0926 DBS Vickers Japfa

www.dbsvickers.com ed: TH / sa: JC

BUY S$0.855 STI : 3,292.81 (Initiating Coverage) Price Target : 12-Month S$ 1.16 Reason for Report : Initiating coverage Potential Catalyst: Sequential recovery in 2H14 earnings Analyst Ben SANTOSO +65 6682 3707 [email protected] Indonesian Research Team

Price Relative

Forecasts and Valuation FY Dec (US$ m) 2013A 2014F 2015F 2016F

Turnover 2,697 3,021 3,524 3,956 EBITDA 233 345 430 543 EBITDA (ex. BA gains) 257 330 430 543 Pre-tax Profit 115 214 290 397 Net Profit 42 97 132 180 Net Pft (Pre Ex.) 42 97 132 180 Net Pft (ex. BA gains) 50 86 132 180 EPS (S cts) 25.3 7.0 9.5 13.0 EPS Pre Ex. (S cts) 25.3 7.0 9.5 13.0 EPS Gth (%) (58) (72) 36 37 EPS Gth Pre Ex (%) (58) (72) 36 37 Diluted EPS (S cts) 25.3 7.0 9.5 13.0 Net DPS (S cts) 0.0 0.0 0.0 0.0 BV Per Share (S cts) 246.1 58.0 67.5 80.4 PE (X) 3.4 12.2 9.0 6.6 PE Pre Ex. (X) 3.4 12.2 9.0 6.6 P/Cash Flow (X) 1.6 7.9 7.2 4.3 EV/EBITDA (X) 4.9 6.3 5.5 4.6 Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 0.3 1.5 1.3 1.1 Net Debt/Equity (X) 1.0 0.6 0.5 0.5 ROAE (%) 6.4 10.5 10.4 11.8 ICB Industry : Consumer Goods ICB Sector: Food Producers Principal Business: Japfa Limited is a leading industrialised producer of multiple animal proteins, dairy and consumer food products in Asia. Source of all data: Company, DBS Bank, DBS Vickers, Bloomberg Finance L.P.

At A Glance Issued Capital (m shrs) 1,765 Mkt. Cap (S$m/US$m) 1,507 / 1,189 Major Shareholders Rangi Management (%) 52.6 Morze International (%) 16.0 Tasburgh Ltd (%) 7.2 Free Float (%) 16.2 Avg. Daily Vol.(‘000) 8,017

DBS Group Research . Equity 25 Sep 2014

Singapore Company Focus

Japfa Ltd Bloomberg: JAP SP | Reuters: JAPF.SI Refer to important disclosures at the end of this report

A meaty proposition

An integrated Dairy, Animal Protein, and Consumer Foods producer with presence in Asia’s fast-growing markets

First-mover advantage with premium pricing in Dairy to drive 53% earnings CAGR in FY13-16F and offer core ROE of 9.2-11.8% in FY14F-16F

Japfa is a fully integrated player in a high entry barrier industry within rising middle-class markets

Initiating with BUY for 36% upside to S$1.16 TP An integrated Dairy, Animal Protein, and Consumer Foods producer with presence in Asia’s fast-growing markets

The right segment at the right place. Japfa Limited (Japfa) has been actively expanding in all of its business segments not only in Indonesia, but also in China, India, Vietnam and Myanmar – where per capita demand for dairy, animal protein and branded consumer foods is still rising. With over 40 years of track record and significant market shares in most of its businesses, we expect Japfa to continue capitalising on Asia’s demographic dividend. We expect the group to deliver FY13-16F bottom line CAGR of 53% and core ROE of 9.2% -11.8% in FY14F-16F. Structural opportunity. We value Japfa at US$1,651m (or S$2,039m), based on sum-of-parts valuation, employing comparative EV/EBITDA multiples. Our TP implies FY15F PER of 12.5x and PEG ratio of 0.24. Japfa’s growth will primarily be driven by capacity expansions in China and Indonesia, where strong dairy and animal protein demand continues to drive both volume and prices. Strong relative positioning. Japfa’s prospective earnings growth rate is superior to its peers in Indonesia, thanks to its fast-growing dairy segment, significant market shares and brand recognition. Japfa’s competitive advantage lies in its bio-security measures, high milk yield, full integration model (now being replicated across its market presence) and widely recognised So Good and Greenfields brands. Initiating with BUY. As the second largest poultry player and an established branded dairy producer in Indonesia, as well as a fast-growing dairy farmer in China; Japfa is a beneficiary of Asia’s growing requirement for animal protein. We believe the counter remains undervalued at the current level.

89

109

129

149

169

189

209

0.7

0.8

0.8

0.9

0.9

1.0

1.0

Aug-14

Relative IndexS$

Japfa Ltd (LHS) Relative STI INDEX (RHS)

Company Focus

Japfa Ltd

Investment summary A brief history. Japfa Limited’s (Japfa) heritage began over 40 years ago when PT Java Pelletizing Factory was established in 1971 as a copra pellet producer. In 1975, the group commenced its first poultry feedmill in Surabaya. Following its listings on the Jakarta and Surabaya Stock exchanges in 1989 and the acquisition of four poultry feed producers in 1990, its name was changed to PT Japfa Comfeed Indonesia. Through internal reorganisations of founder shares, PT Japfa Comfeed Indonesia became a subsidiary of Japfa in 2009. Between 2011 and 2014, Japfa consolidated the founder’s other businesses in India, Vietnam, China and Myanmar; as well as its Consumer Foods business in Indonesia, through a series of internal acquisitions (charts illustrating the group’s historical restructuring are presented in Appendix B of this report). Today, Japfa is a vertically-integrated food producer; and based on 2013 data, has weekly output of 5.5m broilers, 2,900 MT of raw milk, 4,700 heads of beef cattle, 1,400 piglets and 1,600 MT of prepared food. Japfa also sold 60k MT of poultry feed per week in 2013 – both internally and externally. A leading Dairy, Animal Protein, and Consumer

Foods producer. By volume, in 2013, Japfa commanded 25% market share in Day Old Chicks (DOC), 22% in poultry feed, 25% in fresh milk, and 31% in frozen food in Indonesia. Japfa Dairy segment’s milk output is the largest in Indonesia and it is one of the first to undertake an industrialised approach to dairy farming in China – where it currently operates a five-farm hub (four currently in the operational stage) in Shandong Province. The group also commands a significant price premium for its raw milk in China and fresh milk in Indonesia – mainly due to superior safety and nutritional standards. For this reason, Japfa’s fresh milk products in Indonesia command a more significant 38% share by value. Capitalising on structural opportunity in Asia’s

emerging markets. A majority (approximately 65%) of Japfa’s 2013 revenue came from its Poultry segment (Feed, DOC and broilers) in Indonesia, where chicken meat remains the most consumed and has the highest potential for growth – when compared to neighbouring countries’ consumption per capita. We expect Japfa’s broiler sales volume in Indonesia to expand by 15% CAGR between 2013 and 2016. The group is also a key beneficiary of undersupply in premium-quality milk in both Indonesia and China, thanks to its early-mover advantage, proven capability, and superior quality (as attested by its price premiums in both markets).

Significant growth potential. Historically, the group had booked EBITDA (excluding biological asset gains/loss and FX gains/losses) CAGR of 23% between 2011 and 2013, and is projected to accelerate towards 28% CAGR between 2013 and 2016. This is largely driven by the Dairy and Animal Protein segments. In Dairy, Japfa intends to expand its current operations in Indonesia (due for completion in 4Q14) and is building a second dairy farm there (due for completion in 1H16). The group also plans to double its dairy farm production capacity in China by constructing another five-farm hub in Inner Mongolia. Construction is scheduled to commence before the year-end and it is due to be completed by end-2018. In the Animal Protein segment, we expect Japfa’s combined DOC output regionally to expand by 17% CAGR between 2013 and 2016. Demand will be driven by rising income per capita, affordability relative to beef and religious/dietary restrictions. As adverse impacts from Rupiah depreciation and fuel subsidy removal (possibly by early 2015) wear off, we believe pent-up demand in Indonesia will continue to fuel growth. Key investment risks. Outbreak of diseases affecting livestock at the group’s poultry, dairy, swine, beef cattle and aquaculture farms would have material effect on Japfa’s business and financial status. The group is also exposed to volatile movements in raw material costs and currencies across key markets. For example, the recent drop in Rupiah and weakness in consumer purchasing power in Indonesia caused delays in passing-on raw material cost pressures. Japfa needs constant supply of superior livestock genetics, for which there are limited suppliers. Changes in government regulations, licensing, as well as other interventions, and price/volume controls across various jurisdictions may also adversely affect Japfa’s profitability. The group may require further funding to expand, and is hence vulnerable to liquidity and credit risks.

Company Focus

Japfa Ltd

Valuation methodology We employ sum-of-parts valuation based on peers’ EV/EBITDA multiples to arrive at our TP for the counter. Using this methodology, FY15F EBITDA from Japfa’s three segments: Dairy, Animal Protein and Consumer Foods are compared to their respective peers using in-house/consensus FY15F EV/EBITDA multiples. Each segment’s FY15F Enterprise Value (having taken into account any hold co discount) is subsequently subtracted by their respective net debts (based on their 2013 proportionate liabilities) to arrive at their equity values. Each segment’s equity value is then multiplied by Japfa’s effective ownership interest to arrive at net equity value for the group. In the Dairy segment, we compared the group’s operations with mostly upstream Dairy producers operating in China; namely Yuan Sheng Tai Dairy Farm (1431 HK), China Modern Dairy (1117 HK), China Huishan Dairy (6863 HK) and Inner Mongolia Yili (600887 CH). Using 24 Sep14 closing prices, the average FY15F EV/EBITDA for Dairy peers was 8.1x. Based on this, we peg this segment’s multiple at 8.0x In the Animal Protein segment, the group’s operations are comparable to Charoen Pokhpand Indonesia (CPIN IJ), Malindo Feedmill (MAIN IJ), Thai Union Frozen (TUF TB), and

Japfa’s own subsidiary, PT Japfa Comfeed Indonesia (JPFA IJ). Based on 24 Sep14 closing prices, the average FY15F EV/EBITDA for the Animal Protein peers was 8.4x (excluding Charoen Pokhpand Indonesia – being an outlier). However, for this segment we peg the EV/EBITDA target to implied consensus EV/EBITDA of PT Japfa Comfeed Indonesia and applied a 10% holding company discount (as the group’s Animal Protein contribution is primarily derived from its Indonesian subsidiary). Hence, the target EV/EBITDA employed is 8.5x (less 10% holdco discount). In the Consumer Foods segment, we compared Japfa’s operations with Indofood CBP Sukses Makmur (ICBP IJ), Mayora Indah (MYOR IJ), and Tiga Pillar Sejahtera Food (AISA IJ). Based on 24 Sep14 closing prices, the average FY15F EV/EBITDA for the Consumer Foods peers was 11.7x. Based on this, we peg this segment’s target EV/EBITDA multiple at 12.0x. In aggregate, we obtained a net Enterprise Value of US$3,400m. Subtracting forecast net debt and multiplying by each segment’s effective ownership, Japfa’s net equity value is hence estimated at US$1,651m or S$2,039m – implying a TP of S$1.16/share.

