China Pork Sector - DBS Bank Stable demand in the world’s largest pork market. China is the largest pork consumer and producer globally, accounting for close to half of global production

ASIAN INSIGHTS VICKERS SECURITIESed-TH / sa- CW

10 May 2017DBS Group Research . Equity

A meaty task to meet demand • China pork demand to sustain stable growth

• Long-term focus still on self-sufficiency

• Liberalisation of market trade creates opportunity

• BUY WH Group and COFCO Meat

Stable demand in the world’s largest pork market. China is the largest pork consumer and producer globally, accounting for close to half of global production. China's pork consumption is expected to sustain a steady growth of 1.3-1.4% p.a. going forward. Growing income along with rising middle class and continual urbanisation would drive Chinese consumers towards a heavier animal protein-based diet. Coupled with an expanding population, we estimate that China would add an additional 3.5m tonnes of pork demand in the next five years.

A shakeup in the industry allowing new opportunities. With the government’s intention to move hog farms away from urban areas and water sources, many farms have been forced to close down or relocate. Based on our findings, we estimate this could potentially create a shortfall of 77m heads from now until 2020E. We believe the key beneficiaries will be large-scale farmers and import which will grow in importance.

Pick emerging winners. We see the following key trends and potential in the China pork market: (i) industry consolidation with larger players gaining market share as smaller players are phased out due to cost and environmental issues; (ii) vertical integration to maximise profit and secure food safety; (iii) rising focus on production efficiency given the higher cost in China at the moment; and (iv) product innovation, especially for downstream processed meat sector. The latter two are areas where global players could have an added advantage. Leading players with ability to gain market share from consolidation trend and those with strong vertical integration capability would be the long term winners. BUY market leader WH Group (288.HK) and integrated player COFCO Meat (1610.HK).

HSI: 25,015 ANALYST Alison FOK +852 2971 1938 [email protected] Alice HUI, CFA +852 2971 1960 [email protected] Valuation

Pric eT arget

Pric e Rat ingM k tCap F Y 17F

Loc al$ Local$ US$bn PE (x )WH Group*(288 HK)

HKD 6.82 7.7 BUY 12.8 11.7

COF CO Meat*(1610 HK)

HKD 1.67 2.1 BUY 0.8 5.4

Shuanghui(000895 CH)

CNY 21.67 n.a. NR 10.4 14.4

GD Wenshi F ood(300498 CH)

CNY 27.46 n.a. NR 17.3 13.1

Muyuan F oods(002714 CH)

CNY 25.34 n.a. NR 4.3 9.3

Chuy ing Agro-Past.(002477 CH)

CNY 4.69 n.a. NR 2.1 7.5

Source: Thomson Reuters, *DBS Vickers

Asian Insights SparX

China Pork Sector Refer to important disclosures at the end of this report

Asian Insights SparX China Pork Sector

ASIAN INSIGHTS VICKERS SECURITIES

Page 2

The DBS Asian Insights SparX report is a deep-dive look into thematic angles impacting the longer-term investment thesis for a sector, country or the region. We view this as an ongoing conversation rather than a one-off treatise on the topic, and invite feedback from our readers, and in particular welcome follow-on questions worthy of closer examination.

Table of Contents

Executive summary 3

A Middle-class Consumption Story 4

Implications on infrastructure, and key challenges 8

China pork supply chain – who are the players? 12

Business model 28

Case study of a global player - USA 33

Stock recommendation 38

Appendix: Market trends 42

Appendix: Which province produces the most meat? 43

Appendix: Optimising regional distribution 44

Appendix: Others 45

Stock Profiles 52

COFCO Meat (1610 HK) 52 WH Group (288 HK) 58

Note: Prices used as of 10 May 2017



Page 3

Executive summary

Pork demand still on the rise.... Already the world's largest pork market representing around half of the global demand, China's pork consumption is expected to sustain a steady growth of 1.3-1.4% p.a. going forward. Growing income along with rising middle class and continual urbanisation would drive Chinese consumer towards a heavier animal protein-based diet. Coupled with an expanding population, we estimate that China would add on an additional 3.5m tonnes of pork demand in the next five years.

... and so are pork imports. While the higher demand would mean opportunities for domestic players, it has also created more demand for pork imports, which have been surging since late 2015. Widening price disparity between domestic and overseas prices in recent years has made this an increasingly attractive option. While pork imports represent a mere 3% of total demand in 2016, this ratio could swell to 7% by 2020, based on our estimates.

Food safety and environmental concerns to drive sector reform. Despite growing demand, China has faced a number of food scandals and disease outbreaks due to a lack of environmental and regulatory enforcement, which created large volatility in supply and prices historically. With growing land, feed, water and environmental constraints, the governmental has initiated industrialisation and standardisation as well as more stringent food safety protocols to ensure a safe and more secure supply chain.

Market consolidation to continue. In particular, the Chinese government is looking to move hog farms away from urban areas and water sources, with many farms located in the restricted areas being forced to close down or relocated. The stricter environmental laws have also led to closures of smaller and outdated hog farms, to the benefit of large-scale hog producers. Based on our estimation, these closures could potentially create a shortfall of 77m hogs from now till 2020, and the majority of these will benefit major players which have the ability to expand their capacities.

Raising productivity the key goal. Apart from market consolidation, opportunities for large-scale hog players would be in increasing efficiency. Cost of hog production, despite rising scale, is still higher in China than in overseas, largely due to inherently high feed costs, and less efficient farm management. As such, improving efficiency/productivity is a key goal for the government's current 5-year plan for hog production.

Processed meat production has good potential. We expect decent growth outlook for downstream processed meat demand, driven by an increasing focus on convenience as well as rising westernised dietary habits. This is, however, also a sector where competition is expected to intensify, as domestic players strive to gain shares while overseas players also have the competitive edge especially in the premium market.

Convergence a growing trend. The focus on food safety and production efficiency has driven both upstream and downstream players to go for vertical integration. Majority of the leading feed companies in China nowadays have exposure to hog raising and some even in slaughtering, and vice versa as hog producers expand their self-production of feed. Major slaughterhouses are also expanding their raw material sources by investing in hog farms, with some even venturing overseas (WH Group's acquisition of Smithfield) as imports become a more viable option given the price disparity.

Scale and efficiency matters. In summary, we see the below key trends/growth potential in the China pork market: (i) industry consolidation with larger players gaining as smaller players are phased out due to cost and environmental issues; (ii) vertical integration to maximise profit and secure food safety; (iii) rising focus on production efficiency given the higher cost in China at the moment; and (iv) product innovation, especially for downstream processed meat sector. The latter two are areas where global players could have an added advantage.

Stock picks. Against this backdrop, market leader WH Group should be well-positioned to benefit from the rising demand for pork imports and processed meats. For the latter, its know-how from Smithfield could be an added advantage. We reiterate BUY on WH Group with a TP of HK$7.7/sh. We also like COFCO Meat, an integrated player which is expected to benefit from the market consolidation trend. Buy with TP at HK$2.1/share.



Page 4

A Middle-class Consumption Story

(I) Future required capacity – how big is the pork market?

How much pork have the Chinese been consuming? Already the world’s largest pork market representing c.50% of the global consumption, pork consumption in China has been growing at a CAGR of 1.0% in the past six years, reaching 54.5m tons in 2016. On a per capita basis, pork consumption in China is estimated at 31.6kg in 2015 (OECD data), growing at a 1.2% CAGR since 2010.

China pork consumption

51.0

54.5

58.1

46.0

48.0

50.0

52.0

54.0

56.0

58.0

60.0

2011 2016 2021E

MM metric tons

Source: CEIC, DBS Vickers est

China pork consumption per capita – 1995 – 2025E

20.2

31.6 34.9

0

5

10

15

20

25

30

35

40

1995

1998

2001

2004

2007

2010

2013

2016

E

2019

E

2022

E

2025

E

kg/capita

Source: OECD, DBS Vickers

How does China compare to the rest of the world? At 31.6kg, China’s per capita consumption of pork ranks relatively high globally, being only slightly behind that of EU but higher than most Asian countries as well as the US and Canada. This likely reflects the dominance of pork in Chinese society. In fact, if compared to HK where per capita consumption exceeds 67kg, China still has ample growth potential. In terms of overall meat consumption, China’s 50kg per capita is still below levels for most other countries, indicating that there should be room to grow.

China overall meat consumption per capita - 2015

95.4 92.5

68.3 68.1

51.9 50.0

35.4 28.8

22.4

0.0

20.0

40.0

60.0

80.0

100.0

120.0

USA AUS EU28 CAN VNM CHN JPN PHL THA

kg/capita


China pork consumption per capita - 2015

33.0 31.6

29.1

22.7 20.3

15.7 15.0 14.2

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

EU28 CHN VNM USA AUS CAN JPN PHL

kg/capita




Page 5

A gradual change in meat preference? While pork has remained the major type of meat consumed in China, representing c.60% of total, consumption of other types of meat products have been rising. Per capita consumption of beef and lamb, for example, have posted a CAGR of 2.4% and 2.3% respectively during 2010-15, vs 1.2% growth in pork and 1.1% in poultry. This trend, we believe, indicates that as consumers become more affluent, they are diversifying their protein consumption towards more “expensive” ones. In China, beef and lamb typically costs more than double vs pork and poultry.

China per capita meat consumption – pork to stay dominant

0

10

20

30

40

50

60

1990

1995

2000

2005

2010

2015

2020

2025

kg/capita

Beef Pig Poultry Sheep


Price comparison (domestic – Jan-17)

31.2

67.1

59.0

22.0

0

10

20

30

40

50

60

70

80

Pork(Marble meat)

Beef(ham)

Lamb(ham)

Chicken

Rmb/kg

Source: NDRC, DBS Vickers

Still room for pork consumption per capita to rise. As such, we expect growth in pork consumption to continue lagging behind that of beef and mutton, but should maintain its dominant position considering the Chinese dietary preference towards pork. Moreover, the slower growth for pork consumption in the past two years was also partly due to supply constraints, as the pig farming sector has been undergoing consolidation, hence limiting supply. As supply growth is expected to resume gradually, this should also help consumption ahead. Pork consumption per capita is expected to grow mildly by 0.8% in CAGR till 2020E.

An additional 3.5m tonnes of demand for the next five years. Growing per capita consumption aside, pork demand would be further fuelled by expanding population, increasing urbanisation and rising middle class. With a population of close to 1.38bn in 2016, China’s National Health and Family Planning Commission estimates that China's population will reach 1.43bn, adding another 50m by 2020, boosted by the relaxation of its one-child policy. This alone would translate into an additional demand of 1.6m tonnes. On top of that, the continual urbanisation would bring in an additional 80m urban population by 2020. And with rural consumption per capita being less than 70% of urban consumption, this would represent another 0.8-0.9m tonnes of additional demand. Summarising the above, we estimate an overall pork demand growth of 1.3-1.4% p.a., or an additional demand of 3.5m tonnes from now until 2020.

China population

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

19

60

19

64

19

68

19

72

19

76

19

80

19

84

19

88

19

92

19

96

20

00

20

04

20

08

20

12

20

16

20

20

m

Source: World Bank, UN forecasts, DBS estimates



Page 6

(II) Income growth and expenditure –

How much are Chinese consumers spending on meat?

Rising disposable income... Disposable income per capita in China has been growing at c.10% p.a. in the past five years, slightly ahead of the GDP growth. With a slower economy ahead (DBS economist forecasts GDP growth at 6.5% in 2017, vs 7.9% p.a. in the last five years), we expect disposable income per capita (urban) in China to post a softer 8% CAGR, from Rmb23,821 in 2016 to Rmb32,408 in 2020. In fact, China’s GDP growth has been outperforming most of its Asian peers' and is expected to remain so despite slower growth ahead.

China disposable income

14,551 16,510

18,311 20,167

21,966 23,821

0

5,000

10,000

15,000

20,000

25,000

30,000

2011 2012 2013 2014 2015 2016

Rmb/capita

Source: National Bureau of Statistics of China, DBS Vickers

Annual GDP growth by country (2011-15)

6.7

5.2

1.4

6.7 6.7

5.3

4.2

0

1

2

3

4

5

6

7

8

9

Chi

na

Indo

nesia

Taiw

an

Vie

tnam

Indi

a

Mya

nmar

Mal

aysia

%

2012 2013 2014 2015 2016

Source: World Bank, Bloomberg Finance L.P, DBS Vickers

… to support higher spending. Along with higher income, China’s per capita expenditure has been growing at a similar rate of 9.7% in CAGR since 2010, reaching c.Rmb21,400 in 2015. Of which, food is the largest item representing about 30% of total expenditure, followed by residence, telecom and education. And among various food categories, spending on meat alone (excluding dairy and aquatic products) is estimated at 20%, or close to Rmb1,300 p.a, with the bulk being pork.

Per capita income vs. consumption expenditure of urban households

31,200

21,400

45,500

29,900

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Disposable income Consumption expenditure

Rmb/capita

2015 2020E

Source: Frost & Sullivan, Company data, DBS Vickers



Page 7

Household expenditure breakdown (%)

30% 33%

8% 6%

22% 21%

6% 6%9% 9%

14% 11%

11% 13%1% 2%

0%

20%

40%

60%

80%

100%

Urban RuralFood Clothing Residence ServicesMedicine Telecom Education Others

Source: National Geographic, DBS Vickers

Shifting towards a higher meat and dairy-based diet. In terms of food consumption, two trends have been getting more prominent in the past 15-20 years: (i) caloric intake for the Chinese has been rising faster than in most other countries, up 26%+ to 3,073 from 1991 to 2011; (ii) there has been a shift from a grain-based diet towards more diversified ones including more meat, dairy and eggs. Both trends would be in favour of meat demand going ahead. In 2011, meat represented 17% of total caloric intake for an average Chinese, up from a mere 10% back in 1991. Meat, dairy and egg together accounted for c.23% of total caloric intake in China, still well below the 24-32% levels for most Western countries, indicating room to grow further ahead.

Calories per person (China)

243 509

2,189

2,564

0

500

1,000

1,500

2,000

2,500

3,000

3,500

1991 2011

Calories

Meat Grain, sugar, fat, produces & others


Calories per person – by country

2,870 2,717 3,073

3,413 3,539 3,641

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

World Japan China UK Germany US

Calories


Meat, dairy and egg consumption by country

272 332509 489 408 469

235219

170

501 684 527

0

200

400

600

800

1,000

1,200

World Japan China UK Germany US

Meat Dairy & Eggs

Calories




Page 8

Implications on infrastructure, and key challenges

Would production need to rise in tandem with demand? From 2011-16, pork production had been growing at 1.0% CAGR, more or less in tandem with the demand growth (1.3% CAGR). Being the biggest pork market globally, China produces c.700m heads of hog every year. Production has witnessed some declines since 2015, largely a result of the market consolidation as smaller players were phased out due to stricter environmental rules and regulations. In 2016, national hog inventory declined 3.3% y-o-y to 685m heads, or an 6.8% drop from its 2014 peak.

Hog production volume

662

698

716

735

708

685

620

640

660

680

700

720

740

760

2011 2012 2013 2014 2015 2016

m heads

Source: MoA, DBS Vickers

The shortfall, however, has been partly fulfilled by imports, which saw tremendous growth in 2016 as the price gap between domestic and international prices widened. While pork demand is expected to sustain a 1.3-1.4% growth in CAGR going forward, we believe the actual supply/capacity growth required could likely lag behind, as part of the demand could be satisfied by imports.

Pork import volume and % y-o-y

-80%

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

0

50

100

150

200

250

Jan

-10

Sep

-10

May

-11

Jan

-12

Sep

-12

May

-13

Jan

-14

Sep

-14

May

-15

Jan

-16

%'000 tonne

Source: WIND, DBS Vickers

Imports getting more prominent. Imports represented a mere 1.8% of total demand in 2015. This ratio, however, have surged to c.3% (or 5.6% including by-product volume) in 2016. While China hog prices have retreated from their peak in mid-2016, they remain at significant premiums over overseas prices (c. 60% more expensive than US hogs as of March 2017). This price disparity would continue to make imports a viable proposition, especially for downstream pork players. For example, WH Group, one of the major players to import pork into China from the US, has targeted imports to grow by another c.30% in FY17, following a spectacular surge of 87.5% in FY16.

Pork import as % of total demand

1.4% 1.4% 1.3%

1.8%

3.0%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

2012 2013 2014 2015 2016

Source: USDA, DBS Vickers



Page 9

China-US hog price (x)

0.0

0.5

1.0

1.5

2.0

2.5

Au

g/1

0

No

v/1

1

Feb

/13

Jun

/14

Sep

/15

Jan

/17

(x)

Source: CEIC, Bloomberg Finance L.P, DBS Vickers

Assuming that imports grow at a more modest CAGR of 15% going forward (vs a CAGR of 34.7% in 2012-2016), its contribution to total would swell to 7% in 2020 – this means that local pork production capacity would need to edge up merely 0.6% p.a. to fulfil the demand.

Pork import volume breakdown by geography (%) – 2016 – China

US13%

EU58%

Others29%

Source: China Customs, DBS Vickers

Focus on efficiency, quality and environmental issues. While our analysis above indicates that China, as a whole, may not need to expand its total pork production capacity by much, there would be significant changes in the composition of these capacities, most notably a shift from backyard hog farming towards big scale commercial farming, due to the following challenges:

(i) Land: As China’s urbanisation continues to rise, more land previously used as hog farms would be converted for other uses, both for commercial as well as environmental reasons. For example, the Ministry of Agriculture (MoA) has set targets to cap production growth in urban areas (see Appendix: Market Trend, Pg44). This would mean farms in these locations, mostly small backyard operations, would be forced to relocate or shut down.

