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Executive summary
Investment thesis: We initiate coverage on Wilmar International with a BUY rating. We have arrived at our valuation based on a DCF analysis, public comparable analysis, the current and future outlook for the Group, and the outlook for the edible oil sector, with emphasis on the oil palm and soya bean sectors. Wilmar is an integrated agribusiness player involved in the processing of oil palm and soya bean. The Groups activities comprise mainly of the cultivation, milling, refining of oil palm produce; crushing and refining of soya bean and other oilseeds; and the merchandising and packaging of the refined products that include edible oils, oilseed meal, Specialty fats and Oleochemicals. Wilmar is also involved in associated activities such as fertilizer and biofuel manufacturing, and the milling of rice and flour. It also maintains and operates a fleet of liquid bulk vessels to meet its transportation needs. Wilmar is headquartered in Singapore, and its core business operations are located in Indonesia, Malaysia, and China. Possible triggers for stock price movement: IPO listing of China operations:
Sector Edible Fat/Oil Ticker Market Cap. Enterprise Value Per Share Data Current Price 52 Week High 52 Week Low % of 52 Wk. High Number of Shares Multiples PE LTM 2009E 2010E EV/EBITDA LTM 2009E 2010E WIL SGD 40,357.5 mn SGD 46,528.8 mn
Wilmar had postponed the listing of its China business citing a weak IPO environment in China/Hong Kong. Wilmar has until January 2010 to list its China arm, failing which it would have to re-initiate the listing procedure. The Group has confirmed that the listing process is still in progress, though a definite date has not been provided. Wilmar China was expected to be the largest Hong Kong IPO year-to-date, at around USD 3.0-4.0 billion. Any progress in this regard is expected to have a positive impact on the stock. Spike in crude oil prices:
The recent upswing in crude oil prices is significant in the context of the palm oil industry. Crude Palm Oil (CPO) prices have historically moved in tandem with crude oil prices. This relation has become more distinct given that refined vegetable oils are a major source of biofuels. An upward movement of crude oil prices is expected to be followed by a similar trend in the price of CPO, encouraging a more positive outlook on the industry as a whole. Occurrence of El Nio:
Nov-08
Jan-09
WIL SP
Mar-09
May-09
Jul-09
Sep-09
Nov-09
Source: Bloomberg
Alerts have been issued by meteorological institutes in Malaysia, and Australia highlighting the possible onset of El Nio conditions late in 2009. The phenomenon leads to unusually warm temperatures and exceptionally dry weather in SouthEast Asia and Australia. Such weather conditions are known to have an adverse effect on oil palm plantations in the region, affecting crop yields and productivity. Although there is still uncertainty regarding the occurrence and severity of the phenomenon, negative news regarding El Nio may not bode well for companies in the Plantation sector, and may affect the outlook on the industry at large.
Nov-08
Jan-09
Mar-09
May-09
WIL SP
Jul-09
Sep-09
Nov-09
Source: Bloomberg
TresVista Financial Services: All prices are those current at the end of the previous trading session unless otherwise indicated. Prices are sourced from local exchanges via Bloomberg and other vendors. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES ARE LOCATED IN DISCLOSURE APPENDIX
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Table of contents
1. 2. 3.