Company Focus

Japfa Ltd

Peer comparison

Source: DBS Bank, DBS Vickers, Bloomberg finance LP Based on closing prices as at 24 Sep14

Company Focus

Japfa Ltd

Mkt Cap Price 13-15 EPS

Dairy Bloomberg code FYE (US$ mn) Curncy (LCY) 14F 15F 14F 15F 14F 15F 14F 15F 14F 15F CAGR (%)YuanShengTai Dairy Farm 1431 HK Equity 12/2013 685.8 HKD 1.4 0.15 0.19 9.1 7.2 0.9 0.8 4.6 3.5 0.0% 0.0% 30.6China Modern Dairy Holdings 1117 HK Equity 12/2013 2,466.0 HKD 4.0 0.27 0.33 14.7 12.1 2.3 2.0 12.3 10.6 0.0% 0.0% 63.5China Huishan Dairy Holdings* 6863 HK Equity 03/2014 3,382.7 HKD 1.8 0.12 0.16 15.3 11.5 1.8 1.5 9.4 7.2 1.4% 1.8% 25.7Inner Mongolia Yili Industrial 600887 CH Equity 12/2013 13,054.7 CNY 26.2 1.29 1.59 20.2 16.4 4.0 3.6 13.5 10.9 2.2% 2.4% 20.3Simple average 14.8 11.8 2.3 2.0 10.0 8.1 0.9% 1.0% 35.0


Animal Proteins Bloomberg code FYE (US$ mn) Curncy (LCY) 14F 15F 14F 15F 14F 15F 14F 15F 14F 15F CAGR (%)Charoen Pokphand Indonesia CPIN IJ Equity 12/2013 5,619.0 IDR 4,100 189 236 21.7 17.3 5.5 4.5 15.7 13.0 1.2% 1.5% 23.7Malindo Feedmill MAIN IJ Equity 12/2013 512.7 IDR 3,425 182 265 18.8 12.9 4.3 3.3 14.8 9.1 0.9% 1.2% 36.6Japfa Comfeed Indonesia JPFA IJ Equity 12/2013 1,158.3 IDR 1,300 81 108 16.1 12.1 2.4 2.0 9.1 6.4 1.3% 1.6% 38.8Thai Union Frozen Products TUF TB Equity 12/2013 2,544.0 THB 71.5 4.4 5.4 16.2 13.2 1.9 1.8 11.3 9.7 3.1% 3.8% 47.3Simple average 17.0 12.7 2.9 2.4 11.7 8.4 1.8% 2.2% 40.9


Consumer Foods Bloomberg code FYE (US$ mn) Curncy (LCY) 14F 15F 14F 15F 14F 15F 14F 15F 14F 15F CAGR (%)Indofood CBP Sukses Makmur ICBP IJ Equity 12/2013 5,360.7 IDR 11,000 442 512 24.9 21.5 4.5 4.0 15.9 13.6 1.7% 2.0% 15.8Mayora Indah MYOR IJ Equity 12/2013 2,208.8 IDR 29,550 939 1,198 31.5 24.7 5.8 4.9 18.3 14.4 0.8% 0.8% 1.4Tiga Pillar Sejahtera Food AISA IJ Equity 12/2013 563.7 IDR 2,305 134 169 17.2 13.7 2.5 2.2 9.0 7.1 0.6% 0.7% 26.0Simple average 24.5 19.9 4.3 3.7 14.4 11.7 1.1% 1.1% 14.4


Integrated Food Producers Bloomberg code FYE (US$ mn) Curncy (LCY) 14F 15F 14F 15F 14F 15F 14F 15F 14F 15F CAGR (%)Charoen Pokphand Foods CPF TB Equity 12/2013 7,442.1 THB 31.0 1.43 1.95 21.7 15.9 1.9 1.8 16.2 13.4 2.5% 3.3% NMCharoen Pokphand Indonesia CPIN IJ Equity 12/2013 5,619.0 IDR 4,100 189 236 21.7 17.3 5.5 4.5 15.7 13.0 1.2% 1.5% 23.7Indofood Sukses Makmur INDF IJ Equity 12/2013 5,173.6 IDR 7,050 478 551 14.7 12.8 2.3 2.1 7.9 6.9 2.3% 3.3% 39.1Simple average 19.4 15.3 3.2 2.8 13.3 11.1 2.0% 2.7% 31.4* FY15 & 16 forecast

EV/EBITDA (x) Div Yield (%)

EV/EBITDA (x) Div Yield (%)EPS (LCY) PE (x)

EPS (LCY) PE (x) P/BV (x)

EPS (LCY) PE (x) P/BV (x)

P/BV (x)

EV/EBITDA (x) Div Yield (%)

EPS (LCY) PE (x) P/BV (x) EV/EBITDA (x) Div Yield (%)

Company Focus

Japfa Ltd

Valuation summary Source: Bloomberg Finance LP, DBS Bank estimates

EV/EBITDADairy peer comparison CY15FYuanShengTai Dairy Farm 3.5China Modern Dairy Holdings 10.6China Huishan Dairy Holdings* 7.2Inner Mongolia Yili Industrial 10.9Peer average 8.1

EV/EBITDAAnimal Protein peer comparison CY15FCharoen Pokphand Indonesia 13.0Malindo Feedmill 9.1Japfa Comfeed Indonesia 6.4Thai Union Frozen Products 9.7Peer average 8.4

EV/EBITDAConsumer Foods peer comparison CY15FIndofood CBP Sukses Makmur 13.6Mayora Indah 14.4Tiga Pillar Sejahtera Food 7.1Peer average 11.7

CY15F Target CY15 Holdco CY15F Net CY15F Net CY15F Net Proportion Ownership EquityJapfa Limited EBITDA (US$ m) EV/EBITDA discount EV/EBITDA EV (US$ m) debt (US$ m) of net debt value (US$ m)Dairy 115.7 8.0 0% 8.0 925 74.8 10% 61.9% 526.4Animal Protein (JPFA) 278.5 8.5 10% 7.7 2,131 538.9 57.5% 915.2Animal Protein (ex JPFA) 24.0 8.5 0% 8.5 204 44.9 100.0% 159.3Consumer Foods 11.7 12.0 0% 12.0 140 89.8 12% 100.0% 50.5Aggregate value 429.9 7.9 3,400 748 100% 1,651.4

(+) Cash 203(-) Borrowings 951Net debt 748

Number of shares (m) 1,765Equity value/share (US$) 0.94Equity value/share (S$) 1.16FY15F earnings (US$ m) 132.0Implied FY15F PER basd on TP 12.5FY13-16F earnings CAGR 53%PEG 0.24

78%

Company Focus

Japfa Ltd

SWOT analysis

Strengths Weakness High industry barriers to entry: Capital and extensive know-how Leading market positions in multiple protein segments Strong and experienced management team with over 40 years of experience Full integration enables the group to capture value across the chain High milk yields and consistently superior milk quality standard Extensive bio-security measures and vaccine production capabilities

Volatility of raw material costs and exchange rates may adversely affect profitability, if unable to pass on cost pressures Imports of cattle are subject to Indonesian government’s approvals and regulations, including quotas. The industry is also subject to government interference to control supply and prices of DOC in Indonesia and milk in China. However these are transient; and in our view, prices should eventually reflect fundamental supply and demand Required cost efficiency, since the margin in this industry is thin The industry is subject to outbreak of diseases that would adversely affect the group, operationally and financially

Opportunities Threats

Undersupply in quality liquid dairy products in Indonesia and China offers opportunity to expand capacity rapidly through proven business model. We expect prices to remain relatively steady Attractive macroeconomics that could drive growth (increasing populations, income per capita, and food expenditure) Leading downstream consumer brands support growth and margin expansion

New Dairy entrants in China may compete against Japfa after 2018 Faster expansion by competitors in Animal Protein segment may erode market share or cause oversupply Economic and political conditions in the countries where Japfa operates could also affect its financial and operating status

Source: DBS Bank, DBS Vickers

Company Focus

Japfa Ltd

Company background Background. Japfa Limited (Japfa) is a leading industrialised producer of multiple animal proteins, dairy and consumer food products in Asia. Headquartered in Singapore, the group operates within Indonesia, China, Vietnam, India and Myanmar. The group’s business is divided into three operating segments, namely Dairy, Animal Protein (consisting of Poultry, Beef Cattle, Swine, and Aquaculture), and Consumer Foods. Approximately 87% of the group’s FY13 revenue came from the Animal Protein segment, mostly generated through its IDX-listed subsidiary, PT Japfa Comfeed Indonesia. The Consumer Foods segment generated 8% of FY13 revenue, and is the second largest. The Dairy segment accounted for the remaining 5% of FY13 revenue, but offers the highest growth potential. Japfa’s heritage began over 40 years ago and is now run by the second generation of the Santosa family.

Business operating segments

Source: Company

Sales Trend Profitability Trend

Source: Company, DBS Bank, DBS Vickers

Group milestones Source. Company

10.0%

15.0%

20.0%

25.0%

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0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

2012A 2013A 2014F 2015F 2016F

US$ m

Total Revenue Revenue Growth (%) (YoY)

41

91

141

191

241

291

341

391

441

491

2012A 2013A 2014F 2015F 2016F

US$ m

Operating EBIT Pre tax Profit Net Profit

Business

SegmentBusiness Activities Locations

Dairy

Dairy product Dairy farming China (raw milk and distribution)

Milk processing Indonesia (dairy products and distribution)

Branded milk distribution Southeast Asia and Hongkong (distribution)

Animal Protein

Poultry Animal feed Indonesia (poultry, beef, and aquaculture)

Swine Breeding Vietnam (poultry and swine)

Beef Commercial farming Myanmar (poultry)

Aquaculture India (poultry)

Consumer Food

Chicken Ambient Indonesia

Beef Chilled/frozen Vietnam

Seafood

UHT milk

Company Focus

Japfa Ltd

2013 revenue by business segment

Source. Company Leading positions across all market segments. In Indonesia, Japfa commands the second highest share in DOC (Day Old Chicks) market, has the largest beef feedlot operation, and is the leading producer of fresh milk by volume. In Vietnam, Japfa occupies the second largest share in DOC and is one of the largest producers of swine. Japfa’s 2013 market shares

Source: Company, Frost & Sullivan Animal Protein A vertically integrated poultry producer. Japfa has over 40 years of experience in the poultry business and has developed fully integrated and industrialised business model across the entire value chain of poultry production, from feed production, to breeding and commercial farming, to slaughtering and food processing. The group is hence able to capture value at different points in the chain. This model also provides Japfa with greater food security and traceability, which are important requisites to expand the branded Consumer Foods segment.

