CENTRAL PROTEINAPRIMA - CP P. Major customers of its frozen shrimps include Costco, Safeway, Tesco,...

July 2008

CENTRAL PROTEINAPRIMA

I N D O N E S I A

A Giant In The Making

Yap Swie Cu☎☎☎☎☎ (6221) 2557 8805

[email protected]

This report is based on the closing prices of 1 Jul 08

Contents

Executive Summary .......................................................................... 1

Investment Highlights ...................................................................... 2

Valuation ............................................................................................ 5

Recent Developments ...................................................................... 6

Company Background ...................................................................... 9

Financials .......................................................................................... 15

Earnings Outlook ............................................................................ 18

Risks ................................................................................................. 19

Financial Statements ....................................................................... 20

Central Proteinaprima 1

1 July 2008 Initiate Coverage

C E N T R A L P R O T E I N A P R I M A

A Giant In The Making

Net EPS EV/Year to Turnover EBITDA Profit EPS Growth PE EBITDA DPS31 Dec (Rpb) (Rpb) (Rpb) (Rp) (%) (x) (x) (Rp)

2006 4,898.3 442.2 194.7 8 (3.2) 29.6 18.6 02007 6,091.3 599.7 357.8 15 83.8 16.1 13.7 02008F 8,804.9 1,188.6 430.6 18 20.3 13.4 6.9 02009F 12,323.1 1,820.4 834.1 34 93.7 6.9 4.5 02010F 15,680.8 2,474.1 1,255.5 51 50.5 4.6 3.3 0

Sector Aquaculture

Bloomberg CPRO IJ

Website www.cpp.co.id

Exchange Rate Rp9,225/US$

52-Wk Range (Rp) 770/230

52-Wk Avg Daily Vol. ('000)90,492

No. of Shares (m) 20,578

Market Cap (Rpb) 4,835.8

(US$m) 524.2

Major Shareholders (%)

Surya Hidup Satwa 37.9

NTA per Share (Rp) 83.4

ROE (%) 27.0

Net Debt per Share (Rp) 273.3

Alternate Instruments

Nil

Results Due

Interim: Aug Final: Mar

Analyst:

Yap Swie Cu

(6221) 2557 8805

[email protected]

Consensus net profit -- n.a.

(CPRO) is the world's largest vertically integrated shrimp producer and processor.The company produces frozen shrimp, shrimp feeds, fish feeds, shrimp fry, andprobiotics. Major customers of its frozen shrimps include Costco, Safeway, Tesco,Sainsbury's, and Japan's McDonald's and 7-Eleven.

Operational advantages over competitors. Leveraging on its vertically integratedfacilities, CPRO is better positioned than most of its competitors, especially thesmaller farms. Its products are traceable from brood stock, feedmills, hatchery,shrimp farm to shrimp processing. This makes them well accepted in majormarkets which have high food safety standards. Compared with internationalcompetitors, CPRO benefits from its operational setting in Indonesia where herproximity to the equator ensures minimal seasonality, and hence consistentclimate conditions to harvest shrimps all year round.

Dipasena's assets are significant growth drivers. The acquisition of Dipasena'sassets increases CPRO's capacity by almost three-fold and is the quickest way toincrease production capacity to meet rising demand for high quality shrimpand to generate higher efficiency due to a larger operational scale. Theundeveloped concession area of more than 130,000ha is also a potential sourceof growth.

Attractive valuation driven by robust earnings growth. CPRO trades at relativelyhigh FY08 PE of 13.4x compared to its peers' of below 11.0x. However, its PEwill fall sharply to 6.9x in FY09 and 4.6x in FY10 as we expect contribution fromthe full operations of Dipasena's assets. Initiate coverage with BUY and a targetprice of Rp410 based on 10-year DCF, WACC of 13.2% and terminal growthrate of 5%.

Current Price : Rp235Target (12-mth) : Rp410BUY

100

300

500

700

900

1,100

Jul 07 Oct 07 Jan 08 Apr 08 Jul 081,000

1,500

2,000

2,500

3,000

(Rp)

CPRO (LHS)

JCI (RHS)

Founded in 1980 by the Charoen Pokphand Group (CPG), Central Proteinaprima

2 Central Proteinaprima

Investment Highlights

Limited capture fisheries supply increases demand for aquaculture products.With falling captured fisheries and rising fish consumption in line with anexpanding world population, aquaculture products represent the only way tofill the gap.

Shrimp is the most favourite fish products. According to FAO, shrimp is themost important commodity in value terms among fish products. It accountedfor 16.5% of the total value of internationally traded fishery products in 2004,higher than groundfish (hake, cod, haddock, and Alaska pollock- 10.2%), tuna(8.7%) and salmon (8.5%). Key markets for shrimps are the US, Europe andJapan which together represent about 70% of total consumption of all shrimpsproduced by aquaculture.

Figure 2: Shrimp Imports In Major Markets

Source: Central Proteinaprima

555583

582518

468

429

400345332315

598591

540

510

501

422

418376345360

273298299302228249245247247239

0

100

200

300

400

500

600

700

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

United States EU Japan

('000 MT)

Figure 1: World Fisheries

* Preliminary estimateSource: FAO

(m tonnes) 2000 2001 2002 2003 2004 2005*

PRODUCTIONCapture fisheries 96 93 93 90 95 93Aquaculture 35 38 40 43 45 48

UTILISATIONHuman consumption 97 100 100 103 105 108Non-food uses 34 31 33 30 35 33

Total World Fisheries 131 131 133 133 140 141

Per capita food fish supply (kg) 16.0 16.2 16.1 16.3 16.6 16.7


Indonesia is an ideal location for shrimp farms. The Indonesian archipelago isconsidered an ideal setting for aquaculture because of its access to water andthe availability of large tracts of land. Moreover, Indonesia’s proximity to theequator ensures minimal seasonality and hence consistent climate conditionsto harvest shrimps all year round. The availability of cheap labour is also one ofthe advantages to have shrimp farming in Indonesia.

