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Thailand

Investors should look beyond African Swine Flu

  • African Swine Flu (ASF) has spread rapidly across China over the past six months.

  • It has a 90% fatality rate; there is no known vaccine.

  • The crisis has driven pork prices in China up by 40% yoy.

Investors should look beyond African Swine Flu
Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

Tellimer Research
4 June 2019
Published by

African Swine Flu (ASF), a deadly disease for pigs, has spread rapidly across China over the past six months. It has a 90% fatality rate; there is no known vaccine. According to the Economist, it will take years for the disease to be controlled.

The Chinese authorities have said that only 1mn of the 500mn pig herd have been culled, but anecdotal reports suggest the cull rate in some provinces could be as high as 20%. Rabobank, a Dutch bank, estimates that more that 150mn pigs have been affected by ASF – almost one-third of the herd.

The crisis has driven pork prices in China up by 40% yoy and has also increased pork and chicken prices in Thailand – the core market of Southeast Asian meat processor Charoen Pokphand Foods (CPF TB), which we cover – by 8% and 9% ytd, respectively.

Moreover, ASF has led to an upsurge in chicken prices in China, by over 50% yoy, as consumers look for cheaper and safer forms of protein. This suggests CPF TB's China business (representing one-quarter of the firm's revenue) should emerge relatively unscathed from ASF. 

CPF TB produces both chicken feed and swine feed. This is positive for CPP (43 HK), which is CPF TB's associate investment, with operations in China and Vietnam.

Thailand and Vietnam have been relatively unaffected by ASF. There have been a few isolated cases in Vietnam, but Thailand has been unscathed. 

Our DCF-derived target price of THB38.00 for CPF TB is the highest on the street and is corroborated by the SOTP valuation. Stripping out the associate stake in CPALL TB, CPF TB is trading at 5x EV/EBITDA, which represents excellent value. We reiterate our Buy recommendation.