China urbanisation rate

50.6 51.9

53.2 54.4

55.6

60.0

44

46

48

50

52

54

56

58

60

62

2011 2012 2013 2014 2015 2020E

%

Source: Historical - World Bank, Forecast based on Thirteenth Five-Year Plan; DBS Vickers



Page 10

(ii) Environmental: The Chinese government has been adopting stricter environmental regulations on hog farming. Following the launch of the new environmental law in 2015, the government is looking to move hog farms away from urban areas as well as waterways, with provincial governments assigning certain areas/zones where hog farming is prohibited or limited. Hog farms which are located in the restricted areas would be forced to close down or be relocated by end of 2017. Based on some industry estimates, these closures had already reduced total hog supply by more than 50m heads in 2016, with another 40m heads or so to be cut in 2017. As such, this would limit total hog supply in China. Based on the current classification, there is likely a gradual shift of production towards NE China which is a major corn-producing region, as well as to the Southwest (Yunnan & Guizhou).

The implementation of the environmental tax will also start in 2018, which will bring additional costs to hog farms, and thus further accelerate the industry consolidation, which has already been happening in the past few years.

Environment tax 2018

Law Descript ion

Air pollutant Rmb1.2/hog

Water pollutant tax Rmb1.4/hog

Noise pollution RMb350-11,200 per month(depending on noise level)

Applicable to hog farms above 500 hogs in size. If onlyaccounting for air and water pollutant tax, the minimum costfor a 500-hog size farm will be Rmb1,300.

Source: MoA. DBS Vickers



Page 11

(iii) Cost efficiency: Smaller and outdated farms are also

losing their competitiveness against big farms which should likely possess better cost efficiency given scale benefits. As environmental regulations are tightened, farms would need to invest more on related facilities, hence boosting their capex requirement as well as operating costs. Based on our estimates, around 15-16% of total capex for a modern farm nowadays are for investing in related environmental facilities. In the northern regions, capital expenditure is typically higher by Rmb100/head as heating facilities will be required. Smaller farms could find it hard economically to justify such an investment.

(iv) Quality assurance: Last but not least is the focus on food safety for both government and consumers. This is again an area where big farms have an advantage given their stronger control on production processes and better support in technology. For example, big farms like COFCO have established a product traceability system and obtained ISO qualification for its key production procedures. Wen’s, the biggest hog player in China, has also installed a real-time platform to monitor its farm operations.

How much investment would be required? Given the above challenges, outdated hog capacities in China, predominantly small backyard farms, will be phased out. In fact, the number of hog farms with fewer than 50 heads in China has been declining sharply in the past 15 years, shrinking more than half to 46m in 2014 from over 100m in 2002. As such, the capital expenditure required to support the growth in China hog production would be much more than just the organic growth, as that would include also replacement capex for those capacity closures.

No. of hog farms (Below 50 heads)

55.1

51.9

49.4

46.9

42

44

46

48

50

52

54

56

2011 2012 2013 2014

m no.


Estimate Rmb117bn needed for large-scale farming expansion. Assuming that the reduction of small farms with <50 heads continues at c.7% p.a. just like in the past few years, while farms with <500 heads sustain a moderate 2% p.a. decline, we estimate this would create a total shortfall of c.77m heads from now till 2020. This, coupled with an extra 40m heads required to produce additional pork demand of 3.5m tonnes organically, would translate into a total of 117m heads of hog capacity. Premised on around Rmb1,000 per head of estimated capex, this would translate into c.Rmb117bn total capex required for hog farms alone for the next five years.

China hog production data

Sow inve ntory

Hog Inve ntory

Ye a r-e nd l ive hogs

Pig produc tion

Pig s la ughte r

Import vo lume

Export vo lume Consumption

m he a d m he a d m he a ds m tons m he a d m tons m tons m tons2012 50.0 463 475 53.4 696 0.5 0.08 53.9 2013 49.4 457 474 54.9 716 0.6 0.07 55.4 2014 42.9 422 466 56.7 735 0.6 0.07 57.2 2015 38.0 384 451 54.9 708 0.8 0.07 55.6 2016 36.7 367 435 53.0 685 1.6 0.10 54.5

Source: WIND, China Customs, DBS Vickers



Page 12

China pork supply chain – who are the players?

In this section, we provide a detailed walkthrough for each of the key segments in the pork supply chain, including the feed stock producers, the hog farms, the slaughterers, the processed meat producers, as well as the distributors and retailers.

China pork industry – value chain

Breeding farms

Feed stock producers

Hog farms

DistributionWet marketSupermarket/hypermarketSpecialty storesRestaurantsHotels

Meat processors

Slaughterers

Importing

Feed & hog production Slaughter/processed meat Sales & distribution

Developing private labels

Food service expanding central kitchen

Developing specialty POS

Integrated model from feed to specialty outlet

Feed players building hog farms

Hog farmers building own feed

Source: Company data, DBS Vickers



Page 13

(A) Hog farms

A fragmented sector, but large players are emerging. A traditional sector used to be dominated by backyard farms, the Chinese hog farming sector has witnessed changes in the past few decades with the rise of large-scale commercial farming. Although market concentration is still low with backyard farmers remaining the dominant contributor of hog output, accounting for 57% as of 2015, their significance has been reducing sharply from 74% in 2007. Large scale farms, on the other hand, posted the strongest growth with their contribution having more than doubled from a mere 4% in 2007 to 10% in 2015. Mid-sized farms with more than 500 hogs in production have also witnessed strong growth with contribution rising to one-third of the total in 2015.

How does one be classified as a large-scale farm? To be classified as a large-scale hog farm, one must have a minimum of 300 sows and 5,000 hogs for slaughter per year. The farms must abide by the Animal Law, Animal Epidemic Law, Livestock and Poultry Scale Pollution, Prevention, and Control regulation, and other relevant laws and regulations. The farm must register for an Animal Epidemic Prevention Conditions Certificate, as well as have two consecutive years without major disease outbreaks or quality issues. In 2016, 208 hog farms qualified for large-scale production, according to MoA.

Hog production market share

74%

57%

22%

33%

4%10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2007 2009 2011 2013 2015

1–500 500-10,000 10,000+

Source: Frost & Sullivan, DBS Vickers

Commercial farming is the trend. There are various forms of hog operations in China but the most common types for the major players are (i) self-owned and operated industrial scale farms which engage in the whole hog production process from breeding and gestation to finished hogs; and (ii) contract farming where the hog company provides seed stocks, feed etc. to the farmers in return for the finished hogs.

Type of farming

Type o f fa rming

De sc r ip t ion Pros Cons

Industria l scale farming

This is the most labour and capita l intensive type of farming. The farm begins with the breeding and gestation process up until market weight. Although this takes the longest in ramping up, the stricter enforcement of environmental laws may require this to be the way forward to ensure a secure supply chain.

Secured integrated value chain, embraces the trend ahead

High initia l capital, assume most risk

Company + Farmer

Under contract farming, farmers typically use the Company's seed stock, feed, veteninary medicine, and in return is paid a growing income in an off-take arrangement.

Initia lly fast expansion, lower initia l capital; farmers will assume the growth, labour and land responsibility

The value chain not as secure; dependent on the farmers under contract; difficulty in finding new farmers when prices are high and profit may be higher if they se ll externally

Company + Farmer (looser model)

Farmer puts up the land, capital. In return, the Company will have a purchase contract with the farmer, with additional services such as farm management, veteninary medicine, feedstock

Fast expansion, lower initia l capita l; farmers take on market risks

Insecure value chain; may not be up to current strict environmental standards




Page 14

Currently, the largest hog player in China is the Guangdong-based Wen’s, with a market share of 2.5%, well above its closest competitors. Adopting the contract farming with a total of 22,200 farms under its helm, or the “Company plus farm” model, this relatively asset-light business model enables Wen’s to swiftly expand its capacity. The company’s annual hog production has doubled since 2012 to 17m heads in 2016, more than the combined total of the next four biggest players.

China hog production market share (2016)

2.5%

0.6% 0.5% 0.4% 0.3% 0.2%

0%

1%

2%

3%

0

3

6

9

12

15

18

Wen

shi

Foo

dst

uff

Zhen

gd

a

Mu

yuan

Ch

uyi

ng

A

gro

Zhen

gb

ang

CO

FCO

M

eat

Production volume (LHS) Market share (RHS)

MM head

Source: DBS Vickers compilation *Zhengda – derived from news sources

After Wen’s, the next five biggest hog players are Zhengda, Muyuan, Chuying, Zhengbang and COFCO Meat, each commanding a market share of 0.2-0.6%. Among these players, COFCO Meat adopts the self-owned and operated format while the others adopt a mixed approach with both self-owned and contract farming.

There are also numerous feed/pork players which expanded into hog farming as part of their business extension. Leading feed producers such as New Hope, for example, has been involved in hog production as well as slaughtering. Zhengda (CP Group) and Zhengbang, two major feedstock producers in China, are also in hog farming and are ranked among the top six in terms of hog production.

Large is getting larger. But no matter which business model these hog players adopt, the market shares of the leading players are expected to rise further. The top six accounted for merely 5.1% of the total in 2016 (2015: 4.1%). With the government’s increasingly stringent requirements on food safety and the environment, large-scale producers have also begun establishing strategic agreements with local governments to support local needs through a secure food chain. For example, in October 2016, Wen’s announced that it will build an administrative building, feed plants, commercial hog farms (both self-owned and company-family model) to supply 500,000 hogs in Bei-an, Heilongjiang.

China hog production market share (2014-16) – we estimate top 6 players added 5.8m heads of production in 2016

12.2 15.4 17.1

3.0 3.5

4.0 1.9

1.9 3.1

1.2

1.4

2.5

1.5

1.6

2.3

1.0

1.2

1.7

0

5

10

15

20

25

30

35

2014 2015 2016

m head

Wens Foodstuff Zhengda *Muyuan Foodstuff ChuyingZhengbang COFCO Meat

Source: DBS Vickers compilation

*Zhengda – derived from news sources

Northeast and Southwest the potential regions. Sichuan, Henan, Hunan, Shandong and Hubei were the top five pork producing regions in China, accounting for 45% of total pork production in 2015. Going forward, growth in some major regions such as Hunan and Hubei are expected to be limited given constraints on land and environmental issues. The government has classified key cities including Beijing, Tianjin, and Shanghai, as well as Jiangsu, Zhejiang, Fujian, Anhui, Hubei, Hunan and Guangdong, as the Development Control Area where new capacities would be limited. Instead, regions close to the Corn Belt, especially in Northeast and Southeast China, would be the key development areas.



Page 15

Pork output by province (2014) (‘000 ton)

Key dev elopment areaRestricted dev elopment areaPotential growth areaExcessiv e dev elopment area

Guangdong2,826

Hainan486

Hubei

Hunan4,581

Jiangxi2,598

Fujian1,511

Heilongjiang1,426

Inner Mongolia

Hebei2,812

Henan4,780

Jiangsu2,324

Shandong4,068

Anhui2,648

Guangxi2,663

Guizhou1,656

Beijing240

Tianjin299

Jilin1,404

Gansu527

Shaanxi918

Qinghai105

Xinjiang339

Tibet15

Ningxia77

Zhejiang1,270

Yunnan2,924

Liaoning2,403

Shanxi642

Sichuan5,272 Chongqing

1,585

Shanghai188

Source: Ministry of Agriculture, DBS Vickers



Page 16

Listed hog farms – key operating parameters

Wensh iF oodst u f f

M uy uanF oodst u f f Chuy ing A gro Z hengbang CO F CO M eat

廣東溫氏食品牧原食品雛鷹農牧集團正邦集團中糧肉食

300498 :CH 002714 :CH 002477 :CH 002157 :CH 1610： HK

HQ Guangzhou Henan Henan J iangxi Beijing

Date of establishment 1983 1992 1988 1996 2009

Est. market share 2.5% 0.5% 0.4% 0.3% 0.2%

Hog produc t ion v o lume (mn )

2016 17.1 3.1 2.5 2.3 1.7

2015 15.4 1.9 1.4 1.6 1.2

Sales (Rmb m)

2016 59,355 5,606 6,090 18,920 6,616

2015 48,237 3,003 3,619 16,416 5,056

2014 38,723 2,605 1,762 16,998 3,746

G PM (% )

2016 28.1 45.6 24.6 13.7 21.0

2015 19.6 24.6 15.3 9.3 9.3

2014 13.5 7.7 11.4 6.7 5.2

NPM (% )

2016 20.6 41.4 14.3 5.5 13.5

2015 13.8 19.8 6.4 1.9 (2.8)

2014 7.7 3.1 (10.5) 0.5 (8.1)

T o t al asset (Rmb m)

2016 41,438 12,931 16,928 12,259 8,307

2015 32,735 7,068 10,181 9,764 7,438

2014 27,686 4,119 7,241 8,205 8,029

T ot al liab ilit y (Rmb m)

2016 10,059 5,661 10,127 6,040 3,868

2015 9,705 3,546 5,470 6,212 4,794

2014 10,407 2,171 4,361 5,444 5,592

Net gearing (% )

2016 -3% 44% 9% -12% 23%

2015 -3% 42% 21% -38% 119%

2014 4% 56% 55% -79% 58%

Curren t rat io (x )

2016 1.9 0.7 1.8 1.1 1.3

2015 1.7 0.9 1.5 1.1 0.8

2014 1.3 0.9 0.8 0.9 0.8

Inv ent o ry day s (no . )

2016 90 314 94 46 29

2015 84 186 160 37 41

2014 91 157 328 37 96

Rec eiv ab le day s (no . )

2016 1 3 18 9 9

2015 1 1 22 10 12

2014 2 1 32 7 19

Pay ab le day s (no . )

2016 23 34 71 29 28

2015 17 83 71 24 19

2014 17 41 115 24 29

Cash c onv ers ion day s (no . )

2016 69 283 41 26 10

2015 68 105 112 23 34

2014 75 117 245 20 86 Source: Company data, DBS Vickers



Page 17

A-share listed hog farms – sales volume (‘000 heads) (monthly)

溫氏牧原正邦雛鷹農牧

Wenshi M uy uan Z hengbang Chuy ing Subtotal % y - o- y

J an-16 161 16 17 5 199

Feb-16 110 16 16 5 147

Mar-16 140 17 24 11 192

Apr-16 138 19 28 6 190

May-16 131 20 27 9 188

Jun-16 125 27 17 6 174

Jul-16 142 32 21 6 200Aug-16 144 34 17 11 206

Sep-16 140 26 11 8 184

Oct-16 152 27 15 8 203

Nov-16 161 31 17 12 221

Dec-16 169 47 17 12 246

Jan-17 142 40 13 8 203

Feb-17 126 40 15 8 188

Mar-17 159 43 18 16 236

2015 1,535 192 158 139 2,024

2016 1,713 311 226 99 2,349 16%

2016 1-3 411 49 56 21 537

2017 1-3 428 124 45 31 628 17%




Page 18

(B) Slaughtering & fresh pork manufacturers Top ten players account for 5.1% of market share. Although the slaughtering industry in China has been undergoing consolidation since 2008, the sector's concentration remains low. The top ten players in China represent a mere 5.1% of the total market (by sales revenue) in 2015, significantly below developed countries such as the US, where the top five players already account for almost 70% of the market (by daily capacity). The top player in China at the moment is Henan Shuanghui, and other major players include Yurun, People’s Food, Zhongpin, New Hope, etc.

Most players in the slaughtering industry are involved in multiple segments within the pork value chain. For example, major players such as Shuanghui and Yurun are also leaders in the processed meat market.

Fresh pork market share – (2015) by revenue

WH Group37.71%

China Yurun

23.03%

Top 3 - 10 players39.26%


Other players include People’s Food, Zhongpin, Goajin, Longda, TRS,COFCO etc

Overcapacity, but should see improvement ahead. Utilisation in the China slaughtering sector remains low, as reflected in weakening profitability in China Yurun (1068.HK), one of the leading slaughterers. China Yurun had a total of 55.8m heads of slaughter capacity in 2016, with an 11.9% utilisation rate, significantly below breakeven levels of c.30%.

According to the Outline of Development Plan of the National Hog Slaughter Industry (2010-2015), the Chinese government aimed to enforce stricter food safety and production efficiency to ensure faster industry consolidation. Hence, the number of slaughterhouse licenses had declined to c.4,000 in 2015 versus 28,600 in 2008. This trend is expected to continue with the number of slaughterhouse licenses expected to cut by another half to 2,000 by 2018, according to Frost & Sullivan's projection.

No. of slaughter house licences

0

5,000

10,000

15,000

20,000

25,000

30,000

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

E

20

17

E

20

18

E

No.


We believe one reason for the persistent overcapacity in the industry, despite the substantial cut in the number of slaughtering licenses’, is the presence of illegal slaughter houses, and the slow execution of local governments in phasing out non-compliant players. The situation, however, should likely improve going forward as the Chinese government has tightened the implementation of its regulations since mid-2016. As of December 2016, the government had already closed down 4,839 slaughter plants, of which 2,715 were illegal ones while the remaining plants were those not meeting the required standards.

Decline in slaughtering volume in 2016. With lower hog production as the market consolidates, slaughtering volume has been on a declining trend since 2015. In 2016, slaughtering volume declined 3.3% y-o-y. However, as hog production recovers gradually, we expect slaughtering volume to resume mild growth going forward.



Page 19

Slaughtering volume (quarterly)

0

50

100

150

200

250

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

m head


In terms of seasonality, January and December are typically the peak slaughtering seasons due to higher demand during the holidays. Slaughtering volume usually falls after Chinese New Year but begins to rise starting September in anticipation of the peak festive holidays.