Figure 3: Location Of Operations


Equator Line

Better positioned to handle traceability issue. The concept of traceability infood products has become important in major markets where food safetystandards are set by the law. Traceability is a process documenting all the stagesof production and distribution that food products go through. CPRO’s verticallyintegrated shrimp farming puts the company in a better position than smallerfarms in handling this traceability issue. It has a comprehensive tracing systemfor each batch of shrimps from breeding, culture to processing, and keeps adatabase for traceability.

Supplies to international groceries and food retailers. With a high standard ofquality and safety for all its products, CPRO has secured many major names,including Costco, Safeway, Tesco, Sainsbury’s, and Japan’s McDonald’s and 7-Eleven. CPRO has about 95% rate of recurring business to date.

Dipasena’s assets are significant growth drivers. The acquisition of Dipasena’sassets in mid-07 was a significant and strategic move for CPRO. Dipasena has aconcession area of 186,250ha, more than 2.5x the size of Singapore. Thedeveloped concession area was only 48,850ha, consisting of 10,618 ponds, twohatcheries, three feedmills, processing and cold storage facilities. The acquisitionhas more than tripled CPRO’s ponds from 3,856 to 14,474 ponds. It wouldtake about two years (mid-07 to mid-09) to revitalise the ponds to match CPRO’sstandard. If CPRO were to grow organically to the same size, it would takeabout six years to build the ponds, not to mention the possible difficulty in


obtaining land. Total cost needed to acquire and revitalise the ponds is aboutUS$233m, much lower than the US$600m needed to build the same numberof ponds.

Another benefit from the acquisition is the higher efficiency due to the largeroperational scale and also Dipasena’s ponds (under Aruna Wijaya Sakti (AWS)and Wachyuni Mandira (WM)) are close to CPRO’s ponds (under CentralPertiwi Bahari (CPB)) and processing plants. Moreover, the acquisition changesthe company-owned:plasma pond profile from 19:81 to 26:74 , which meansbetter margins for CPRO as company-owned ponds can save about 30% in thecost of production compared with plasma ponds.

Longer-term growth will be driven by the expansion of undeveloped concessionarea of more than 130,000ha into more ponds and other facilities.

Securing demand. With a significant increase in production volume expected,CPRO has several strategies to secure demand. Leveraging on its premiumproduct quality, CPRO has not only received repeat orders from buyers butalso managed to increase the trade volume. In 1Q08, trade volume with its top20 buyers grew by more than 25% yoy. Furthermore, it has entered 6-12 monthcontracts with several buyers with total contract volume of about 8,000 tonnesper year. CPRO also plans to venture into Taiwan, Korea, China, Canada, theMiddle East, Central and Eastern Europe. New sales opportunity will also comefrom expanding product range and brands. With a bigger processing capacity,CPRO can now sell ready-meal products to several major retail chains in theUS and Europe. Previously, its ready-meal products were sold only to Japanbecause of capacity constraint.

Figure 4: Location Of Operations


Phase 1: Wachyuni Mandira (WM)Total number of ponds: 4,70965% Company / 35% Plasma

Phase 1: Wachyuni Mandira (WM)Total number of ponds: 4,70965% Company / 35% Plasma

Phase 2: Aruna Wijaya Sakti (AWS)Total number of ponds: 5,908100% Plasma

Phase 2: Aruna Wijaya Sakti (AWS)Total number of ponds: 5,908100% Plasma

Central Pertiwi Bahari (CPB)Total number of ponds: 3,52012% Company / 88% Plasma

Central Pertiwi Bahari (CPB)Total number of ponds: 3,52012% Company / 88% Plasma


Valuation

Attractive valuation driven by robust earnings growth. CPRO currently tradesat a relatively high fully-diluted FY08 PE of 13.4x compared with its peers’ ofbelow 11x. However, its PE will fall sharply to 6.9x in FY09 and 4.6x in FY10 aswe expect contribution from the full operations of Dipasena’s assets. Initiatecoverage with a BUY and a target price of Rp410 based on 10-year DCF, WACCof 13.2% and terminal growth rate of 5%. Our target price represents 12xFY09 PE and 8x FY10 PE.

Figure 5: Peer Comparison

Source: Bloomberg, UOB Kay Hian

Market Cap ------------- PE (x)------------- --- EV/EBITDA (x) ---Company Ticker Country Price (US$m) FY08F FY09F FY10F FY08F FY09F FY10F

Central Proteinaprima CPRO IJ Indonesia Rp235 524.2 13.4 6.9 4.6 6.9 4.5 3.3Pacific Andes PAH SP Singapore S$0.5 451.5 7.5 5.2 4.6 5.8 4.7 4.3Charoen Pokphand Food CPF TB Thailand Bt3.8 846.0 10.7 9.0 8.0 8.5 7.7 7.1Thai Union Frozen TUF TB Thailand Bt16.7 436.8 8.1 7.2 6.4 7.7 6.9 6.4

Figure 6: DCF Valuation

Source: UOB Kay Hian

Assumption:Cost of equity 19.2%Cost of debt (net of tax) 7.7%WACC 13.2%Terminal growth 5.0%

Valuation:Total PV of FCF to equity (Rpb) 7,806PV of terminal year (Rpb) 6,082Net Cash (Debt) (Rpb) (3,848)Total (Rpb) 10,041

12-month DCF value/share (Rp) 410

Figure 7: Sensitivity Analysis

Terminal Growth Rate 4.0% 4.5% 5.0% 5.5% 6.0%

WACC12.2% 424 434 444 455 46712.7% 407 417 427 437 44913.2% 392 401 410 420 43113.7% 376 385 394 404 41514.2% 361 370 379 388 398

Source: UOB Kay Hian


Recent Developments

Shareholding structure. Currently, CPG (Jiaravanon family) controls about72.8% of CPRO but the stake could be reduced to as low as 44.6% if all warrantsand MSOP are exercised and the exchangeable bonds issued by Red DragonGroup (RDG) are converted into CPRO shares.