Investment thesis _________________________________________________________ 3 Price performance and correlation __________________________________________ 5 Company overview _______________________________________________________ 6
Oil palm industry _______________________________________________ 22 o Crude palm oil Current scenario ____________________________ 24 o o o
Supply and demand for palm oil _____________________________ 25 The relationship between CPO and crude oil ___________________ 28 El Nio and its impact on CPO production ____________________ 29
Soya bean industry ______________________________________________ 31 o Soya bean crushing Current scenario ________________________ 33 o
7. 8. 9. Short term outlook _________________________________________ 35
10. Valuation analysis _______________________________________________________ 43 11. Valuation EBITDA exit _________________________________________________ 44 12. Valuation Perpetuity growth_____________________________________________ 45 13. Key financials and ratios__________________________________________________ 46 14. Public comparable trading analysis ________________________________________ 47
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Investment thesis
Relative weakness post delay in China IPO - a good opportunity to buy The Wilmar China IPO was initially expected in mid-October, but has been delayed. According to the Group, weak capital markets have lead to an unstable IPO market at the Hong Kong stock exchange. The delay in listing seems justified as the recent IPO performance at the Hong Kong stock exchange has not been encouraging, with most recent IPOs significantly underperforming since listing. The recent relative weakness in Wilmars share price is judged to be the result of investor perception that the response to Wilmar Chinas listing plans was not encouraging, and caused the IPO to be delayed as a result. Core performance backed by supportive market conditions However this presents a good opportunity to invest in the stock, as the Groups core performance has been solid over the past few quarters, and is backed by strong fundamentals and favorable industry dynamics, thereby limiting the downside. CPO prices are expected to improve and gain further ground from current levels, owing to a combination of factors including robust demand from India and China, rising prices for crude oil - which shares a close correlation with CPO, falling CPO inventories and stockusage ratios in recent quarters, and the looming possibility of a bout of the El Nio phenomenon, which could affect output and exert further upward pressure on prices. On the other hand, announcements of a bumper soya bean harvest in USA and improving growing conditions in South America have lead to a correction in Soya bean prices. This has lent a helping hand to crushing margins in China, where supply is low due to a current shortage in Soya bean supply, driving up prices for products like Soya meal. Crushers of soya bean and oilseeds like Wilmar are price-makers as they artificially control demand, and hence prices, by controlling the amount crushed by them. Hence the combination of rising demand and falling raw material prices have created a situation that players in oilseeds crushing like Wilmar can capitalize on. China and India are major growth drivers Demand from China and India are integral to Wilmars growth. Both countries are major customers, and are among the most populous and fastest growing economies in the world. Demand for refined vegetable oil in China and India has accelerated over the past decade. Major reasons include the rise in per capita income in these nations which have seen people shift from traditional, locally sourced vegetable oils and fats to more refined, branded versions that available in the consumer market. The easing of protectionary tariffs in these nations has lead to a surge in imports of vegetable oils and derivatives. Urbanization has been a major trend in China and India over the past two decades, and has altered the demographic profile of these nations; with more and more people moving from a more traditional, agrarian way of life where food requirements were locally sourced, to an urban culture that is dependent on the large scale production of packaged foods, including edible oils, to meet nutritional needs. The improvement in the quality of life in emerging nations has also lead to a change in dietary habits, where consumers prefer processed foods as well more variety in selection, leading to a rise in the large scale production of processed foods, where vegetable oil and specialty fats find a wide range of applications. Vertically integrated business model gives Wilmar the advantage Wilmars vertically integrated business model sets it apart from most of its peers, who are mainly pure-play plantations or midstream comparables. Wilmar benefits from the scale of its business operations, which enables it to gather superior market intelligence from a large network on the ground. This gives the Group the edge in effectively timing its raw material purchases and taking up trading positions to extract maximum gains from prevailing market conditions. Operating its own oil palm plantations allows Wilmar to allocate output efficiently. During times when CPO prices are high the Group has the advantage of selling its mill produce Crude Palm Oil, in the open market, at the cost of its downstream operations. At the same time, Wilmar is a net buyer of CPO as a result of its vast downstream operations, providing its plantations with an immediate buyer for its goods. The Group also enjoys significant logistical advantages arising from the proximity of its refineries to its plantations and important shipping routes. The cost savings thus derived translates significant margin gains given the scale of its operations. Wilmar also operates and maintains a number of key, small scale operations that adds to the benefits derived from its agricultural operations. One such operation is its fledgling fertilizer business that produces NPK fertilizers mainly for its Fresh Fruit Bunch (FFB), Palm Kernel, and CPO subscribers. Accordingly, Wilmar benefits from having a captive market with a significantly lower credit risk. Wilmar also manufactures biodiesel as part of its palm oil refining operations. In this case, the startup cost for setting up biodiesel operations were partially offset by integrating it with its refinery operations. In addition, the Group also maintains a fleet of liquid bulk vessels to meet part of its transportation requirements. Wilmar also has a dominant presence in the Merchandising and Packaging sector for its refined products, in high-growth markets like India and China, as well as Indonesia and Vietnam, among others, where its brands enjoy a majority share of the market. Rise in per capita incomes and purchasing power, as well as the growing level of urbanization in these regions make it very attractive
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as a market for packaged edible oils. Its competitive advantage in these regions is facilitated by joint ventures and tie-ups with local players, enabling it to adjust and modify its product offering to suit local preferences. Ultimately, the scale, volume, and reach of Wilmars operations enable it to extract margins from almost every step in the value chain. Superior market intelligence affords timely purchase of raw materials, transport and logistical operations become more streamlined, inventory risk is minimized, products are diversified to suit local tastes, and the Groups output volumes attract big players like Unilever who require uninterrupted supply for its raw material requirements.