Slaughtering volume (above scale-slaughter house)

10

15

20

25

30

Janu

ary

Febr

uary

Mar

ch

Apr

il

May

June July

Aug

ust

Sept

embe

r

Oct

ober

Nov

embe

r

Dec

embe

r

m head

2012 2013 20142015 2016 2017


A shift towards chilled fresh pork. Another key trend in fresh meat consumption is the shift towards chilled and frozen pork. Depending on different chilling processes, fresh pork in China are sold under three major formats - warm fresh pork, chilled fresh pork and frozen pork. While warm fresh pork, typically sold in traditional wet markets, remains the largest category representing 55.4% of domestic consumption in 2015, demand for it has been on a declining trend. As modern trade channels continue to expand, demand for chilled and frozen pork is expected to rise rapidly. Chilled pork, in particular, has

witnessed over 20% CAGR in 2010-15, and is expected to maintain a double-digit growth ahead.

China fresh pork consumption volume breakdown by category (2010-20E)

0

10

20

30

40

50

60

70

2010 2015 2020E

Chilled fresh pork Frozen fresh pork Warm fresh pork

MM metric tons

CAGR: 5.1%

CAGR: 2.9%

Source: Frost & Sullivan

This trend should benefit major players as their focus is more on the chilled and frozen meat category. Leading players like Shuanghui produces only chilled and frozen meat while Yurun derived more than 80% of its revenue from chilled pork. (C) Processed pork manufacturers

As mentioned, major slaughterers in China are also involved in the processed meat market. Shuanghui (under WH Group) is currently the biggest player in the market, followed by Yurun, People’s Food, Zhongpin and TRS Group. The top five players are estimated to account for 14.3% of the total market in 2015 based on Frost & Sullivan. Given that processed meats have higher added value, and opportunity to use by-products to enhance margins, both domestic and foreign players are paying close attention to this segment.



Page 20

China processed pork market share (2015) by sales

WH Group54.20%

Top 2 - 10 players45.80%

Source: Frost & Sullivan Other players include People’s Food, Zhongpin, Goajin, Longda, TRS, COFCO etc Westernisation and premiumisation. According to Frost & Sullivan, processed meat consumption is expected to grow at a faster rate of 6% in 2015-20E, against 2010-15 CAGR of 4.6%. This is driven by an increase in disposable income, expansion of middle class population and rising westernised dietary habits. Processed meat can be categorised into LTMP (ham, sausages and bacon) and HTMP (ham, sausages and canned pork). It is expected that LTMP products, such as bacon and ham, will grow at a faster rate as western-style products gain popularity while the cold chain in supporting the chilled product category improves.

Processed meat consumption breakdown by LTMP & HTMP

4 4 4.2 4.5 4.9 5.4 5.9 6.7 7.3 7.9 8.5

7.7 7.7 7.9 8.3 8.7 9.2 9.49.7 10.1 10.5 10.9

0

5

10

15

20

25

20

10

20

11

20

12

20

13

20

14

20

15

20

16

E

20

17

E

20

18

E

20

19

E

20

20

E

LTMP consumption HTMP consumption

MM metric tons

CAGR: 4.6%

CAGR: 6.0%

CAGRLTMP

c onsumptionHTMP

consumption2010-2015 6.30% 3.70%2015-2020E 9.80% 3.50%

w

Source: Frost & Sullivan

Although growth is expected to be quite promising for this segment, competition is also quite intense, as margins have been relatively attractive. Leading player WH Group, for example, has managed to command a decent operating margin of over 20% for its China packaged meat division, doubling that of its US packaged meat margins. To capture growth, packaged meat players have been striving to improve their product mix, with premiumisation becoming a more evident trend as consumers focus more on food safety and quality.

Shuanghui – Packaged meat gross profit margin

24%27%

28%32% 32%

20%23%

24%

31% 31%

0%

5%

10%

15%

20%

25%

30%

35%

2012 2013 2014 2015 2016

HTMP (高温肉制品 ) LTMP (低温肉制品)


Increasing foreign participation. The premiumisation trend has also attracted more foreign participation in the packaged meat product market, though overall market share of international brands remains relatively low at c.5% (based on Euromonitor). Hormel, which entered China as early as 1994, had tripled its processing capacity in 2016. Danish Crown also announced in late 2016 of its plan to invest around DKK300m in a new processing plant in Shanghai. WH Group has also introduced its Smithfield brand into China with the commencement of a dedicated production plant for its brand in 2016.



Page 21

Foreign company investment

Compa ny Origin De sc ription Re la tionship with Chine se compa nyHormel Food USA Food processor with brands under Applegate,

Jennie-O, Muscle Milk, Skippy, Spam and more. JV with Beijing Capital Agricultural Group, Shanghai Shangshi Meat Products

BRF S.A Brazil Meatpacker and food processor Strategic investment in COFCO Meat (US$20M)

Danish Crown Denmark A global meat processor To open up a meat processing plant in China

Smithfield USA Largest pork company globally Acquisition by Shuanghui International, now under WH Group

Source: Company compilation , DBS Vickers



Page 22

(D) Pork distributors and retailers Wet market still dominant. Pork is traditionally sold in the form of fresh and warm format through wet markets and now more so in modern retail chains (supermarkets, and hypermarkets), hotels and restaurants, and retail stores (grocery stores and branded chain stores). Around 70% of pork are sold fresh, while frozen (25%) and chilled (5%) are smaller but growing faster, particularly in the chilled category as China’s cold chain logistics improve.

Fresh pork distribution channel breakdown (%)

Fresh70%

Frozen25%

Chilled5%


… but modern trade picking up fast. Wet market still dominates the fresh pork channel, distributing over 56% of total volume in 2015. But with rapid urbanisation and the rise in middle class, the preference has been shifting towards modern retailers and retail stores. The modern retailer channel is expected to grow at a CAGR of 14% between 2015-20E, vs a decline in the traditional wet market channel.

Fresh pork distribution channel (%)

0

10

20

30

40

50

60

70

2010 2015 2020ERetail stores Wet marketModern retailers Hotels & restaurantsOthers

MM metric tonsCAGR: 2.9%

44.3

51.6

59.4CAGR: 3.1%

CA GR(10– ’15)

CA GR(15– ’20E)

Retailstores

8.40% 7.20%

Wetmarket

-0.90% -4.80%

Modernretailers

17.80% 14.00%

Hotels andrestaurants

8.30% 8.30%


Hotel and restaurants. Another key trend is the rise of the food services channel like hotels and restaurants, especially in the top-tier cities. Frost & Sullivan estimates sales in this channel to grow at over 8% CAGR till 2020. To tap into the food services channel, pork players are not only extending their processed product offerings, but some are also working with restaurant chains to collaborate at a central kitchen level, and even providing cooked processed products as a value-add for its clients. This subsequently reduces the proportion of processed meat sold to wholesalers, and increases it at higher-margin channels.

Specialty outlets to increase brand awareness. Pork players have also extended their channel offerings into specialty outlets (standalone outlets) under their own brands to increase brand awareness and create deeper penetration into local regions. This could be through wholly-operated stores or franchise outlets. Some have established membership loyalty programmes to enhance the number of repeat customers. In addition, specialty stores allow cross-selling of other brands and products, and provide a platform for pork players to gather more on-the-ground market insights.



Page 23

Pork brands

Compa ny Bra nd

WH Group Shuanghui (雙匯)

Yurun Yurun (雨潤)

People's Food Jinluo (金鑼)

No. 1 Pig No. 1 Pig (壹號土豬)

COFCO Meat Joycome (家佳康)

COFCO Meat Maverick (萬威客)

Beijing Shunxin Shunxin (順鑫)

Muyuan Longda (龍大)

Source: DBS compilation

E-commerce – the fastest-growing retail channel. Last but not least is the fast growing popularity of the e-commerce channel. The revenue of online fresh-food grocery shopping, reached Rmb50bn in 2015, and is expected to grow at a CAGR of 68% in 2015-18E, according to iResearch. The strong growth of this channel has two implications: (i) Domestic brands are placing more focus on digital marketing; (ii) the online platform also provides a channel for international brands to get into China.

Fresh grocery e-retailing

3.6 12.7 22.0 49.7 90.5

153.8

236.6

0.4%1.3%

2.4%

3.4%

4.8%

6.1%7.0%

0%

1%

2%

3%

4%

5%

6%

7%

8%

0

50

100

150

200

250

2012

2013

2014

2015

2016

F

2017

F

2018

F

RMB bn

Online grocery % of agriculture sales of retail products

Source: iResearch



Page 24

(E) Cold chain logistics

Along the pork industry supply chain, the growth in cold chain logistics in China has been crucial in supporting the development of downstream chilled meat and processed meat sector. According to China Warehousing Industry Bluebook 2016, the cold chain warehouse capacity grew by 12% in 2015 to 27m tonnes, with cold chain warehouse space per capita reaching 78 litres (vs 53 litres in 2011). The penetration, however, remains far below global level. US, for example, has a per capita space of 372 litres, more than 4x that of China.

Cold chain space per capita

78

372

0

50

100

150

200

250

300

350

400

China US

litre

Source: China Warehouse Industry Bluebook 2015, DBS Vickers

A report by ITA in 2016 also revealed that China’s cold storage penetration has been lower than some developing countries such as India and Brazil.

Cold storage by country per capita (cubic m)

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0.40

US

Jap

an

Au

stra

lia

Ind

ia

Bra

zil

Ch

ina

Ind

on

esia

Mex

ico

Cold storage capacity per capita

Source: ITA, US Department of Commerce, DBS Vickers

With the increasing demand for fresh products and rising food safety concerns, the cold chain logistics market is expected to sustain solid growth. At the moment, the market is fragmented but some large players have been emerging. Some pork players have also been developing their own cold chain logistic operation. Case in point being Shuanghui, which cold chain logistic operation is among the largest in China.



Page 25

China top 10 cold chain logistics provider (2015)

Capab ilit y Remark s

1 Rokin Logistics 80,000 sqm of refrigeratedwarehouse plus ov er 450 cold trucks

Bought by CJ Korea Express in 2015

2 Shuanghui Logistics 17 logistics centres plus 1,200 coldtrucks

Subsidiary of Shuanghui Dev elopment

3 Henan Xiany i Supply Chain Ov er 20 logistics centres A logistic solution prov ider and a subsidiary ofZhongpin

4 Shanghai Lingxian Logistics 55,000 sqm of refrigeratedwarehouse, 26 logistics centres

Subsidiary of Bright Dairy

5 ZM Logistics 600+ cold trucks Inv estors include Sequoia Cap, Cathay Capital PE6 SF Express 130,000 sqm of refrigerated

warehouse, 497 cold trucksLargest courier serv ice prov ider in China

7 Hav i Logistics Specialised in prov iding logisticsupport to restaurant brands

Global logistic prov ider

8 Zhongrong Logistics F ocus on meat, dairy , v egetable, andpharmaceutical cold chain logistic

Third-party cold chain logistic prov ider

9 DCH Logistics Manages ov er 3m sf of godown Subsidiary of DCH Grouop

10 China Merchants Americold 14 refrigerated warehouse with total154,000 sqm

J V between China Merchant Logistic & AmericoldRealty Trust

Source: China Cold Chain Logistics Committee, Company websites, DBS Vickers



Page 26

(F) The raw material suppliers – the feedstock producers

China: largest feed supplier. China is the largest feed producer globally, accounting for c.20% of global output, followed by the US and Brazil. Current demand for feed is driven mainly by the swine sector, which represented c.42% of total feed output in 2015, followed by poultry and aquaculture. During 2010-15, total feed output in China grew at a CAGR of 4.3%, or which swine feed output saw a stronger CAGR of 6.9%, according to China’s Feed Association.

2015 China feed output breakdown (%)

Swine42%

Poultry - egg15%

Poultry -meat28%

Aquaculture9%

Others6%

Source: China Feed Association; DBS Vickers

2010-2015 China total feed output

162181

194 191 192 200

0

50

100

150

200

250

2010

2011

2012

2013

2014

2015

m mt


Being the largest feed market globally, China has also produced some of the biggest feed companies. Domestic market leader New Hope Liuhe, estimated to command 7% of the market in 2015, ranked third globally in terms of volume

after CP Group and Cargill. Other major players in China include Haida, CP, Zhengbang, etc.

Feed player market share 2015

New Hope7%

Haida3% CPH

3%

Zhengbang2%

DBN2%

Tongwei2%Others

81%

Source: Companies, DBS Vickers

Feed players – both challenges and opportunities. The consolidation in the hog production segment during the past two years has affected demand for feed in China. While we expect hog production to resume growth, the new capacities should come mostly from large-scale farms, whose feed demand will be largely filled by self-production. Major hog farms like Cofco have been expanding their feed production capacity, looking to build a vertical integration chain.

While this would post a challenge for the feedstock companies, we believe their opportunities lie on the following:

(i) Market consolidation. The abuse in the use of feed additives and the H7N9 outbreak have led to stricter licensing standards on local farms, as well as on the feed companies to meet acceptable raw material standards (Regulation on the Administration of Feed and Feed Additives). The Ministry of Agriculture also initiated a strict re-licensing campaign in 2014, requiring feed companies to meet stricter standards. This has been causing a decline in the number of feed companies since 2014. On top of this, the government also plans to phase out the smaller feed manufacturers, given their inefficiency and pollution problems. It is estimated that around 3,000 smaller players will be closed in the next five years.

(ii) Material costs: Corn is the largest component of feed, amounting >60% of total raw material, thereafter followed by soybean meal. In September 2015, China announced a 10% cut on state support prices, the first since 2008 when the price support was put in place. The government has also announced stricter quality requirements on state purchases. If the standards are not met, the farmers will



Page 27

have to sell on the market at a discount. In March 2016, NDRC announced that the temporary reserve policy in Northern provinces and Inner Mongolia will be replaced by direct subsidies. With a cut in support prices and as indicated by the Thirteenth Five-Year Plan, corn planting acreage is expected to reduce by 70m acres in 2015-20E. Nevertheless, corn prices were roughly 90% higher in China as compared to the US in 2016. Hence, we expect domestic feed prices to decline in FY17F.

Corn price – China vs. US

0.5

1.0

1.5

2.0

2.5

3.0

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12

Jul-1

2

Jan-

13

Jul-1

3

Jan-

14

Jul-1

4

Jan-

15

Jul-1

5

Jan-

16

Jul-1

6

Jan-

17

US corn China corn

Rmb/kg

Source: Bloomberg Finance L.P, DBS Vickers

Liberalising agricultural sector. In summary, this indicates rising liberalisation of the market, with efforts to relieve state reserves as well as to narrow the rising pressure of cheaper imports.

Thirteenth Five-Year plan production target

2015 2020

Corn m acre 570.0 500.0Soybean m acre 98.0 140.0Cotton m acre 57.0 50.0Oil Planted m acre 210.0 200.0Meat production m tons 86.3 90.0


Corn production

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

0

50

100

150

200

250

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

m ton

m tons % y-o-y

Source: MoA, WIND, DBS Vickers DDGS: some reprieve for feed producers. Unlike pork, we believe corn alternatives may find it more difficult to enter into China as a form of protectionism. A smaller proportion of feed is comprised of Distiller-Dried Grain Soluble (DDGS). DDGS is a corn-based by-product used as a substitute for corn and soy meal. In 2015, China purchased 6.8m tons of DDGS, valued at US$2bn. However, since September 2016, MOFCOM has been stepping up on anti-duty subsidies on DDGS, in efforts to support the domestic corn sector. Anti-dumping duties will now range between 42.2% and 53.7%, while anti-subsidy tariffs will be between 11.2% and 12% over the next five years (previous anti-dumping duties: 33.8% and anti-subsidies: 10-10.7% in September 2016).

DDGS export (US to China)

2.2 2.8

6.2

5.4

3.4

0

1

2

3

4

5

6

7

2011 2012 2013 2014 2015

m ton




Page 28

Business model

(i) Dissecting cost of producing a pig in China

The biggest cost component in raising a hog is feed, which is estimated to account for c. 60% of total production costs in China. Feed mainly comprises of corn, follow by soybean meal, cottonseed and other oilseed meals. While some backyard farms still use fodders, which include food scraps, vegetables, and other by-products of food processing, well over 90% of the farms in China now use feed concentrates (grains, oilseed meal, etc) given its better effectiveness in weight gain.

Pork production cost and income breakdown (%)

Farm profit7%

Farm cost52%

Retail-wholesale profit &

cost14%

Slaughter profit &

cost 27%

Source: Yearbook of Cost and Income of Agricultural Products (China),DBS Vickers Assumptions: (i) Based on live hog weight of Rmb15.6/kg, and cost to raise on

Yearbook scalable farming costs (ii) 85% pork yield Other costs include utilities, labour, depreciation, vaccine and other expenses. Hog production costs in China have been rising sharply since 2005, largely due to higher feed costs, as well as rising labour costs. The lower feed costs since 2015 has helped ease overall production costs in the past two years.

Hog production costs - US

0.0

0.5

1.0

1.5

2.0

2.5

1990 1995 2000 2005 2010 2015

Feed Piglet Other Retail Pork Price

Dollars per lb


In terms of profit and cost allocation along the whole industry chain, we estimate that the farms and the retailers/distributors earn the biggest portion, while the slaughterers' profits are slimmer. For every kg of pork sold in China, we estimate that close to 60% of the value goes to the farms.

Retail price breakdown by industry chain players

0.89 9.8 12

21.8

33.3

55.1

2.216.1 18.3

8

26.3

4.7

31

0102030405060

Farm

er P

rofit

Farm

er C

ost

Farm

er V

alue

Cos

t of S

laug

hter

Who

lesa

le

valu

e

Who

lesa

le

& re

tail c

ost

Reta

il val

ue

Rmb/kg

US China

Source: Yearbook of Cost and Income of Agricultural Products (China),DBS Vickers estimate



Page 29

(ii) China costs vs global level

While China is the world's largest producer of pork, its hog production costs are relatively high compared to other countries. Based on ADHB, farmer cost in the US is c.56% below the cost in China, likely due to cheaper raw materials, economies of scale and better farm management. China's hog production costs are also relatively high against key European and American producers.

