pork prices should retreat ANALYST Potential pressure from sugar and PET prices on beverage players Alice HUI, CFA +852 2971 1960 Grain prices remain favourable. Despite prior concerns on [email protected] impact from La Nina in 2016, production volume for grains (corn, Alison Fok +852 2971 1938 soybean) remained robust. According to USDA, global corn [email protected] production is expected to rise in FY17F. This, coupled with the cessation of the Chinese government’s corn reserve purchasing Mavis HUI+852 2863 8879; system since late 2016, would likely continue to put pressure on [email protected] corn prices. Corn prices in China have fallen by another 4.4% Eric YEE, CFA +86 21 6888 3360 m-o-m in January 2017, after dropping some 24% in 2016. As [email protected] corn makes up a large portion of meat and dairy upstream players’ raw material costs (est. 60-70% of total), lower corn F&B peer table prices should bode well for their margins. Meanwhile, prices of other grains such as soybean will also likely see limited upside as Price Target Upside Rec Mkt FY17 a result of a change in acreage planting in China (a shift from HK$ Price % Cap PE (x) lower-margin corn to other grains with better margins), as well HK$ (US$m) as stable global production volume growth, according to USDA. China F oods 3.54 3.95 12 Buy 1,277 30.0 (506 HK) Higher dairy prices; expected pork price retreat. International Uni-President 5.31 4.6* (13) Hold 2,957 26.0 dairy prices have rallied 49.8% from a low since July 2015, on (220 HK) reduction in production from New Zealand and EU. In FY17F, Want Want 5.01 5.3 6 Hold 8,094 13.8 international dairy prices will likely stay supportive as top dairy- (151 HK) exporting countries continue to cut production volume. Yet, we Vitasoy # 15.40 16 4 Hold 2,088 27.2 expect domestic dairy prices, which have rebounded 4.4% since (345 HK) May 2015, to rise mildly by 2% y-o-y in 2017F as (i) the gap Bright Dairy 13.23 14.5 10 Hold 2,338 32.1 between domestic and international milk prices remains wide; (600597 CH)^ and hence (ii) the demand is likely to be more than sufficiently Tsingtao 29.05 28.2 (3) Hold 5,422 23.3 filled by imported milk powder. As for pork, after reaching a (168 HK) peak in June 2016 at Rmb20.5/kg, we expect pork prices to Tsingtao decline mildly by c.11% to avg. Rmb16.5/kg in 2017F. This is 29.54 24.4 (17) FV 5,422 26.5 (600600 CH)^ still a relatively high level versus 2012-15’s historical range of Rmb13.4-15.3/kg, as the accelerating industry consolidation would cap overall production growth, hence supporting pork * Under Review # FY17: FY18 ^ RMB prices. All-in, we expect hog-to-grain ratio to remain supported Source: Thomson Reuters, DBS Vickers by softer grain prices. Watch out for sugar and PET prices. Prices of sugar, a key raw material for beverages, have rallied 30% yoy in 2016 on tight supply. Although sugar prices have started to retreat in the past few months from October’s peak, outlook remained mixed given low stock level globally. Meanwhile, PET prices, which rose 10.6% in 2016, could see further recovery as oil prices trend higher. To alleviate potential cost pressure, we expect beverage players will continue to focus on new products and upgrades. And despite a possible recovery in sales momentum stemming from low base, we see limited room for the sector to re-rate at currently valuation of 19x FY17F PE. ed-TH / sa-CW China / Hong Kong Monthly Chart Book Food & Beverage Table of Contents Share price performance 3 Valuation 4 F&B shareholding changes 6 Raw material cost trends 8 F&B retail price trends 9 Sector – Beer 10 Sector – other alcohol (wine, baiju) 12 Sector – Dairy 13 Sector – Beverages 15 Sector – Edible oil 18 Sector – Meat 20 Sub-sector – Others 23 Monitor of F&B climate in China 24 Page 2 China / Hong Kong Monthly