Japfa - The Emerging Markets Agribusiness Specialist

Business Overview:

Japfa is a leading pan-Asian, industrialized agri-food company dedicated to feeding emerging Asia with essential proteins. With over 32,000 employees across Singapore, Indonesia, Vietnam, Myanmar, India, and China, our target market consist of 3 billion people where more than 40% of the world’s total population live in.

Currently, Japfa is a leader among the upstream regional players in terms of cost efficiencies. Japfa is recognized as one of the most efficient and low-cost producers in the business of dairy and animal proteins in all of the countries that it operates in (except India). This highlights the high operational effectiveness and capabilities of the business to manage price fluctuations in the cyclical agri-food industry.

Three main business segments:

1) Animal protein segment which is geographically split into Indonesia (51%-owned PT Japfa) and Animal Protein Others (Vietnam, Myanmar, and India).

Indonesia (PT Japfa):

Animal Protein Others (Vietnam, Myanmar, and India):

2) Dairy operations mainly carried out in China (upstream dairy farming) and Indonesia (vertically integrated dairy business).

Dairy Operations:

3) Consumer food segment, mainly for the Indonesian market (expansion plans into the other geographies), which Japfa also uses some of its animal protein products as raw materials.

Consumer Food Operations:

Thesis:

1) Highly replicable and scalable business model with improving operations

Japfa has been successful in bringing the best practices and infrastructure design across its five protein groups into five different countries. Their management are highly experienced in being able to quickly replicate and scale up their profitable business model which captures the value and margins of the entire value chain. As seen from the graphs above previously, profitability from the animal protein segment is largely stable and improving. The dip in Animal Protein Others segment was due to China’s import restrictions in 4Q2016 which caused the overall demand for swine to fall significantly. This affected Vietnam’s swine business as swine prices have dropped drastically and remain below cost level, recording a loss.

Overall however, being one of the lowest cost and efficient players in the industry, Japfa has the capabilities to tide over the impact of the new restrictions which are putting pressure on swine prices. This can be seen from Japfa’s 1Q 2018 performance metrics, which have improved over a year earlier ago which recorded losses mainly due to the Vietnam operations.

As the demand and supply characteristics for swine rebalances itself over time, the recovery of swine prices would enable Japfa to resume its profitability. This could also be an opportunity to consolidate some of the smaller players.

Furthermore, the replicable business of Japfa also includes farm design model in dairy farms, DOC breeding farms, feedmills, etc. Hence, the diversified operations of Japfa in various geographical regions also lends stability to the overall business. With the management’s track record of having the necessary expertise and experience, Japfa can easily replicate and expand into other emerging geographical regions as a new source of growth.

2) Greater upside to be unlocked from improving economic growth

As Japfa’s operations are focused on the rapidly growing emerging Asian markets, there is much value to be derived as it continues to strengthen its market position and cost efficiencies (already one of the top).

With the emerging Asian markets having some of the lowest poultry consumption per capita rates, there exists a potential upside for higher poultry meat consumption as diets evolve to include more meat-based protein from currently carbohydrates-heavy diet as GDP per capita increases. This relationship can be seen from the positive correlation between GDP per capita and poultry meat consumption as developed countries such as the U.S. and Singapore consume much more poultry meat per capita.

Therefore, as the geographies in which Japfa resides in becomes more affluent over time, sales volume and prices should increase accordingly. Given Japfa’s cost efficiencies and ability to reap great economies of scale and synergies through its expansive operations and vertically integrated business model, this would provide a boost to operating margins and contribute to higher profitability.

Nevertheless, this is a longer-term strategic play as Japfa is still in the midst of developing and strengthening its main pillars of operations to become a more efficient and dominant player in the emerging Asian markets.

3) High yield Dairy business with greater growth capabilities

With the acquisition of remaining interest in AustAsia, Japfa will now enjoy full contribution from the strong Dairy business starting from 01 January 2018. Year-on-year revenue growth (1Q 2017-2018) from Dairy operations improved by 20.2% due to higher raw milk sales volume in both China and South-east Asia, signaling external demand for dairy remains strong.

Japfa now has full control over the highly successful vertically integrated “grass-to-glass” modern dairy operations. AustAsia has a track record of consistent profitability, and even despite prevailing low raw milk prices due to their ability to tap on the efficiencies generated across the dairy value chain. This has allowed AustAsia to command a leadership position in terms of milk yields within China improving from 38.6Kg/head/day to 38.9Kg/head/day. Milkable cows in China also improved by 8.7% to a population of 42,010 heads. Therefore, with the current low raw milk prices, this presents a potential upside for the Dairy business when the market rebalances out and prices recover.

The Dairy business also owns a highly successful brand Greenfields, which is the #1 brand of Fresh Pasteurized Milk in Indonesia where it commands significant customer base and brand equity.The Dairy business also owns a highly successful brand Greenfields, which is the #1 brand of Fresh Pasteurized Milk in Indonesia where it commands significant customer base and brand equity.

With a strong upstream dairy business substantially in place, Japfa is now focused on strengthening its downstream dairy business by diverting resources and effort into accelerating the development of the Greenfields brand in Asia. In Indonesia, the management is channeling profits into further brand building and widening of the Greensfield dairy products to capture a larger target segment, and therefore should contribute to greater sales and stability to profits over time.

We also witness the rolling out of newer dairy product categories such as yogurt and cheeses to capitalize on the premium branding of Greenfields which will be a means for Japfa to further expand and solidify its market positioning.

Risk:

1) The agri-food business is subjected to cyclicality which have direct impacts on Japfa’s core pillars of revenue and profitability. As cyclicality is dependent of a variety of external factors which are beyond Japfa’s control for example the seasonality of harvest and festivals, as well as macroeconomic factors that affect purchasing power and government policies, they can cause disruptions to Japfa’s normal course of business and affect its profitability (one good illustration is China’s restrictions on swine imports from Vietnam at the start of 2017).

2) Given Japfa’s strategy of targeting the Asian emerging markets, there exist the risk associated with a greater amount of sovereign and economic issues that could impact that operations of the business such as the appreciation/devaluation of currency, high country debt, political instability, and worsening economic problems. Despite being diversified among various countries, they are all still concentrated within the Asian emerging economies. Hence, should one of them fail, there could be a chain-effect on the surrounding economies, eventually hurting Japfa.