Cost of hog production (2015/16)

0.2 1.5 0.9 1.5 0.5

2.0 1.2

1.9 1.5

1.1 1.1

1.0

7.7

7.4

5.5 6.6

3.8 11.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

China (Scalable farming)

EU USA Denmark

Indirect cost Other variable costs

Labour Feed

Piglet

Rmb/kg

13.7 12.0

8.7

Source: Yearbook of Cost and Income of Agricultural Products (China),ADHB, DBS Vickers

Cost of hog production changes % y-o-y

2012 2013 2014 2015

Total production cost 3% -9% -9% 15%

Live hog price 7% 1% -2% 0%

Piglet 4% -7% -11% 11%

Feed 9% 5% 2% -4%

Energy 0% -3% 2% -1%

V eterinary 1% 3% 2% -3%

Mortality -4% 1% -8% -4%

Technology -1% -1% 0% -4%

Indirect cost 3% 4% 11% -2%

Labour cost 22% 15% 6% 4%

Source: Yearbook of Cost and Income of Agricultural Products (China),DBS Vickers

In the following sections, we compare some of the key operating parameters and examine the cost differences in more details:

(1) Feed cost per kg

China's feed costs have doubled in the past ten years, a reflection of higher corn prices. Due to the government's pricing policies, China's corn prices have been at a significant premium over that in US. We estimate that China’s feed cost per kg is close to double of US’s feed cost, while it stands at 4% above EU's. We note feeder cost is not included in China’s feed cost/kg.

Feed cost per kg

7.7 7.4

5.5

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

China EU USA

Rmb/kg

Source: Yearbook of Cost and Income of Agricultural Products (China),AHDB, DBS Vickers

In terms of daily weight gain, China's average daily weight gain is largely similar to EU and USA.

Average daily weight gain

812

821

814

806

808

810

812

814

816

818

820

822

China USA EU

g

Source: Yearbook of Cost and Income of Agricultural Products (China),AHDB, DBS Vickers



Page 30

(2) Feed conversion ratio

Feed conversion ratio is an indicator of the efficiency of feed use. Based on NDRC and USDA data, China’s industry feed ratio is at 3.0-3.1x (2006-15), a premium versus the US's 2.76x (2013). However, based on our conversations with large-scale players, their feed conversion ratio has already reached 2.8x. We expect large-scale players to continue focusing on improving feed mix, environmental impact, genetics, and to pay close attention on improving feed diet. Wen’s, the largest hog producer in China, indicated that its feed conversion ratio is as low as 2.4.

Feed conversion ratio (x)

3.00

2.80 2.76 2.83

1

2

3

China industry avg.

China large-scale

US (2015) EU (2015)

x

Source: CNDRC, USDA, DBS Vickers

(3) Pig weaned per sow

In terms of piglets weaned per sow ("PSY"), China's large-scale farms average 22-23 piglets weaned per year, but the figure is likely to be lower at smaller backyard farms. Although some farms such as New Hope reported PSY of more than 26 heads (in 1H16), China farms' PSY in general is towards the low end compared to global standards, suggesting a higher mortality rate and further room for better nutrition.

Average no. of pigs weaned per sow/annum

22.6

25.3

26.8

21

22

23

24

25

26

27

28

China USA EU

weaned/sow/yr

Source: AHDB (based on 2014), Company data (China - COFCO Meat), DBS Vickers

(4) Average live weight at slaughter

Production cycle is slightly longer in the Western countries, where they typically grow the finishing hog to a heavier weight to achieve maximum production efficiency. On the other hand. China's average live-weight at slaughter is slightly lower, likely due to higher demand for piglets, as well as lower efficiency.

Average live-weight at slaughter

117

128

120

110

112

114

116

118

120

122

124

126

128

130

China USA EU

kg

Source: Yearbook of Cost and Income of Agricultural Products (China), ADHB , USDA, DBS Vickers



Page 31

(5) Mortality rate

With a larger percentage of hog farms below 500 hogs in size, we expect hog farms in China to be more vulnerable to disease outbreaks, and higher mortality rate.

(1) Pre-weaning piglet losses – Pre-weaning process is likely the most vulnerable stage in hog production, as the piglet will detach from milking to dry feeds. To reduce the overall mortality rate, stronger vaccination of gestating sows, regular hygiene procedures for sows in the farrowing units, as well as greater nutrition (iron, milk) for the newborns and piglets are various ways to reduce overall mortality.

(2) Finishing mortality rate – Feeder-to-finish mortality rate is generally lower. Key options to improve this would include maintaining optimal temperature in barns, hygiene, environmental waste treatment, and pro-active screening of diseased animals.

(6) Labour costs

Labour is one of the key concerns for the upstream hog players, given the high worker turnover rate and lack of skilled agriculture labour force. In terms of percentage of total production cost, labour cost is largely in-line to Western countries. According to Yearbook of Cost and Income of Agricultural Products, labour costs account for 11% of total production costs, versus 12.4% in the US and 9% in EU. To improve efficiency, we expect labour spent on per hog basis to be reduced as the industry continues to move towards large-scale farming.

Labour cost as % of production cost

11.0%

9.0%

12.4%

0%

2%

4%

6%

8%

10%

12%

14%

China EU USA

Source: AHDB, Yearbook of Cost and Income of Agricultural Products(China), DBS Vickers

(7) Hog-to-corn ratio

Hog-to-corn ratio. This is a strong indicator to determine the pork industry’s profitability. In the US, when the ratio is above 15x, it indicates attractive profitability. In China, the hog-to-corn ratio range is much lower, likely a reflection of the higher feed costs. We expect the pork sector to attract capacity growth when the ratio is at 6.5x and above.

Hog-to-corn ratio (US vs. China)

0

2

4

6

8

10

12

0

5

10

15

20

25

30

Jan/

14

Apr

/14

Jul/1

4

Oct

/14

Jan/

15

Apr

/15

Jul/1

5

Oct

/15

Jan/

16

Apr

/16

Jul/1

6

Oct

/16

Jan/

17

US (LHS) China (RHS)

X X

Source: Iowa State estimates, CEIC, DBS Vickers

We believe the lower production costs in the US largely reflect the stronger productivity of the hog players there. With much higher market concentration in the US hog industry, the cost difference lies in:

(i) Higher average finishing hog weight in the US at least over 120kg per head, compared to China where the typical weight is around 117kg;

(ii) Closer proximity to cheaper and readily available feed materials for US players, while China feed costs, representing 60% of production costs and comprising corn, soybean, DDGS and other materials, are typically higher.

(iii) Better feed conversion, lower mortality rate in the US, hence better yields.



Page 32

(iii) Imports to grow Net importer of pork. As China demand grows, import has become increasingly important. In 2006, the blue ear swine disease sent hog prices surging, and created an opportunity for imports, leading the boom in 2006-2008. In 2009, there was an immediate plunge in imports due to the 2009 flu pandemic (Swine Flu). This caused China to fully ban pork imports from countries such as the US. The ban was thereby lifted in 2010, which led to a resurgence of pork imports. Currently, China’s pork self-sufficiency is roughly at c.97%, which we expect to drop as the market consolidates.

Import requirements. Imports are typically subjected to a tariff (fresh or chilled – 20%, and frozen – 12%), as well as 13% VAT for most items. Based on industry players, an average of 1.4x above domestic prices will be required for import volume to be profitable. Aside from this, imported pork must not contain ractopamine, and the meat processing plants are required to be monitored by a third-party testing organisation.

US pork export to China (Inc. HK) (Volume & Value)

0

200

400

600

800

1,000

1,200

0

100,000

200,000

300,000

400,000

500,000

600,000

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

US$mton

Volume (LHS) Value (RHS)


Surge in import by 29.6% in February 2017 YTD. In 2016, pork import volume and value grew 108% to 1.62m tons and 120% to US$3.2bn respectively, accounting for 3.1% of domestic pork production. If we include pork by-products, imports account for 5.6% of total volume. In February YTD, pork import volume grew 29.6% y-o-y to 2.2m tons. The key exporting countries include the EU, US, Canada, Germany, France and Spain.

EU accounts for 58% of pork imports. EU accounted for 58% of total pork imports into China in 2016, followed by the US (13%) and Canada (11%).

China monthly import data (2016) –

Dec - 16 Y T D % y - o- yY T D

% y - o- yImport v alue (US$m)

Canada 27 320 94 205Spain 31 520 (9) 104Argentina 7 87 29 70Chile 7 87 11 68UK 6 68 7 48F rance 11 189 (26) 93Denmark 14 334 (30) 90Germany 49 666 0 83US 25 409 57 109T ot al 213 3,190 14 120

Import v o lume (m k g)Denmark 4 43 32 53Chile 4 46 8 47UK 4 43 17 31F rance 5 87 (27) 103Canada 16 179 94 192Spain 16 260 (7) 90Denmark 7 159 (27) 96Germany 27 344 7 68US 14 216 58 112T ot al 113 1,620 18 108




Page 33

Case study of a global player - USA

The US now commands one of the most competitive pork industries in the world. Its hog production, despite much smaller than that of China, has been growing at a decent 1.3% p.a. during 2011-16, with 20.8% of its production are now exported to other countries. The development in the US pork industry, which saw significant productivity gain as well as structural changes in the past two decades, could possibly shed some lights on how China pork industry could move going forward.

Hog production – China vs US

(m head) China US

2011 662 111

2012 698 113

2013 716 112

2014 735 107

2015 708 115

2016 685 118

2017e 672 123

Product ion v olume


Hog farming consolidation. The change in market structure has been a major trend in the US pork industry since the 90s. While the US hog production has been rising, the number of hog farms declined by more than 70% between 1992 and 2009, based on USDA. This resulted in larger farms; the average size of a hog farm grew from 945 heads in 1992, to 8,389 heads in 2009.

Average size of a hog farm - US

945

8,389

0

2,000

4,000

6,000

8,000

10,000

1992 2009

No. of hogs per farm


Back in 1994, hog production from farms with more than 5,000 heads in the US represented less than 30% of total. In 20 years’ time, this number has surged to 93% (2014), indicated that bigger hog farms are taking market shares from the smaller players – number of hog operations with fewer than 5,000 heads shrank significantly from over 210,000 in early 90s to fewer than 70,000 in 2006.

Pig crop distribution by size of operations - US

0%

20%

40%

60%

80%

100%

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

5000+ Head places <5000 Head places

Source: U.S. Pork Powerhouse, Successful farming, USDA, DBS Vickers



Page 34

Specialised farming & contract farming. Apart from market structure, there has also been a notable change in the way farms operate. Farms have been increasingly focused on a single phase of operation, rather than the traditional farrow-to-finish format (i.e. from hog breeding to hog raising). Market shares for feeder-to-finish producers (only involved in raising piglets to market hog) increased from 19% in 1992 to 47% in 2009 while farrow-to-finish players saw shares declining from 54% to 23% during the same period.

Type of hog producers as % of total operations -US

0%

10%

20%

30%

40%

50%

60%

1992 1998 2004 2009

Farrow-to-finish Feeder-to-finish


This apparent shift is likely also related to the increasing popularity of contract farming, which represents 48% of US hog production in 2009, a significant jump from merely 3% in 1992.

Improvement in productivity. The above changes, coupled with adoption of better technology and knowhow in genetics, equipment, veterinary services etc have helped to improve overall productivity in the industry. During 1992-2009, US hog production costs have fallen between 27-43%, with significant improvement noted in key parameters such as hogs per litter, feed and labour efficiency.

Hog per litter - US

0

2

4

6

8

10

12

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

Hogs per litter


Scale matters. The structural change in the US pork industry in the past 20 years also helped producing some of the biggest pork companies in the world. The top three pork companies in the US now have more sows than the combined total of the top 25 producers back in 1996. Smithfield, the leader in the industry, has grown its sow stocks by more than 7 times in the past 20 years.



Page 35

Top U.S pork companies

Top U.S. Pork play ers - by no. of sows

Top 10 in 2016 Top 10 in 1996

Smithfield 880,000 Murphy Family 260,300

Triumph Foods 385,500 Smithfield 112,000

Seaboard Foods 290,000 Carroll's Foods 111,400

The Maschhoffs 218,000 Tyson Foods 110,000

Pipestone System 185,000 Premium Standard 105,000

JBS 177,000 Prestage Farms 102,200

Prestage Farms 175,000 Cargill 90,000

Iowa Select Farms 171,000 Seaboard 90,000

Carthage System 145,000 DeKalb Swine 72,000

AMVC Management 115,000 Iowa Select Farms 62,000

Total 2,741,500 Total 1,114,900

Top 10 as % of total 45% Top 10 as % of total 17%


How did all these big players grow to their current size? Through both organic expansion as well as acquisition. Smithfield became the top player via acquisition of two of its biggest rivals, Carroll’s Foods and Murphy Family Farms. Triumph Foods was formed by several major pork producers. Seaboard Foods grew both organically as well as through acquisition.

Smithfield’s number of sows

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

19

94

19

96

19

98

20

00

20

02

20

04

20

06

20

08

20

10

20

12

20

14

20

16

Acquired Carroll's Foods & Murphy Family Farms

Acquired Premium Standard FarmsNo of sows


Vertical integration. Another common feature among these big players is that they are integrated players involving in multiple stages of the production chain. Smithfield is the leading player in hog production, slaughtering as well as

processed meat production. Both Triumph and Seaboard are also engaged in the processed meat business.

Slaughter daily capacity market share (Spring 2016)

Smithfield26%

JBS20%

Tyson Foods18%

Hormel8%

Triumph Foods5%

Others23%

Source: EMI Analytics, National Hog Farmers, DBS Vickers

Implications to Chinese players. We believe the development in the US pork industry indicated that there should still be lots of room for China to improve its productivity, as the market consolidation should drive scale of pork players. Rising adoption of contract farming, which enabled better specialization as seen in the US, should likely apply to China too. One such example is the market leader Wen’s, which specialization in the contract farming model has helped to double the company’s hog business in 4-years’ time. Last but not least, some form of integration along the supply chain appears to be the way to help efficiency as well as to ensure food safety.



Page 36

Opportunities across the industry chain Food safety a top priority. Food safety and productivity improvement are the key priorities of the Chinese government. To achieve this, the government has imposed licensing requirements for the feed sector, hog farms and slaughterhouses, as well as strengthening environmental regulations as a way to consolidate the market. These changes would bring opportunities to different players along the industry chain. Hog farm – scale, knowhow and integration. Hog farming, being the most fragmented segment along the chain, is likely to be the most vibrant segment in terms of market potential. Apart from expanding scale to capture the shortfall due to closures of smaller farms, there are room for industry players to further improve their productivity via better farming technology and knowhow.

Meanwhile, we expect the Company + Farmer model to get increasingly popular, as it offers a speedy way of expanding with much lower capital needs. Last, but not least, is the potential for hog farms to extend their presence along the supply chain (upstream to feed production and downstream to fresh meat and processed meat manufacturing) to capture greater profits.

Other segments with opportunities. With demand for processed meat expected to outgrown other segments , we expect product innovation, brand awareness, and consumers trading up will be the key captures. We also expect food services will require accountability from its upstream, which represents opportunities for stronger partnerships. Lastly, import should display strong growth, as long as the hog price disparity (including tariff) remains attractive.

Stabilising overall profitability in the sector. While pork prices may appear to be softening, we believe the market consolidation, softer corn prices and volume expansion by large players will continue to stabilise the overall profitability in the sector. Pork imports and potential overseas partnerships could drive greater premiumisation in the long run. For a mature market, the pork sector is marked to grow in a stable manner, favouring large-scale players.



Page 37

Growth opportunities

No. K ey t rends & opport un it ies ExamplesF eedst ock a - Since the removal of floor pricing in corn, hog

producers are building internal capacity .- COFCO Meat plans to build feedmills to fulfil 35-40% ofits needs by 2017F .- Wenshi is fully sufficient in its feedstock to supply to itsfarmers.- CP Group, Zhengda, New Hope are either building hogfarms or building farm+company model to capture demand.

Hog f arm a - With stricter env ironmental laws, backyard farmersare forcibly removed if they do not meet therequirements

- The closure of hog farms reported up to 50m heads in2016

b - Players are fast expanding their capacity / influencein regions to gain market share, which requires highcapital

- Heavy capital needed to own their own farms, while someopt for Company+ Farmer off-take contracts to expand ata faster pace.- Larger players have set long-term targets of close todoubling their existing capacity .

c - There are difficulties in recollecting land due to thefragmentation of rural land.

- By offering Company -Farmer Contract, the Companyguarentees a growing fee to farmers to ensure stableincome, thereby able to consolidate land use.

Slaught er /f resh pork

a - There is an overcapacity situation in the sector atthe moment, which has resulted as the weakest linkin the pork sector in terms of profitability .

- There may be opportunities in the sale of defunct plants.

b Distribution channel is changing from wet-marketsto modern and e-commerce fresh retailing channels.

F ranchising or own-operated specialty outlets have been agood option in adapting to such changes, and improveretailing margins.

Processedpork

a LTMP is increasingly a more popular choice of meat. - Product innovation, brand awareness and marketpenetration will be required to gain market share.

b Distribution channel is changing from wet-marketsto modern and e-commerce fresh retailing channels.

Building brand awareness in local areas, and working withe-commerce retailers would be key to gain market share asthe channel noticably shifts.

c Import volume is growing rapidly as consumers areincreasingly able to accept chilled pork.

