- We re-iterate our BUY recommendation on Three-A Resources(3A) but clip our fair value from RM1.70/share to RM1.50/share, based on atarget PE of 20x FY13F revised earnings as we impute in a more conservative utilisationrates based on progressive earnings contributions from 3A's maiden China plant.Our target PE is close to China consumer peers' average of 18x.
- Following a recent meeting with management, our longtermconviction in 3A is reinforced ' its structural transformational growth isfirmly on track. We understand commercial production of its 'blueprint'manufacturing hub in Qinhuangdao, China, is scheduled to kick-off this June.
- The group is in the midst of fine-tuning its machineriesat the state-of-art facility which boasts 13,600m'' total floor area. Aspresent, installed HVP production line with a capacity of 6,000MT p.a. isalready more than 3x the size for equivalent produce in Malaysia. To underlineour growing confidence, expansion plans for an additional 6,000MT (+100%) hasalready been targeted for completion by end-FY13F.
- More importantly, produce in China is expected to yield highermargins due to:-
1) A strong focus on higher value products such as HVPpowder (hydrolysed vegetable protein) vs. HVP liquid and;
2) Absence of quality competition within the local market.
- Contrary to perception, most local producers operate on amuch smaller scale, while a few bigger ones lack international accreditation.In contrast, 3A adheres to European standards, and hence, is expected to enjoy betterpricing power.
- We estimate earnings contributions from the China plant torise from 5% in FY12F to 23% next year, with FY13F being the inflexion point.Earnings near term will remain predominantly Malaysia-driven, given enlargedcapacities from the 2nd caramel colour plant (+4,000MT or 100%) and anaverage utilisation rate of ~70%.
- Valuation is attractive and the current weakness in share priceis an excellent opportunity to accumulate the stock. As it is, 3A's forward PERof 15x is at a deep 20% discount to the stock's 5-year mean of 19x. Further, wesee material upside to our earnings forecast from the potential expansion toother geographical locations in China