- Following our recent company visit, we re-affirm our BUY recommendation on Three-A Resources (3A), with an unchanged fair value of RM1.50/share. Our target PE of 20x FY13F earnings is close to the stock's 5-year mean of 19x.

- We retain our long-term bullish conviction in 3A. The group has exciting growth plans mapped out, backed by its highly-scalable business model and supportive operating dynamics. A stable cost structure, steady double-digit demand growth and a transformational rise in earnings as underpinned by its maiden 50:50 China JV plant with associate Wilmar International (WIL Sp Equity, Hold) are set to drive 3-year earnings CAGR of 31%. 

- To be sure, the group is in the final phase to attain the remaining certifications from the relevant authorities before embarking on  full commercialisation. To recap, the group had back in June initiated fine-tuning of machineries at its state-of-art facility in Qinhuangdao for production of better-margin HVP (hydrolysed vegetable protein).

- We also understand initial feedback from 3A's marketing drive has been encouraging ' leading us to believe the maiden plant may surpass our expectation of an 18-20 months' payback period. This is premised on:- 1) 3A's access to Wilmar's wide customer base and; 2) Wilmar's proven franchise value with a dominant 45%-50% market share of China's cooking oil industry.

- To underline management's confidence, we learnt expansion plans are in place to lift the maiden plant's current installed capacity of 6,000 tonnes/pa to 2x the size ' potentially translating into RM70-80mil additional revenues based on our estimates. Further out, we do not rule out an accelerated expansion phase into other locations given Wilmar's vast geographical presence in China with over 60 plants.    

- Earnings near term will be mainly driven by its Malaysia ops on the back of enlarged capacities from newly-installed 2^nd  caramel colour production line (+4,000 tonnes or +100%). More importantly, we anticipate utilisation rate to see a gradual uptick from the current 50% to ~75% by end-FY13F, as demand momentum and operational efficiency kick-in. As it is, management has secured contracts with a few multinational F&B producers ' effectively minimising downside risks. Additionally, 3A has begun construction of its 3^rd maltodextrin line for completion in Jul-Aug 2013. 

- We have trimmed our FY12F EPS forecast by 14%, but our FY13F-14F projections are maintained post adjustments from:- 1) an upward revision to our sales volume growth assumptions, and 2) higher taxation rate of 20%-24%, from 16% previously due to absence of reinvestment allowances.

- Valuation is attractive given 3A's solid earnings prospects. The stock is trading at 16.5x forward earnings ' well below its PE band of 26x-42x.

Source: AmeSecurities