International players are looking for domestic partners or attheir own capacity to expand over. Danish Crownannounced it will be building its own processing plant inNov '16.

d Food chains demand greater accountability from theupstream value chain to ensure greater food safety .

Hog players could work with food chains to produce value-added products and serv ice the entire supply chain toensure greater food safety .




Page 38

Stock recommendation

Stock picks. To conclude, we prefer pork players with ability to develop an integrated supply chain. We expect profitability along the supply chain will continue to fluctuate in the midst of rapid market consolidation and pork price cycles over the next few years. Among listed players, we like WH Group (288.HK) and COFCO Meat (1610.HK), both of which have extensive presence along the hog supply chain.

While we believe the volatility in pork price would remain a concern for upstream pork players, whose profitability would be affected, we are convinced that market consolidation is inevitable. This should favour the large-scale farms as the government is taking action to remove unqualified hog farms in the next few years. Hence, although we expect hog prices to decline in FY17, we maintain BUY on COFCO Meat, given its stronger-than-industry volume growth and attractive valuation.

WH Group (288.HK, BUY). We like WH Group for its market leadership in China as the top slaughterer and packaged meats processor. Despite a decline in packaged meat sales volume in FY16, market share for Shuanghui’s packaged meat products reached 39.6% (+1.9ppts y-o-y) in the national supermarket channel, according to National Supermarket Channel Share (CICC data). We expect packaged meat’s margin to improve in 2H as impact from lower raw material costs kick in. We are also positive on its US operations, as solid upstream operations should support growth in its export volume. Maintain BUY on WH Group, with TP at HK$7.7/sh.

COFCO Meat (1610.HK, BUY). COFCO Meat is one of the leading hog producers in China with production volume reaching 1.6m heads as of FY16. We expect the Company will expand its upstream capacity from 3.5m in FY16 to 5.5m heads in FY20E. Apart from improving productivity efficiencies, the Company is expected to expand its feed self-sufficiency ratio from 5% to 35-40% by end-FY17. The Company also offer sufficient slaughtering and packaged meat facilities to support its growing upstream supply. Valuation is undemanding at 5.4x FY17F PE. We rate COFCO Meat as a BUY, TP at HK$2.1/sh.



Page 39

Peers valuation

M k t PE PE Y ield Y ield P/Bk P/Bk RO E RO E

Currenc y Pric e Cap F isc al 17F 18F 17F 18F 17F 18F 17F 18F

Company Name Code L oc al$ US$m Y r x x % % x x % %

ChinaCOF CO Meat*(中糧肉食)

1610 HK HKD 1.67 837 Dec 5.4 4.6 0.0 0.0 0.9 0.8 19.1 18.7

WH Group*(萬洲國際)

288 HK HKD 6.82 12,837 Dec 11.7 10.6 2.6 2.8 1.8 1.6 16.3 16.1

Henan Shuanghui 'A '(雙匯發展)

000895 CH CNY 21.67 10,354 Dec 14.4 13.0 6.4 7.5 4.3 4.2 30.8 32.6

GD Wenshi F ood(溫氏股份)

300498 CH CNY 27.46 17,299 Dec 13.1 12.9 2.3 1.1 3.1 2.6 26.0 20.3

Muyuan F oods 'A '(牧原股份)

002714 CH CNY 25.34 4,251 Dec 9.3 9.1 1.0 1.0 2.9 2.2 33.0 25.9

Chuy ing Agro-Past. 'A'(雛鷹農牧)

002477 CH CNY 4.69 2,129 Dec 7.5 9.3 n.a. n.a. 2.2 1.8 20.8 19.2

G lobal

Pilgrims Pride PPC US USD 24.71 6,147 Dec 11.5 11.3 0.5 0.5 5.6 n.a. 45.3 37.4

Ty son F oods 'A'(泰森食品)

TSN US USD 57.88 20,733 Sep 11.6 11.7 1.6 1.9 2.2 1.9 18.8 16.7

Hormel F oods(霍梅爾食品)

HRL US USD 34.58 18,290 Oct 20.8 19.8 1.9 2.1 3.9 3.6 18.8 18.3

J BS On J BSS3 BZ BRL 11.05 9,477 Dec 7.7 6.7 2.4 3.3 1.0 0.9 14.4 14.5

A v erage 11 .3 10 .9 2 .1 2 .3 2 .8 2 .2 24 .3 22 .0

Source: Thomson Reuters, *DBS Vickers



Page 40

Hog inventory

Sow inventory

350

370

390

410

430

450

470

490

Feb-

12

Aug

-12

Feb-

13

Aug

-13

Feb-

14

Aug

-14

Feb-

15

Aug

-15

Feb-

16

Aug

-16

Feb-

17

m head

30

35

40

45

50

55

Dec

-11

Apr

-12

Au g

-12

Dec

-12

Apr

-13

Au g

-13

Dec

-13

Apr

-14

Au g

-14

Dec

-14

Apr

-15

Au g

-15

Dec

-15

Apr

-16

Au g

-16

Dec

-16

m head

Source: WIND, DBS Vickers Source: WIND, DBS Vickers

Live hog price

Feedstuff: corn price

8

10

12

14

16

18

20

22 Rmb/kg

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

Nov

/13

Jan/

14

Apr

/14

Jul/1

4

Oct

/14

Jan/

15

Apr

/15

Jul/1

5

Oct

/15

Jan/

16

Apr

/16

Jul/1

6

Oct

/16

Jan/

17

Rmb/ton

Source: CEIC Source: CEIC



Page 41

Peer comparison table – feed

New Hope L iuheCo.

G uangdong HaidG roup

J iangx iZ hengbangT echno logy

BeijingDabeinong

T ongw ei Co .

新希望六和廣東海大江西正邦科技北京大北農通威股份

000876 :CH 002311:CH 002157:CH 002385:CH 600438:CH

HQ Sichuan Guangzhou J iangxi Beijing SichuanF eed % of sales 59% 79% 80% 90% 93%Est. market share(based on vol)

7.2% 3.1% 2.4% 1.9% 1.9%

F eed sales volume (mn ton) 14.49 6.30 4.83 3.82 3.80

Major feed productsSwine, poultry and

aquacultureAquaculture Pig and poultry

Pig, poultry andaquaculture

Aquaculture andpoultry

F inanc ials Rmb m Rmb m Rmb m Rmb m Rmb m

Sales2015 61,520 25,570 16,416 16,098 14,0792014 70,012 21,090 16,998 18,445 15,4092013 69,395 17,930 15,582 16,661 15,190G PM2015 6.9 9.4 9.3 24.3 13.42014 5.9 9.8 6.7 22.0 11.32013 5.9 8.5 5.4 20.7 9.8NPM2015 3.6 3.9 1.9 4.4 2.42014 2.9 3.4 0.5 4.3 2.12013 2.7 2.4 (0.2) 4.6 2.0Sales f rom F eed2015 41,685 20,170 13,096 14,544 13,1322014 49,398 19,435 14,259 17,188 14,2552013 46,103 16,877 13,788 15,676 14,014G PM f rom F eed2015 7.0 11.1 7.9 22.1 13.42014 6.2 9.7 5.8 20.0 11.62013 6.8 8.0 4.8 18.8 9.9Net gearing2015 10% Net cash 38% 18% 11%2014 16% Net cash 79% 29% 12%2013 -25% Net cash 182% 16% Net cashCurrent rat io2015 1.0 1.3 1.1 1.9 0.92014 1.0 1.7 0.9 1.6 1.02013 0.9 1.5 0.7 1.5 1.1Inv en t ory t u rnov er2015 21 26 37 50 252014 26 38 37 49 292013 25 32 33 54 28A R2015 2 8 10 19 112014 2 9 7 12 92013 3 10 6 8 8A P2015 11 10 24 26 122014 12 16 24 20 152013 13 13 24 23 19Cash conv ers ion day s2015 13 23 23 43 242014 16 30 20 41 242013 15 28 15 39 17




Page 42

Appendix: Market trends

Environmental concerns leading to closure of smaller farms. In March 2013, it was reported that at least 10,000 dead pigs were found floating on the Huangpu river, near Shanghai Songjiang section. The carcasses were found to have porcine circovirus, and were disposed by farmers in Jiaxing. In other years, pork products were found to contain clenbuterol, a lean meat chemical, which caused a recall of products.

Since 2014, China began the reconstruction, or closure of several pig farms in China. According to news sources, over 13k farms closed down in Fujian Province in 2H15, while 70k farms closed in Zhejiang by end-Sept-14. Several more news sources conferred in Guangdong, Guangxi, Hunan, Shandong, Hainan and more on news of forcible closure of hog farms not up to regulatory standards.

Heavy investment into upstream pork. The closure of small hog farms has enticed large companies to expand their hog farming capabilities. In 2016, hog players came forward with indicative targets for the next 3-10 years on hog production

capabilities via organic growth, collaboration with family farms or offering services for farmers (farm structure, feedstock, and veterinary medicine).

While the companies’ targets appear aggressive, several of the companies may rely on management or cooperation with family farms, thereby lowering overall investment expenditure.

Environmental standards set in respective regions

Reconst ruc t ion or c losure of p ig f arms

2014 Anhui (69,597 farms closed, 97.92% of total)

2015 Fujian (30,900 farms closed, 90% completed), Sichuan

2016 Beijing, Shanghai, Nanchang, Louxing District

2017Shaanxi, Liaoning, Shandong, Henan, J iangsu,Guangdong, Guangxi, Guizhou, Yongchuan

2020 Yunnan

Source: News sources, DBS Vickers



Page 43

Appendix: Which province produces the most meat?

Pork accounts for 63.4% of total meat output. In 2016, China total meat output reached 83.64m tons (-1.1% y-o-y). Of which, pork production reached 52.99m tons (-3.4% y-o-y), versus beef at 7.17m tons (+2.4% y-o-y), poultry at 30.95m tons (+3.2% y-o-y), and dairy at 36.02m tons (-4.1% y-o-y).

Top 10 provinces account for 58% of output. The top 10 pork production provinces are Sichuan, Henan, Hunan, Shandong, Hubei, Yunnan, Hebei, Guangdong, Anhui, and Guangxi. These provinces account for roughly 58% of total output.

Meat production breakdown by province (%) – 2014

0%10%20%30%40%50%60%70%80%90%

100%

Sich

uan

Hen

anSh

ando

ngH

unan

Hub

eiH

ebei

Yun

nan

Anh

uiLi

aoni

ngG

uang

dong

Gua

ngxi

Jiang

xiJia

ngsu IM

Hei

long

jiang Jilin

Gui

zhou

Cho

ngqi

ngFu

jian

Zhej

iang

Xin

jiang

Shaa

nxi

Gan

suSh

anxi

Hai

nan

Tian

jinQ

ingh

aiBe

ijing

Nin

gxia

Tibe

tSh

angh

ai

Pork Beef Mutton




Page 44

Appendix: Optimising regional distribution

In 2014, MOA set indicative targets for industry standards to reach higher levels by 2020E. While the overall hog production volume is not expected to change significantly (2020E has a +1.4% difference with 2014 production output), MoA aims to improve overall production efficiency in the sector by 2020E, and cap growth in urban areas.

Land, environmental and social constraints remain a key issue due to the fragmentation of the market. The government has structured a guideline on the growth rate in each province to ensure standardisation and improve productivity to optimal regional distribution use. In order to reduce costs, hog farms are encouraged to be situated closer to the Corn Belt to reduce transportation costs.

According to recent environmental regulations, the key development regions include Hebei, Shandong, Henan, Chongqing, Guangxi, Sichuan and Hainan. Production volume is expected to grow 1% y-o-y, which will also cater to neighbouring regions such as Shanghai, Jiangsu, Zhejiang, and Guangdong.

Regions with limited production (Limited Regions) include Beijing, Tianjin, Shanghai, Jiangsu, Zhejiang, Fujian, Anhui, Jiangxi, Hubei, Hunan, Guangdong and other Southern regions due to land constraints. Their volume growth is expected to be flat. The key potential growth region is Northeast China, which includes Liaoning, Jilin, Heilongjiang and Inner Mongolia, as well as Yunnan and Guizhou. These locations offer good land

space and their volume growth is expected to increase by 1-2% y-o-y. This will be the key pork producing region in the future.

Southern Water Network. In November 2015, the MoA issued the “Southern Water Network on the promotion of the layout of the optimal adjustment of pig farming guidance,” to reiterate regional focus on agricultural land, particularly focusing on the Limited Regions. This particularly focuses on Shanghai, Zhejiang, Jiangsu, Guangdong, Anhui, Jiangxi, Henan, Hubei, Hunan, etc. due to strong hog production and growing water and waste constraints. By 2020E, MoA aims to increase hog farms with >500 heads each to cover up to 70% market share, and up to 85% market share for those with adequate disposal treatment facilities. By outlining designated zones, those that do not fit the criteria will be forcibly removed.

Hog production target

2010 2014 2020EPork production (m ton) 50.7 56.7 57.6Above 500 hogs farms (%) 38 42 52Industrial-size slaughter house (%)

66 68 75

Effi c ie nc y ta rge tEx-inventory target (%) 144 155 160Per sow provides.. (head) 13 15 19No. of hogs managed per person (Hog/ person)

500 650 1,000

Feedstock to pork 2.9 2.8 2.7

Source: MoA



Page 45

Appendix: Others

National Swine Breeding Improvement.

Since 2010, the Ministry of Agriculture (MoA) has implemented a swine genetic improvement programme with 100 selected core national breeding fields. Among these, 74 were selected as core breeding companies. Aside for basic permits and complete breeding facilities and equipment required, the core number of sows (large-white pigs) must be more than 600, with over 300 heads of Duroc breed. The company must have a clear programme for breeding pigs, with over two years of experience and work report. The key objective of the programme is to facilitate performance testing, and to ensure sustainable development of the seed-stock in China to raise overall quality and efficiency of the existing breed.

Bio-security & government support

Bio security measures and government support. Since 2005, the Chinese government has provided subsidies for animal protein players in breeding stock, construction of industrial-scale farms, insurance, environmental-related purposes, compensation for culled animals, warehousing facilities, subsidies for village veterinarians and free vaccination.

Vaccination is required starting from sow (pre-pregnancy stage), piglet, to finishing hogs. MoA periodically conducts tests at designated breeding farms on (i) respiratory syndrome, swine fever, pseudo rabies, circovirus disease, porcine parvovirus disease and others, (ii) the grandparent stock testing on highly pathogenic avian influenza, avian leukemia, and others.

Government support can come from various farms relating to (i) the raising of environmental standards through better wastage management, piglet and feed loans and insurance premiums, (ii) introduction of quality breed sow (Rmb400-600/head), (iii) introduction of large-scale farming, (iv) vaccination support programmes, (vi) insurance premium support, and more.

No. of disease incidences

0

5,000

10,000

15,000

20,000

25,000

30,000

Feb-

12Ju

n-12

Oct

-12

Feb-

13Ju

n-13

Oct

-13

Feb-

14Ju

n-14

Oct

-14

Feb-

15Ju

n-15

Oct

-15

Feb-

16Ju

n-16

Oct

-16

Feb-

17

Swine Fever (Incidence)

Blue Ear (Incidence)

Porcine Reproductive and Respiratory Syndrom (Incidence)

Cysticercosis (Incidence)

Anthrax (Incidence)

Swine Erysipelas (Incidence)

Pig Lung Diseas (Incidence)

Brucellosis (Incidence)




Page 46

Common hog diseases

Disease Prev ent ion/ T reatment

Foot and Mouth Disease 口蹄疫 Vaccination

Porcine Epidemic Diarrhea V irus (PEDV) 豬流行性腹瀉病毒（PEDV） Vaccination

Blue Eat Disease (PPRS) 藍色食欲疾病（PPRS） Vaccination

Japanese encephalitis (J E) 日本腦炎（JE） Vaccination

Procine parvovirus Procine細小病毒 Vaccination

Swine fever 豬瘟 Vaccination

Swine influenza 豬流感 Vaccination

Porcine pseudorabies (PRVD) 豬偽狂犬病毒（PRVD） Vaccination

Porcine Circo V lrus (PCVD) 豬圓環（PCVD） Vaccination

Infectious pleuropneumonia 傳染性胸膜肺炎 Antibiotics

Bacterial (E. Coli) 細菌（大腸杆菌） Antibiotics

Atrophic rhinitis 萎縮性鼻炎 Antibiotics

Salmonella 沙門氏菌 Antibiotics


Top exporting countries

European Union (EU). EU is the largest exporter to China. Bilateral protocols have been signed with China to meet veterinary and health requirements. They must register at AQSIQ through CNCA to receive proper certification. Meat products will only enter the country through specific inspection and quarantine centres.

United States (US). The US is competing intensely with EU in exporting to China. With similar requirements in registration and certification, US plants are also required to have third-party testing to confirm no presence of ractopamine in its pork export.

A net importer of pork. China is the world’s largest pork producer, accounting for c.50% of global pork consumption in FY15. It is a net importer of pork, where imports fulfilled 1.4% of domestic consumption. Due to a widening discrepancy between domestic and international pork prices, import share is expected to expand to 3% in 2016F.

