Saturday, April 25, 2009

Pfood vs Yurun

Both are similar:
  • In the same business, slaughtering pigs and processing meat
  • Vying for number 2 and 3 in the China pork market
  • Similar business model and financial statements (i.e.: low debt, low capex business with high turnover and working capital, COGS make up > 80% of costs).
  • Both affected by the same events: the pork shortage starting 1H06 until end 07, and the current ongoing recovery.
Some differences:
  • Yurun concentrated on selling through third parties (e.g.: supermarkets, hotels) after listing in 1H06. Pfood runs its own stores - it has just started mentioning that it will look to third party distributors in its 2008 AR.

Yurun listed in Oct 05 on HKEX (announcements here). HKEX makes it a hell of a lot easier to find documents than SGX.

Competition:

(All figures in RMB millions)

YOY Sales:



YOY Operating Margins:


Half Yearly Margins during the FY06-07 pig shortage:

Why did Yurun's 2H08 operating profit drop so much? It was due to increases in admin and distribution expenses, decreases in other income and finance income ($HK):

In their FY08 prelim report, they say:
"During [FY08], the operating expenses of the Group were... up 59.2% ... The increase was mainly attributable to higher transportation costs resulting from the increase in fuel costs, combined with an increase in advertising expenses and management costs due to the increase in staff number".

Notes:
  • Yurun started from a smaller base, but expanded faster and surpassed Pfood in sales in 08.
  • Yurun has higher gross margin. This may be due to better branding or better supplier network/location.
  • Pfood has higher operating margin however. It is more efficient.
  • Yurun has announced aggressive expansion plans for the future. Plans to double capacity to 30m head by 2010 (currently at end 08 is 18m). Financed by cash and debt. Yurun has previously expanded this fast in previous years. Horizontal integration. Market share and scale.
  • Pfood has announced plans to enter pig farming and be able to meet all its raw material needs within 5 years. Vertical integration. Efficiency.
Currently the 2 companies are similar with different characteristics. In future, they will have different profiles.

Still need to look through these before making a descision.
  • Yurun's cashflow statements (working capital) and footnotes.
  • Product mix (LTMP vs HTMP) between the two companies - can this account for the differences in margins?

3 comments:

mitchell said...

Hi Black Cat,
Nice analysis..I feel that Yurun is quite richly valued with a short operating record? 2/3 years?but Pfood has been undervalued due to poor S chips sentiment?...Pfood also has a longer operating history..10 years right?More trustworthy and dependable?

Black Cat said...

Hi mitchell,

Pfood is ideed more trustworthy and dependable. Like a cash printing machine which regularly pays dividends to shareholders. Yurun has had cash outflows due to their expansion for at least the past 3 years. Still going thru their cashflow statements to see how comfortable I am with this. Hopefully will have something to post this weekend.

My original aim of looking at Yurun is to see how it is competing with Pfood, which I hold. In the long term, what happens if Yurun keeps getting a larger share of the market (eg: 6%) while Pfood grows more slowly (mabye getting 3%). Will pfood still have pricing power?

Valuation also depends on growth. At HK$10, Yurun's 08 PE is 13 or 14. If the company can consistently grow at 30%, then its cheap.

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