China Yurun Food:Australia NDR,positive takeaways

We have just returned from a 3-day non deal roadshow (NDR) withChina Yurun’s CFO Ms. Rosa Lee and IR Head Ms. Winny Yip inSydney and Melbourne.

Consistent with our long-held view, the company is positive about thescope for market share gains by leading players, which obviouslyincludes itself as the largest operator in China, as chilled meatcontinues to gain popularity to displace room temperature meat.

Investors were impressed with Yurun’s solid track records inmaintaining margins and convinced that the company’s overallmargins are not too sensitive to fluctuations in hog prices.

In the longer run, management sees margin upside to be provided byincreased sales of pre-packed chilled meat as well as industryconsolidation that will strengthen bargaining power of larger players.

In our view, the key attraction of Yurun’s investment case lies in themassive room for industry consolidation, as the raw pork industryremains extremely fragmented with the top three players controllingno more than 5 % of the market. More importantly, the consolidationprocess is now set to accelerate on the back of supportivegovernment policies. We see sustainable high growth in Yurun’supstream production volume in many years to come.

It appears that Yurun will be able to reverse its negative free cashflow position no later than FY11, which should reduce the chance ofanother equity financing by the company but further sell-down bychairman is always in the question.

On a slightly negative note, Yurun’s concentration in a single productsuggests a valuation discount is warranted to other frontlinemulti-product F&B names.

Still, the risk reward appears very favorable with a FY11F PE of just18x versus 23-27x for the majority of leading comparables.