Global production est. at 108m mt (2016F)

China49%

EU22%

US11%

Brazil3%

Russia3%

Vietnam2%

Canada2%

Philippines1%Mexico

1%Japan 1%

Others5%

Source: pork.org, DBS Vickers



Page 47

Key environmental laws

Law Desc ript ion

Env ironmental Protection Law of the PRC (Rev ised,and effectiv e on J an-15)

Entities that cause env ironmental pollution and other public hazards mustincorporate env ironmental protection work into their plans, establish anenv ironmental protection responsibility sy stem, and adopt effective measures toprevent and control pollution and other env ironmental harms caused to theenv ironment by waste gases, wastewater, waste residues, dust, malodorous gases,radioactive substances, noise, v ibration and electromagnetic radiation generated inthe course of the production, construction or other activ ities. Enterprises that are inv iolation of the Env ironmental Protection Law may be subject to a warning,payment of damages, imposition of a fine, or limitation or suspension of productionin accordance with the seriousness of the case. If a criminal offense is committed,the offender may be subject to criminal liabilities

The Administrative Measures on the Prevention andCure of Pollution Caused by Breeding of Liv estockand Poultry and the Regulations on the Preventionand Control of Pollution from Large-scale Breedingof Liv estock and Poultry (Effectiv e 2014)

Set out the requirements for the prevention and ratification of pollution caused byor contaminants emitted during the breeding of liv estock and poultry . In the eventof v iolation of such administrative measures, the relevant authorities ofenv ironment protection can impose orders to stop by production and to rectify thev iolation.

Law on Prevention of Water Pollution of the PRC Enterprises which discharge water or air pollutants must pay discharge fees basedon the types and volumes of the pollutants discharged. The discharge fees arecalculated by the local env ironmental protection authority , which will rev iew andverify the types and volumes of pollutants discharged.

Under the above-mentioned laws and regulations, companies are required to abide by various prov isions regarding the env ironmentalprotection and prevention of pollution. Companies are required to complete the env ironmental impact evaluation process prior tocommencing a construction project. Companies are also required to obtain discharge permits and pay discharge fees for the discharge ofpollutants. F ailing to comply with env ironmental protection laws and regulations would subject the companies to a range of penaltiesvary ing from warnings, fines and suspension of the production or operation to other administrativ e sanctions, depending on the degreeof damage or adverse consequences. The responsible person of the breaching entity may be subject to criminal liabilities for seriousbreaches which result in significant damages to private or public property or personal injury or death.

Source: COFCO Meat Prospectus, DBS Vickers



Page 48

Major regulator overview

L aw s andreg u lat io n s

Det ails

V eterinary DrugsSuperv ision

According to Regulations on Administration of V eterinary Drugs (《獸藥管理條例》 ) , which were promulgatedby the State Council on 9 Apr 2004 and became effectiv e on 1 Nov 2004, and were amended on 29 J ul 2014 and 6F eb 2016, it is prohibited to add in animal feedstuffs or drinking water any hormonal drug or other prohibited drugsspecified by the administrativ e department for v eterinary medicine under the State Council, administer humanmedicine to animals, or to sell animal food products that contain illicit drugs or in which the residual amount ofv eterinary drugs exceeds the limits. The drugs prohibited to be added in animal feedstuffs or drinking water are listedin detail in the List of Drugs F orbidden to be Used in F eeds or Drinking Water of Animals (《關於禁止在飼料和動

物飲用水中使用的藥物品種目錄》 ) co-promulgated by the MOA, the Ministry of Health, and the State F oodand Drug Administration (formerly known as "State Drug Administration") on 9 F eb 2002.

Hog SlaughteringRequirement

According to Regulations on Administration of Hog Slaughtering (《生豬屠宰管理條例》 ), which werepromulgated by the State Council on 19 Dec 1997 and 19 Dec 2007, respectiv ely , and became effectiv e on August1, 2008, and Implementing Measures for Regulations on Administration of Hog Slaughtering (《生豬屠宰管理條例

實施辦法》 ), the PRC gov ernment implements a sy stem that requires hogs to be slaughtered by designated hogslaughtering plants (houses) and quarantined in a centralized manner. The gov ernments of prefecture-lev el cities areresponsible for issuing the permits and signboards of designated hog slaughtering plants (houses) to the designatedplants. A designated hog slaughtering plant (house) is required to:(1) hav e a source of water supply that is commensurate with the operation scale of the slaughter and meet thestandards for water quality set by the national gov ernment authorities;(2) hav e stand-by slaughter rooms, slaughter rooms, emergency slaughter rooms, hog slaughter equipment andmeans of transportation which conform to the requirements prescribed by the national gov ernment authorities;(3) hav e the technical staff for hog slaughter who hav e obtained health certificates;(4) hav e qualified meat product quality inspectors;(5) hav e inspection equipment and sterilization facilities that conform to the requirements prescribed by thegov ernment, and the facilities for pollution prev ention and control that conform to the env ironmental protectionrequirements ;(6) hav e the facilities for innocuous disposal of diseased hogs and hog products deriv ed therefrom; and(7) obtain a qualification certificate of animal epidemic prev ention.A designated hog slaughtering plant (house) is required to establish a stringent inspection sy stem controlling meatproduct quality . Inspection of meat product quality must be carried out simultaneously with hog slaughtering, andthe inspection results must be recorded truthfully . The records of inspection results must be retained for at least twoy ears. Hog products of a designated hog slaughtering plant (house) shall not leav e the plant (house) before theyhav e undergone the inspection process or if they fail such inspection.

Breeding F arm orLarge-ScaleBreeding Plot

According to the Animal Husbandry Law of the PRC (《中華人民共和國畜牧法》 ) which was promulgated bythe Standing Committee of the National People's Congress (the "Standing Committee") on 29 Dec 2005 and becameeffectiv e on 1 J ul 2006, and amended on 24 Apr 2015, and Administrativ e Measures for Labeling the Liv estock andPoultry and Breeding F iles (《畜禽標識和養殖檔案管理辦法》 ), which were issued by Ministry of Agriculture(農業部 ) (the "MOA") on 26 J un 2006 and became effectiv e on 1 J ul 2006, liv estock and poultry breeding farmsand large-scale breeding plots are required to, among other things:(1) hav e production premises and supporting facilities commensurate with their scales of breeding;(2) hav e animal husbandry and v eterinary technicians in their serv ice;(3) meet the epidemic prev ention conditions, as prov ided for by laws and administrativ e regulations and prescribedby the administrativ e department for animal husbandry and v eterinary medicine under the State Council;(4) hav e facilities such as methane-generating pits for the comprehensiv e use of, or other facilities for innocuoustreatment of, the feces of liv estock and poultry , waste water and other solid wastes; and(5) meet other conditions prov ided for by laws and administrativ e regulations.

Source: Company, DBS Vickers



Page 49

Major regulator overview (continued)

L aw s andregu lat ion s

Det ails

Animal EpidemicPrev entionRequirement

According to the Animal Epidemic Prev ention Law of the PRC (《中華人民共和國動物防疫法》 ), which werepromulgated by the Standing Committee on 3 J ul 1997, amended on 30 Aug 2007, 29 J un 2013 and 24 Apr2015, and became effectiv e on 1 J an 2008, and Censoring Measures on Conditions for Animal Epidemic Prev ention(《動物防疫條件審查辦法》 ), building an animal breeding farm (small breeding plot) or isolation place, animalslaughtering and processing house, or a place where animals and animal products are giv en innocuous treatmentrequires the Certificate of Conformity to the Conditions for Animal Epidemic Prev ention (《動物防疫條件合格

證》 ) from the administrativ e department for v eterinary medicine. Before slaughtering, selling or transporting animals,or selling or transporting animal products, the owner shall submit an application to the local animal health superv isioninstitution for quarantine. Quarantine Certificates will be issued for and quarantine marks will be attached on theanimals and animal products that hav e passed the quarantine. Measures for the Administration of Animal Quarantine(《動物檢疫管理辦法》 ), which were promulgated by the MOA on 21 J an 2010 and became effectiv e on 1 Mar2010, further prov ide that an examination must be conducted by local authorities

Import license According to the Import and Export Administration Regulations and Measures for the Administration of AutomaticImport Licensing for Goods (《貨物自動進口許可管理辦法》 ), which were promulgated by the MOF COM andGeneral Administration of Customs on 10 Nov 2004 and became effectiv e on 1 J an 2005, to import goods whichare subject to automatic import licensing requirements, the consignee (including importers and imported goods users)shall submit the application for an Automatic Import License with the local or corresponding license issuing authorityand obtain an Automatic Import License before going through customs declaration formalities. Chilled and frozenpork is included in the Catalogue of Goods Subject to Automatic Import License Administration for the Year 2014(《 2014年自動進口許可管理貨物目錄》 ), and thus are subject to such licensing requirements.




Page 50

Major regulator overview (continued)

Re gu la tion Da te De sc rip t ion

Livestock and poultry scale pollution prevention and control regulations

Jan-14 The regulation targets the livestock and poultry pollution prevention and regulatory controls. There are specific ban sizes (ideal breeding areas), incentives and penalties available.

Environmental Protection Law Jan-15 The Environment Law focuses on the livestock farms, breeding areas and slaughter enterprises in the location, construction and management to be compliant to laws and regulation

Water Ten Apr-15 This specifies livestock and poultry breeding prohibition area must be enforced close to Beijing-Tianjin-Hebei, Yangtze River Delta, Pearl River Delta to be relocated.

Guidance by MoA Aug-15 MoA requried animal husbandry departments to cooperate with the environmental protection department to set up bans on work areas with submission of the delination ofprohibited regions

Southern Area on the promotion of pig farming layout adjustment and optimisation of guidance

Nov-15 the Ministry of Agriculture promulgated the "Southern Area on the promotion of pig farming layout adjustment and optimization of the guidance." Opinions, the main producing counties to develop pig breeding plan, a reasonable delineation of suitable breeding area and prohibit the construction of livestock and poultry farms and breeding area area. Prohibited area in accordance with the "Water Pollution Prevention Action Plan" time limit by the local government legally closed or relocated pig-scale farms, to guide the transfer of live pigs to non-overloaded areas.

Soil Ten May-16 In May 2016, the State Council issued a "soil ten", requiring a clear and reasonable to determine the layout and scale of livestock and poultry breeding, livestock and poultry pollution prevention and control.

Livestock and poultry breeding area designated technical guidelines

Nov-16 The Ministry of Environmental Protection, and MoA issued a "livestock and poultry breeding area designated technical guidelines", will be used as a late all over the country designated the basis of the ban area. After the completion of the document, the local environmental protection and farming and animal husbandry departments shall, in accordance with the unified arrangements of the local governments, actively cooperate with the re levant departments to assist in closing or re locating existing closed farms or relocated ones.

13th-Five Year Plan Dec'16 In the 13th-Five Year Plan, it requires the re location and closure of livestock farms which are in the prohibited areas by end-2017, such as drinking source areas, nature reserves, scenic spots, urban residential areas, and cultural and educational scientific research, and others.




Page 51

Meat major transaction between countries

Date A cquirer T argetT argetcount ry M eat T y pe Desc ript ion

Nov -16 BRF COFCO Meat China Pork Stake BRF entered into a cornerstone agreement to acquire 77.6mshares (1.99%) of COFCO Meat as part of a strategicagreement.

Nov -16 Danish Crown n.a China Pork n.a Danish Crown will build a processing plant in China to beclose to its target consumers.

Oct-16 CPF Fujian SumpoFood

China Poultry M&A CPF agrees to purchase 70% stake in Fujian Sumpo Food,which is principally engaged in the manufacturing andtrading of animal feed, farming and trading of poultryproducts in China.

Aug-16 Zhongfu n.a Australia Cattleland

M&A Shanghai Zhongfu Group (v ia. Kimberley AgriculturalInvestment) purchased 476,000 hectare of Carlton Hill inAustralia (cattle station ) for US$76m.

Apr-16 Cranswick Crown Chicken UK Chicken M&A UK Sausage maker, Cranswick buy s Crown Chicken for £40m.

Apr-16 Foresun Group Margrif GlobalFood assets

Argentina Meat M&A Foresun Group, acquires for 3 beef slaughterhouses and alivestock confinement unit in Argentina owned by MargrifGlobal Foods S.A for US$75m .

Apr-16 Group controlledby ShanghaiPengxin Group

S. Kidman Australia Cattle M&A Chinese led group (controlled by Shanghai Pengxin Group)aims to purchase 80% of S. Kidman & Co. for AUS370m.

J an-16 Foresun Group n.a n.a n.a M&A Foresun Group reports to be planning a backdoor listingthrough a reverse merger with Sundiro Holding(000571:CH), helped by CDH

Nov -15 Delisi Food Bindaree BeefGroup

Australia Beef M&A Delisi Food purchases a 45% stake in Australia's 4th largestmeat processor that is expected to be worth US$105m.

Sep-15 Bright Food Silver Fern Farms NewZealand

Beef M&A Bright Food agrees to purchase 50% stake in New ZealandMeat processor.

J ul-15 JBS USA Cargil Porkbusiness

USA Pork M&A J BS USA agrees to purchase Cargil Pork business forUS$1.45bn.

J un-15 Pilgrim Ty son FoodMexicanoperations

Mexico Pork M&A Pilgrim acquires Ty son Food's Mexico operations

J un-14 KKR, Baring PE,HOPU, BOYU

COFCO Meat China Pork M&A KKR, Baring Private Equity , HOPU and Boyu invests inCOFCO Meat to build and manage large-scale industrialisedhog farms and meat processing plants in China

J un-14 V &V Walsh Grand Farm China Lamb J V Western Australia's largest meat processor signs US$1bndeal with Grand Farm, China's largest red meat importer, bysupply ing lambs and cattles.

Apr-14 Hong YongCapital Holdings

Tabro Meat Australia Beef M&A Tabro Meat was sold to Hong Young Capital for US$18m,which CDH Investment also participated.

May-13 Shuanghui Smithfield Foods China Pork M&A Shuanghui buys Smithfield for US$4.7bn (incl. debt), andbecomes the largest pork player globally .


ASIAN INSIGHTS VICKERS SECURITIESed-JS/ sa- JY

BUY Last Traded Price ( 10 May 2017):HK$1.67 (HSI : 25,015) Price Target 12-mth: HK$2.10 (26% upside) Potential Catalyst: Favourable hog and feed prices Where we differ: More conservative margins Analyst Alison FOK +852 2971 1938 [email protected] Mavis HUI +852 2863 8879 [email protected] Alice HUI CFA, +852 2971 1960 [email protected]

What’s New • 1Q production volume is on track, up 31% y-o-y • Live hog prices weaker than expected in May, a

typically low season, and expect some price recovery in 2H

• Reiterate BUY on attractive valuation, TP

unchanged at HK$2.1/sh

Price Relative

Forecasts and Valuation FY Dec (RMB m) 2015A 2016A 2017F 2018FTurnover 5,056 6,616 7,922 9,198 EBITDA 122 1,184 1,306 1,532 Pre-tax Profit 220 949 947 1,118 Net Profit 210 948 937 1,107 Net Pft (Pre Ex) (142) 892 937 1,107 Net Profit Gth (Pre-ex) (%) N/A N/A 5.1 18.1 EPS (RMB) 0.06 0.28 0.27 0.32 EPS (HK$) 0.07 0.31 0.31 0.36 Diluted EPS (HK$) 0.18 0.33 0.31 0.36 DPS (HK$) 0.00 0.00 0.00 0.00 BV Per Share (HK$) 0.87 1.45 1.76 2.12 PE (X) 24.3 5.4 5.4 4.6 Core PE (X) nm 5.7 5.4 4.6 P/Cash Flow (X) 13.4 3.8 6.7 4.3 P/Free CF (X) nm 16.6 nm 13.5 EV/EBITDA (X) 55.6 5.1 5.1 4.2 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 1.9 1.1 0.9 0.8 Net Debt/Equity (X) 0.6 0.2 0.3 0.2 ROAE (%) 8.4 26.8 19.1 18.7 Earnings Rev (%): Nil Nil Consensus EPS (RMB) 0.24 0.29 Other Broker Recs: B: 3 S: 0 H: 1

Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX

Market share gains ahead 1Q17 volume growth largely on track, reiterate Buy for the fast growing hog producer. We reiterate our BUY rating on COFCO Meat, and target price at HK$2.1/share. 1Q17 hog production volume remains on track, up 31% y-o-y, forming 21% of our full year estimate. Commercial hog prices declined by 9% y-o-y to Rmb16.3/kg. Feed cost declined 3.9% y-o-y with the corn price decline partly offset by an upswing in soybean prices (+18% y-o-y). Hog prices retreated to Rmb14.6/kg in May-17 (down c.28% y-o-y), which is due to low-season. As such, we maintain our forecast of sales volume growth at 34.5% y-o-y, and an 11% decline in hog prices in FY17F. Expansion and efficiency improvement to drive earnings. Following a 30% p.a. growth in capacity from 2013-15, the company has completed five hog production projects in 2016, adding another 34.8% in capacity to over 3.1m heads, and is expected to add another 29% to 4m heads by end-FY17F. We also expect efficiency improvements from better economies of scale, standardisation, and refinement of production processes. Key beneficiary of industry consolidation. The PRC government has been adopting stricter environmental laws and regulations, which has led to the closure of smaller and outdated hog farms to the benefit of large-scale hog producers who have gained market share. With the deadline to close or shift such hog farms by end FY17/18, we believe COFCO Meat will be a key beneficiary, and would continue to grow at the expense of smaller operators and further increase its market presence. Valuation: We value COFCO Meat at 8x FY17F PE. Key Risks to Our View: Fluctuation in hog and corn prices, outbreak of hog diseases, food safety issues, potential equity fundraising.

