l Equity Research l

Important disclosures can be found in the Disclosures Appendix

All rights reserved. Standard Chartered Bank 2014 http://research.standardchartered.com
China l Food & Beverage 25 March 2014
Changshouhua Food
A solid growth-oriented consumer brand
Net earnings rose 32% in 2013, mildly missing estimates,
due to lower-than-expected growth from non-branded oil.
We believe Changshouhua will lower its non-branded oil
capacity by transferring it to branded oil.
We believe Changshouhua will continue to record solid top-
line growth and gross margin expansion; therefore, we
largely maintain our 2014E and 2015E earnings. We reiterate
OP with a new PT of HKD 13.40 as we roll over our earnings.
Catalyst: Newly-launched, high-end rice bran oil and dietary
supplement. Although we have not factored these two new
products in our earnings forecast, we think they could be an
upside risk.

OUTPERFORM (unchanged)





Solid branded oil growth in 2013; maintain momentum in 2014.
Net earnings rose 32% to RMB 270mn in 2013, marginally missing
our and consensus estimates by 3% and 4%, respectively, due
mainly to lower-than-expected growth in non-branded oil. However,
branded oil sales volume grew 27%, and we expect continued
growth momentum in 2014. We expect a 30% volume growth for
branded oil this year.
Continual channel expansion drives growth. In 2013, whole
distributors rose to 972 (from 815 in 1H13) and chain retailers grew
to 146 (125 in 1H13). We believe Changshouhua will continue to
invest in these channels in order to continually expand and
upgrade its distribution channel. Last week, management signed a
strategic agreement with Sun Art to allow distribution of
Changshouhuas branded oil through 300+ Sun Art stores at more
beneficial terms than competitors.
Gross margin should improve due to product mix. We expect
gross margin to expand to 22% in 2014 (from 20.4% in 2013)
because of the product mix. We believe the company will lower its
non-branded oil capacity by transferring it to branded oil, which
enjoys greater demand and higher margin.
Valuations and earnings estimates. We largely maintain our
2014E and 2015E earnings. We reiterate OP with a new price
target of HKD 13.40 (from HKD 12.70) as we roll over our
earnings.

Source: Company, Standard Chartered Research estimates

Share price performance


Source: Company, FactSet


PRICE as of 24 Mar 2014
HKD 8.50
PRICE TARGET
HKD 13.40
Bloomberg code Reuters code
1006 HK 1006.HK
Market cap 12-month range
HKD 4,697mn (USD 605mn) HKD 4.09 - 10.18
EPS adj. est. change 2014E 1.3% 2015E 3.2%
Year-end: December 2012 2013 2014E 2015E
Sales (RMB mn) 2,704 2,930 3,781 4,887
EBITDA (RMB mn) 319 374 518 669
EBIT (RMB mn) 292 337 463 621
Pre-tax profit (RMB mn) 292 337 463 621
Net profit adj. (RMB mn) 204 270 371 498
FCF (RMB mn) 195 95 221 313
EPS adj. (RMB) 0.39 0.49 0.67 0.90
DPS (RMB) 0.08 0.10 0.13 0.18
Book value/share (RMB) 2.90 3.58 4.10 4.82
EPS growth adj. (%) 15.5 26.6 36.7 34.2
DPS growth (%) 40.0 20.8 36.6 34.2
EBITDA margin (%) 11.8 12.8 13.7 13.7
EBIT margin (%) 10.8 11.5 12.2 12.7
Net margin adj. (%) 7.6 9.2 9.8 10.2
Div. payout (%) 21.0 20.0 20.0 20.0
Net gearing (%) -32.8 -26.6 -29.6 -33.2
ROE (%) 14.2 15.5 17.5 20.2
ROCE (%) 20.3 19.3 21.9 25.2
EV/sales (x) 0.4 0.8 0.8 0.6
EV/EBITDA (x) 3.7 6.0 5.9 4.3
PBR (x) 1.2 2.2 1.7 1.4
PER adj. (x) 7.9 10.2 10.1 7.5
Dividend yield (%) 2.6 2.0 2.0 2.7
3
7
11
Mar-13 Jun-13 Sep-13 Dec-13 Mar-14
Changshouhua Food HANG SENG INDEX (rebased)
Share price (%) -1 mth -3 mth -12 mth
Ordinary shares 1 -10 105
Relative to index 3 -5 107
Relative to sector - - -
Major shareholder Sanxing Trade Co., Ltd (50.9%)
Free float 43%
Average turnover (USD) 1,714,878
Tallan Zhou
Tallan.Zhou@sc.com
+852 3983 8520
Charles Z. Yan, CFA
Charles.ZX.Yan@sc.com
+852 3983 8523







