Fufeng Group Limited
Fufeng (‘group’) is engaged in the manufacture and sale of a) Food
additives including MSG and starch sweeteners (52% of revenues), b) Animal
nutrition products (31%), c) Colloid products (7%), d) High-end amino acids
(6%), and e) “Others” including fertilizers, synthetic ammonia, pharmaceuticals,
etc.
The group generates 68% of its revenues within China and is a leading
player in the amino acid industry. It also has access to relatively low-cost
coal power, which is instrumental in strengthening its pricing power.
Covid-19 reduced demand from the catering industry for food additives. Further,
corn prices (raw material) were higher during the period.
Its animal nutrition segment continued to be sluggish after the swine
flu outbreak in 2019. The colloid segment, which primarily sells Xantham gum
used in oil mining, was impacted by low crude oil prices. And the high-end
amino acids were impacted by US tariffs arising from the US-China trade
dispute.
However, sales declines were offset by newly added lysine capacity that
was operational during the period.
The group reported TTM sales of $18.4b (2019: $18.3b), ebitda of $2.5b
(2019: $2.7b) and net profits of $1b (2019: $1.3b).
The group has a portfolio of products subject to cyclical factors.
Considering the unused production capacity in the animal nutrition segment
(only 70% utilized in the last twelve months) and continual focus on cost
efficiencies, we think 2019 earnings of $1.3b may be a conservative estimate of
future earning power.
The balance sheet reveals net debt of $1.4b, which appears conservative with
respect to ebitda. The current and liquid asset ratios are slightly below par
at 1.67 and 0.89 respectively but passable considering the low level of
external borrowings and strong market position.
With tangible assets of $12.7b, profitability is only moderate at about
10%/year.
The stock sells at $7.6b, which is under 6x earnings.
Management spent $883m on dividends and buybacks in 2019 but the interim
dividend was cut in half recently.
We think this stock meets basic tests of quantitative value. Moreover,
its market leadership and scale are important qualitative pluses that provide
assurance on the stability of future earnings. It isn’t a screaming bargain,
but it’s passable.