In Jul 07, Surya Hidup Satwa (SHS), a part of CPG, sold 4.39b CPRO shares (or23.97% stake) to RDG, also a part of CPG, for US$182m to secure US$200m ofexchangeable bonds issued by RDG to third parties. The exchangeable bonds,which are due in 2010, can be converted into CPRO shares at Rp400/share.The sale proceeds together with SHS’ own funds were used to provide a loanfacility of a maximum of US$250m to CPRO. Currently CPRO has taken aboutUS$175.6m of the facilities. No interest is charged on the loan but at the endof loan period in 2010, a part or the entire principal amount of the loans canbe converted into CPRO shares through a rights issue mechanism.

Business restructuring. On 27 Jun 07, CPRO sold its subsidiary, Central Agrominawhich deals in poultry feeds and day-old chicks, for Rp51.5b. This divestment ispart of CPRO business restructuring to focus on aquaculture. Early this year,CPRO also sold power plants (ex Dipasena assets) to Central Daya Energi (CDE),a part of Charoen Group, for Rp780b. Following the sale, CPRO entered intoenergy supply agreement with CDE whereby CDE will provide electricity toCPRO.

Figure 8: Current And Proforma Shareholding Structure

Source: Central Proteinaprima, UOB Kay Hian

Post Warrant & ESOP and conversion of RDG's

Current Post Warrant & ESOP exchangeable bondsAs at 31 Mar 08 No. of Shares % No. of Shares % No. ofShares %

Surya Hidup Satwa 6,939,688,455 37.18 6,939,688,455 28.35 6,939,688,455 28.35Public 5,070,785,118 27.17 10,889,713,284 44.48 13,556,334,534 55.37Red Dragon Group Ltd 2,666,621,250 14.29 2,666,621,250 10.89 - -Charm Easy International Ltd 2,004,207,226 10.74 2,004,207,226 8.19 2,004,207,226 8.19Regen Central International Ltd 1,753,608,019 9.40 1,753,608,019 7.16 1,753,608,019 7.16Central Pertiwi 121,585,574 0.65 121,585,574 0.50 121,585,574 0.50Perfect Companion Group Company Ltd 70,110,438 0.38 70,110,438 0.29 70,110,438 0.29Iceland International Ltd 36,097,754 0.19 36,097,754 0.15 36,097,754 0.15

Total 18,662,703,834 100.0 24,481,632,000 100.0 24,481,632,000 100.0


Acquisition of Dipasena. On 6 Jul 07, shareholders approved the acquisition ofDipasena’s assets from state-owned Assets Management Company (PPA) forUS$189m, including a recap debt of US$100m. The acquisition of Dipasenamore than tripled CPRO’s number of ponds from 3,856 to 14,474. Now, CPROis revitalising Dipasena’s ponds which were poorly run. Total capex needed forthe revitalisation programme (including ponds and supporting infrastructure)is US$242m. Until end-07, CPRO has completed the revitalisation of 4,709 pondsout of 10,618 Dipasena’s ponds, ahead of schedule.

About Dipasena. Established in 1987 by Mr Sjamsul Nursalim, Dipasena hasfacilities in Lampung and South Sumatra with a concession area of 186,250ha(about 2.5x the size of Singapore) and developed concession area of 48,850ha.Dipasena has 10,618 ponds (at 5,000sqm per pond), two hatcheries, threefeedmills, two vessels, and two processing and cold storage facilities.

Figure 9: Dipasena Group

* Converted into 5,000sqm ponds.** Only Lampung feedmill was operating at 66,000MT p.a. at the time acquired.*** Dipasena Citra Darmaja is renamed Aruna Wijaya Sakti.Source: Central Proteinaprima

Dipasena Group

98.9% 98.4%

• 80,000 ha of concession area in Lampung

• 1,956 ha has been developed into 4,709 ponds* (1,614 plasma and 3,095 company)

• 1,940 farmers

98.0% 86.7% 99.9%

Wachyuni Mandira

Shrimp farm

Biru Laut KatulistiwaTriwindu Graha Manunggal

Hatchery

Bestari Indoprima

Feed mill

Mesuji PratamaLines

Shipping

Dipasena Citra Darmaja***

Cold Storage

• 2 hatcheries in Lampung & West Java

• Total capacity: 7.25 billion fries per year

• 3 feed mills in Karawang, Tangerang & Lampung

• Total capacity: 123,000 MT per year**

• Located in Lampung

• 2 vessels, each with a total capacity of 1,000 MT


• 2 processing plants in Lampung with a total capacity of 60 MT per day (or 20,160 MT per year)

• 4,501 ha have been developed into 5,909 ponds* (all plasma)

• 7,673 farmers

Dipasena Group

98.9% 98.4%


• 1,956 ha has been developed into 4,709 ponds* (1,614 plasma and 3,095 company)

• 1,940 farmers

98.0% 86.7% 99.9%

Wachyuni Mandira

Shrimp farm

Biru Laut KatulistiwaTriwindu Graha Manunggal

Hatchery

Bestari Indoprima

Feed mill

Mesuji PratamaLines

Shipping

Dipasena Citra Darmaja***

Cold Storage

• 2 hatcheries in Lampung & West Java

• Total capacity: 7.25 billion fries per year

• 3 feed mills in Karawang, Tangerang & Lampung

• Total capacity: 123,000 MT per year**

• Located in Lampung

• 2 vessels, each with a total capacity of 1,000 MT


• 2 processing plants in Lampung with a total capacity of 60 MT per day (or 20,160 MT per year)

• 4,501 ha have been developed into 5,909 ponds* (all plasma)

• 7,673 farmers


Agreement with plasma farmers. In Oct 07, CPRO entered cooperationagreements with plasma farmers under the former companies of Dipasena-WM and AWS. Under the agreement, CPRO will provide technical assistancefor shrimp farming, including providing materials for shrimp production suchas feed and fry. In return, farmers will sell their shrimps only to CPRO. Farmerswill start working as soon as the ponds revitalisation is completed.