SWOT Analysis
Strengths
Dominant position in palm oil supply-chain market Advantage over other players through economies of scale Relatively insulated from commodity price fluctuations due to volume growth Superior market intelligence Large area of maturing plantations Experienced management with strong track record Dominant market presence for downstream products in China, India, Indonesia, and Vietnam Profitable trading desk and highly effective hedging activities Complementary business activities including shipping and fertilizers Significant cost savings through proximity of plantations to refineries and favorable shipping routes
Weaknesses
Management may be divided among shareholders Lack of transparency in operational data Partial RSPO certification denies the premium commanded by RSPO certified palm oil Supernormal profits dependent on success of trading desk
Opportunities
Conversion of large unplanted land bank for productive use Further expansion into India and China Expansion in other regions including Europe and West Africa Capitalize on China IPO Well placed to take advantage of the increased demand for biodiesel Absorption of surplus CPO supply through biodiesel boom Low gearing ratio allows room for M&A expansion
Threats
Volatility in CPO prices Changes in government regulations and tariff policies Onset of crop disease could that damage plantations Possible cap on consumer pack prices, especially in China Logistical breakdown or civil strife in Indonesia Integration risk of acquired businesses
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90,000,000.0
8.0
80,000,000.0
7.0 Record Q1-08 results following purchase of Kuok Group Strong Q1-09 results. Announces 6.0 plans to list in China Crude oil rebounds. Record palm oil inventories begin to clear after exports pick up 4.0
70,000,000.0
60,000,000.0
5.0
50,000,000.0
40,000,000.0 China announces food price cuts 30,000,000.0 Crude oil slumps. Major concerns 20,000,000.0 regarding credit crisis. 2.0 3.0
10,000,000.0
1.0
Nov-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Share Price (SGD) Mar-09 May-09 Jul-09 Sep-09 Nov-09
Wilmars stock price performance has been in line with the fortunes of the palm oil industry. The stock has witnessed a period of consistent growth after recovering from the lows brought about by the recession late in 2008. Positive news regarding the proposed listing of its China business will be a price trigger in the near to short term.
Relative share price performance & correlation with crude oil & CPO
Public comparables: Share price performance - November 2008-09
Correlation - r
Hap Seng Plantations Astra Agro Indofood Agri Resources PP London Sumatra Indonesia Golden Agri-Resources IOI Corporation Kuala Lumpur Kepong (KLK)
Crude Oil
0.786 0.681 0.753 0.678 0.778 0.745 0.692 0.571 0.510 0.688
CPO
0.910 0.869 0.886 0.856 0.938 0.914 0.872 0.743 0.660 0.850
300.0 250.0
200.0
81.9%
150.0
100.0 50.0
Nov-08
Hap Seng Plantations PP London Sumatra Indonesia Kuala Lumpur Kepong (KLK)
Source: Bloomberg
Average
Source: Bloomberg, Broker Research
Wilmar has consistently been trading in the upper bracket and has returned ~ 133.5% over the last year. Wilmars correlation with Crude oil and CPO prices is among the lowest in the industry. Owing to its integrated business model and diverse revenue streams, the business is partially insulated from external price fluctuations.
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Company overview
Background
Wilmar International Ltd. was founded in 1991 as a palm oil trading company. Headquartered in Singapore, it is one of Asias leading agribusiness groups and the 2nd largest listed company by market capitalization on the Singapore Exchange (as on November 19, 2009). Its business activities include 1. 2. 3. 4. 5. 6. Oil palm cultivation Edible oils refining Oilseeds crushing Consumer pack edible oils processing and merchandising Specialty fats, oleochemicals and biodiesel manufacturing Grains processing and merchandising
Wilmar is one of the largest global processors and merchandisers of palm and lauric oils, and the among the largest palm biodiesel manufacturers in the world. The Group has operations in more than 20 countries across four continents, with the primary focus on Indonesia, Malaysia, China, India and Europe. It employs around 70,000 people, and has over 250 processing plants and an extensive distribution network; with products delivered to more than 50 countries globally. Wilmars oil palm cultivation and processing activities are centered in Indonesia and Malaysia, while its oilseed crushing and consumer packaging activities are located mainly in China. The Group also has business operations in other parts of Asia, Europe and Africa, where it has formed a number of joint ventures with local players.