Standardised farm development model

Source: Company Extensive regional presence. Japfa operates breeding and commercial chicken farms in Indonesia, Vietnam, India, and Myanmar. As at end-Dec13, the group operated 16 poultry feedmills in nine locations throughout Indonesia, five poultry feedmils in Vietnam and five poultry feedmills in India. In addition, the group also constructed a feedmill in Myanmar which was fully operational in Jun14. Japfa also operates 57 DOC breeding farms and 24 hatcheries throughout Indonesia. In Vietnam, the group operates 12 DOC farms and four hatcheries, and in Myanmar Japfa operates one DOC farm and one hatchery. In India, Japfa operates two DOC farms and three hatcheries. The group enforces strict bio-security measures. Japfa’s poultry breeding facilities are enclosed, climate controlled and are typically located in isolated areas, which help to increase their bio-security levels. Most of the group’s grandparent stocks in Indonesia are sourced from Aviagen. Largest beef feedlot operation in Indonesia. Japfa owns and operates beef feedlot operations in Indonesia and China. Japfa is considered one of the largest beef cattle feedlot operators in Indonesia and the largest importer of live cattle by import permits. As at Dec13, the group owned four beef feedlots in Lampung and East Java; as well as one slaughterhouse located in Serang, West Java. As at end-Dec13, the combined capacity of the group’s operations in Indonesia was 165,000 heads of cattle per annum. In addition to the group’s operations in Indonesia, Japfa is also developing a 10,000-head feedlot in the Hekou district of Shandong province in China. A vertically integrated beef producer. Similar to poultry, Japfa’s beef feedlot operation is fully integrated, from breeding, fattening, and processing. The breeding operation was added in Oct13, when Japfa acquired Australian cattle-breeding stations, encompassing c.555k ha of cattle-breeding grounds at the Riveren and Interway stations. Both sites are located in the Victorians River Downs in the Northern Territories.

Consumer food8%

Animal protein87%

Dairy5%

Ja pfa Comfe e d

CP I 's ia

Ma l indo Fe e d.

Sie ra d Prod.

Indo food He inz

DOC** 25% 31% 8% 6% - -Animal feed** 22% 33% 6% 5% - -Dairy (fresh milk)* 25% - - - 12% -Frozen consumer food* 31% 37% - 17% - -Ambient-temp. food* 13% - - - - 16%* by volume, Indonesia only** by capacity, Indonesia poultry only

Primary processing Commercial

Breeding

Feedmill

Company Focus

Japfa Ltd

Standardised farm development model

Source: Company A vertically integrated swine business in Vietnam. The group diversified into swine breeding in Vietnam in 2012 when it entered into a JV with Hypor, one of the world’s leading suppliers of swine genetics. This would enable Japfa to operate the entire chain of swine breeding farms in Vietnam. In 2013, the group sold 72.7k piglets, and we expect this number to expand rapidly over the next three years. We also expect Japfa to further expand into commercial pig fattening farms this year. Supported by feedmills. Augmenting its breeding operations, Japfa operates three swine feedmills in northern Vietnam and two feedmills in southern Vietnam. For the year ended Dec13, the group’s combined swine feedmill capacity was approximately 245,000 MT per annum. The group has over five formulations of swine feed marketed under the brands Comfeed, Profeed, Bonafeed, Corefeed, and BigBang. Aquaculture. Japfa’s aquaculture division is managed by PT Suri Tani Pemuka – a subsidiary of PT Japfa Comfeed Indonesia. The group is a leading producer of aqua-feed in Indonesia with minor interests in fish and shrimp ponds. Japfa offers two premium aqua-feed brands, Comfeed and Benefeed. Most of the aqua-feed produced is sold directly to local farmers and independent distributors located throughout

Indonesia. As at end-Dec13, the group owned five aqua-feed mills located in Gresik, Banyuwangi, Cirebon, Lampung and Medan. Dairy A premium dairy producer. Japfa commenced its dairy farm operations in Indonesia in 1997 and launched the Greenfields brand in 2000. The group replicated its dairy farm operations in China in 2009 and established a dairy distribution there in 2013. Japfa is considered one of a small group of leading industrialised premium milk producers in China with superior milk quality – thus commanding premium prices. Japfa’s milk has consistently surpassed local and International nutrition and safety standards, including the EU raw milk standard, which is among the most stringent industrial standards for raw milk and other dairy products in the world. Japfa’s milk test results

Source: Company Dairy value creation. In China, Japfa focuses on producing premium raw milk, which is sold to leading dairies in China at a premium. The Chinese government’s policies to reduce reliance on small farms (to have better accountability of dairy companies’ sources after the 2008 melamine-tainting incident) has created a structural undersupply of premium quality milk, which we expect to continue for the next three years. In Indonesia, Japfa fully captures its raw milk production as raw materials for its consumer dairy products (including fresh milk, UHT milk, and premium cheese) under the Greenfields brand. Due to undersupply of dairy cows, most of the dairy products consumed in Indonesia are mostly imported. This creates a structural opportunity for Japfa to expand its capacity.

Farm at

Malang, East

Java, Indonesia

Farms in China

(Farm 1, Farm 2,

Farm 3)

EU

Standard

Safety standard

Microbe count 10.0K/ml 11.0K/ml <100K/mlSCC 200.0K/ml 152.7K/ml <400K/ml

Nutritional standard

Protein 3.3% 3.3% >3.1%Fat 3.8% 4.1% >3.5%

Establish free stall

Feeding

Import heifers

Waste management Milking

Female calves Male calves Culled or sold

Insemination

Calving

Company Focus

Japfa Ltd

Japfa’s 1Q14 raw milk price in China

Source. Company, Frost & Sullivan Expanding Dairy amidst supply shortage. Japfa currently operates a five-farm hub of dairy farms in China with four of the farms in the operational stage. Construction of the fifth farms is due to be completed in 4Q14 and first milking is expected in early 2015. Japfa’s dairy farms in China are located in Shandong province. A second five-farm hub in Inner Mongolia is planned for construction at the end of this year and is expected to be completed by end-2018. As at end-Dec13, the group had over 40,600 heads of dairy cattle in China, with approximately 14,500 milking cows. In 2013, Japfa produced over 130k MT of raw milk in China. In Indonesia, Japfa operates one dairy farm located in Malang, East Java with over 5,700 heads of dairy cattle – of which roughly 3,000 are milking. An expansion is currently underway and is scheduled for completion in 4Q14. The group is also constructing a second dairy farm in Blitar, East Java with holding capacity of 8,000 heads and milking capacity of 3,800 heads. Completion is expected in 2Q16. Consumer Foods Downstream segment to Japfa’s integrated model. Japfa’s Consumer Foods segment produces ambient temperature and chilled/frozen food products from chicken, beef and seafood for the Indonesian and Vietnamese markets. This segment also produces UHT milk – the raw milk for which is mostly procured from local dairy farmers in Indonesia. For the most part, raw materials for the Consumer Foods segment are sourced from the group’s upstream protein businesses.

Japfa’s consumer food products

Source: Company So Good as their leading brands. Japfa’s consumer products’ brands are So Good, So Good Sozzis, Real Good, and So Nice. These are recognised brands in Indonesia, and in our view have the potential for growth in tandem with rising income per capita. Japfa’s value-added chilled/frozen meat products include breaded chicken meat, chicken on bone, chicken and beef meatballs, as well as seafood products. For ambient temperature products, Japfa manufactures chicken and beef sausages. The group’s UHT milk is marketed under the Real Good brand. In Vietnam, the group manufactures and markets branded shelf stable sausages under the So Yumm brand. Japfa’s meat processing and packaging facility is located at Binh Duong. Large major customers. Japfa’s Consumer Foods products are distributed through hypermarket chains, supermarket chains, minimarket chains, wholesalers, semi-wholesalers, as well as retail shops. Consumer brand shares

Source: Frost & Sullivan

5.25

4.24

Japfa China average

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

2008 2009 2010 2011 2012 2013

Fiesta

So Good

Belfoods

Brand Indus try category ProductsMarket s hare

So Good and So Good Sozzis

Branded chilled/frozen Chicken nuggets, beef/chicken/fish/shrimp balls, 12%

Ambient temperature Shelf table sausages

So Nice Branded chilled/frozen Chicken nuggets, beef/chicken/fish/shrimp balls, 34%

Ambient temperature Shelf table sausages

So Fresh ChilledDressed and cut-up chicken, fresh beef/meat balls <1%

Company Focus

Japfa Ltd

Map of Japfa Ltd’s operations Source: Company Segmental contribution

Source: DBS Bank estimates

2011 2012 2013 2014F 2015F 2016F 2017F 2018F

Dairy (US$'000)

Indonesia revenue 52,700 58,200 54,600 64,960 75,944 128,317 179,602 224,587

Indonesia gross profit 11,383 15,830 15,725 22,323 27,034 53,102 75,164 97,044

Indonesia gross margin 22% 27% 29% 34% 36% 41% 42% 43%

China revenue 13,200 43,100 93,400 178,447 265,128 374,943 446,463 473,141

China gross profit 3,258 14,477 35,871 80,044 116,489 182,002 234,503 264,095

China gross margin 25% 34% 38% 45% 44% 49% 53% 56%

Dairy EBITDA 8,283 18,119 39,195 78,980 115,651 196,646 256,906 298,695

Animal protein (US$'000)

Indonesia revenue 1,555,800 1,720,390 1,907,800 1,984,130 2,247,739 2,398,933 2,565,268 2,760,485

Vietnam revenue - 71,200 287,300 364,809 416,032 477,636 544,613 598,400

Myanmar revenue - - - 66,423 117,634 128,802 129,687 130,416

India revenue 62,500 72,700 75,900 69,720 79,159 86,662 94,751 104,019

Cow feedlot rev. (I'sia + China) 90,100 115,400 83,200 83,123 91,977 105,075 116,055 127,590

Total animal protein revenue 1,708,400 1,979,690 2,354,200 2,568,204 2,952,542 3,197,108 3,450,374 3,720,910

Total animal protein GP 217,500 324,690 387,600 448,614 541,569 589,571 647,174 729,543

Total animal protein GPM 12% 16% 17% 17% 18% 18% 19% 20%

Total animal protein EBITDA 152,248 209,630 183,350 255,850 302,519 333,669 377,980 441,904

Consumer foods (US$'000)

Consumer food revenue 228,800 239,424 227,599 209,058 230,589 255,533 283,176 313,809

Consumer food GP 66,600 41,324 53,099 46,988 52,105 58,072 64,704 72,075

Consumer food GPM 29% 17% 23% 22% 23% 23% 23% 23%

Consumer food EBITDA 28,213 15,044 10,981 10,619 11,695 12,772 13,966 15,245

Company Focus

Japfa Ltd

Management

Strong and experienced management team. Japfa’s senior management team consists of experienced industry executives with a long history in the Japfa Group. They have extensive relevant experience in managing Dairy, Animal Protein, and Consumer Foods businesses. Japfa is currently

headed by Mr. Handojo Santosa, who serves as Executive Deputy Chairman. A summary of key management roles are presented below.

Key Management Team

Source: Company

Na me De s igna tion Role , c re de ntia l s

Mr. Ha ndojo Sa ntosa Exe cutive De puty Cha i rma n Mr. Santosa is in charge of the overall management of the business and operationsof the group and any major corporate decisions. He oversees the formulation of thegroup's corporate planning, strategic direction, business and corporate policies

Mr. Santosa joined Japfa in 1986 as manager in edible oil division. From 1989 to1997 he served as Vice-President Director of PT Japfa Comfeed Indonesia and in 1997was appointed as President Director of PT Japfa Comfeed Indonesia and has oversightof Japfa's operations

Mr. Ta n Yong Na ng Exe cutive Di re c tor a nd CEO Mr. Tan is in charge of leading the development and execution of Japfa's long termstrategy. He is also responsible for day-to-day management decisions and for implementing Japfa's long and short term plans

Mr. Tan joined Japfa in 2007 as Assistant to CEO and COO of corporate servicesbefore taking on the position of CEO in 2011. Previously he worked as ProjectDirector and COO in Li and Fung Group in 2005.