At A Glance Issued Capital (m shrs) 3,902 Mkt. Cap (HK$m/US$m) 6,516 / 837

Major Shareholders China Foods (Holdings) Limited (%) 27.6 KKR & Co. L.P. (%) 15.0 Mitsubishi Corporation (%) 13.6 Baring Private Equity Asia GP V, L.P. (%) 6.8 Temasek Holdings (Private) Limited (%) 6.2

Free Float (%) 30.9 3m Avg. Daily Val. (US$m) 1.5 ICB Industry : Consumer Goods / Food Producers

66

86

106

126

146

166

186

206

1.3

1.4

1.5

1.6

1.7

1.8

1.9

2.0

2.1

2.2

Oct-16 Jan-17 Apr-17

Relative IndexHK$

COFCO Meat Holdings Ltd (LHS) Relative HSI (RHS)

DBS Group Research . Equity 10 May 2017

China / Hong Kong Company Guide

COFCO Meat Holdings Ltd Version 2 | Bloomberg: 1610 HK Equity | Reuters: 1610.HK

Refer to important disclosures at the end of this report


Page 53

Company Guide

COFCO Meat Holdings Ltd

CRITICAL FACTORS TO WATCH Sales growth driven by hog price and volume growth. Hog prices and sales volume are key determinants to COFCO Meats’ revenue growth. We expect hog prices to decline by 11% y-o-y in FY17F, thereafter decline at a softer rate to 6% in FY18F Sales volume. We expect sales volume to grow by 34.5%, which should help offset the 11% decline in hog prices in FY17F. Following a 30% p.a. growth in capacity from 2013-15, which helped to boost its market share from 0.13% in 2013 to 0.17% in 2015, the company completed another five hog production projects in 2016, adding another 34.8% in capacity to 3.1m heads. With the adoption of stricter environmental laws and regulations by the PRC government, smaller and outdated hog farms have been closing down, resulting in a decrease in supply while large-scale hog farms have been gaining market share. This should benefit COFCO Meat. Margin determined by feed costs. Feed cost account for 56-62% of costs for COFCO Meat. With the end of the government’s stockpiling policy, the difference in domestic and international corn prices will narrow, as domestic corn prices will have to be more market-competitive. As such, despite softer hog prices, we expect gross margins to stay largely flat at c.20.5% in FY16-18F.

Hog price (Rmb/kg)

Corn price (Rmb/kg)

Average finish weight (kg)

Production volume (m head)


13.3

15.2

18.116.5

15.5

0.0

2.6

5.2

7.8

10.4

13.1

15.7

18.3

2014A 2015A 2016A 2017F 2018F

2.3 2.3

2.0 1.9 1.9

0.00

0.46

0.92

1.38

1.84

2.30

2014A 2015A 2016A 2017F 2018F

97.8101.8 104.4 104.4 104.4

0

21

43

64

85

106

2014A 2015A 2016A 2017F 2018F

11

2

2

3

0.00

0.61

1.21

1.82

2.42

3.03

2014A 2015A 2016A 2017F 2018F


Page 54

Company Guide


Balance Sheet: We expect COFCO Meat’s net gearing to increase to 30% at end-FY17E (FY16: 22.6%). Free-cash flow is expected to turn negative in 2017F with capital expenditure of Rmb1.1bn planned. Share Price Drivers: Hog and corn prices are primary drivers to the company’s earnings with its strong upstream exposure. Aside from this, clear expansionary plans, and production efficiency improvements are also drivers to sustain stronger topline growth than its peers. Key Risks: Key earnings risks include fluctuation in selling prices of hog and meat products, outbreak of hog diseases, food safety issues, increase in feed costs and environmental-related costs, ability to ramp up new capacities as well as changes in consumption habits of meat products. Company Background: COFCO Meat is one of the major pork players in China with a vertically integrated business model. It operates across the entire industry value chain, spanning from feed production, hog production, slaughtering, and the production and distribution of fresh pork and processed meat, to import of frozen meat products. With 47 hog farms, two slaughtering plants and two processed meat plants in China, the company is ranked fourth in hog production and was the second largest meat importer in China in 2015, according to Frost & Sullivan.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE

Forward PE Band

PB Band


0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

2004 2005 2006 2007 2008

Financial Leverage (LHS)

0.0

200.0

400.0

600.0

800.0

1,000.0

1,200.0

2014A 2015A 2016A 2017F 2018F

Capital Expenditure (-)

RMBm

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2014A 2015A 2016A 2017F 2018F

Avg: 5.3x

+1sd: 5.6x

+2sd: 5.9x

‐1sd: 5x

‐2sd: 4.7x

4.1

4.6

5.1

5.6

6.1

6.6

7.1


(x)

Avg: 1.13x+1sd: 1.19x+2sd: 1.26x

‐1sd: 1.07x‐2sd: 1x

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6


(x)


Page 55

Company Guide


Key Assumptions

FY Dec 2014A 2015A 2016A 2017F 2018F Hog price (Rmb/kg) 13.3 15.2 18.1 16.5 15.5 Corn price (Rmb/kg) 2.3 2.3 2.0 1.9 1.9 Average finish weight (kg)

97.8 101.8 104.4 104.4 104.4

Production volume (m head)

1.0 1.2 1.7 2.3 3.0


Segmental Breakdown (RMB m)

FY Dec 2014A 2015A 2016A 2017F 2018F Revenues (RMB m) Hog production 411 756 1,657 2,152 2,776 Fresh Pork 1,443 2,027 2,711 2,851 3,077 Processed meat 290 330 333 377 493 Imported meat 1,603 1,943 1,915 2,542 2,852 Inter-segment (893) (1,081) (1,642) (1,762) (2,002) Total 3,746 5,056 6,616 7,922 9,198 Source: Company, DBS Vickers

Income Statement (RMB m) FY Dec 2014A 2015A 2016A 2017F 2018F Revenue 3,746 5,056 6,616 7,922 9,198 Cost of Goods Sold (3,626) (4,938) (6,568) (6,367) (7,402) Gross Profit 120 118 48 1,555 1,796 Other Opng (Exp)/Inc (281) (117) 956 (455) (529) Operating Profit (161) 1 1,004 1,100 1,267 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 0 0 0 0 0 Net Interest (Exp)/Inc (138) (133) (110) (153) (149) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) (48) 352 56 0 0 Pre-tax Profit (346) 220 949 947 1,118 Tax (4) (10) (1) (9) (11) Minority Interest 0 0 0 0 0 Preference Dividend 0 0 0 0 0 Net Profit (349) 210 948 937 1,107 Net Profit before Except. (302) (142) 892 937 1,107 EBITDA (50) 122 1,184 1,306 1,532 Growth Revenue Gth (%) 0.3 35.0 30.9 19.7 16.1 EBITDA Gth (%) N/A N/A 867.5 10.3 17.3 Opg Profit Gth (%) (479.0) (100.8) 75,217.6 9.5 15.2 Net Profit Gth (%) (338.8) N/A 352.1 (1.1) 18.1 Margins & Ratio Gross Margins (%) 3.2 2.3 0.7 19.6 19.5 Opg Profit Margin (%) (4.3) 0.0 15.2 13.9 13.8 Net Profit Margin (%) (9.3) 4.1 14.3 11.8 12.0 ROAE (%) (25.7) 8.4 26.8 19.1 18.7 ROA (%) (5.4) 2.7 12.0 10.6 11.1

ROCE (%) (3.8) 0.0 16.2 14.1 14.3 Div Payout Ratio (%) N/A 0.0 0.0 0.0 0.0 Net Interest Cover (x) NM 0.0 9.1 7.2 8.5 Source: Company, DBS Vickers


Page 56

Company Guide


Balance Sheet (RMB m)

FY Dec 2014A 2015A 2016A 2017F 2018F Net Fixed Assets 3,391 3,418 4,131 5,176 5,711 Invts in Associates & JVs 0 0 36 36 36 Other LT Assets 530 508 626 662 702 Cash & ST Invts 2,175 715 1,638 1,018 1,276 Inventory 933 519 408 497 578 Debtors 190 165 159 191 222 Other Current Assets 809 2,112 1,307 1,787 2,062

Total Assets 8,029 7,438 8,307 9,368 10,586 ST Debt

3,200 2,053 1,737 1,737 1,737 Creditors 280 244 394 480 558 Other Current Liab 1,791 2,065 670 700 732 LT Debt 283 370 849 849 849 Other LT Liabilities 38 61 218 227 228 Shareholder’s Equity 2,325 2,644 4,435 5,372 6,479 Minority Interests 111 0 3 3 3 Total Cap. & Liab. 8,029 7,438 8,307 9,368 10,586 Non-Cash Wkg. Capital (138) 487 811 1,296 1,572 Net Cash/(Debt) (1,308) (1,709) (948) (1,567) (1,310) Debtors Turn (avg days) 18.5 11.9 8.8 8.8 8.8 Creditors Turn (avg days) 28.7 19.5 27.5 27.5 27.5 Inventory Turn (avg days) 95.9 41.3 28.5 28.5 28.5 Asset Turnover (x) NM NM NM NM NM Current Ratio (x) 0.8 0.8 1.3 1.2 1.4 Quick Ratio (x) 0.4 0.2 0.6 0.4 0.5 Net Debt/Equity (X) 0.5 0.6 0.2 0.3 0.2 Net Debt/Equity ex MI (X) 0.6 0.6 0.2 0.3 0.2 Capex to Debt (%) 19.6 32.3 40.4 42.5 30.9 Z-Score (X) NA NA NA NA NA Source: Company, DBS Vickers

Cash Flow Statement (RMB m)

FY Dec 2014A 2015A 2016A 2017F 2018F Pre-Tax Profit (411) 151 952 947 1,118 Dep. & Amort. 163 183 181 206 265 Tax Paid (20) (6) (8) (1) (9) Assoc. & JV Inc/(loss) 0 0 0 0 0 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. (135) 384 688 (484) (276) Other Operating CF 32 (330) (460) 89 81

Net Operating CF (370) 381 1,352 756 1,179 Capital Exp.(net) (684) (782) (1,044) (1,100) (800) Other Invts.(net) 0 0 (50) (151) 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 3 6 10 0 0 Other Investing CF (18) (476) 1,105 0 0 Net Investing CF (699) (1,252) 21 (1,251) (800) Div Paid 0 0 0 0 0 Chg in Gross Debt 1,392 (1,025) (769) 0 0 Capital Issues 1,671 59 747 0 0 Other Financing CF (161) (132) 55 (125) (121) Net Financing CF 2,903 (1,098) 33 (125) (121) Currency Adjustments 0 0 0 0 0 Chg in Cash 1,833 (1,969) 1,406 (620) 258 Opg CFPS (RMB) (0.06) 0.00 0.19 0.36 0.42 Free CFPS (RMB) (0.27) (0.12) 0.09 (0.10) 0.11 Source: Company, DBS Vickers


Page 57

Company Guide


Target Price & Ratings History

Source: DBS Vickers

Analyst: Alison FOK

1

23

1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 2.0

No

v-1

6

Dec

-16

Jan-

17

Feb-

17

Mar

-17

Ap

r-1

7

May

-17

HK$S.No. Da te Clos ing 12-mth Ra ting

Pric e Ta rge tPric e

1: 8-Feb-17 HK$1.63 HK$2.10 Buy2: 28-Mar-17 HK$1.74 HK$2.10 Buy3: 5-Apr-17 HK$1.91 HK$2.10 Buy

ASIAN INSIGHTS VICKERS SECURITIESed-CK / sa- JY

BUY Last Traded Price ( 10 May 2017):HK$6.82 (HSI : 25,015) Price Target 12-mth: HK$7.70 (13% upside) Potential Catalyst: Better than expected packaged meat sales, M&A opportunities with improving financial strength

Where we differ: Topline growth more bullish than consensus Analyst Alison FOK +852 2971 1938 [email protected] Mavis HUI +852 2863 8879 [email protected] Alice HUI CFA, +852 2971 1960 [email protected]

What’s New • Lower-than-expected US hog prices should

support export volume growth and mid-downstream margins

• Improving product mix and scalability in China

operations • Maintain BUY and TP unchanged

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2015A 2016A 2017F 2018FTurnover 21,209 21,534 22,270 23,372 EBITDA 2,027 2,223 2,453 2,750 Pre-tax Profit 1,429 1,678 1,793 1,973 Net Profit 866 1,014 1,095 1,212 Net Profit Gth (Pre-ex) (%) 17.5 17.1 8.0 10.6 EPS (US$) 0.06 0.07 0.07 0.08 EPS (HK$) 0.46 0.54 0.58 0.64 EPS Gth (%) 17.5 17.1 8.0 10.6 Diluted EPS (HK$) 0.46 0.54 0.58 0.64 DPS (HK$) 0.09 0.16 0.17 0.19 BV Per Share (HK$) 3.06 3.36 3.78 4.25 PE (X) 14.8 12.7 11.7 10.6 P/Cash Flow (X) 8.0 6.5 9.1 7.4 P/Free CF (X) 14.6 9.8 15.4 11.1 EV/EBITDA (X) 8.2 6.9 6.0 5.0 Net Div Yield (%) 1.3 2.4 2.6 2.8 P/Book Value (X) 2.2 2.0 1.8 1.6 Net Debt/Equity (X) 0.4 0.2 0.1 0.0 ROAE (%) 15.9 16.8 16.3 16.1

Earnings Rev (%): 1.8 4.0 Consensus EPS (US$) 0.08 0.08 Other Broker Recs: B: 15 S: 0 H: 0

Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX

Decent US performance, so far The leading global pork player. We reiterate BUY rating on WH Group with a target price of HK$7.70, which is equivalent to 13.2x FY17F PE. With higher hog inventories reported by USDA earlier this year, US hog price futures saw a y-o-y price decline in March-April after reaching the peak in Feb 2017, with prices expected to rise again into June-August, when hog supply is at the lowest. This is in anticipation of greater slaughtering capacity being introduced later in 2017 (Triumph-Seaboard). We maintain our view that US hog production losses should still narrow, and US fresh pork sales volume growth will offset temporarily compressed margins in the mid-downstream business in FY17F. We also like WH Group for its One Smithfield initiative to lower logistics and manufacturing costs, and targets in improving the product mix and scalability in China operations. China performance still soft, but should stabilise with lower hog prices. While 1Q17 China packaged meat sales disappointed largely due to an earlier CNY and a higher base comparison in 1Q16 (cheaper inventory used), the company reported a stabilisation in sales volume in April-May. With softer hog prices, we should also see some benefits materialising in 2H17. It targets to maintain double-digit EBIT margin, and volume growth for FY17F. Separately, Dalian Commodity Exchange has also applied for regulatory approval for hog futures contracts, which may take some time to materialise. This should shed some light on hog price cyclicality. Favourable credit rating and refinancing achieved. With the investment grade of Baa2 achieved in Oct 2016, WH Group has completed refinancing of US$1.4bn of its Senior Notes, in addition to a credit agreement of US$1bn of senior unsecured revolving facility and US$500m of senior unsecured term loans. Due to the refinancing activities, the group recorded a debt retirement cost of US$70m, but should also see a lower interest rate offset effect this year. Based on our estimates, we expect its net gearing to lower to 14% by end FY17F (FY16: 24%). Valuation: Maintain BUY on improving financials and solid business. Our TP is derived using SOP valuation, with the China business pegged at 16x FY17F PE (Shuanghui’s 3-year average) and the US business at 11x (the average PE for meat players in the US). Key Risks to Our View: Raw material cost volatility, trade and regulation changes, food safety and disease outbreaks, shareholder reduction overhang.

At A Glance Issued Capital (m shrs) 14,651 Mkt. Cap (HK$m/US$m) 99,920 / 12,837

Major Shareholders Rise Grand (The management) (%) 36.0 CDH (%) 9.3

Free Float (%) 54.7 3m Avg. Daily Val. (US$m) 24.6 ICB Industry : Consumer Goods / Food Producers

59

79

99

119

139

159

179

199

219

3.4

3.9

4.4

4.9

5.4

5.9

6.4

6.9

7.4

7.9

Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17

Relative IndexHK$

WH Group Ltd (LHS) Relative HSI (RHS)

DBS Group Research . Equity 10 May 2017

China / Hong Kong Company Guide

WH Group Ltd Version 2 | Bloomberg: 288 HK Equity | Reuters: 0288.HK

Refer to important disclosures at the end of this report


Page 59

Company Guide

WH Group Ltd

CRITICAL FACTORS TO WATCH US to lead growth. We expect US operating profit to achieve a CAGR of 11% in 2016-18F. We expect the company’s continuous enhancement in product mix towards more popular items (belly and ham), as well as the One Smithfield Initiative to reduce redundant positions in the company by FY17F. The Clougherty acquisition should support volume growth for packaged meats in 2017F. In addition, this should offer new distribution channels in the West Coast for Smithfield’s existing products, and shorter lead time to West port for exports. Packaged meat in China. We expect China to deliver operating profit CAGR of 4% in FY16-18F. Despite the consumption environment remaining soft in China, we expect a preference towards low-temperature meat products (LTMP), product mix enhancement (introduction of American-style products), to continue enhancing profitability. In addition, we think that the rising US exports into China for raw material use in packaged meats should bode well for overall margins. Export volume growth. With matured pork demand, the US relies on exports to support growth in the pork sector. In Feb’ 2017, US export volume growth reached 16% y-o-y, with the key export countries being Mexico (32.7% of total volume share), Japan (22.7%), South Korea (10.0%), and China/Hong Kong (9.9%). China/Hong Kong reported a mild volume decline of 3.5% y-o-y, likely due to competitive prices from the EU. Seeking M&A opportunities. With strong free-cash-flow generation, WH Group is primed to seek out M&A opportunities to continue enhancing its market share leadership in the US. In Jan 2017, the company purchased California’s largest pork processor, Clougherty, which owns two processing facilities, three farms and approx. 2k employees, which should help extend its distribution network to the West Coast.

