Japfa set to feast on pork shortage, higher prices amid African swine fever outbreak

Singapore

JAPFA'S swine operations in Vietnam could experience a boost in profitability as another outbreak of African swine fever (ASF) across certain Asia-Pacific countries exacerbates an ongoing pork supply deficit.

Lean hog futures have already jumped 55 per cent since the beginning of the year, and are currently hovering at seven-year highs.

The big rally has been attributed partly to the end of a two-month price ceiling on pork imports by the Philippines, as it seeks to address a domestic shortage by ramping up purchases from abroad.

But it is mostly said to be driven by reduced global supplies due to the ASF outbreak in China, the world's top pork producer and consumer.

On March 6, China confirmed outbreaks of ASF in its key pork producing provinces of Sichuan and Hubei. This came less than two years after an ASF outbreak wiped out about half of the country's herd in 2019.

Analysts say any respite from the current ASF outbreak will not happen quickly. Aurelia Britsch, head of commodities at Fitch Solutions, told The Business Times that the new ASF variants in China are putting herd rebuilding efforts at risk.

Ms Britsch also noted that China had been on a recovery path from the virus, which began accelerating in Q4 2020. However, the emergence of new ASF variants in Q1 2021 due to the illegal movement of pigs and illicit ASF vaccines are likely to slow down the pick-up in pork production.

Fitch is currently estimating that pork production in China will rise 11 per cent in 2021, the first positive growth in four years. The recovery is expected to accelerate in 2022, with output growing a further 15 per cent. However, Fitch notes that these figures are "well below official statistics which claim that the pork sector is close to a full recovery".

Ms Britsch expects China to import more pork from other countries, as it consolidates its own operations and farms. "The ASF outbreak is reshaping China's pork sector at a fast speed," she said.

"From being an extremely scattered sector, pork production is consolidating, with players aiming for greater vertical integration. This will increase demand for industrial feed and eventually smooth out China's pork cycles to some extent."

Against this backdrop, Singapore-listed agri-food play Japfa is optimistic about its swine operations in Vietnam, which is part of its Animal Protein Others (APO) segment.

Tan Yong Nang, chief executive of Japfa, said that the company has operations across the entire value chain, ranging from feed and breeding, to commercial farming. This means the company is "less susceptible to market fluctuations and price volatility", said Mr Tan.

But the company is expecting to benefit as the world grapples with a shortage of pigs.

Said Mr Tan: "Pork supply is still short due to the impact of ASF on the swine population in Vietnam and we can expect the supply-demand imbalance to persist in 2021, as it takes time for the industry to rebuild the swine stock and to properly train staff to manage new farms."

Rabobank said Vietnam's hog population as at end-2020 stood at 27.3 million. Although this is 20 per cent higher compared to 2019, it is still only about 87 per cent of the levels prior to the ASF outbreak.

Mr Tan says Japfa has been able to minimise the negative impact of the virus with strict biosecurity protocols.

The knock-on effects of the imbalance in demand and supply across the pork industry is already evident in Japfa's financial results. For FY2020 ended December last year, the company posted a net profit of US$322 million, up from US$120 million in FY2019. Revenue for the year fell one per cent to US$3.87 billion, from US$3.89 billion in the previous year.

Japfa's Indonesian unit, PT Japfa Tbk, was the only segment to report a decline in revenue due to lower poultry demand on the back of Covid-19 disruptions. The group's other two key profit pillars - its swine operations unit in Vietnam and dairy operations unit in China - had "more than offset the weaker performance" of the Indonesian unit.

For the APO segment, Japfa attributed the improved performance to high prices for "fattening" swine as well as an increase in feed sales volume, which surpassed the one million tonne milestone in FY2020.

Looking ahead, Mr Tan said Japfa is focused on further expanding its swine operations in Vietnam due to the country's high pork consumption and shift towards industrialised producers.

"In the future, we cannot exclude (the possibility of) expanding to other markets should the opportunity arise, as we have successfully done in the past by replicating our business model in protein production across different markets," said Mr Tan, referencing the group's poultry segment which has expanded to Vietnam, India and Myanmar.

CGS-CIMB analyst Cezzane See said that the virus should have a medium-term positive impact on the company, though much depends on whether the virus resurfaces in Vietnam. She added that swine prices in FY2021 could remain "at least at FY2020's average prices".

The research house has maintained its "add" call on Japfa with an unchanged target price of S$1.18, noting that the company has successfully diversified its business into several pillars that can "mitigate each others' weaknesses".

Japfa shares closed at S$0.90 on Monday, down 0.6 per cent or 0.5 Singapore cent. The company has a market capitalisation of S$1.84 billion.