Fufeng (546 HK, HK$4.40, BUY) – Over 120% bottom line growth in Jan-Oct

The company’s management account showed net profit in the first 10 months of FY12/09A was over 2.2x of which in full FY12/08A (RMB294.7m), thanks to continuous improvement of MSG market with increase in both sales volume and selling price. In our previous note (“Strong MSG price”, 23 Nov), We mentioned the MSG price hike from ~RMB7,500/tonne to ~RMB11,000/tonne in the past two months, which, based on our preliminary estimate, can bring around RMB150m additional net profit to the company this year (present forecast: RMB758.4m). Meanwhile, the potential retention of MSG price at this high level will definitely favor Fufeng even in FY12/10F. We are reviewing our model. An upward adjustment on target price (present: HK$4.86) is likely.

Fufeng (546 HK, HK$3.87, BUY) - strong MSG price

MSG price has been increasing sharply since Sep from ~RMB7,500 / tonne to ~11,000 / tonne due to: 1) higher-than-expected corn price backed by the bad weather condition, which affected corn transportation and settlement, and rumored another round of government purchase; 2) capped supply after the government raised environmental requirement for MSG industry plus Meihua’s Bazhou plant (150,000 tonnes) is still under environmental investigation and has suspended operation since May.  Fufeng has largely locked in its corn cost in 4Q through procurement of total 250,000 tonnees corn from the government at fixed RMB1,570 / tonne. This purchase allows ~104,000 tonne MSG output, implying a potential before tax gain of ~RMB208m on top of our old estimates of RMB834.6m (assuming average selling price of MSG in 4Q will be RMB200/tonne higher than estimated ~RMB8,500), which gives a full-year bottom line over ~RMB900m (our old forecast: RMB758.4m). We are reviewing our model and our old target price is HK$4.86, which represents 10x of our current FY12/09F estimated EPS.

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