Figure 10: Comparison Of Dipasena And CPRO

* Converted into 5,000sqm ponds.** Based on standard yields/ha.*** Only Lampung feed-mill was operating at 66,000MT p.a. at the time acquired.Source: Central Proteinaprima

Operating Statistics Dipasena Pre-acquisition CPRO

Total Concession Area (ha) 186,250 22,721Developed Concession Area (ha) 48,850 7,830

No. of Ponds* Nucleus 3,095 737 Plasma 7,523 3,119 Total 10,618 3,856

Shrimp Harvested (MT) Approx. 15,000 45,741Harvested Capacity (MT)** 159,270 57,840Broodstock (pcs/year) - 120,000Hatchery (m fries) 7,250 10,200Shrimp Feedmill (MT) 123,000/(66,000) *** 211,200Fish Feedmill (MT) - 413,724Processing Plant (MT/day) 60 221


Company Background

World’s largest vertically integrated shrimp producer and processor. Foundedin 1980 by CPG, CPRO has 28 years of experience in running modern integratedshrimp farms and processing facilities. It affirmed its position as the world’slargest vertically integrated shrimp producer and processor through theacquisition of Dipasena’s assets in 2007, which increases CPRO’s capacity byalmost three-fold. The company produces frozen shrimp (both raw and valueadded), shrimp feeds, fish feeds, shrimp fry and probiotics. CPRO voluntaryde-listed from the JSX in Dec 04, but was re-listed in Nov 06.

Figure 11: Integrated Shrimp Producer And Processor


Figure 12: Corporate Structure


Central Proteinaprima

IsodoroHolding BV

100%

Central Bali Bahari

99.37%

CentralpertiwiBahari

Marindo Lab Pratama

90%

Blue Ocean Resources

100% 99.99% 99.99%

Central Windu Sejati

99.99%

Shrimp Improvement Systems LLC

100%

Central Panganpertiwi

AndalasWindumurni

CitrawinduPertala

SuryawinduPertiwi

WindusejatiPertiwi

99.98% 99.99% 99.99% 99.98%

Central Proteinaprima

IsodoroHolding BV

100%

Central Bali Bahari

99.37%

CentralpertiwiBahari

Marindo Lab Pratama

90%

Blue Ocean Resources

100% 99.99% 99.99%

Central Windu Sejati

99.99%

Shrimp Improvement Systems LLC

100%

Central Panganpertiwi

AndalasWindumurni

CitrawinduPertala

SuryawinduPertiwi

WindusejatiPertiwi

99.98% 99.99% 99.99% 99.98%

AndalasWindumurni

CitrawinduPertala

SuryawinduPertiwi

WindusejatiPertiwi

99.98% 99.99% 99.99% 99.98%


Exports to the US, Europe and Japan. CPRO is Indonesia’s largest shrimpexporter and one of the major exporters to the world’s largest shrimp marketsin the US, Europe and Japan. Major customers include big groceries in such asCostco, Safeway, Tesco, Sainsbury’s, and Japan’s McDonald’s and 7-Eleven. Thecompany is also the market leader for shrimp feed, fish feed and shrimp fryproduction in Indonesia with approximate market share of 40%, 50% and 50%respectively.

Figure 13: Major Customers


USA

EUROPE

JAPAN

Ito Yokado, Tsukji Market, Osaka Fish Market, Kyushu Fish Market,food reprocessors, Lawson

PRODUCTS

Frozen shrimp

Frozen shrimp products are broadly grouped into three categories:Conventional products are the most basic products and include head-onand headless shrimps.Value-added products are shrimps that have been transformed to increasethe value and usability of the products. Examples of these products arepeeled, de-veined, sushi ebi and nobashi ebi.Food products are those that need substantial processing. Examples arebreaded shrimp, shrimp burger patties, shrimp gyoza and frozen meals.

Almost all of CPRO’s frozen shrimps are exported under the brands of customersand also under its own brands, Bird River, for the US market, and Krakatoa, forthe Japanese market.


Shrimp fry

In 2006, CPRO bought US-based Shrimp Improvement Systems, LLC (SIS), ashrimp genetic breeding company and broodstock producer, for US$5.5m.The acquisition is part of CPRO’s objectives to produce high-quality shrimpfries. SIS has a breeding programme to continually improve disease resistanceand increase growth rates of its specific pathogen free (SPF) and specificpathogen resistance (SPR) pedigree lines of shrimp breeding stocks that itsells to shrimp farming companies in over 20 countries worldwide.

Shrimp feed

The company has six brands of shrimp feeds with each brand specificallyformulated to the required diet of the particular shrimp species. They are:

Irawan- for intensive production of Vannamei shrimp.VIP, CP, Marine, and Bintang- for Monodon shrimp.Scampi- for Rosenbergii shrimp.

Fish feed

The company produces floating fish feed and sinking fish feed which are usedfor commercial fishes and ornamental fishes. The products are sold under thefollowing brands:

Hiprovite is the most popular brand for floating fish feeds and specialised forcatfish.Common Carp Floating Feed 779 is premium floating fish feed product.Bintang is the company’s first-grade sinking fish feed.Turbo is a sinking fish feed exclusively designed for tilapia and common carp.