1006 HK
HKD 8.50 HKD 13.4 0

Equity Research l Changshouhua Food

25 March 2014 2
2013 results review
Changshouhua reported its 2013 results before market open on 25 March 2014. As
expected, branded oil sales volume growth remained intact at 27%. Net profit grew
32% during the year.
Net earnings rose 32%, mildly missing estimates: Chanshouhua reported a net
profit of RMB 270mn, up 32%, slightly missing our and consensus estimates by
3% and 4%, respectively. We attribute the miss to negative growth in non-branded
oil. However, we believe that reduced non-branded oil production will satisfy the
significant demand from branded oil sales.
Branded oil sales volume grew 27%; ASP decline concerns should ease in
2014: The company reported 2013 total sales of RMB 1,849mn, up 17%, led by a
27% increase in sales volume, while ASP declined 8%. As mentioned previously,
Changshouhua cannot control the ASP of its minor oil segment currently, as it is
highly correlated with the prices of soybean oil, which is the largest oil consumed
in China. That said, we believe ASP decline concerns should ease, given that
soybean oil prices are at trough levels and its likelihood of a further decline is
remote.
Gross margin beat our expectation: Changshouhua reported a gross margin of
20.4%, expanding 50bps from 19.9% in 2012, beating our estimate by 126bps and
that of consensus by 54bps:
Branded oil gross margin came in at 30.2%, up from 29.3% in 2012, due to lower
raw material prices.
Non-branded oil gross margin came in at 2.7%, down from 7.2% in 2012, due to
lower ASP.
Increased proportion of SG&A for channel expansion: Changshouhua is still at
the volume growth stage. We believe the company will continue to invest more in
order to expand its distribution channel. Last week, it signed a strategic agreement
with Sun Art (and its e-commerce platform). We believe such penetration efforts
will continue in 2014-16E.
Net cash: Changshouhua reported net cash of RMB 565mn as of end-2013.
Figure 1: Soybean average price in China (RMB/litre), 2013-March 2014


Source: Wind, Standard Chartered Research

11.0
11.2
11.4
11.6
11.8
12.0
12.2
12.4
12.6
12.8
Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14
Equity Research l Changshouhua Food

25 March 2014 3
Figure 2: Changshouhua 2013 results review
(RMB mn) 2012 2013
Diff.
(%/bps) 2013E
Diff.
(%/bps) Consensus
Diff.
(%/bps)
Revenue 2,704 2,930 8% 3,344 -12% 3,140 -6.7%
Non-branded corn oil 732 546 -25% 778 -30%

Branded corn oil 1,579 1,849 17% 2,022 -9%

Corn meal 298 411 38% 446 -8%

Other oil 96 125 30% 97 29%

Sales volume (10,000 tonnes)

Branded corn oil 11.9 15.1 27% 15.7 -3%

Non-branded corn oil 8.2 6.8 -18% 9.2 -26%

ASP (RMB/tonne)

Branded corn oil 13,301 12,220 -8% 12,902 -5%

Non-branded corn oil 8,916 8,067 -10% 8,470 -5%

Gross profit 537 597 11% 638 -7% 622 -4.1%
Gross margin 19.9% 20.4% 50bps 19.1% 126bps 19.8% 54bps
SG&A 273 338 23% 365 -8%