Mr. Ke vin Monte i ro Exe cutive Di re c tor a nd CFO Mr. Monteiro is Executive Director and Chief Financial Officer of Japfa. His key rolesare to develop a balanced capital structure and to source adequate funding for thethe group and to ensure integrity of financial data

Mr Monteiro has over 14 years experience of working in the agri food industry,having joined PT Japfa Comfeed Indonesia in 1999. Prior to joining Japfa, he was afinancial advisor to PT. Trafindo Perkasa between between 1995 and 1999.

Mr. Ba mba ng Budi He a d of Poul try Mr. Hendarto is Head of Japfa's Poultry. He oversees the entire poultry operations ofHe nda rto the group, including feed, breeding and commercial aspects and is responsible for

establishing corporate objectives, strategies and plans for Japfa's poultry operations

Mr Hendarto joined the company in 1978 as Nutrition Manager in the productionplanning control department. He was promoted several times and in 1997 becamethe Head of Poultry in Indonesia until now.

Mr. Edga r Dowse Col l ins He a d of Da i ry Mr. Collins is responsible for the day-to-day operations of the group's Dairy segmentand is in charge of formulating, developing and implementing strategic and longterm business plans for the Dairy operations.

Mr. Collins has been with AustAsia since 1999 and is currently its ManagingDirector. Mr Collins, has been involved in beef and cattle operations throughout hiscareer and has accumulated many years of experience in the industry.

Mr. Pe te r Chin Chi Ke e He a d of Consume r Foods Mr. Chin heads Hjapfa's Consumer Foods segment. He has oversight of theperformance of existing business in Indonesia and its expansion in Vietnam, Myanmarand India.

Mr Chin has over 30 years experience in the food industry. Prior to joining Japfa, heworked for several national and multi national corporations, including Eta Foods,Fonterra Cooperatives, and Goodman Fielder Wattie, where he engaged indifferent roles including sales, marketing, quality assurance and generalmanagement.

Company Focus

Japfa Ltd

Competitive strengths Significant market share in Indonesia. Indonesia’s poultry industry is relatively oligopolistic with the top three companies, Charoen Pokphand Indonesia (CPIN IJ), Malindo Feedmill (MAIN IJ), and Japfa Comfeed Indonesia (JPFA IJ), commanding more than 60% market share. Japfa is one of the leaders across multiple classes of

proteins including feed, cattle, DOC, fresh milk, and consumer food products. Based on Frost & Sullivan’s data, Japfa has significant market shares across its business segments. Japfa’s 2013 market shares

Source: Company, Frost & Sullivan Recognisable brands. Japfa has established itself with leading and reputable brands for the Consumer Foods product. Japfa’s widely recognised brands include So Good, So Nice and Best Chicken. In Indonesia, Japfa’s consumer food has the second largest market share in the frozen consumer food category. Meanwhile, Greenfields, the group’s dairy brand is a recognisable brand in Indonesia, Singapore and Hong Kong.

Tremendeous growth potential. Japfa operates in five high-growth emerging Asian markets (Indonesia, China, Vietnam, Myanmar and India). Relatively low protein consumption offers tremendous growth potential, given its sheer size (with population of ~3bn people) and potential growth in disposable income per capita. Premium pricing of dairy in Indonesia and China. Japfa’s milk is considered as being the highest quality in both the Chinese and Indonesian markets. The levels of proteins and fats of the company’s milk exceed the standards of Chinese and International industry by substantial margins. This premium quality of raw mik leads to the premium pricing in Indonesia and China. Strict bio-security measures. In order to increase the operational efficiency and higher productivity of grandparent and parent stock, Japfa applies strict bio-security measures. Japfa further strengthened its bio-security by acquiring PT Vaksindo Satwa Nusantara – one of only three Indonesian companies with research capabilities on the H5N1 (avian flu) virus – in 2008. This acquisition has enabled Japfa to develop vaccines internally to protect its livestock. Strategic alliances with genetic suppliers. In Vietnam, Japfa has strengthened its vertical integration by partnering with Hypor, one of the world’s leading suppliers of swine genetics. This acquisition has enabled the group to have its own high-performance supply of swine genetics. Japfa is also the sole importer of high grade Indian River broiler from Aviagen (one of the world’s leading poultry genetics companies) into Indonesia. These strategic alliances enables Japfa to have premium quality DOC and swine.

Ja pfa Comfe e d

CP I 's ia

Ma l indo Fe e d.

Sie ra d Prod.

Indo food He inz

DOC** 25% 31% 8% 6% - -Animal feed** 22% 33% 6% 5% - -Dairy (fresh milk)* 25% - - - 12% -Frozen consumer food* 31% 37% - 17% - -Ambient-temp. food* 13% - - - - 16%* by volume, Indonesia only** by capacity, Indonesia poultry only

Company Focus

Japfa Ltd

Growth strategies Expanding China dairy farms. The group intends to expand its dairy business in China through continued replication of its successful business model. The fifth farm of the first five-farm hub in Shandong province is scheduled for completion by the end of this year. A second five-farm hub is planned for construction between the end of this year and 2018 in Inner Mongolia. When completed, the new hub would increase the group’s herd size in China to 120k heads of cattle by end-2018 from 42k as at end-1Q14. Expansion of Indonesia Dairy operations. The group is currently expanding its dairy capacity in Malang, East Java by an additional 9,000-head holding capacity. Completion is expected by the end of this year. In addition, a second dairy farm is also under construction in Blitar, East Java with total holding capacity of 8,000 heads. Completion of the second farm is expected in 2Q16. Japfa’s Dairy segment capacity Source: Company

Continued investment in the group’s Animal protein

operations in Vietnam, India and Myanmar. We expect the group’s swine operations in Vietnam to commence pig fattening and selling this year. The group has also acquired poultry operations in Myanmar this year. Construction of new feedmill in Medan, Indonesia. The planned feedmill will produce fish and shrimp feeds catering to farms in the surrounding areas. Construction began in 2012 and is scheduled for completion in the last quarter of 2015. The additional capacity is 164,000 MT p.a. Continued expansion in Poultry business in

Indonesia, in line with growing population and per capita income. The group’s DOC capacity is scheduled to expand by 50% by 2015; supported by poultry feed operations, which in 2013 underwent significant expansion. Construction of new beef cattle feedlot in China. Currently, a new beef cattle feedlot is being constructed in Shandong province with production capacity of 10,000 heads per annum. Completion is scheduled for 3Q14. The bull calves produced by Japfa’s five dairy farms in Shandong will be the livestock input for the new beef cattle feedlot in China. Further investment in high-growth Consumer Food

brands. The group intends to expand its manufacturing and processing capacities in Indonesia and Vietnam as it seeks to expand the reputation and market reach of its brands, including Real Good for UHT milk and So Good, So Nice and Best Chicken for processed meats.

China

Development

status

Size

(ha)

Cattle

population

(heads)

Holding

capacity

(heads)

Milking

capacity

(heads)

Farm 1 Milking since 2009 50.7 11,956 10,000 6,000Farm 2 Milking since 2011 109.1 12,933 13,000 6,000Farm 3 Milking since 2013 110.2 9,855 13,000 6,000Farm 4 First milk in 2H14 100.8 5,947 17,000 6,000Farm 5 First milk in 1H15 113.3 NA 13,000 6,000

40,691 66,000 30,000

Indonesia

Development

status

Size

(ha)

Cattle

population

(heads)

Holding

capacity

(heads)

Milking

capacity

(heads)

Malang farm 1 Milking since 2H98 50 5,758 6,000 2,800Blitar farm 2 First milk in 1H16 60 NA 8,000 3,800

5,758 14,000 6,600

Company Focus

Japfa Ltd

Key risks Outbreak of diseases affecting livestock at the group’s poultry, dairy, swine, beef cattle and aquaculture farms would have material effect on the group’s business and financial status. While the group has instituted strict bio-security measures (including obtaining superior genetics, integration with own vaccine production company and constant monitoring) to reduce the risk of these events happening, there can be no assurance that Japfa would be immune to them. The group is also exposed to volatile movements in

raw material costs and currencies across key markets. For example, the recent drop in Rupiah and weakness in consumer purchasing power in Indonesia caused delays in passing on raw material cost pressures. Japfa needs a constant supply of superior livestock genetics, for which there are limited suppliers. Although Japfa has forged good working relations with its suppliers, there can be no guarantee of continuous supply of superior genetics. As such, a disruption in supply would adversely affect the group’s operational and financial standing.

Changes in government regulations, licensing, as well as other interventions, and price/volume controls across various jurisdictions may adversely affect Japfa’s profitability. For example, required reduction in DOC supply to control post-Eid oversupply would temporarily affect the group’s financial performance. Also, a reduction in quota and/or restrictions in importation of live cattle would adversely affect the group’s beef feedlot operations. The group may require further funding to expand; and is hence vulnerable to liquidity and credit risks. Any plans for more equity funding would dilute the shareholdings of the group’s existing shareholders.

Company Focus

Japfa Ltd

Key assumptions

Source: DBS Bank estimates

2011 2012 2013 2014F 2015F 2016F 2017F 2018F

Corn (US$/bushel) 6.64 6.85 5.85 5.72 5.97 5.96 5.94 5.93

Soybean meal (US$/kg) 0.37 0.48 0.39 0.38 0.37 0.39 0.41 0.41

GDP growth 6.5% 6.2% 5.8% 6.0% 6.0% 6.0% 6.0% 6.0%

Inflation 5.3% 4.0% 6.4% 7.3% 6.0% 6.0% 6.0% 6.0%

USD/IDR avg. exchange rate 8,799 9,440 10,849 11,695 11,750 11,750 11,750 11,750

Indonesia

Poultry feed capacity (MT) 2,951,400 3,115,800 3,732,600 4,092,600 4,362,600 4,542,600 4,722,600 4,902,600

Poultry feed sales (MT) 2,185,600 2,426,800 2,642,100 2,858,842 3,118,712 3,305,834 3,504,185 3,714,436

Poultry feed ASP (US$/MT) 533 526 548 516 514 519 522 523

DOC sales ('000 birds) - net of internal 277,818 282,677 257,275 299,994 377,995 390,971 411,159 435,829

DOC ASP (US$/bird) 0.54 0.41 0.42 0.42 0.44 0.46 0.47 0.48

Broiler sales (MT live) 278,100 371,700 467,800 539,989 680,391 703,748 740,087 784,492

Broiler ASP (US$/MT) 1.63 1.37 1.40 1.33 1.36 1.40 1.44 1.49

Aquafeed volume (MT) 187,900 194,800 204,800 223,544 234,721 246,457 258,780 271,719