FACILITIES

The last phase of revitalisation to start. The revitalisation of Dipasena’s ponds isimplemented in two phases. The first phase focuses on WM’s 4,709 ponds andthe second phase focuses on AWS’ 5,908 ponds. The first phase was completedin end-07, ahead of its initial estimate of only 1,461 ponds. The second phase isexpected to start in 2Q08 and to complete before 2H09. CPRO has also increasedthe capacity of other supporting facilities, such as processing plants, shrimpfeedmills and hatcheries, to meet the rising harvest.


SHRIMP FARMING AND PROCESSING

CPRO’s vertically integrated shrimp farming allows the company to maintainsuperior product quality and enables it to have end-products that are traceablefrom the beginning to the end of the production chain.

Best input to get the best output. The process starts with high quality broodstock which will produce shrimp fries with an equal superior quality. CPROmakes sure all its fries come from Specific Pathogen Free (SPF) and SpecificPathogen Resistant (SPR) brood stocks to maintain a minimal disease outbreakduring cultivation. Feed is also an important part of the process. By having itsown feed manufacturing facilities, the company can control the nutritionalvalue as well as the safety of the feed to ensure optimal results. Another criticalinput is water. Unlike traditional shrimp farming, the sea water needed forhatchery and shrimp farming is pretreated before being pumped into hatcheryunits and shrimp ponds to filter potential disease carriers.

Figure 14: Capacity Expansion

* Converted into 5,000sqm ponds. ** Based on standard yields/ha.

1ha=107,639sfSource: Central Proteinaprima

CPRO + CPRO + CPRO + CPRO +Dipasena Dipasena Dipasena Dipasena

CPRO Actual Target Target TargetFY06 FY07 FY08F FY09F FY10F

No. of Ponds Operated * Nucleus 737 3,832 3,832 3,832 3,832 CPRO 737 737 737 737 737 WM - 3,095 3,095 3,095 3,095 Plasma 3,119 4,733 8,279 10,641 10,641 CPRO 3,119 3,119 3,119 3,119 3,119 WM - 1,614 1,614 1,614 1,614 AWS - - 3,546 5,909 5,909 Total 3,856 8,565 12,111 14,474 14,474

Harvested Capacity (MT)** 57,840 128,475 181,665 217,095 217,095 CPRO 57,840 57,840 57,840 57,840 57,840 Dipasena - 70,635 123,825 159,255 159,255Processing Plant Capacity(MT) 80,665 118,080 155,040 192,000 222,240 CPRO 80,665 84,480 84,480 84,480 84,480 Dipasena - 33,600 70,560 107,520 137,760Shrimp Feedmill Capacity (MT) 211,200 307,200 334,200 448,200 448,200 CPRO 211,200 211,200 211,200 211,200 211,200 Dipasena - 96,000 123,000 237,000 237,000Fish Feedmill Capacity (MT) 413,724 413,724 413,724 413,724 413,724 CPRO 413,724 413,724 413,724 413,724 413,724 Dipasena - - - - -Broodstock (pcs) 120,000 120,000 120,000 120,000 120,000 CPRO 120,000 120,000 120,000 120,000 120,000 Dipasena - - - -Hatchery Capacity (m fries) 10,200 19,476 28,396 28,396 28,396 CPRO 10,200 10,296 13,896 13,896 13,896 Dipasena - 9,180 14,500 14,500 14,500


Tight control and supervision over the entire process. The company ensurestight control and supervision over the entire process is taken by both its employeesand plasma farmers. The cultivation period, from pond preparation to breedingstage, is closely monitored periodically throughout the farming period to preventdisease outbreak. It uses a closed water management system, meaning eachpond is isolated from another, to prevent contamination of diseases. Ponds haveplastic linings to prevent contact between soil and water. Water quality iscontrolled using biological method, thus avoiding the use of antibiotics andpesticides. Once the shrimps are harvested, they are transported, processedand packed in CPRO’s 24-hour processing plant within a few hours fromharvesting to ensure the freshness of end-products.

Operational efficiency improvements. Continuous efforts to produce moresuperior products are seen by the improvement in operating statistics. In FY07,the average shrimp harvested per hectare of pond per cycle (pond yield) was15.1MT, the highest ever. This was a result of a higher stocking density (numberof fries stocked in a pond), lower flushing rate (percentage of ponds flushed asdiseases are found), higher survival rate and higher mean body weight.

Figure 15: Operational Statistics

* Exceptional circumstances of unseasonally cold weather in 3Q06 (26 degrees Celcius) reduced yields and survival ratesSource: Central Proteinaprima

Stocking Density Flush Rate Pond Yield

3.9

5.04.4

5.1

2.4

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2003 2004 2005 2006* 2007

(%)

5.9

11.4

13.913.0

15.1

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2003 2004 2005 2006* 2007

(MT/ha/cycle)

CAGR: 21% CAGR: 27%

53.2

85.698.0

106.0114.7

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

2003 2004 2005 2006 2007

(shrimp fry/sqm)


NUCLEUS-PLASMA PARTNERSHIP PROGRAMME

The nucleus-plasma partnership programme defines the relationship betweenthe sponsor (the company) and independent plasma shrimp farmers. Underthe partnership, the company constructs the ponds, houses and all theinfrastructure that is needed. The company then assigns farmers – typically onepond per farmer - to do the cultivation. The company also provides inputs forfarming and gives technical assistance for good farming practices. Farmers arerequired to follow all the standard operating procedures set by the company,relating to closed water management and waste disinfection system, full bio-security measures, and step-by-step approach to 120-day cultivation cycle. Inabilityto meet the company’s standards will result in the termination of the agreement.The farmers sell back all of its harvest to the company at an agreed price. Theincome is then deducted from the farmer’s loans installments to the company.These loans include investment loan for building the infrastructure and loansfor working capital.