Global operations
- Areas of operation
- Headquarters - Singapore
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Origination
Processing
Specialty Fats
Oleochemicals
Oilseeds Meal
Customers
Recent acquisitions
Three-A Resources Bhd - 16.7% stake
Wilmar acquired a 16.67% stake in Three-A Resources Bhd, a Malaysian company manufacturer of F&B ingredients. The transaction was completed on November 13, 2009, through a private placement of shares for a total consideration of RMB 46.2 million. Three-As main products include caramel colour and powder, soya protein sauce, glucose and maltose powder, vinegar and Maltodextrin.
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Wilmar acquired a port facility for a sugar terminal in Brisbane, Australia, on September 21, 2009. The acquisition was done through Wilmar Gavilon Pty Ltd., a 50:50 joint venture between Wilmar International and The Gavilon Group, for an undisclosed amount. The terminal features a private berth, 100,000.0 MT dry storage shed, covered truck receiving station and ship loader. Wilmar stated that the facility will be expanded and upgraded to handle grain and other bulk and liquid commodities, and is expected to handle grain exports early 2010.
Wilmar acquired a 25.0% stake in Water Enterprises Ltd., a bottler and distributor of mineral water. The transaction was completed on May 1, 2009, through a transfer of shares from Tibet Water Resources Ltd., for a total consideration of RMB 175.0 million. The Company, through its wholly owned subsidiary in China, bottles and distributes mineral water sourced from Tibet under the 5100 brand name. Wilmar stated that it will undertake to utilize its sales, marketing, and logistics network to further grow the business, as part of a broader consumer strategy in China.
Wilmar acquired a 35.0% stake in Taizhou Yongan Port Co. Ltd., through its wholly owned subsidiary, Wilmar China New Investments Pte. Ltd. The transaction was completed on March 26, 2009, for an undisclosed amount. Taizhou Yongans principal activities are port cargo loading and unloading. Wilmar later increased this stake to 39.77%.
Future strategy
Wilmar is optimistic about the improving global economic environment, and the resilient demand for food and agricultural commodities. The Group aims to pursue positive growth prospects in emerging markets, which it feels are driven by the growing demand for high quality processed agricultural and consumer products due to rising affluence and increasing urbanization in countries like China. Wilmar intends to increase its investment in core businesses, with an emphasis on growth in India, China, and Indonesia, and also diversify into new markets. Wilmars Chairman, Mr. Kuok Khoon Hong said that the Group is looking to invest at least USD 1.0 billion in China, Indonesia, and Africa, to expand plantations and plants. Wilmar stated that it will also pursue inorganic expansion, and continue to look out for attractive investment opportunities. Wilmars recent acquisition of a minority stake Three-A resources is indicative of expansion in the Groups downstream business. China, which accounted for ~ 49.0% of Wilmars sales in 2008, is an important part of the Groups growth strategy. Wilmars diversification in new businesses is highlighted by its minority stake in Water Enterprises, which it acquired in May 2009. The Group has stated that it intends to further grow the business as part of a broader business strategy for China. Furthermore, Wilmars intention to list its business in China may be seen as a response to growing concerns in China, of the rising dominance international players in Chinas soya bean crushing industry. In addition to expanding its shareholder base in China, the listing would help Wilmar China in being viewed as a more of a domestic player rather than an international one.