Aquafeed ASP (US$/MT) 674 665 736 725 724 731 736 740

Vietnam

Poultry feed sales ('000 MT) 296 338 389 447 514 565

Poultry feed ASP (US$/MT) 475 516 514 519 522 523

DOC sales ('000 birds) - net of internal 1,256 13,523 12,871 14,159 15,573 16,092

DOC ASP (US$/bird) 0.38 0.46 0.47 0.49 0.50 0.52

Piglets (heads) 72,700 161,691 161,691 161,691 161,691 161,691

Piglets ASP (US$/kg) 1.95 1.97 1.99 2.01 2.03 2.05

Pigs (heads) 155,204 218,802 218,111 218,111 218,111 218,111

Pigs ASP (US$/kg) 1.95 1.97 1.99 2.01 2.03 2.05

India

Poultry feed sales ('000 MT) 160 170 172 139 152 165 180 196

Poultry feed ASP (US$/MT) 0.412 0.430 0.434 0.413 0.411 0.416 0.417 0.418

DOC sales ('000 birds) - net of internal 10,001 7,546 1,016 1,357 1,751 1,837 1,935 2,041

DOC ASP (US$/bird) 0.44 0.26 0.28 0.32 0.33 0.34 0.34 0.35

Myanmar

Poultry feed sales ('000 MT) 120 211 229 229 229

Poultry feed ASP (US$/MT) 0.516 0.514 0.519 0.522 0.523

DOC sales ('000 birds) - net of internal 13,227 23,287 25,199 25,199 25,199

DOC ASP (US$/bird) 0.42 0.44 0.46 0.47 0.48

Dairy - China

Number of farms 2 3 4 5 6 7 7 10

Total cattle population 12,774 24,345 40,691 55,300 64,547 66,711 73,267 83,124

Number of milking cows 3,777 9,534 14,498 20,726 30,424 38,794 42,156 41,098

Avg. milk yield/cow (MT) 7.9 10.5 11.5 11.1 11.4 11.7 11.7 11.9

Raw milk sold (MT) 20,225 62,487 124,408 196,255 292,788 403,201 474,392 493,653

Raw milk ASP (CNY/kg) 4.06 4.22 4.51 5.19 5.08 5.13 5.19 5.22

Dairy - Indonesia

Number of farms 1 1 1 2 2 2 2 2

Total cattle population 5,532 5,647 5,758 11,019 11,634 15,794 15,968 18,274

Number of milking cows 2,604 2,687 2,959 3,316 3,713 7,991 7,708 11,124

Avg. milk yield/cow (MT) 9.0 9.4 9.1 10.1 10.4 10.4 10.6 10.8

Raw milk sold (MT) 20,315 24,111 26,676 31,731 36,506 60,571 83,105 101,757

Fresh milk ASP (US$/kg) 2.52 2.34 1.97 1.99 2.01 2.05 2.09 2.14

Consumer foods

Chilled & frozen foods sales (MT) 5,017 5,187 8,550 9,199 9,897 10,648 11,457 12,326

Chilled & frozen foods ASP (Rp/kg) 53,323 52,579 46,866 48,576 50,033 51,534 53,080 54,673

Ambient temp. food sales (MT) 36,871 36,893 44,268 47,628 51,243 55,132 59,317 63,819

Ambient temp. food ASP (Rp/kg) 37,749 34,077 30,918 32,047 33,008 33,998 35,018 36,069

Company Focus

Japfa Ltd

Animal protein industry overview Industry definition. Animal protein is a complete protein, meaning it contains all of the amino acids necessary for the human body. Hence, it is sometimes also called high quality proteins. Animal protein is derived from red meat (such as beef, pork, and lamb), poultry, eggs, fish, as well as dairy products. Other protein sources include plant protein, which is derived from fruits, vegetables, grains, and nuts. These proteins are incomplete, as they contain fewer calories and less fat. Structural growth story . We believe that the poultry industry is still on a structural growth path as rising disposal income should continue to drive poultry consumption. Socio-economic factors such as changing food habits, rising purchasing power, and increasing urbanisation are important contributors to the growth of the poultry industry. Income growth is a driver for demand per capita. The driving factors contributing to the demand on poultry products are income, price, lifestyle, population, trade and communication. There is a linear relationship between per capita income and broiler consumption, especially on the lower income countries. Chicken consumption is income elastic in countries with low per capita income. As in the case of China, poultry consumption has expanded nearly 10-fold over the last 20 years, as per capita income increased. 2013 disposable income per capita vs. 2013-18F CAGR

(%)


Food expenditure share of income (2013-16F CAGR)

Source: Frost and Sullivan Urbanisation as a catalyst. Urbanisation is another reason for a shift in lifestyle, by having more people seeking convenient sources of protein. As part of this, the fast food industry also promotes the consumption of beef, poultry meat and eggs, which are widely accepted worldwide. However, compared to developed economies, populous countries such as China, India and Indonesia still consume significantly less meat per capita. Urban populations 2010 vs. 2030F

Source: Frost and Sullivan Asia plays a major part. According to Frost & Sullivan research, Southeast Asian countries play an important role in livestock production and are considered as having the potential for the largest livestock development in the world. More than 500m people live in this region with per capita income of less than US$5,000 per annum (except Singapore). Developing countries with large populations such as Indonesia, Philippines and Vietnam still have relatively lower

9.0%8.4%

11.0%

7.6%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

China Indonesia Vietnam India

49.2% 49.9%

30.4% 32.1% 30.9%

68.7%63.1%

43.3% 44.1%39.8%

0.0%

20.0%

40.0%

60.0%

80.0%

China Indonesia Vietnam Nyanmar India2010 2030F

4,130

2,057

1,250 1,253

10.1%5.6% 10.5% 6.9%

-

1,000

2,000

3,000

4,000

5,000

China Indonesia Vietnam India

Company Focus

Japfa Ltd

purchasing power and as a result, chicken meat and egg consumption is relatively low. Malaysia has the highest purchasing power parity among other SEA countries and hence, has higher consumption of broiler and egg because its per capita income has already reached the medium level. 2013 population vs. 2013-18F CAGR (%)

Source: Frost and Sullivan Different preferences across countries. Among the types of meat consumed in Asia, chicken, beef, and pork are the most dominant. However, there are variations between countries. Vietnamese consume more pork than chicken meat; while Indonesians consume more chicken meat than pork (c.90% of the population are Muslims) and beef (due to higher price). In China, demand for beef has been rising in recent years due to the outbreak of Avian Influenza, while in India beef and pork consumption is neglible due to cultural and religious beliefs. Indonesia Chicken meat as a primary source of animal protein. According to Frost & Sullivan research, poultry meat is a leading source of protein in Indonesia, accounting for approximately 87% of total meat consumption. Affordability and dietary restrictions (88% of the population are Muslims) explain the significant share. Beef is not as popular, as it is more expensive, but is commonly consumed in major religious festivals, such as the Eid. In 2012, beef consumption accounted for aproximately 8% of overall meat consumption in Indonesia. A minority of the population also consume pork as their major protein, due to its taste and affordability.

2012 consumption of major protein in Indonesia

Source: Frost and Sullivan

Relatively low disposable income per capita. Compared to other Southeast Asian countries, Indonesia has one of the lowest disposable incomes per capita. As in 2013, Indonesia’s annual disposable income has shown an improvement over the years, with a high of USD 2,057. (Frost & Sullivan). Demand and growth potential in Indonesia. Frost & Sullivan research revealed that Indonesia still has a relatively lower meat consumption per capita compared to other Southeast Asian countries. In 2012, Indonesia’s per capita consumption of chicken was 8kg; vis-à-vis 46kg in Malaysia and 14kg in Thailand. However, demand is rapidly increasing. Between 2009 and 2012, per capita chicken consumption in Indonesia grew from 4.8kg to 8kg, representing a CAGR of 18.6%. Frost & Sullivan’s forecast also indicate strong expansion in total demand for chicken consumption over the next three years (i.e. from 2.22m MT in 2013 to 3.35m MT in 2016, representing a 14.7% CAGR). Poultry consumption in Indonesia 2011-2018F Source: Frost & Sullivan

Beef8% Pork

5%Others

1%

Poultry87%

1,386

250

92 53

1,252

0.5% 1.1% 0.9% 0.8% 1.1%-

500

1,000

1,500

China Indonesia Vietnam Myanmar India

2,100 2,070 2,057 1,993

2,156

2,349

2,519

2,699

1.67

1.97

2.22

2.52

2.93

3.35

3.79

4.22

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

2011 2012 2013E 2014F 2015F 2016F 2017F 2018F

Annual income per capita (USD) (LHS)

Consumption (mn MT) (RHS)

Company Focus

Japfa Ltd

Drivers for demand growth. Higher disposable income per capita, expanding urban population, modernisation of sales/distribution channels, as well as rising health awareness all contribute to rising poultry consumption in Indonesia. A majority of high income earners come from urban rather than rural areas. As the urban population increases, so too would poultry consumption. According to Frost & Sullivan research, Indonesians living in the western parts of the country (Java and Sumatra) consume more poultry and beef, while people living in the eastern parts of the country (Sulawesi and Kalimantan) tend to consume more fish. However consumption in the Eastern part of the country may shift, as more people are mobilised. Increased health awareness is also pushing for higher standards in the quality of protein intake – hence driving further growth in demand for poultry. Poultry breeding farms’ competitive landscape. Indonesia’s poultry industry is dominated by commercial farms, mostly operated by integrated companies such as Charoen Pokphand Indonesia, Japfa, Sierad Produce and CJ feed. Commercial poultry farms are concentrated in Java (especially East and West Java) and North Sumatra. Poultry feed industry’s competitive landscape. Indonesia’s feed business is very competitive and are dominated by a few large producers, namely Charoen Pokphand Indonesia, Japfa, Cheil Jedang, Malindo and Sierad; which have a combined market share of c.75% in 2012 (based on research by Frost & Sullivan). However, to produce quality feeds, raw materials such as corn and soybean meal are mostly imported. Hence, the import cost of raw materials (based on international prices) and the value of the Rupiah would affect feed prices in Indonesia. Poultry feed raw material procurements. Indonesia does not have the right climate for large acreages of soybeans, nor does it have a meaningful crushing industry that can produce soybean meal as key ingredients for poultry feed. Hence, all soybean meal required for animal feed production is imported. However, Indonesia produces another key ingredient: corn. Approximately 30-60% of Indonesia’s local corn output is consumed by the animal feed industry. Indonesia’s beef industry. The Indonesian beef industry’s size by sales value was estimated by Frost & Sullivan at Rp56.2 tn in 2013. Since 2009, sales value has

growth by 18.7% CAGR, although in volume terms the industry has been expanding by 10.1% CAGR since 2009. Approximately 13.3% of beef consumption is met by direct imports. However, domestic beef production is also dominated by imports of live cattle. Beef production in Indonesia from 2009-2013 (k MT) Source: Frost and Sullivan Cattle imports’ competitive landscape. There are 16 importers of live beef cattle into Indonesia. These include PT Great Giant Livestock, PT Tipindo, PT Hayuni Mas Lestari and PT Kariyana Gita Utama. According to Frost & Sullivan, the beef feed sector contributed less than 3% of the whole animal feed industry in 2010. The major feed ingredients are cassava, rice rean, wheat polar, wheat brand, molasses, coconut cake and soybean meal. The majorities of raw materials are imported and hence make up 85% of feed cost. This in turn drives the beef feed price. China Beef industry in China. Meat is an important source of protein in China. Frost & Sullivan research revealed that the Chinese consumed 84.3m MT of meat in 2012. Pork meat accounted for approximately 64% of total consumption in 2012 – given the popularity of pork as a source of protein and fat. Poultry and beef consumption in the same year accounted for approximately 23% and 8% respectively. It is correlated with improving living standards and better health awareness in China. In recent years, Chinese dietary habits have been gradually shifting away from pork in favour of higher and better protein and low fat choices such as beef, fish and chicken. The chart below shows the market shares of major protein products in China in 2012.