Figure 16: Nucleus-Plasma Partnership Programme


CPRO

• Fry and Feed• Electricity and Water• Aquaculture Training, Support and Monitoring

Strict Standard Operating Procedures Plasma

• Closed water management/waste disinfection system• Full bio-security measures• Step-by-step approach to 120-day cultivation cycle

• Shrimp (harvested by CPP)• Contractual Agreement

CPRO

• Fry and Feed• Electrici y and Water• Aquaculture Training, Sup ort and Monitoring

Strict Standard Operating Procedures Plasma

• Closed water managemen /waste d sin ection system• Full b o-secur ty measures• Step-by-step approach to 120-day cultivation cycle

• Shrimp (harvested by CPP)• Contractual Agreement


Financials

1Q08 sales jumped 44.7% yoy. In 1Q08, CPRO’s total sales jumped 44.7% yoyto Rp1.8trillion, driven by robust growth in the sales of frozen shrimp. But salesfell 6.9% qoq due to the divestment of its poultry feed business.

Frozen shrimp sales soared 88.3% yoy to Rp859.8b, boosted by higherproductivity from CPB’s ponds and contribution from some of WM’s newly-revitalised ponds. Frozen shrimp sales volume was 13,002MT- 10,222MT fromCPRO (1Q07: 6,636MT) and 2,780MT from WM. The contribution from WM’sponds is still insignificant as the majority of the ponds only started in late-07and it takes about 120 days in the grow-out phase.

With more ponds in operation, shrimp feed and fry sales also grew strongly by80.7% and 35.3% yoy to Rp386b and Rp66b respectively. The pace of shrimpfry sales was slower than frozen shrimp and shrimp feed as strong shrimp frysales has been started since 3Q07. The slower shrimp fry sales growth was alsocaused by a lower average price of Rp30/fry (1Q07: Rp32) as the portion ofcompany-owned ponds, which charge a cheaper price, has increased significantlywith the operation of WM’s ponds.

Net sales of fish feed increased 50.8% yoy to Rp328.2b, driven by a 26.3% yoygrowth in sales volume and average selling price increase of 19.4% yoy.

Figure 17: Quarterly Results


Year to 31 Dec (Rpb) 1Q07 2Q07 3Q07 4Q07 1Q08

Turnover 1,221.3 1,369.1 1,602.0 1,898.9 1,767.2COGS (1,006.9) (1,085.3) (1,247.9) (1,633.0) (1,407.7)

Gross Profit 214.4 283.8 354.1 265.9 359.5Selling Expenses (51.3) (57.0) (67.0) (78.1) (95.6)General & Adm Expenses (68.5) (71.4) (106.1) (140.6) (120.4)

EBITDA 117.9 179.0 207.1 95.7 214.5

Operating Profit 94.6 155.4 181.0 47.2 143.5Interest Expenses (54.4) (45.6) (107.3) (97.6) (94.8)Gain/Loss on Forex (4.5) 0.4 (48.0) (124.7) 82.9Others 77.7 13.0 2.4 338.1 11.7

Pretax Profit 113.3 123.2 28.0 163.0 143.3Tax (35.9) (38.6) (4.8) 10.6 (42.9)Minority Interest (0.6) (0.1) 0.1 (0.4) (0.6)

Net Profit 76.8 84.4 23.3 173.2 99.8

Gross Margin (%) 17.6 20.7 22.1 14.0 20.3EBITDA Margin (%) 9.7 13.1 12.9 5.0 12.1Operating Margin (%) 7.7 11.4 11.3 2.5 8.1Net Margin (%) 6.3 6.2 1.5 9.1 5.6


Margin recovery in 1Q08. After being hit by soaring raw material prices in4Q07, margins recovered in 1Q08. One of the company’s strategies to managemargins was to use alternative sources of raw materials (more local than import)while maintaining the same nutritional quality. It also entered forward purchaseagreements with suppliers and raised selling prices of some products. Furtherboost to margins in 1Q08 came from more contribution from company-ownedponds, which cost of production is 30% lower than plasma ponds’, and theexiting from the poultry business, which had the lowest gross margin of onlyaround 3% in FY07.

Figure 20: Selling Price


1Q07 2Q07 3Q07 4Q07 1Q08

Frozen shrimp (Rp/kg) 68,823 62,095 68,232 65,698 66,132Shrimp feed (Rp/kg) 8,351 8,346 8,085 8,087 8,066Fish Feed (Rp/kg) 3,857 3,896 3,919 4,236 4,606Shrimp fry (Rp/fry) 32 34 32 26 30

Figure 18: Sales


473 556 498 471 457 556 695 686860

215 206 233 245 213254

239 356386

169212 211 227 218

262283

390328

-200400600800

1,000

1,2001,4001,6001,8002,000

1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08

(Rpb)

Frozen shrimp Shrimp feed Fish FeedShrimp fry Poultry Feed Other

Figure 19: Sales Volume


1Q07 2Q07 3Q07 4Q07 1Q08

Frozen shrimp (MT) 6,636 8,961 10,179 10,445 13,002Shrimp feed (MT) 25,560 30,423 29,537 43,999 47,818Fish Feed (MT) 56,428 67,365 72,124 92,123 71,257Shrimp fry (m fries) 1,519 981 2,300 2,489 2,239


Higher debt burden to finance the revitalisation work. Due to the intensivecapital expenditure for the revitalisation programme, the company more thandoubled its borrowings from Rp2.3trillion in 1Q07 to Rp5.3trillion in 1Q08,which raised its net gearing from 1.7x to 3.0x. Excluding borrowings ofUS$175.6m from related parties which are charged zero interest, CPRO’s netgearing was 2.0x. More than half of the total debt come from US$325m ofbonds payable which has a coupon rate of 11% p.a. and maturing in Jun 2012.As a result of the higher debt exposure, interest expense in 1Q08 soared 74.4%yoy to Rp94.8b. Interest coverage was 1.5x in 1Q08 (1Q07: 1.7x).