Chart Book Food & Beverage Share price performance F&B Sector PE vs. HSI PE HK-listed F&B Sector PE vs. A-share F&B Sector PE x x 45 40 40 35 35 30 30 25 25 20 20 15 15 10 10 5 Jan-15 Jun-14 Oct-13 Sep-15 Dec-16 Mar-13 May-16 Jan-15 Jun-14 Oct-13 Sep-15 Dec-16 Mar-13 May-16 HK-listed F&B Sector PE HSI PE China listed F&B Sector PE HK-listed F&B Sector PE Source: Thomson Reuters, DBS Vickers F&B sector price performance T ick er Company 1 mt h 3 mt hs 6 mt hs 12 mt hs Ev ent s Brewery sector 168 HK Tsingtao Brewery -H (7.8) (9.5) 9.2 (8.1) 600600 CH Tsingtao Brewery -A (3.4) (8.6) (2.6) (0.7) CR-Beer completes 49% stake acquisition from SAB-Miller in Oct-16. 291 HK CR-Beer (1.8) (10.0) (2.4) 9.8 000729 CH Beijing Yanjing (3.0) (8.8) (8.8) (1.0) Wine sector 200869 CH Yantai Changyu (3.7) (8.5) (12.6) (20.3) Dairy sector downstream Yili proposes Rmb9bn new share placement in Oct'16 (1) to buy 37% of Shengmu, the largest organic upstream milk producer, for 600887 CH IM Yili (3.3) 9.8 (0.9) 22.7 HK$5.2bn, and (2) to issue new shares to create poison pill to avoid hostile takeover by Sunshine Insurance Group. 600597 CH Bright Dairy (4.4) (8.0) (5.7) 1.5 Dairy sector - upstream 6863 HK Huishan Dairy 1.4 0.0 (7.7) (3.0) Short-seller report attacks Huishan Dairy in Dec'16 YST Dairy proposes for new share placement of 781.7m shares (20% 1431 Hk YST Dairy (17.2) (10.2) 16.5 (3.6) of existing share cap/ 16.67% of expanded share capital) at HK$0.5/sh in 22-Dec-16 Dairy sector - infant formula powder Biostime acquires the remainder 17% interest of Swiss brand for 1112 HK Biostime 5.3 21.5 (10.3) 45.8 AUD311.3m (HK$1.7bn), or 21x EV/EBITDA, based on FYJun16. 002570 CH Beingmate 2.4 11.4 (1.0) 19.9 Instant Noodle & Beverage and Others 322 HK Tingyi (6.6) (9.0) 21.7 (9.7) Tingyi's Taiwan operations will be fully shut down starting J an'17. 151 HK Want Want (1.0) (1.2) (4.1) (6.3) 220 HK UPC 1.1 (1.1) (16.8) 1.5 Coca-Cola realigns its bottling system from 3 bottlers to 2 bottlers, of which China Foods increases its market share from 33% to 50%, 506 HK China Food 6.0 (7.1) 33.0 16.2 adding Chongqing, Sichuan, Jilin, Heilongjiang, Shanxi, Liaoning, Shaanxi. 3799 HK Dali Foods 3.4 3.4 (6.6) (0.5) Slaughter Sector After reaching trough of RMB15.8/kg in Oct'16, live pork prices climbed to RMB18.4/kg in anticipation for CNY. We expect prices 1068 HK China Yurun 3.4 (4.7) 0.0 (15.2) will begin to lower when the demand softens. 288 HK WH Group (4.1) (6.8) 3.8 48.8 Source: Bloomberg Finance L.P., DBS Vickers Page 3 China / Hong Kong Monthly Chart Book Food & Beverage Valuation Valuation table Target Mkt PE PE Yield Yield P/Bk P/Bk ROE ROE Price PriceRec Cap Fiscal 16F 17F 16F 17F 16F 17F 16F 17F Company Name Code HK $ HK $ HK $m Y r x x % % x x % % HK listed Brewery Sector Tsingtao Brewery 'H'* 168 HK 29.05 28.20 Hold 42,020 Dec 21.2 23.3 1.5 1.3 2.0 1.9 9.7 8.3 CR Beer 291 HK 15.52 n.a. NR 50,350 Dec 39.3 24.2 0.6 1.3 2.3 2.2 7.4 9.4 MC Wt. average 31.1 23.8 1.0 1.3 2.2 2.1 8.4 8.9 Dairy Sector Biostime Intl.Holdings 1112 HK 24.40 n.a. NR 15,384 Dec 22.0 19.3 0.5 0.6 3.4 3.0 16.1 16.0 China Huishan Dairy# 6863 HK 2.90 n.a. NR 39,082 Mar 37.1 31.2 0.7 0.7 2.7 2.6 7.6 8.2 Yuanshengtai Dairy 1431 HK 0.54 n.a. NR 2,111 Dec n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. MC Wt. average 14.6 22.7 0.8 0.9 2.5 2.3 3.9 10.9 Instant Noodle & Beverage and Others Tingyi* 322 HK 8.94 8.90 Hold 50,104 Dec 34.7 24.2 2.0 2.1 2.2 2.1 6.3 8.8 Want Want China* 151 HK 5.01 5.30 Hold 62,779 Dec 14.3 13.8 3.1 3.3 4.0 3.5 29.6 27.0 Uni-President China Hdg.* 220 HK 5.31 4.60 Hold 22,936 Dec 27.1 26.0 0.7 0.8 1.7 1.6 6.4 6.3 V itasoy Intl.Hdg.*# 345 HK 15.40 16.00 Hold 16,193 Mar 25.6 27.2 2.3 2.2 6.4 5.9 26.7 21.2 China Foods* 506 HK 3.54 3.95 Buy 9,902 Dec 14.7 30.0 2.4 1.2 1.6 1.6 11.5 5.3 Dali Foods Group Co.