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Revenue growth
Wilmar International: Revenues - 2005-2009 (USD millions)
36,000.0
30,000.0
24,000.0
18,000.0
19,301.2
12,000.0
7,504.9
6,000.0
4,651.6
2005
M&P - Palm & Laurics Plantation & Palm Oil Mills
Source: Company filings Note: M&P - Merchandising & Processing
2006
2007
2008
Consumer Products
Business segments
Revenue breakdown by product - 2008 ( % of total) Revenue breakdown by geography - 2008 ( % of total)
Others 12.4% Consumer Products 16.3% Plantation & Palm Oil Mills 0.2% Others: Fertilizers & Shipping 2.7% M&P - Palm & Laurics 55.3%
Source: Company filings Note: M&P - Merchandising & Processing Source: Company filings
Europe 8.7%
India 5.7%
China 49.2%
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Business operations
a) Plantations and palm oil mills
Wilmar owns and operates more than 500,000 hectares of oil palm plantations in Malaysia and Indonesia. As of December 31, 2008, the Groups total planted area amounted to 223,528 hectares, comprised of 160,805 hectares in Indonesia, and 62,453 hectares in Malaysia. Wilmars plantations are located in Sumatra, West and Central Kalimantan in Indonesia, and Sabah and Sarawak in Malaysia. In addition to processing locally harvested Fresh Fruit Bunches (FFBs), Wilmar also sources FFB from third-party suppliers, including small landholders under the Plasma Programme developed by the Group. The Plasma Programme is a government initiative in Indonesia whereby plantation companies help develop plantation plots held by small landowners. The Company managed 33,867 hectares under the Plasma Programme during the year ended December 31, 2008. Additionally, the Group managed a planted area of more than 4,000 hectares in Uganda, approximately 36,000 hectares in West Africa, and about 120,000 hectares under a small shareholders scheme in West Africa during the year.
Oil palms Productivity and maturity The main factor that contributes to the productivity of a plantation is its maturity, which determines the yield. The FFB yield of a typical oil palm is relatively low during the first three years after plantation. During the years 7-18, yield gradually increases every year, until the oil palm reaches peak production. Beyond that, the yield of the oil palm wanes. The commercial lifespan of an oil palm is around 25 years, after which it is no longer deemed to be commercially viable for production. Fully mature oil palms produce 18 to 30 metric tonnes (MT) of FFB per hectare. Yield depends on a variety of factors, including age, seed quality, soil and climatic conditions, quality of plantation management and the timely harvesting and processing of FFBs. The harvested FFB is then processed at oil mills to produce Crude Palm Oil (CPO) and Palm Kernel (PK). CPO and PK are the main raw materials used in the refining process of palm oil. During the year ended, December 31, 2008, the Group processed 7.2million MT of FFB of which 41.2% was sourced internally.
2008
2009
< 3 years
2010
4-6 years
2011
7-14 years
2012
15-18 years
2013
> 18 years
2014
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Milling
Palm Kernel
Crushing
Refining Fractionating
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Wilmars Bulk Edible Oil products include RBD palm oil RBD palm olein RBD palm stearin RBD palm kernel oil RBD coconut oil
RBD palm oil can be further processed into RBD palm olein and RBD palm stearin. RBD palm olein, which has a lower proportion of saturated oil than RBD palm stearin, is mainly used as cooking oil and in industrial frying of processed foods. RBD palm stearin is mainly used in the manufacturing of specialty fats and oleochemicals. Palm kernel oil and coconut oil, also known as lauric oils, have a high proportion of lauric acid and are primarily used for the production of specialty fats and oleochemicals. Consumer pack edible oils
The Group produces a range of consumer pack edible oils. The oils used are either pure vegetable oils or a blend of various oils including groundnut oil and soya bean oil. These edible oils are merchandized and packaged as a wide variety of cooking oils that are sold through the Groups own brands. Specialty fats
Wilmars specialty fats products include cocoa butter equivalents (CBE), cocoa butter replacers (CBR), cocoa butter substitutes (CBS), specially formulated filling fats, creaming fats, ice-cream fats, milk fat replacers, shortenings, margarines, frying fats and many tailor-made fats to suit customer requirements. These products are widely used in chocolate coating fats, chocolates, sugar confectionery, bread, pastry, cakes, cream filling (for candy, wafers, and biscuits) and in coffee whiteners. Oleochemicals
The Groups oleochemical products include fatty acids, fatty alcohols, soap noodles, glycerine and other derivatives. They are used in a variety of applications including the manufacturing of detergents, shampoos, soaps, cosmetics, pharmaceutical products, food additives, plastics, lubricants, surface coatings, and polymers. Biodiesel
Wilmar produces palm oil methyl ester and palm olein methyl ester. Its biodiesel meets European (EN14214) and US (ASTM D6751) standards. It contains virtually no sulphur, and burns cleaner than traditional petroleum-based fuel.
