We attended a site visit organised by Japfa Ltd (“Japfa”) to its Breeding Farm and Hatchery in Hmawbi, as well as its Myaung Dagar Feedmill in Yangon, Myanmar on Monday 17^th Oct 2016. We had the privilege of understanding Japfa’s operations outside its primary market of Indonesia as the CEO, CFO and respective country and business units heads of Japfa shared with us their market insights and technical knowledge.

Key takeaways from the site visit

1. Well positioned in the emerging markets (such as Indonesia, Vietnam, Myanmar, and India) to capture the strong structural growth in protein consumption.
2. Diversification strategy: three core pillars cushioning market volatility, and building the fourth – Consumer Food.
3. Brief summaries of its expansion plans beyond PT Japfa Tbk.
4. Management expectations on operating margin in 3Q16.
5. Antimonopoly fine has relatively insignificant financial impact on Japfa.
6. KKR’s investment as a vote of confidence.

Figure 1: Breeding Farm and Hatchery in Hmawbi

Source: PSR

Investment Actions

Japfa is undervalued relative to the peer average EV/EBITDA and P/E multiples. No stock rating or price target provided, as we do not have coverage on Japfa Ltd.

Figure 2: Peer Comparison

Key takeaways from the site visit

1. Well positioned to capture the strong structural growth in protein consumption

Growing protein consumption underpinned by strong projected growth in GDP per capita in the countries which it operates in, namely, Indonesia, India, Vietnam, and Myanmar. These countries are amongst the lowest poultry consumption per capita in Asia.

Source: Company’s Presentation Slides

2. Three core pillars and building the fourth

Currently, its 51%-owned subsidiary, PT Japfa Comfeed Indonesia Tbk (PT Japfa Tbk), Animal Protein Other, and Dairy form the Group’s three core pillars, contributing 50%, 30% and 20% of the Group’s 1H2016 Core PATMI without Forex, respectively. The Group targets to have all three core pillars to contribute equally in near term.

Its fourth business segment, the Consumer Food segment, has been profitable in Indonesia but dragged by its relatively new set up in Vietnam. The Group will continue to build its Consumer Food business, such that all four segments can contribute equally.

Source: Company’s Presentation Slides

3. Looking beyond PT Japfa Tbk

• Vietnam: Swine business building up, fast and furious

Japfa Comfeed Vietnam only commenced its swine breeding operations in 2012. Compared to C.P. Vietnam (“CP”), the dominant market player who had been in the Vietnam swine business for more than 20 years, Japfa managed to gain c.11% market share in 2015, securing its position as the second largest player.

Source: Company’s Presentation Slides

In 2Q2016, Vietnam operations contributed more than 60% of Animal Protein Other segment’s revenue and more than 70% of operating profit. And its swine business contributed to c.45% of its 1H2016 profit from Japfa Comfeed Vietnam, up from c.25% last year.