409

437

485

509

546

400

420

440

460

480

500

520

540

560

2009 2010 2011 2012 2013

Company Focus

Japfa Ltd

2012 consumption of major protein in China

Source: Frost and Sullivan Growing demand for beef in China. Beef consumption per capita in China has increased to 5.1kg in 2013 from 4.6kg in 2008. Frost & Sullivan expects this to further increase to 5.4kg in 2018. Different regional traditions and cultures also cause the beef consumption pattern to vary significantly across China. In the Muslim provinces, beef has traditionally been considered one of the most popular choices of animal proteins. The chart below shows per capita consumption of beef in China from 2008 to 2018F. China beef consumption per capita (kg p.a.) Source: Frost & Sullivan Key drivers for China’s poultry growth. Over the past few years, China's economy has grown rapidly. The significant growth has made an impact on living standards and consumption of foods. The demand for higher proteins such as beef has been increasing in recent years due to higher disposable incomes, urbanisation and changing dietary habits, as well as supportive government policies towards the

beef industry. From a supply perspective, the beef market is highly fragmented. Over half of beef cattle output comes from small-scale farms or individual farmers, which make up 90% of all beef cattle farms (Frost & Sullivan). Hence, faced with rising input cost and likewise rising beef price, large-scale farms stand out in terms of cost advantages due to economies of scale, strong bargaining power with downstream players, and supportive policies. There are four major cattle production areas in China, namely the Northeast, the Central, the Southwest and the Northwest regions. Each of these regions has its own unique geographical features that are advantageous for cattle breeding, such as natural grassland, feed resources and breed supply. The Northwest and Central regions are known for their vast natural grassland, fine feed, and sufficient supply of Xinjiang Brown and Qinchuan cattle breeds. The Northeast region is known for its fine natural grassland and sufficient supply of Yanbian cattle breeds. The Central region is known for its long history as a cattle producing area and sufficient supply of high quality yellow cattle breeds such as Luxi Yellow Cattle, Jinnan Cattle and Nanyang Cattle. Per capita consumption remains relatively low. Despite rapid economic growth, 5.0kg beef consumption per capita in China in 2013 remains significantly lower compared to other countries that have similar dietary cultures, such as Japan (10.0kg in 2012), Taiwan (9.6kg in 2011), South Korea (12.9kg in 2011) and Hong Kong (32.3kg in 2011). For this reason, the beef industry in China has strong growth potential in the coming years. India

Poultry industry in India. In India, the major sources of animal protein are from poultry, lamb, beef and pork. Based on Frost & Sullivan research, beef accounts for 41% of India’s meat production. However, consumption of beef and pork in India remains insignificant due to cultural and religious beliefs. Hence, a majority of beef production in India are largely for export markets. Poultry has an advantage, having a wider acceptance of Indian consumers. The following chart highlights the split between animal protein productions in India.

Poultry23%

Beef8%

Pork64%

Others5%

4.6

4.8 4.9

4.8 4.9

5.0 5.1

5.2 5.3 5.3

5.4

4.2

4.4

4.6

4.8

5.0

5.2

5.4

5.6

2008 2009 2010 2011 2012 2013E 2014F 2015F 2016F 2017F 2018F

Company Focus

Japfa Ltd

2012 consumption of major protein in India

Source: Company, Frost and Sullivan Infrastructure could be a problem. Lack of infrastucture in India (encompassing collection, storage, and processing of poultry eggs and meat in the rural areas) still hampers India’s production growth. Poultry traders and commission agents in metropolitan cities set prices based on supply-demand dynamics, which are often not matched by rural farmers. India as the next growth market. Socio-economic factors such as changing food habits, rising purchasing power, and increasing urbanisation are important contributors to the growth of the poultry industry in India. The preference for poultry meat over other meats is expected to persist, even as urbanisation and rising disposable incomes influence consumers’ palates. Processed poultry demand to maintain momentum. The government is promoting processed poultry. Hence, the growth of efficient distribution systems, cold storage infrastructure and technology are expected to drive future growth. Rising urbanisation and the proliferation of malls are also expected to fuel the momentum. Products such as ready-to-eat and snack items could spearhead the growth of the poultry industry. Religious restrictions. Poultry is also the meat of choice as it is a ‘neutral’ meat with no religious restrictions like beef or pork. People not affected by religious beliefs choose poultry on the grounds that it is leaner and healthier than beef and pork. Frost & Sullivan expects this preference for poultry to persist in the Indian market and thereby drive the consumption of poultry over beef and pork.

Decent long-term growth prospects. Frost & Sullivan expects the Indian poultry industry to expand 10.5% CAGR until 2018. Over the years, independent poultry farmers have evolved and become contract manufacturers for larger parent companies. In effect, the Indian poultry industry has evolved into an organised, vertically-integrated oligopoly, with good scope for volume and value growth. Although international players represent only a minor share of the market, players such as Japfa and Charoen Popkhand Group have established themselves in India and strengthened their market positions over the last decade. The higher capital inflows are likely to translate into better managed facilities and induction of faster-growing breeds of poultry. The improved genetic stock is also expected to lead to faster turnaround times and lower incidences of disease. Growth in this industry still leaves the field open for new players and improved technology. Per capita poultry consumption trend in India Source: Frost & Sullivan Competitive landscape in India. Poultry farms in India are mainly concentrated in the southern states such as Andhra Pradesh and Tamil Nadu, which are home to many organised, large-scale poultry farms. The western and northern states of India follow in descending order of industry organisation. A majority of independent farmers are concentrated in the eastern and northeastern states, as these states are relatively less developed. Yet, Frost & Sullivan noted the emergence of vertically integrated players like Amrit Poultry Group in the east.

2.372.48 2.52 2.56

2.692.83

2.973.13

1,547 1,501

1,414 1,389

1,494

1,611

1,741

1,869

800

1,000

1,200

1,400

1,600

1,800

2,000

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

2011 2012 2013 2014E 2015E 2016E 2017E 2018E

Annual income per capita (USD) (RHS)

Consumption per capita (kg p.a.) (LHS)

Beef41%

Poultry37%

Goat and Sheep14%

Pork5%

Others3%

Company Focus

Japfa Ltd

Vietnam Poultry industry in Vietnam. The major animal protein sources for the Vietnamese are pork, poultry and beef. According to Frost & Sullivan, in 2011, pork accounted for approximately 74% of total production, followed by poultry at 17%. In Vietnam, pork meat is widely consumed for its rich proteins and fat, and also for its affordability. Chicken meat comes second. 2011 consumption of major proteins in Vietnam

Source: Frost & Sullivan Supported by huge population. Vietnam’s population reached 90.8m in 2012 from 87.4m in 2008. The working population has also expanded to 52.9m from 49.1m over the same period. According to Vietnam General Office for Population and Family Planning, Vietnam’s employed population is projected to grow by 1.43% CAGR between 2011 and 2020. Growth in the working population and higher levels of income and wealth are expected to drive pork and poultry consumption in Vietnam. Substantial growth consumption per capita. Based on Frost & Sullivan research, Vietnam’s per capita pork and chicken consumption has been growing briskly in the last few years. Per capita pork consumption expanded to 23.8kg in 2012 from 21.6kg in 2008 (CAGR of 1.96%). At the same time, per capita chicken consumption increased to 8.5kg in 2012 from 5.7kg in 2008 (CAGR of 8.32%). Demand is expected to continue to grow in tandem with population growth.

Vietnam chicken/pork consumption per capita (kg p.a.)

Source: Frost & Sullivan Competitive landscape in Vietnam. The animal protein industry in Vietnam has long been depicted as highly fragmented, with a majority of the growers being small household farmers. The industry started developing commercially in the early 1990s, when the country embarked on opening up its economy to foreign investors. Industry players who have established their presence in Vietnam’s animal protein industry include: 1. Charoen Pokphand CP Vietnam (Thailand-based; entered

Vietnam in 1990) 2. Proconco (a joint venture between France and Vietnam;

first feed mill in Vietnam in 1991) 3. Cargill (US-based feed maker, entered Vietnam in 1995) 4. Japfa (Indonesia-based, entered Vietnam in 1995) 5. CJ (Korea-based feed maker, entered Vietnam in 1996) Myanmar Myanmar’s rapid economic growth. Myanmar has been growing rapidly after the government opened up the country’s economy in 2011. According to Frost & Sullivan, Myanmar’s GDP is expected to grow by 9.3% in 2014. The growth will be supported by strong FDI, higher commodity exports and strong growth in service and construction sectors. This rapid growth is expected to boost demand and hence the prospects of poultry industry in Myanmar. Historically low poultry consumption. In Myanmar, the people prefer fish as the main source of protein – accounting for 53% of total protein produced 2012. Poultry contributed 15% (second largest protein source).

Pork, 74%

Poultry, 17%

Others, 9%

5.7 6.17.4 8.4 8.5

31.733.2 34.1 34.5 34.8

0

5

10

15

20

25

30

35

40

2008 2009 2010 2011 2012per capita chicken consumption per capita pork consumption

Company Focus

Japfa Ltd

Competitive landscape in Myanmar. Most poultry industry players are within the five major townships of Yangon, Mandalay, Mawlamyaing, Bago and Pathein, which have strong pools of customers. Currently, there are 155 registered poultry feed producers and 33 registered businesses in the livestock

segment. Most of the players are small-scale ones. The whole industry is structured closely to an oligopoly model, where Japfa has 28% share in DOC; while Myanmar C.P. Livestock (Charoen Pokphand Group) controls 45% of the DOC market.

Regulatory framework in poultry industry


No Na tion Re gu la tion Re fe re nce1 Indonesia Aimed at developing the domestic livestock industry by ensuring the survival Minister of Agriculture regulation no.19/Permentan/OT/140/2/2010

of smaller family-owned farms by creating a partnership scheme2 Indonesia This regulation provides financial incentives, mostly in tax reduction, to create a Ministry of Finance regulation no.176/PMK.011/2009

conducive farm business climate in order to increase productivity of meat producers3 Indonesia These regulations prohibit the import of carcass, meat, offal, and processed meat Minister of Agriculture Regulation No. 84 and 85/Permentan/PD.410/8/2013

and also limit the import of fresh beef and beef cattle into the country4 Indonesia This regulation provides authority to provincial and district governments to manage Government Regulation No. 404/kpts/OT.210/6/2002

their livestock industry, as well as provide guidelines and approval for all players operating in their area

5 Indonesia For all animal farms in Indonesia to meet an acceptable standard of farm practices Ministry of Agriculture Regulation No. 55 and No.49/Permentan/OT.140/10/2006pertaining to raw materials, waste management, and environmental standard

6 Indonesia The Indonesia Clergy Council ensures a strict Halal assurance system for all animal Food Law No. 7/1996products, as the majority of Indonesian population are Muslims and have religiousrestrictions over non-halal food.