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c)
Wilmar is a leading oilseed crusher in China, where it processes oilseeds like soybean, rapeseed, groundnut, cottonseed, sunflower seed and sesame seed into protein meal and edible oils. Protein meal is used primarily by feed millers to produce animal feed for hog, poultry, and aquaculture industries. The edible oils produced are sold to the Groups consumer products division, as well as to third parties, including distributors, wholesalers, feed millers, industrial users, and retailers in China. The Group also exports meal to Japan, Korea, and Vietnam. Wilmar also engages in the milling of wheat into wheat flour and wheat bran, as well as the milling of paddy into rice, rice bran and rice bran oil.
Soya Beans
+ Hexane
Extraction Wet Meal Desolventizing, toasting, drying, cooling Defatted flakes Grinding
Miscella
Carbohydrate removal
Recovered Hexane
Degumming
Soy Lecithin
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Soya bean meal is one of the most widely used protein ingredients in animal feed. Soya bean meal is a concentrated source of protein and energy, and is lower in fiber than most other oilseed meals available to feed manufacturers. Soya bean oil Soya bean oil is used in many edible products such as salad and cooking oils, shortenings and margarines, and for industrial uses such as pesticides carriers, adhesives, waterproof cement, soaps, paints, plastics, biofuel and lubricants. The Group markets soybased consumer pack edible oils under its own brands. Soy Lecithin
Soy lecithin is a by-product of crude soya bean oil refining. Lecithin is widely used in animal and fish feeds, as well as in food and non-food applications. Lecithins food related applications include margarine, baking products, confectionery, ice-cream and whipped toppings, instant food, cocoa powder, coffee whitener, powdered soups and milk replacers. Its non-food applications include cosmetics, soaps, pharmaceuticals, paints and coatings, inks, polymers, pesticides and textiles. Soy proteins
Wilmar also produces soy proteins such as Arcon SJ and SPC. Arcon SJ is used in meat processing while SPC is used as a high source of protein in the feed industry.
d) Consumer products
Wilmar, along with its joint ventures, produces consumer pack edible oils and markets them under its own brands in China, India, Indonesia, Vietnam, and Bangladesh. The combined operations in these countries makes Wilmar the worlds largest producer of consumer pack edible oils. In addition to edible oils, the Groups markets many flour brands, including Double Ring, Purple Orchid, Neptune, Yellow Dynasty, Twin Crane, Twin Spoon and Blue Key. 1. China:
Wilmar produces and markets different types of edible oils under various brands in China, targeted at different market segments. These segments are drawn by geographical regions and consumer preferences. The Group has an established sales and distribution network spanning traditional retail outlets, hypermarkets, supermarkets and convenience stores nationwide.
S.No. 1. 2. 3. 4. 5. 6. 7. 8. Brand Arawana Koufu Orchid Gold Ingots Golden Carp Huaqi Baihehua Xiangmanyuan Products Range of edible oils including blended oils, soya bean, rapeseed, corn, sunflowerseed, sesame, groundnut and camellia Range of edible oils including blended oils, soya bean, rapeseed, corn, sunflowerseed, sesame, groundnut and camellia Groundnut oil Soya bean oil Rapeseed oil Assortment of edible oils Assortment of edible oils Assortment of edible oils
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2.
Indonesia:
Wilmar markets its products in Indonesia under the Sania and Fortune brand names
S.No. 1. 2.
Products
3.
India:
Wilmars products under the Fortune brand of cooking oil are distributed by Adani Wilmar Limited (AWL) a joint venture company between the Adani Exports Group of India and Wilmar. Other brands distributed by AWL are Jubilee and Raag. Wilmar also has two other brands in India - Aadhar and Alpha which are distributed by Acalmar, a joint venture company with the Acalpo Group. Both brands are distributed mainly in the eastern, coastal region of India, in states like Andhra Pradesh, Tamil Nadu and Orissa.
S.No. 1. 2. 3. 4. 5. Brand Fortune Jubilee Raag Alpha Aadhar Products Assortment of edible oils (including soya, sunflower seed, cottonseed, mustard seed, groundnut, palm, and coconut oil) Shortening Soya bean oil and vanaspati Palm oil and vanaspati Soya bean and sunflower oil
4.
