Fufeng (546 HK, HK$2.00, BUY) - Lower costs to fuel earnings growth

Headquartered in Shandong province, Fufeng has operations in Junan (Shandong), Baoji (Shannxi) and Hohhot (Inner Mongolia). Principal products include glutamic acid, monosodium glutamate (MSG) and xanthan gum, which contributed 29.4%, 28.0% and 12.6%, respectively, of the total revenue in FY12/08A. Our views towards the company include:

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Fufeng (546 HK, HK$1.76) – To be included in MSCI Global Small Cap Index

It is reported that Fufeng will be put into MSCI Global Small Cap Index (MSCI環球小型股指數) this Friday after market close.

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Fufeng (546 HK, HK$1.21) - This is the good time

We are optimistic towards the company’s earnings in FY12/09F, given: 1) relatively inelastic demand for glutamic acid / MSG; 2) decline in raw materials costs; 3) xanthan gum capacity expansion combined with cost advantage. The management guided a ~10% top-line growth and ~30% at bottom line. Comparably, its present valuation (historical 6.0x) seems undemanding, in our view.

This is the good time