7 China This regulation provides tax preference to agribusinesses in China. The enterprise’s Regulation on the Implementation of the Enterprise Income Tax Law of the PRCincome derived from raising of livestock and poultry, and preliminary processing of agricultural products can be exempted from income tax

8 China Companies that self-produce agriculture products are exempted from Regulations of the People‘s Republic of China on Value-Added Taxvalue added tax. Thus, beef producers are able to increase their profits and promote the development of beef cattle industry

9 China standardizes the management of feed and feed additives, to improve the quality of Administration rules of feed and feed additivefeed and feed additives and promote the development of feed industry and aquaculture industry

10 China the hygiene standards of food production, transportation, equipment, etc Food Hygiene Law of the People’s Republic of China11 China Ensure the quality and safety of agricultural products; Maintain the health of Law of the People's Republic of China on Agricultural Product Quality Safety

general public; Promote development of agriculture and rural economy12 China Give aid to selective breeding, feeding, trading and transportation, production Animal Husbandry Law of the People's Republic of China

and operation, as well as quality and safety of livestock and poultry13 Vietnam Focuses on incentive policy for enterprises to invest in agriculture and rural area Decree No. 61/201014 Vietnam Focus on credit policies for agriculture and rural development, an important Decision No. 41/2010

policy that gives financial support to organizations and individuals involved in livestock production

15 Myanmar A relatively limited number of activities require a local partner and investments with Myanmar Foreign Investment Law (FIL) 100% foreign ownership is permitted for the vast majority of business activities

16 Myanmar Foreign ownership of land and immovable property is expressly prohibited Foreign Ownership of Landunder the Transfer of Immovable Property Restriction Law 1987

17 Myanmar The Myanmar government has recently enacted a Special Economic Zone Law that Special Economic Zonesincludes several tax incentives for investors. Businesses that operate in promotion zones are also allowed tax exemptions to varying degrees

Company Focus

Japfa Ltd

Dairy industry overview Promising growth in upstream dairy business. Population growth, rising income, urbanisation and dietary shifts in developing countries such as China and Indonesia are major demand drivers of dairy products. In recent years, structural undersupply in China’s fresh milk is a major factor in boosting growth. The structural undersupply in China is primarily due to government policies to reduce reliance on small farms and to have better accountability from large dairy companies’ sources since the 2008 melamine-tainting incident. Some dairy giants have invested heavily on upstream quality control and/or to secure their upstream sources (e.g. China Mengniu bought stakes in upstream industrialised farms such as Yuan Sheng Tai and China Modern Dairy). Yet, a limited number of dairy companies have focused on establishing grass-growing and feed-processing. Economic development of a country leads its level of dairy consumption. Therefore, according to Frost & Sullivan, growth drivers for the dairy industry in China and Indonesia are typically based on a combination of social and economic factors leading to strong purchasing power, growing population and rising urbanisation. Better health awareness and improved distribution networks are also the key driving forces in the dairy industry’s overall development. Improving dairy demand in Indonesia. Based on Frost & Sullivan, Indonesia’s per capita consumption of dairy products in 2013 was 14.6kg, expanding from 12kg in 2010 (i.e. CAGR of 6.9%). This has likewise translated into higher demand for raw milk. Yet, domestic supply of raw milk continues to struggle to meet demand. In 2013, only 17% of the demand for dairy products was met by domestic supply. Indonesia’s total raw milk production was estimated at 817,360 MT in 2010. In 2011, production dropped due to loss of dairy cows for beef supply. Although it subsequently recovered to 652,649 MT in 2012, it has remained below the 2010 level.

Indonesia raw milk production volume (MT) Source: Frost & Sullivan Demand for quality milk. The dairy industry demands quality raw milk from its suppliers. The 2008 intentional adulteration post-farm gate with melamine in China prompted customers to demand for quality dairy products. Heavily import-dependent. Indonesia depends heavily on imports, mainly from Australia and New Zealand, to meet its domestic demand for dairy products. In 2013, approximately 83% of its demand (in volume consumed) for dairy products was met by imports. Expanding its domestic milk output to replace imports has therefore become one of the national objectives. Indonesian dairy production and consumption (k MT) Source: Frost & Sullivan Types of products from dairy segment. According to Frost & Sullivan, dairy production in Indonesia mainly consists of four major categories, namely drinking-milk products, yoghurt and sour milk products, cheese, as well as other dairy

817,360

694,756

578,963

652,649

715,809

400,000

500,000

600,000

700,000

800,000

900,000

2010 2011 2012 2013 2014F

2,876 3,133

3,325

3,648 3,968

794 675 562 634 695

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2010 2011 2012 2013E 2014F

Total consumption (k MT)

Domestic production (k MT)

Company Focus

Japfa Ltd

products. The market shares of key dairy products in Indonesia 2008 are presented below. 2008 consumption of dairy products in Indonesia Source: Frost & Sullivan 1. Drinking-Milk Products: Drinking-Milk Products mainly include fresh milk (also known as pasteurised milk), UHT milk (also known as long-life milk), and flavoured milk drinks. In volume terms, this category had the largest share (44.6%) in 2013. This category is also the main growth driver in the dairy industry. 2. Yogurt and Sour Milk Products: In 2013, this category accounted for 21.1% share in volume terms. The segment is expected to grow further to 24% in 2018. 3. Cheese: Processed and unprocessed cheese and other similar products fall into this category. Cheese is not popular in Indonesia compared to western countries. In 2013, cheese accounted for only 1.5% share by volume. 4. Other dairy products include chilled and shelf stable desserts, chilled snacks, coffee whiteners, condensed/evaporated milk, cream, fromage frais and quark. The share of this segment has been stable throughout the years. According to Frost & Sullivan, Frisian Flag is the market leader in this segment and controlled 38.4% market share in 2013. Modern retail channels facilitate development of

Indonesia’s dairy market. In Indonesia, the dairy retail market is dominated by traditional/general trade channels. However, in the past years, modern retail channels have been catching up through rapid expansion. Based on Frost & Sullivan research, between 2003 and 2008,

traditional/general trade channels expanded by 9.2% while supermarkets expanded by 75.3%. Continuous growth in Indonesia’s middle/upper income segment, urbanisation and infrastructure improvements are expected to sustain growth in modern retail distribution. Hypermarkets, minimarkets and supermarket are better equipped with refrigeration, which increases the shelf-life of fresh milk. This, combined with increased health awareness, is expected to fuel demand for fresh milk. Greenfields brand dominates. Based on the group’s data, in 2013, Greenfields was the leading brand in the fresh milk segment, commanding 24.5% market share calculated based on production volume, and 38.4% market share in terms of production value. Greenfields’ significant market share in terms of production value is attributed to the higher retail price charged for its premium quality. Greenfields’ market share in Indonesia

Source: Company

The main breeds of dairy cows in China include Holstein, Jersey, Dairy Simmental, Brown cattle and Sanhe cattle. 1. Holstein is the most common dairy cow breed in China, known for its highest milk yield compared to other breeds. Holsteins have strong adaptability to nearly all kinds of conditions. In China, Holstein accounts for c.80% of the total dairy cow breeds in 2012. 2. Jersey is known for its high protein content of raw milk, mainly for the production of cheese and high quality premium dairy products. Jerseys are adaptable to a wide range of climatic and geographical conditions and also show more tolerance to heat compared to other dairy cow breeds.

Yoghurt and Sour Milk Products

16%

Drinking Milk Products

40%Chese1%

Others43%

24.5%

38.4%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

By volume By value

Company Focus

Japfa Ltd

3. Other minority dairy cow breeds also have their unique characteristics. Dairy Simmental’s colour varies from gold to red with white, and provides the second highest milk yield after Holstein.

The importance of weather. Generally, dairy cows prefer the cool and dry climate over the warm and humid climate. In Indonesia, Java is suitable for dairy farming. In 2013, almost 99% of dairy cows in Indonesia were located in Java, with over 50% in East Java. In China, the Central

Northern Region is suitable for dairy farming, not only for its climate but also for its vast natural resources such as grasslands, fresh water, and feed. Shandong Province also has a number of advantages, including better infrastructure and strong support from the local government. Shandong Province is situated in the eastern part of China on the lower reaches of the Yellow River, which offers a good environment for the local dairy industry.

Company Focus

Japfa Ltd

Consumer Foods industry overview Shift in lifestyle – positive outlook for Consumer

Foods. Urban developments in many major cities have changed the lifestyles of its dwellers and are a driver for increased demand for processed/packaged food. According to Frost & Sullivan, this food segment was the largest of the consumer food industry in Indonesia, accounting for 67% share. Ambient temperature food and frozen consumer food account for the remaining 33% share. Ambient temperature food segment. Based on Frost & Sullivan research, the ambient temperature food market in Indonesia is led by Heinz ABC, which commands 16.3% share. Maya Muncar and So Good Food are close second and third positions with 15.6% and 13.2% shares respectively. Ambient temp. food market share in Indonesia - 2012

Source: Frost & Sullivan Frozen/chilled consumer food segment. The top three players of frozen consumer food segment in Indonesia account for 85% share. Dominating the scene are Primafood International’s Fiesta, So Good Food’s So Good and Sierad Produce’s Belfood and Delfarm.

Frozen consumer food market share in Indonesia - 2012

Source: Frost and Sullivan Pros and cons of ambient temperature food

products. Ambient temperature foods have the advantage of longer shelf life, and are easier to transport and store. Yet, given their low cost of distribution, barriers to entry are lower and this causes the market to be saturated with many brands of similar products. Increased competition and competitive pricing hence limit the margins such products can command. Pros and cons of frozen/chilled food products. Frozen food products appear as higher-quality packaged and processed food – hence the higher pricing and higher entry barrier. However, a higher cost of distribution and limited customer base are its drawbacks.