Vietnam:
Wilmar offers a range of edible oil and related products, designed to target different market segments, in Vietnam.
S.No. 1. 2. 3. 4. Brand Neptune Simply Meizan Cai Lan Products Palm olein blended with soya bean oil Soya bean oil, rapeseed oil, sunflower oil, and rice bran oil Palm olein blended with soya bean oil, and soya bean oil Palm olein blended with soya bean oil
e) Fertilizers
Wilmars fertilizer business is designed to leverage the Groups network of raw material suppliers. Its primary customers are the FFB, CPO and palm kernel suppliers to the Group. This enables Wilmar to benefit from the captive market with lower credit risk. The fertilizer manufacturing and distribution business is expected to grow with the expansion of oil palm acreage in Indonesia. Wilmar produces NPK compound fertilizers, which consists of three primary nutrients Nitrogen (N), Phosphorous (P), and Potassium (K). The Group is also engaged in the trading of straight fertilizers such as potash, rock phosphate, urea, ammonium sulphate, and kieserite.
f)
Shipping
Wilmar owns and operates a fleet of liquid bulk vessels that caters primarily to in-house needs. The fleet meets around 30.0% of the Groups liquid bulk shipping needs. In October, 2008, Wilmar acquired a 60.0% stake in the Raffles Shipping Corporation, a Singapore based ship chartering agent that managed Wilmars vessels prior to the acquisition. The acquisition is expected to enable Wilmar manage its shipping operations more efficiently.
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No. of Plants
Capacity (MT/annum)
33 38 23 12 32 5 2 4
NA NA NA NA NA NA NA
Note: as of June 30, 2007. Includes plants & facilities that were planned/under construction
Customer profile
Wilmar International - Major Customers
Customer Alfred C. Toepfer International Arnott Indonesia Beijing Heyirong Cereals & Oils Beijing Orient-Huaken Cereal & Oil Bunge Cargill China Grains & Oils Group China National Vegetable Oil Corp. Cognis Deutschland Hindustan Lever Nestle Nirma Procter & Gamble Savola Unilever VVF
Source: Broker Research Note: As of September 2008
Country Germany Indonesia China China USA USA China China Germany India Switzerland India USA Saudi Arabia Netherlands/UK India
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Mr. Kuok, 59, is the Co-founder, Chairman and Chief Executive Officer of the Group. He is in charge of overall management of the Group with a particular focus on new business development. He has held several key executive positions in various companies, including General Manager of Federal Flour Mills Bhd from 1986 to 1991, and Managing Director of Kuok Oils & Grains Pte Ltd from 1989 to 1991. Mr. Kuok graduated from the then University of Singapore with a Bachelor of Business Administration degree. b) Mr. Martua Sitorus Executive Director and Chief Operating Officer
Mr. Sitorus, 49, is the Co-founder, Executive Director and Joint Chief Operating Officer of the Group. He is in charge of the management and development of plantations, infrastructure, factories and facilities in Indonesia and India. He is also in charge of technical operations and Group operations in Malaysia and Europe. He holds a degree in economics from HKBP Nomensen University in Medan, Indonesia. c) Mr. Chua Phuay Hee Executive Director Finance and Corporate Services
Mr. Chua, 55, is in charge of Finance and Corporate Services. He joined the Group in 2002. His past positions include Chief Financial Officer and Chief Risk Officer of Keppel TatLee Bank Ltd, Singapore. Prior to that, he spent 9 years with the Monetary Authority of Singapore in various capacities relating to insurance regulation, human resource management and securities industry regulation. He is a Director at Industrial Bank Co., Ltd., a company listed on the Shanghai Stock Exchange. Mr. Chua received his Masters of Science (Actuarial Science) degree from Northeastern University, Boston, USA, and a Bachelor of Science (First Class Honours) degree in Mathematics from the then Nanyang University, Singapore. d) Mr. Teo Kim Yong Executive Director (Commercial)
Mr. Teo, 55, is in charge of commercial activities and the Groups merchandising of palm and lauric oils. Mr. Teo joined the Group in 1992 and has extensive experience in the merchandising of edible products. His past positions include Marketing Manager of Sime Darby Edible Products and International Marketing Manager of Hwa Hong Oil Industries. He also served as a director of Gardner Smith, Singapore, Marketing Director of Keck Seng Pte Ltd and Managing Director of Kimlimco Pte Ltd. Mr. Teo graduated from the then University of Singapore with a Bachelor of Business Administration degree.