Figure 21: Margins


16.2 17.0 16.7 16.7 17.6

20.722.1

14.0

20.3

8.710.0 9.1 8.3

9.7

13.1 12.9

5.0

12.1

6.98.4 7.4 6.5

7.7

11.4 11.3

8.1

2.5-

5

10

15

20

25

30

1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08

(%)

Gross Margin EBITDA MarginOperating Margin


Earnings Outlook

Robust sales growth in the next three years. We expect total sales to grow by arobust CAGR of 37.1% in 2008-10, driven by rising sales of frozen shrimp, shrimpfeed and shrimp fry as more ponds start operating. Sales growth beyond 2010,after all the revitalised ponds are in production, could be driven by rising prices,operational improvement (feedstock technology, quality and disease controls,cultivation and harvesting techniques) and the expansion of undevelopedconcession area.

Figure 22: Operational Assumptions


2006 2007 2008F 2009F 2010F

Sales VolumeFrozen Shrimp (MT) 30,446 36,221 64,308 98,072 126,193Shrimp Feed (MT) 109,673 129,519 190,032 232,953 306,349Shrimp Fry (m fry) 5,389 7,300 9,643 14,381 19,048Fish Feed (MT) 219,029 288,040 339,976 375,954 388,068

PriceFrozen Shrimp (USD/kg) 7.1 7.2 7.5 7.4 7.5Shrimp Feed (Rp/kg) 8,197 8,200 9,079 9,758 10,255Shrimp Fry (Rp/fry) 30 30 32 33 35Fish Feed (Rp/kg) 3,738 4,003 4,811 5,151 5,570

Margins to improve. EBITDA margin is projected to rise from 9.8% in FY07to13.5%, 14.8% and 15.8% in FY08-10. There are several reasons for the marginimprovement:

a) there will be a higher portion (27%) of more profitable company-ownedponds (19% pre-acquisition),

b) more contribution of frozen shrimp sales of 50-55% (from 40%),c) the divestment of the less profitable poultry business which had gross margin

of only 3% in FY07,d) company’s plan to reduce the portion of conventional frozen shrimp products

from around 45% currently to below 35% and increase the contribution ofvalue-added and processed food products,

e) the commencement of Group’s power plants in 2009 which will halve thecost of electricity, and

f) higher efficiency gained from a larger operational scale.

Improving ability to service debt. We expect the company’s ability to coverhigh interest expenses to improve in the coming years as newly-acquired assetsstarting to contribute significantly to earnings. Our projection shows interestcoverage to rise from 1.6x in FY07 to 2.3x in FY08, 3.9x in FY09 and 5.3x inFY10. We do not expect the company to take on additional loans as we believecash flow from operations is sufficient to finance the huge capital expenditureneeded for the revitalisation programme in the next two years.


Risks

Trade barriers. International trade barriers could be imposed on Indonesianshrimp export if there is evidence of antidumping, re-labelling country of origin,or violation of country standards. Currently, no barrier has been imposed onIndonesian shrimp exports. In fact, in Jul 08, Japan plans to liberalise its shrimpimports from Indonesia by removing the 1% shrimp import duty.

Diseases. A disease outbreak could hit CPRO’s production and sales. CPRO hasnever had any major disruptions to its production facilities as a result of diseasesor contaminants, supported by its highly advanced bio-security measures, andclosed water management system, modular pond system and other protectivesystems.

Deterioration in product quality. In the food business, quality of the products isfundamental to the success of the business. Any slight deterioration in productquality may result in negative publicity, loss of business and financial liability.CPRO is certified by many international manufacturing and food safety standardsorganisations, including ISO 9001 (2000), HACCP-USDC, BRC and GMP, whichprovide a reasonable assurance to the safety of its products. Its long track recordof providing high-quality products resulted in 95% repeat customers.

Rising raw material prices. The bulk of CPRO’s production costs is from rawmaterials, such as fish meal, wheat flour and soybean meal. Prolonged risingcommodity prices may affect its margins. So far, the pressure on margins ismitigated by changing the feed formulation using alternative sources of rawmaterials (more local than import), while maintaining the same nutritionalvalue. Besides, the company also has forward purchase agreements with suppliersand raised selling prices of some products.

Possible delay in the completion of the revitalisation programme. Delay in thecompletion of the revitalisation programme will change the projections of thecompany’s financials and valuation. Its ability to cover rising operational expensesand debt servicing will be affected. The company may also have to take onadditional borrowings if it misses cash flow projections.

Potential EPS dilution from rights issue plan. In 2007, the company entered anagreement with major shareholder, CPG, in which CPRO would receive loanfacilities of a maximum US$250m with zero interest until 2010. At the end ofthe loan period, a part or the entire principal loans will be converted into CPROshares under a rights issue mechanism. As of 31 Mar 08, CPRO has exercisedUS$175.6m of the loans. The size of the rights issue will depend on the amountof loans that will be converted to CPRO shares and CPG’s ownership in CPROthen.


Figure 23: Profit & Loss


Year to 31 Dec (Rpb) 2006 2007 2008F 2009F 2010F

Turnover 4,898.3 6,091.3 8,804.9 12,323.1 15,680.8COGS (4,083.0) (4,973.1) (6,903.9) (9,461.6) (11,946.1)

Gross Profit 815.2 1,118.2 1,901.0 2,861.4 3,734.7Selling Expenses (216.4) (253.4) (443.4) (563.5) (676.1)General & Adm Expenses (240.7) (386.6) (562.3) (788.1) (962.7)

EBITDA 442.2 599.7 1,188.6 1,820.4 2,474.1

Operating Profit 358.1 478.1 895.2 1,509.8 2,095.9Interest Expenses (144.8) (304.9) (385.7) (388.2) (392.6)Gain/Loss on Forex 21.0 (176.8) 89.9 - -Others 41.7 431.1 19.3 77.0 100.9