SG&A/sales 10.1% 11.5% 141bps 10.9% 59bps

Selling and distribution 216 279 29% 301 -7%

Administrative 56 58 5% 60 -3%

Other operating expenses 1 3 76% 4 -40%

EBIT 292 337 16% 340 -1% 332 1.6%
EBIT margin 10.8% 11.5% 72bps 10.2% 134bps 10.6% 94bps
Net income 204 270 32% 279 -3% 281 -4%
EPS 0.39 0.49 27% 0.52 -5% 0.52 -5%

Source: Company, Standard Chartered Research estimates

Equity Research l Changshouhua Food

25 March 2014 4
2014E and 2015E earnings changes
Figure 3: Changshouhua Our earnings forecast changes

Previous estimates Current estimates Difference (%/bps)
RMB mn 2014E 2015E 2014E 2015E 2014E 2015E
Turnover 4,167 5,191 3,781 4,887 -9% -6%
-Branded corn oil 2,629 3,417 2,524 3,445 -4% 1%
-Non-branded corn oil 856 942 573 602 -33% -36%
Sales volume (10,000 tonnes)

-Branded corn oil 20.1 25.7 19.7 25.6 -2% 0%
-Non-branded corn oil 10.1 11.1 6.9 7.0 -32% -37%
ASP (RMB/tonne)

-Branded corn oil 13,104 13,309 12,831 13,472 -2% 1%
-Non-branded corn oil 8,470 8,470 8,310 8,559 -2% 1%
Gross profit 819 1,052 818 1,103 0% 5%
Gross margin 20% 20% 22% 23% 199 bps 230 bps
SG&A 455 567 439 590 -4% 4%
SG&A/Sales 11% 11% 12% 12% 68 bps 114 bps
Selling and distribution 375 467 360 489 -4% 5%
Administrative 75 93 75 97 0% 4%
Other operating expenses 5 7 3 4 -38% -35%
Other income 84 104 83 108 0% 3%
EBIT 447 589 463 621 3% 5%
EBIT margin 11% 11% 12% 13% 151 bps 135 bps
Net income 366 483 371 498 1% 3%
Net income margin 9% 9% 10% 10% 103 bps 89 bps
Net earnings 366 483 371 498 1% 3%
EPS (RMB) 0.66 0.87 0.67 0.90 1% 3%
Source: Company, Standard Chartered Research estimates

A revised price target of HKD 13.40
We continue to derive our price target by using a blend of PER-based and DCF-
based valuation methodologies.
PER-based valuation of HKD 13.50: We maintain our PER target multiple of 14x,
but use a 12-month weighted average EPS (April 2013 to March 2014) of RMB
0.747 or HKD 0.93 (RMB 0.747=0.67*8/12+0.9*4/12), which is 13% higher than
RMB 0.66 used previously. This gives as a PER-based valuation of HKD 13.50.
DCF-based valuation of HKD 13.20: We roll over our DCF model and derive our
DCF-based valuation of HKD 13.20, which is slightly higher than the previous
HKD 13.10, as our 2014E and 2015E earnings remain largely unchanged.
The weighted average of the above two valuation methods gives us a price target of
HKD 13.40.