Jakarana7.1%

Denis Freres7.1%

Canning Foods

Indonesia8.7%

So Good Food

13.2%

Maya Muncar15.6%

Heinz ABC Indonesia16.3%

Others32.0%

Sierad Produce16.9%

So Good Food

31.2%

Primafood International

36.5%

Others15.4%

Company Focus

Japfa Ltd

Key Assumptions

FY Dec 2011A 2012A 2013A 2014F 2015F 2016F

Raw & fresh milk output (k MT) 40.5 86.6 151.1 228.0 329.3 463.8

Broiler sales (mn birds) 182.4 228.0 287.9 344.6 430.9 448.3

Consumer foods volume (k MT) 69.7 73.2 85.6 78.2 84.1 90.5

China raw milk price (CNY/kg)

4.1 4.2 4.5 5.2 5.1 5.1

Average USD/IDR rate 8,799.3 9,439.8 10,848.5 11,695.0 11,750.0 11,750.0

Segmental Breakdown

FY Dec 2011A 2012A 2013A 2014F 2015F 2016F

Revenues (US$ m)

Dairy 38 72 122 243 341 503

Animal protein 1,763 2,010 2,347 2,568 2,953 3,197

Consumer foods 229 239 228 209 231 256

Total 2,030 2,322 2,697 3,021 3,524 3,956

EBITDA (US$ m)

Dairy 8 18 39 79 116 197

Animal protein 152 210 183 256 303 334

Consumer foods 28 15 11 11 12 13

Total 189 243 234 345 430 543

EBITDA Margins (%)

Dairy 21.5 25.1 32.0 32.4 33.9 39.1

Animal protein 8.6 10.4 7.8 10.0 10.2 10.4

Consumer foods 12.3 6.3 4.8 5.1 5.1 5.0

Total 9.3 10.5 8.7 11.4 12.2 13.7


Reduced DOC volume (due to government intervention), higher A&P in Greenfields, weaker sales in Ambient Temperature Consumer Foods segment contributed to reduction in EBITDA from Japfa’s initial expectations earlier this year – offset by recovery in DOC ASP, broiler ASP and drop in feed raw material costs

Company Focus

Japfa Ltd

Income Statement (US$ m)

FY Dec 2011A 2012A 2013A 2014F 2015F 2016F

Revenue 2,030 2,322 2,697 3,021 3,524 3,956

Cost of Goods Sold (1,663) (1,874) (2,198) (2,423) (2,787) (3,073)

Gross Profit 367 448 499 598 737 883

Other Opng (Exp)/Inc (231) (257) (297) (328) (368) (405)

Operating Profit 135 191 202 270 369 478

Other Non Opg (Exp)/Inc 18 8 (23) 17 (3) (3)

Associates & JV Inc 0 0 0 0 0 0

Net Interest (Exp)/Inc (39) (51) (64) (73) (76) (78)

Exceptional Gain/(Loss) 0 0 0 0 0 0

Pre-tax Profit 114 149 115 214 290 397

Tax (35) (38) (33) (43) (58) (79)

Minority Interest (35) (57) (40) (74) (100) (137)

Preference Dividend 0 0 0 0 0 0

Net Profit 44 53 42 97 132 180

Net Profit before Except. 44 53 42 97 132 180

Net Pft (ex. BA gains) 40 51 50 86 132 180

EBITDA 208 252 233 345 430 543

EBITDA (ex. BA gains) 177 238 257 330 430 543

Growth

Revenue Gth (%) nm 14.4 16.2 12.0 16.7 12.2

EBITDA Gth (%) nm 21.0 (7.6) 48.6 24.4 26.3

Opg Profit Gth (%) nm 41.6 5.4 33.7 36.8 29.5

Net Profit Gth (%) nm 19.7 (21.5) 133.1 35.5 36.7

Margins & Ratio

Gross Margins (%) 18.1 19.3 18.5 19.8 20.9 22.3

Opg Profit Margin (%) 6.7 8.2 7.5 8.9 10.5 12.1

Net Profit Margin (%) 2.2 2.3 1.5 3.2 3.7 4.6

ROAE (%) 9.0 9.7 6.4 10.5 10.4 11.8

ROA (%) 3.6 3.6 2.3 4.5 5.2 6.4

ROCE (%) 9.0 11.5 9.1 11.0 12.8 14.9

Div Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0 0.0

Net Interest Cover (x) 3.5 3.8 3.2 3.7 4.9 6.1 Source: Company, DBS Bank, DBS Vickers

Margins Trend

1.0%

3.0%

5.0%

7.0%

9.0%

11.0%

13.0%

2012A 2013A 2014F 2015F 2016F

Operating Margin % Net Income Margin %

Growth mainly driven by higher feed, DOC, and dairy sales on the back of capacity expansions, higher-cost pass-through, as well as margin expansion

No dividend payout policy, but the management had indicated re-distribution of dividends received from PT Japfa Comfeed Indonesia

Including US$9.6m gains from sale of fixed assets and US$5m IPO expense

Company Focus

Japfa Ltd

Balance Sheet (US$ m)

FY Dec 2011A 2012A 2013A 2014F 2015F 2016F

Net Fixed Assets 404 600 653 855 978 1,108

Invts in Associates & JVs 0 0 0 0 0 0

Other LT Assets 122 200 275 380 462 543

Cash & ST Invts 150 157 225 319 203 180

Inventory 332 487 543 527 606 668

Debtors 113 134 135 150 175 197

Other Current Assets 99 124 133 173 223 275

Total Assets 1,220 1,701 1,964 2,404 2,647 2,972

ST Debt

309 425 457 476 469 597

Creditor 88 133 195 181 208 229

Other Current Liab 86 141 65 17 22 29

LT Debt 162 302 469 484 484 356

Other LT Liabilities 80 100 81 81 80 79

Shareholder’s Equity 263 330 406 808 940 1,120

Minority Interests 233 270 291 358 445 562

Total Cap. & Liab. 1,220 1,701 1,964 2,404 2,647 2,972

Non-Cash Wkg. Capital 370 470 550 652 774 882

Net Cash/(Debt) (320) (570) (701) (641) (749) (772)

Debtors Turn (avg days) 20.3 21.0 18.1 17.2 16.8 17.1

Creditors Turn (avg days) 19.9 26.6 27.9 29.0 26.1 26.6

Inventory Turn (avg days) 75.4 97.5 87.7 82.6 75.9 77.4

Asset Turnover (x) 1.7 1.4 1.5 1.4 1.4 1.4

Current Ratio (x) 1.4 1.3 1.4 1.7 1.7 1.5

Quick Ratio (x) 0.5 0.4 0.5 0.7 0.5 0.4

Net Debt/Equity (X) 0.6 1.0 1.0 0.6 0.5 0.5

Net Debt/Equity ex MI (X) 1.2 1.7 1.7 0.8 0.8 0.7

Capex to Debt (%) 32.3 33.8 22.2 34.6 27.0 28.7


Asset Breakdown

Net Fixed Assets -53.4%

Assocs'/JVs -0.0%

Bank, Cash and Liquid

Assets -1.0%

Inventory -36.1%

Debtors -9.5%

Drop in net gearing ratio due to additional equity raising from IPO

Company Focus

Japfa Ltd

Cash Flow Statement (US$ m)

FY Dec 2011A 2012A 2013A 2014F 2015F 2016F

Pre-Tax Profit 114 149 115 214 290 397

Dep. & Amort. 36 43 55 58 64 68

Tax Paid (35) (38) (33) (43) (58) (79)

Assoc. & JV Inc/(loss) 0 0 0 0 0 0

Chg in Wkg.Cap. (144) (163) (80) (92) (149) (134)

Other Operating CF 0 0 0 0 0 0

Net Operating CF (23) 27 89 150 166 275

Capital Exp.(net) (152) (246) (206) (333) (257) (274)

Other Invts.(net) 0 0 0 0 0 0

Invts in Assoc. & JV 0 0 0 0 0 0

Div from Assoc & JV 0 0 0 0 0 0

Other Investing CF 4 4 1 0 (2) (2)

Net Investing CF (148) (242) (205) (333) (260) (276)

Div Paid (34) (7) (9) (8) (13) (20)

Chg in Gross Debt 250 250 125 (18) (7) 0

Capital Issues 45 39 131 304 0 0

Other Financing CF (44) (61) (63) (2) (2) (2)

Net Financing CF 217 222 183 277 (22) (22)

Currency Adjustments 0 0 0 0 0 0

Chg in Cash 45 7 68 94 (116) (23)

Opg CFPS (US cts.) 108.6 171.1 80.8 13.7 17.8 23.2

Free CFPS (US cts.) (157.3) (197.0) (55.7) (10.3) (5.2) 0.1


Capital Expenditure

0

50

100

150

200

250

300

350

400

2012A 2013A 2014F 2015F 2016F

Capital Expenditure (-)

Capex will remain elevated on sustained capacity expansion in all segments; but dairy occupies larger capex share

Company Focus

Japfa Ltd

DBS Bank recommendations are based an Absolute Total Return* Rating system, defined as follows:

STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)

BUY (>15% total return over the next 12 months for small caps, >10% for large caps)

HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)

FULLY VALUED (negative total return i.e. > -10% over the next 12 months)

SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)

Share price appreciation + dividends GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Bank Ltd. This report is solely intended for the clients of DBS Bank Ltd and DBS Vickers Securities (Singapore) Pte Ltd, its respective connected and associated corporations and affiliates (collectively, the “DBS Vickers Group”) only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBS Bank Ltd. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”)) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed and it may not contain all material information concerning the company (or companies) referred to in this report. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk

assessments stated therein. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBS Vickers Securities (USA) Inc ("DBSVUSA")"), a U.S.-registered broker-dealer, does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. ANALYST CERTIFICATION The research analyst primarily responsible for the content of this research report, in part or in whole, certifies that the views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst also certifies that no part of his/her compensation was, is, or will be, directly, or indirectly, related to specific recommendations or views expressed in this report As of the date the report is published, the analyst and his/her spouse and/or relatives who are financially dependent on the analyst, do not hold interests in the securities recommended in this report (“interest” includes direct or indirect ownership of securities). COMPANY-SPECIFIC / REGULATORY DISCLOSURES

1. DBS Bank Ltd., DBS Vickers Securities (Singapore) Pte Ltd (“DBSVS”), their subsidiaries and/or other affiliates do not have a proprietary position in the securities recommended in this report as of 31 Aug 2014.

2. DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates may beneficially own a total of 1% of any class of common equity securities of the company mentioned as of 31 Aug 2014.

3.

Compensation for investment banking services: DBS Bank Ltd., DBSVS, DBSVUSA, their subsidiaries and/or other affiliates may have received compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from the company mentioned.

Company Focus

Japfa Ltd

DBSVUSA does not have its own investment banking or research department, nor has it participated in any investment banking transaction as a manager or co-manager in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.

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Malaysia This report is distributed in Malaysia by AllianceDBS Research Sdn Bhd ("ADBSR") (formerly known as HwangDBS Vickers Research Sdn Bhd). Recipients of this report, received from ADBSR are to contact the undersigned at 603-2604 3333 in respect of any matters arising from or in connection with this report. In addition to the General Disclosure/Disclaimer found at the preceding page, recipients of this report are advised that ADBSR (the preparer of this report), its holding company Alliance Investment Bank Berhad, their respective connected and associated corporations, affiliates, their directors, officers, employees, agents and parties related or associated with any of them may have positions in, and may effect transactions in the securities mentioned herein and may also perform or seek to perform broking, investment banking/corporate advisory and other services for the subject companies. They may also have received compensation and/or seek to obtain compensation for broking, investment banking/corporate advisory and other services from the subject companies.

Wong Ming Tek, Executive Director, ADBSR

Singapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report.

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United Kingdom

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Dubai

This research report is being distributed in The Dubai International Financial Centre (“DIFC”) by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3rd Floor, Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for professional clients (as defined in the DFSA rulebook) and no other person may act upon it.

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Other jurisdictions

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DBS Bank Ltd.

12 Marina Boulevard, Marina Bay Financial Centre Tower 3 Singapore 018982 Tel. 65-6878 8888

Company Regn. No. 196800306E

0926 DBS Vickers Japfa

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