US hog price change (%)

16%19%

0% 1%

0%

5%

10%

15%

20%

25%

0

1,000

2,000

3,000

4,000

5,000

Packaged meats

Fresh pork Hog production

Others

US$m

2016 % of sales

US FY16 sales & % of total sales

33%

21%

4%0%

0%5%10%15%20%25%30%35%

0

2,000

4,000

6,000

8,000

Packaged meats

Fresh pork Hog production

Others

US$m

2016 % of sales

Smithfield pork export to China vs. rest of US market

25 83179

280

0

100

200

300

400

2015 2016

'000 ton

Rest of the industry export to China

Smithfied export to China

Total volume of Smithfield pork export to all countries vs. rest of US industry

1,498 1,596

639 715

0

500

1,000

1,500

2,000

2,500

2015 2016

'000 ton

Rest of industry export to all countries

Smithfield export to all countries



Page 60

Company Guide

WH Group Ltd

Balance Sheet: The company completed the refinancing activities of its Senior Notes of US$1.4bn, and credit agreements of US$1bn and US$500m respectively in early-FY17. Excluding a debt retirement cost of US$70m, this refinancing should help lower its interest cost. As of end-FY16, WH Group had a net gearing of 24.7%. Looking at two businesses separately, China has cash before delivery policy, while US credit policy is roughly 30 days. Capital expenditure reached US$451m in FY16, and we expect this to reach US$500-600m in FY17F. Net gearing is expected to lower to 14% by end-FY17F. Share Price Drivers: Packaged meat product mix enhancement. Packaged meat operating profit accounts for bulk of the group’s operating profit. Through continuous improvement in product mix (introduction of American-style brand in China) and cost-saving initiatives (One Smithfield), we expect packaged meat operating profit to improve by 6.3% y-o-y in FY17F. Export volume. The direct access to the largest pork consuming country in the world and favourable US-China hog price gap, should continue to enhance overall economies of scale for its fresh pork operations. Key Risks: Raw material & selling price volatility. WH Group is sensitive to both hog and corn prices in the US and China. However, the company does hedging for its US operations, which should help limit price volatility. Previous key shareholder seeking to lower its stake. CDH has lowered its stake by 21.1% since Aug2016, with its remaining stake at 9.3%. Political and trade policy. WH Group’s US fresh pork and hog production sales rely on export volume growth. Any political and trade policy changes will impact WH Group’s US operations. Food safety and disease concerns. WH Group is subject to food safety and disease risks in both countries. Company Background: WH Group is the largest integrated pork player globally, with operations spanning the US, China and the EU. In the US, Smithfield is the no. 1 packaged meat player (18% of packaged meat market share). In China, the Shuanghui brand is also the no.1 packaged meat player with a market share of 39.6% as of end-FY16.

Leverage & Asset Turnover (x)

Capital Expenditure

ROE

Forward PE Band

PB Band


1.4

1.5

1.5

1.6

1.6

1.7

1.7

0.00

0.10

0.20

0.30

0.40

0.50

0.60

0.70

0.80

2014A 2015A 2016A 2017F 2018F

Gross Debt to Equity (LHS) Asset Turnover (RHS)

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0

2014A 2015A 2016A 2017F 2018F

Capital Expenditure (-)

US$m

0.0%

5.0%

10.0%

15.0%

20.0%

2014A 2015A 2016A 2017F 2018F

Avg: 10.4x

+1sd: 12.2x

+2sd: 14.1x

‐1sd: 8.5x

‐2sd: 6.7x6.0

8.0

10.0

12.0

14.0

16.0


(x)

Avg: 1.83x

+1sd: 2.22x

+2sd: 2.61x

‐1sd: 1.44x

‐2sd: 1.05x0.9

1.4

1.9

2.4

2.9

3.4


(x)


Page 61

Company Guide

WH Group Ltd

Key Assumptions

FY Dec 2014A 2015A 2016A 2017F 2018F US hog price change (%) 11.6 (31.7) (20.0) 5.0 0.0 China hog price change (%)

(8.3) 10.0 21.7 (10.8) (6.1)


Segmental Breakdown (US$ m)

FY Dec 2014A 2015A 2016A 2017F 2018F Revenues (US$ m) China 7,395 7,087 7,755 7,732 8,365 US 13,235 12,745 12,358 13,267 13,712 Others 1,613 1,377 1,421 1,270 1,295 Total 22,243 21,209 21,534 22,270 23,372 Source: Company, DBS Vickers

Income Statement (US$ m) FY Dec 2014A 2015A 2016A 2017F 2018F Revenue 22,243 21,209 21,534 22,270 23,372 Cost of Goods Sold (18,297) (17,065) (17,182) (17,781) (18,628) Gross Profit 3,946 4,144 4,352 4,489 4,744 Other Opng (Exp)/Inc (2,269) (2,523) (2,542) (2,629) (2,759) Operating Profit 1,677 1,621 1,810 1,860 1,985 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 51 15 41 70 74 Net Interest (Exp)/Inc (353) (207) (173) (137) (86) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 1,375 1,429 1,678 1,793 1,973 Tax (432) (354) (462) (493) (543) Minority Interest (206) (209) (202) (204) (218) Preference Dividend 0 0 0 0 0 Net Profit 737 866 1,014 1,095 1,212 Net Profit before Except. 737 866 1,014 1,095 1,212 EBITDA 2,087 2,027 2,223 2,453 2,750 Growth Revenue Gth (%) 97.7 (4.6) 1.5 3.4 5.0 EBITDA Gth (%) 419.2 (2.9) 9.7 10.3 12.1 Opg Profit Gth (%) 81.9 (3.3) 11.7 2.8 6.7 Net Profit Gth (%) N/A 17.5 17.1 8.0 10.6 Margins & Ratio Gross Margins (%) 17.7 19.5 20.2 20.2 20.3 Opg Profit Margin (%) 7.5 7.6 8.4 8.4 8.5 Net Profit Margin (%) 3.3 4.1 4.7 4.9 5.2 ROAE (%) 19.9 15.9 16.8 16.3 16.1 ROA (%) 5.1 6.0 7.3 8.0 8.6

ROCE (%) 9.5 10.0 11.2 11.8 12.2 Div Payout Ratio (%) 0.0 19.7 30.0 30.0 30.0 Net Interest Cover (x) 4.8 7.8 10.5 13.6 23.1 Source: Company, DBS Vickers


Page 62

Company Guide

WH Group Ltd

Interim Income Statement (US$ m)

FY Dec 2H2014 1H2015 2H2015 1H2016 2H2016 Revenue 11,703 10,205 11,004 10,453 11,081 Cost of Goods Sold (9,693) (8,260) (8,805) (8,405) (8,777) Gross Profit 2,010 1,945 2,199 2,048 2,304 Other Oper. (Exp)/Inc (1,169) (1,182) (1,341) (1,193) (1,349) Operating Profit 841 763 858 855 955 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc 19 13 14 31 20 Net Interest (Exp)/Inc (187) (118) (101) (96) (87) Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit 673 658 771 790 888 Tax (207) (194) (160) (223) (239) Minority Interest (95) (97) (112) (101) (101) Net Profit 371 367 499 466 548 Net profit bef Except. 371 367 499 466 548 Growth Revenue Gth (%) N/A (3.2) (6.0) 2.4 0.7 Opg Profit Gth (%) N/A (8.7) 2.0 12.1 11.3 Net Profit Gth (%) N/A 0.3 34.5 27.0 9.8 Margins Gross Margins (%) 17.2 19.1 20.0 19.6 20.8 Opg Profit Margins (%) 7.2 7.5 7.8 8.2 8.6 Net Profit Margins (%) 3.2 3.6 4.5 4.5 4.9 Source: Company, DBS Vickers

Balance Sheet (US$ m)

FY Dec 2014A 2015A 2016A 2017F 2018F Net Fixed Assets 4,582 4,674 4,529 4,576 4,455 Invts in Associates & JVs 539 185 181 181 181 Other LT Assets 4,225 4,229 4,058 4,058 4,058 Cash & ST Invts 1,000 1,154 1,190 1,217 1,546 Inventory 1,900 1,748 1,678 1,736 1,819 Debtors 1,108 956 1,001 1,032 1,077 Other Current Assets 1,366 1,355 974 1,114 1,243

Total Assets 14,720 14,301 13,611 13,915 14,380 ST Debt

699 594 995 995 995 Creditors 607 559 557 513 513 Other Current Liab 1,816 1,706 1,771 1,831 1,915 LT Debt 3,951 3,308 1,867 1,367 867 Other LT Liabilities 1,597 1,431 1,383 1,380 1,377 Shareholder’s Equity 5,130 5,763 6,316 7,107 7,991 Minority Interests 920 940 722 722 722 Total Cap. & Liab. 14,720 14,301 13,611 13,915 14,379 Non-Cash Wkg. Capital 1,951 1,794 1,325 1,539 1,711 Net Cash/(Debt) (3,650) (2,748) (1,672) (1,145) (316) Debtors Turn (avg days) 37.9 37.4 35.6 35.6 35.6 Creditors Turn (avg days) 17.0 17.4 18.1 18.1 18.1 Inventory Turn (avg days) 39.0 36.7 33.4 32.8 31.8 Asset Turnover (x) 1.5 1.5 1.5 1.6 1.7 Current Ratio (x) 1.7 1.8 1.5 1.5 1.7 Quick Ratio (x) 0.7 0.7 0.7 0.7 0.8 Net Debt/Equity (X) 0.6 0.4 0.2 0.1 0.0 Net Debt/Equity ex MI (X) 0.7 0.5 0.3 0.2 0.0 Capex to Debt (%) 15.0 18.8 23.4 24.1 30.6 Z-Score (X) NA NA NA NA NA Source: Company, DBS Vickers


Page 63

Company Guide

WH Group Ltd

Cash Flow Statement (US$ m)

FY Dec 2014A 2015A 2016A 2017F 2018F Pre-Tax Profit 1,420 1,302 1,678 1,793 1,973 Dep. & Amort. 359 391 525 523 691 Tax Paid (398) (373) (462) (493) (543) Assoc. & JV Inc/(loss) 0 0 0 0 0 (Pft)/ Loss on disposal of FAs (79) 110 (202) (204) (218) Chg in Wkg.Cap. 227 191 446 (214) (172) Other Operating CF 31 (8) 0 0 0

Net Operating CF 1,560 1,613 1,985 1,404 1,731 Capital Exp.(net) (699) (735) (670) (570) (570) Other Invts.(net) 0 0 0 0 0 Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (22) 221 16 (3) (3) Net Investing CF (721) (514) (654) (573) (573) Div Paid (191) (162) (171) (304) (329) Chg in Gross Debt 2,689 2,347 (1,040) (500) (500) Capital Issues 2,284 0 0 0 0 Other Financing CF (5,434) (3,086) (218) 0 0 Net Financing CF (652) (901) (1,429) (804) (829) Currency Adjustments 0 0 0 0 0 Chg in Cash 187 198 (98) 27 329 Opg CFPS (US$) 0.09 0.10 0.11 0.11 0.13 Free CFPS (US$) 0.06 0.06 0.09 0.06 0.08 Source: Company, DBS Vickers

Target Price & Ratings History

Source: DBS Vickers

Analyst: Alison FOK

12 3

5.0

5.5

6.0

6.5

7.0

7.5

8.0

May

-16

Jun

-16

Jul-1

6

Au

g-16

Sep-

16

Oct

-16

Nov

-16

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Apr

-17

May

-17

HK$S.No. Da te Clos ing 12-mth Ra ting

Pric e Ta rge tPri c e

1: 22-Feb-17 HK$6.14 HK$7.70 Buy2: 23-Mar-17 HK$6.06 HK$7.70 Buy3: 28-Apr-17 HK$6.92 HK$7.70 Buy



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DBSVHK recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends Completed Date: 10 May 2017 19:14:24 (HKT) Dissemination Date: 10 May 2017 19:54:14 (HKT)

Sources for all charts and tables are DBS Vickers unless otherwise specified.

GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited (“DBSVHK”). This report is solely intended for the clients of DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd. (“DBSVS”) and DBSVHK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVHK. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., DBSVS and DBSVHK, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report. This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.



Page 66

ANALYST CERTIFICATION

The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the

companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her

compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s)

primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of the

issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real

estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity who is responsible for the

management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or

his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has

procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of

research reports. The research analyst(s) responsible for this report operates as part of a separate and independent team to the investment

banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment

banking function is handled appropriately. There is no direct link of DBS Group's compensation to any specific investment banking function of the

DBS Group. COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBSVHK and its subsidiaries do not have a proprietary position in the securities recommended/mentioned in this report as of 09 May

2017.

2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.

3. Compensation for investment banking services: DBS Bank Ltd., DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from COFCO Meat Holdings Limited (1610 HK) as of 31 Mar 2017. DBS Bank Ltd., DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA have managed or co-managed a public offering of securities for COFCO Meat Holdings Limited (1610 HK) in the past 12 months, as of 31 Mar 2017. DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

4. Disclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months.

1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the

trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst.

2 Financial interest is defined as interests that are commonly known financial interest, such as investment in the securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or investments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new listing applicant.



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RESTRICTIONS ON DISTRIBUTION

General This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.

Australia This report is being distributed in Australia by DBS Bank Ltd. (“DBS”) or DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”) or DBS Vickers (Hong Kong) Limited (“DBSVHK”), which are exempted from the requirement to hold an Australian Financial Services Licence under the Corporation Act 2001 (“CA”) in respect of financial services provided to the recipients. Both DBS and DBSVS are regulated by the Monetary Authority of Singapore under the laws of Singapore, and DBSVHK is regulated by the Securities and Futures Commission of Hong Kong under the laws of Hong Kong, which differ from Australian laws. Distribution of this report is intended only for “wholesale investors” within the meaning of the CA.

Hong Kong This report is being distributed in Hong Kong by DBSVHK which is licensed and regulated by the Hong Kong Securities and Futures Commission.

Indonesia This report is being distributed in Indonesia by PT DBS Vickers Sekuritas Indonesia.

Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR"). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

Thailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. Research reports distributed are only intended for institutional clients only and no other person may act upon it.

United Kingdom

This report is produced by DBSVHK which is regulated by the Securities and Futures Commission of Hong Kong. This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd (“DBSVUK”). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom. In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication.

Dubai

This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

United States This report was prepared by DBSVHK. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restrictions on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate.

Other jurisdictions

In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions.

DBS Vickers (Hong Kong) Limited

18th Floor Man Yee building, 68 Des Voeux Road Central, Central, Hong Kong

Tel: (852) 2820-4888, Fax: (852) 2868-1523

Company Regn. No. 31758



Page 68

As i a n Eq u i t i e s Sa l e s , Sa l e s Tra d i n g a n d R e s e a rc h Co n ta c ts

Sa l e s H e a d s Te l : Ema i l :Singapore Kenne th Tang 65-6398 6951 kenne thtang@dbsvicke rs.comHong Kong Andrew Au 852-2820 4992 [email protected] rs.comLondon Graham Booth 44-20-7618 1881 [email protected] York Ela ine Yu 1-212-826 3553 e la [email protected] rs.comTha iland Na risa ra Vise skosin 662-657 7759 Na risa [email protected] rs.comIndonesia Rica rdo Silaen, CFA 6221 3003 4911 rica rdo.sila [email protected] rs.com

Sa l e s Tra d i n g Co n ta c t s Te l : Ema i l :Singapore Vivian Goh 65-6398 6927 viviangohkb@dbsvicke rs.comHong Kong Franco Law 852-2971 1828 [email protected] rs.comLondon Cha rle s Davie s 44-20-7618 1883 cha rle sdavie [email protected] York Brenda Wong 1-212-826 3558 [email protected] rs.com

R e s e a rc h Co n ta c t s Te l : Ema i l :Regiona l Timothy Wong 65-6682 3691 [email protected] Janice Chua 65-6682 3692 [email protected] Kong Carol Wu 852-2863 8841 ca [email protected] rs.comMa laysia Wong Ming Tek 603-2604 3970 mingtek@a lliancedbs.comTha iland Chanpen Sirithana ra ttanakul 662-657 7824 [email protected] rs.comIndonesia Mayna rd Pria ja ya Arif 6221 3003 4930 mayna rd.a [email protected] rs.com

DBS V ic k ers Sec u rit ies - Reg ional O f f ic es

HO NG K O NG M A LA Y SIA SING A PO RE DBS V ickers (Hong Kong) Ltd AllianceDBS Research Sdn Bhd DBS Bank Ltd18th F loor Man Yee Building 19th F loor, Menara Multi-Purpose 12 Marina Boulev ard68 Des V oeux Road Central Capital Square, 8 J alan Munshi Abdullah Level 40Central, Hong Kong 50100 Kuala Lumpur Marina Bay F inancial CentreTel: 852-2820 4888 Tel: 603 2604 3333 Tower 3, Singapore 018982F ax: 852-2868 1523 F ax: 603 2604 3921 Tel: 65-6878 8888Participant of The Stock Exchangeof Hong Kong Limited

INDO NESIA UNIT ED ST A T ES UNIT ED K ING DO MPT DBS V ickers Securities (Indonesia) DBS V ickers Securities (USA) Inc DBS V ickers Securities (UK) LtdDBS Bank Tower 777 Third Av enue 4th F loor Paternoster HouseCiputra World 1, 32/F Suite 26A 65 St Paul's Churchy ardJ l. Prof. Dr. Satrio Kav . 3-5 New York, New York 10017 London EC4M 8ABJ akarta 12940, Indonesia Tel: 1-212-826 1888 Tel: 44-20-7618 1888Tel: 62-21- 3003 4900 F ax: 1-212-826 8704 Fax: 44-20-7618 1900F ax: 62-21- 3003 4943 Member of F INRA and SIPC Regulated by The F inancial Serv ices Authority

T HA ILA NDDBS V ickers Securities (Thailand) Co, Ltd989 Siam Piwat Tower Building, 9th, 14th-15th F loor, Rama 1 Road, Pathumwan, Bangkok Thailand 10330 Tel. 66 2 657 7831F ax: 66 2 658 1269

e

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