Equity Research l Changshouhua Food

25 March 2014 5

Source: Company, Standard Chartered Research estimates
Income statement (RMB mn) Cash flow statement (RMB mn)
Year-end: Dec 2011 2012 2013 2014E 2015E Year-end: Dec 2011 2012 2013 2014E 2015E
Sales 2,058 2,704 2,930 3,781 4,887 EBIT 213 292 337 463 621
Gross profit 381 537 597 818 1,103 Depreciation & amortisation 23 27 37 55 48
SG&A (215) (273) (340) (439) (590) Net interest (1) 0 (0) 0 0
Other income 46 54 81 83 108 Tax paid (35) (87) (66) (91) (122)
Other expenses 0 (26) 0 0 0 Changes in working capital (54) (67) (143) (136) (177)
EBIT 213 292 337 463 621 Others 19 43 12 10 18
Net interest (1) 0 (0) 0 0 Cash flow from operations 166 207 175 301 388
Associates 0 0 0 0 0
Other non-operational 0 0 0 0 0 Capex (187) (12) (80) (80) (75)
Exceptional items 0 0 0 0 0 Acquisitions & Investments 0 0 0 0 0
Pre-tax profit 212 292 337 463 621 Disposals 0 0 0 0 0
Taxation (35) (87) (66) (91) (122) Others (18) (64) 0 0 0
Minority interests 0 0 0 0 0 Cash flow from investing (205) (76) (80) (80) (75)
Exceptional items after tax 0 0 0 0 0
Net profit 177 204 270 371 498 Dividends (31) (30) (54) (74) (100)
Issue of shares 0 0 0 0 0
Net profit adj. 177 204 270 371 498 Change in debt 0 0 0 0 0
EBITDA 237 319 374 518 669 Other financing cash flow 0 0 0 0 0
Cash flow from financing (81) (30) (13) (116) (100)
EPS (RMB) 0.34 0.39 0.49 0.67 0.90
EPS adj. (RMB) 0.34 0.39 0.49 0.67 0.90 Change in cash (120) 101 82 105 213
DPS (RMB) 0.06 0.08 0.10 0.13 0.18 Exchange rate effect 1 0 0 0 0
Avg fully diluted shares (mn) 526 526 549 553 553 Free cash flow (21) 195 95 221 313
Balance sheet (RMB mn) Financial ratios and other
Year-end: Dec 2011 2012 2013 2014E 2015E Year-end: Dec 2011 2012 2013 2014E 2015E
Cash 400 501 565 671 884 Operating ratios
Short-term investments 0 0 0 0 0 Gross margin (%) 18.5 19.9 20.4 21.6 22.6
Accounts receivable 185 150 297 384 496 EBITDA margin (%) 11.5 11.8 12.8 13.7 13.7
Inventory 171 289 310 394 503 EBIT margin (%) 10.4 10.8 11.5 12.2 12.7
Other current assets 98 83 145 174 213 Net margin adj. (%) 8.6 7.6 9.2 9.8 10.2
Total current assets 855 1,023 1,318 1,623 2,096 Effective tax rate (%) 16.7 30.0 19.7 19.7 19.7
Sales growth (%) 33.8 31.4 8.4 29.0 29.3
PP&E 605 547 743 757 766 Net income growth (%) 23.3 15.5 32.3 37.4 34.2
Intangible assets 82 80 127 127 127 EPS growth (%) 23.3 15.5 26.6 36.7 34.2
Associates and JVs 0 0 0 0 0 EPS growth adj. (%) 23.3 15.5 26.6 36.7 34.2
Other long-term assets 3 74 64 64 64 DPS growth (%) -4.7 40.0 20.8 36.6 34.2
Total long-term assets 690 702 933 948 956
Efficiency ratios
Total assets 1,546 1,724 2,251 2,570 3,052 ROE (%) 13.9 14.2 15.5 17.5 20.2
ROCE (%) 16.8 20.3 19.3 21.9 25.2
Short-term debt 0 0 41 0 0 Asset turnover (x) 1.4 1.7 1.5 1.6 1.7
Accounts payable 38 32 32 41 53 Op. cash/EBIT (x) 0.8 0.7 0.5 0.7 0.6
Other current liabilities 157 165 210 265 336 Depreciation/capex (x) 0.1 2.2 0.5 0.7 0.6
Total current liabilities 195 196 283 305 389 Inventory days 37.4 38.7 46.8 43.4 43.2
Accounts receivable days 24.5 22.6 27.9 32.9 32.9
Long-term debt 0 0 0 0 0 Accounts payable days 6.0 5.9 4.9 4.5 4.5
Convertible bonds 0 0 0 0 0
Deferred tax 0 0 0 0 0 Leverage ratios
Other long-term liabilities 0 0 0 0 0 Net gearing (%) -29.6 -32.8 -26.6 -29.6 -33.2
Total long-term liabilities 0 0 0 0 0 Debt/capital (%) 0.0 0.0 2.1 0.0 0.0
Interest cover (x) 243.4 nm 690.9 nm nm
Total liabilities 195 196 283 305 389 Debt/EBITDA (x) 0.1 0.0 0.1 0.0 0.0
Current ratio (x) 4.4 5.2 4.7 5.3 5.4
Shareholders funds 1,350 1,528 1,968 2,265 2,664
Minority interests 0 0 0 0 0 Valuation
EV/sales (x) 0.8 0.4 0.8 0.8 0.6
Total equity 1,350 1,528 1,968 2,265 2,664 EV/EBITDA (x) 6.6 3.7 6.0 5.9 4.3
EV/EBIT (x) 7.3 4.0 6.7 6.7 4.6
Total liabilities and equity 1,546 1,724 2,251 2,570 3,052 PER (x) 11.2 7.9 10.2 10.1 7.5
PER adj. (x) 11.2 7.9 10.2 10.1 7.5
Net debt (cash) (400) (501) (524) (671) (884) PBR (x) 1.0 1.2 2.2 1.7 1.4
Year-end shares (mn) 526 526 549 553 553 Dividend yield (%) 1.5 2.6 2.0 2.0 2.7
Equity Research l Changshouhua Food