Pretax Profit 276.0 427.5 618.7 1,198.6 1,804.1Tax (80.6) (68.7) (185.6) (359.6) (541.2)Minority Interest (0.7) (1.0) (2.5) (4.9) (7.4)

Net Profit 194.7 357.8 430.6 834.1 1,255.5

Figure 24: Balance Sheet



Current AssetsCash & Cash Equivalents 585.5 334.5 1,646.8 2,145.0 1,665.3Short-term Investments 334.1 - - - -Account Receivables 777.3 2,241.9 2,247.4 2,488.1 2,948.1Inventories, Net 644.8 1,169.9 1,324.0 1,555.3 1,636.4Other Current Assets 112.7 306.7 337.3 371.1 408.2

Non-current AssetsFixed Assets, Net 971.7 3,357.9 2,964.2 3,163.3 3,048.2Other Long-term Assets 358.8 383.6 412.6 445.0 481.2Total Assets 3,785.0 7,794.5 8,932.3 10,167.8 10,187.4

Current LiabilitiesShort-term Debt 274.9 539.7 620.0 682.0 750.2Current Maturity of Long-term Debt 63.2 94.2 79.1 87.1 95.8Account Payables 236.0 704.5 567.4 777.7 981.9Other Current Liabilities 62.7 90.4 248.6 311.8 379.0

Non-current LiabilitiesLong-term Debt 1,926.0 1,717.5 1,624.8 1,624.8 0.1Bonds payable - 2,996.8 2,939.7 2,953.9 2,968.0Other Long-term Liabilities 89.9 111.4 141.8 180.8 199.8Total Liabilities 2,652.7 6,254.5 6,221.6 6,618.1 5,374.7

Minority Interest 8.1 9.1 11.7 16.6 24.0Shareholders' Equity 1,124.1 1,530.8 2,699.0 3,533.1 4,788.6

Total Liabilities and Equity 3,785.0 7,794.5 8,932.3 10,167.8 10,187.4


Figure 25: Cash Flow



Net Profit 194.7 357.8 430.6 834.1 1,255.5Depreciation & Amortization 97.3 121.5 293.3 310.6 378.2Changes in Working Capital (133.0) (1,521.3) (296.6) (261.8) (336.9)Other Non-Cash (184.2) (274.2) 105.7 40.1 17.5Cash Flow from Operation (25.2) (1,316.1) 533.0 923.0 1,314.3

Capital Expenditure (250.7) (2,630.7) (680.8) (509.7) (263.1)Other Investing Activities (1,794.4) 541.1 807.2 1.4 3.3Cash Flow from Investments (2,045.1) (2,089.6) 126.4 (508.3) (259.8)

Changes in Capital 1,370.3 4.0 737.9 - -Net Change in Debt 1,310.5 3,150.1 (85.0) 83.6 (1,534.2)Dividend (200.0) - - - -Other Financing Activities 81.0 0.6 - - -Cash Flow from Financing 2,561.7 3,154.7 652.9 83.6 (1,534.2)

Change in Cash 491.4 (251.0) 1,312.3 498.3 (479.7)Beginning Cash & Cash Equivalent 94.1 585.5 334.5 1,646.8 2,145.0Ending Cash & Cash Equivalent 585.5 334.5 1,646.8 2,145.0 1,665.3

Figure 26: Ratios


Year to 31 Dec (%) 2006 2007 2008F 2009F 2010F

GrowthTurnover (2.1) 24.4 44.5 40.0 27.2Gross Profit (2.0) 37.2 70.0 50.5 30.5EBITDA 3.5 35.6 98.2 53.2 35.9Operating Profit 6.8 33.5 87.2 68.7 38.8Pre-tax Profit (5.4) 54.9 44.7 93.7 50.5Net Profit (3.2) 83.8 20.3 93.7 50.5

ProfitabilityGross Margin 16.6 18.4 21.6 23.2 23.8EBITDA Margin 9.0 9.8 13.5 14.8 15.8Operating Margin 7.3 7.8 10.2 12.3 13.4Net Margin 4.0 5.9 4.9 6.8 8.0Operating ROA 11.4 8.3 10.7 15.8 20.6ROE 17.1 27.0 20.4 26.8 30.2

LeverageTotal Debt/Total Assets (x) 0.6 0.7 0.6 0.5 0.4Total Debt/Equity (x) 2.0 3.5 2.0 1.5 0.8Net Debt (Cash)/Equity (x) 1.5 3.3 1.3 0.9 0.4Interest Coverage (x) 2.5 1.6 2.3 3.9 5.3

As of 1 July 2008, the analyst and his / her immediate family do not hold positions in the securities recommended inthis report.

We have based this document on information obtained from sources we believe to be reliable, but we do not make anyrepresentation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness.Expressions of opinion contained herein are those of UOB Kay Hian Research Pte Ltd only and are subject to changewithout notice. Any recommendation contained in this document does not have regard to the specific investmentobjectives, financial situation and the particular needs of any specific addressee. This document is for the informationof the addressee only and is not to be taken as substitution for the exercise of judgement by the addressee. Thisdocument is not and should not be construed as an offer or a solicitation of an offer to purchase or subscribe or sell anysecurities. UOB Kay Hian and its affiliates, their Directors, officers and/or employees may own or have positions inany securities mentioned herein or any securities related thereto and may from time to time add to or dispose of anysuch securities. UOB Kay Hian and its affiliates may act as market maker or have assumed an underwriting position inthe securities of companies discussed herein (or investments related thereto) and may sell them to or buy them fromcustomers on a principal basis and may also perform or seek to perform investment banking or underwriting servicesfor or relating to those companies.

UOB Kay Hian (U.K.) Limited, a UOB Kay Hian subsidiary which distributes UOB Kay Hian research for onlyinstitutional clients, is an authorised person in the meaning of the Financial Services and Markets Act 2000 and isregulated by The Securities and Futures Authority.

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