25 March 2014 6
Disclosures appendix
The information and opinions in this report were prepared by Standard Chartered Bank (Hong Kong) Limited, Standard Chartered Bank Singapore Branch, Standard
Chartered Securities (India) Limited, Standard Chartered Securities Korea Limited and/or one or more of its affiliates (together with its group of companies, SCB)
and the research analyst(s) named in this report. THIS RESEARCH HAS NOT BEEN PRODUCED IN THE UNITED STATES.

Analyst Certification Disclosure: The research analyst or analysts responsible for the content of this research report certify that: (1) the views expressed and
attributed to the research analyst or analysts in the research report accurately reflect their personal opinion(s) about the subject securities and issuers and/or other
subject matter as appropriate; and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views
contained in this research report. On a general basis, the efficacy of recommendations is a factor in the performance appraisals of analysts.
Where disclosure date appears below, this means the day prior to the report date. All share prices quoted are the closing price for the business day prior to the
date of the report, unless otherwise stated.




2.99
4.93
6.87
8.82
10.76
12.70
Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14
HKD
Recommendation and price target history for Changshouhua Food
1

Date Recommendation Price target Date Recommendation Price target Date Recommendation Price target
1 15 Nov 13 OUTPERFORM 12.70

Source: FactSet prices, SCB recommendations and price targets

Recommendation Distribution and Investment Banking Relationships


% of covered companies
currently assigned this rating
% of companies assigned this rating with which SCB has provided
investment banking services over the past 12 months
OUTPERFORM 53.2% 14.5%
IN-LINE 35.2% 12.8%
UNDERPERFORM 11.6% 8.3%
As of 31 December 2013

Research Recommendation

Terminology Definitions
OUTPERFORM (OP) The total return on the security is expected to outperform the relevant market index by 5% or more over the next 12 months
IN-LINE (IL)
The total return on the security is not expected to outperform or underperform the relevant market index by 5% or more over the next
12 months
UNDERPERFORM (UP) The total return on the security is expected to underperform the relevant market index by 5% or more over the next 12 months

SCB uses an investment horizon of 12 months for its price targets.

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scer@sc.com.

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Equity Research l Changshouhua Food

25 March 2014 7
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