Key management
a) b) c) d) e) Mr. Kuok Khoon Hong Chairman and Chief Executive Officer Mr. Martua Sitorus Executive Director and Chief Operating Officer Mr. Chua Phuay Hee Executive Director Finance and Corporate Services Mr. Teo Kim Yong Executive Director (Commercial) Mr. Lee Hock Kuan Executive Director (Head of Southern Region, Consumer Pack, Specialty Fats & Oleochemicals for the China division)
Mr. Lee, 55, is Vice Chairman of China Division and Group Head of Consumer Pack & Specialty Fats. He has been a Director of Kuok Oils & Grains Pte Ltd since 1997. Mr Lee was responsible for starting the Kuok Groups first vegetable oil refinery in China in 1988. He has extensive experience in the overall management and strategic operations in the edible oils, oilseeds and grains businesses, especially in China where he has been posted for almost 20 years. Mr Lee holds a Masters Degree in International Business Management. f) Mr. Goh Ing Sing Head of Plantations Division
Mr. Goh was appointed as the Deputy Head of Plantations Division in July 2007 and has served as the Head of Indonesian Plantations since 1992. He has held various managerial positions with plantation companies from 1976 to 1992. He received his Executive Masters of Business Administration and Bachelor of Business Administration degrees from Preston University, USA and a Bachelor of Science (Honours) degree from the University of New South Wales.
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g)
Mr. Saksti joined the Groups Indonesian operations in 1994 as a Branch Manager, responsible for the palm oil business. In 1996, he was appointed Finance and Accounts Director. He is currently in charge of the Groups fertilizer business, several manufacturing plants and the marketing of Wilmars consumer pack cooking oil in Indonesia. h) Mr. Yee Chek Toong Head of Operations, Malaysia
Mr. Yee was appointed Head of Operations, Malaysia in July 2007, following the completion of the Groups merger and restructuring exercise. He joined PGEO Edible Oils Sdn Bhd in 1980 and is presently the Chairman and Managing Director of PGEO Group Sdn Bhd. He holds a Bachelor of Science (Honors) degree majoring in Chemistry from the University of Malaya. i) Mr. Francis Heng Hang Song Chief Financial Officer
Mr. Francis Heng joined the Group as the Chief Financial Officer in September 2008. He is in charge of Finance, Corporate Secretarial, Legal, Risk Management and Investor Relations. He has previously worked for SingTel, ST Engineering, Jardine Matheson & Tetra Pak group. Mr. Heng started his career with United Overseas Bank and subsequently joined the Monetary Authority of Singapore in foreign reserve management, and then worked for JP Morgan. He has lived and worked in New York, London, Switzerland & Hong Kong. Mr. Heng graduated from the National University of Singapore with a Business Administration degree.
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Shareholding profile
Top 10 shareholders
Shareholder/Institution Wilmar Holdings Pte. Ltd. Kuok Brothers Sdn. Bhd. Archer-Daniels Midland Co Kerry Group Limited Kuok (Singapore) Limited Van Eck Associates Corporation William Blair & Company, L.L.C. Barclays Global Investors, N.A. JF Asset Management (Singapore) Ltd. Capital International, Inc. Others Total Shareholding Source: Reuters
Number of Shares 1,874,362,601.0 1,164,784,955.0 662,012,700.0 535,326,678.0 256,951,112.0 35,970,115.0 30,365,400.0 18,515,000.0 17,138,630.0 16,169,520.0 1,774,084,289.0 6,385,681,000.0
% holding 29.35% 18.24% 10.37% 8.38% 4.02% 0.56% 0.48% 0.29% 0.27% 0.25% 27.78% 100.00%
1.
Kuok Group of companies was started in 1949 in Malaysia as Kuok Brothers Private Limited engaged in the business of trading in rice, sugar and wheat flour. The Kuok Group has since grown to become one of Asia's most diversified multinational conglomerates. Kuok Groups business activities include Trading - sugar, fertilizers, chemicals, steel products and agricultural machinery Shipping and logistics Manufacturing sugar refining, flour milling, feed milling, fertilisers, chemicals Financial services - insurance, fund management Real estate Hotels and hospitality Environmental engineering, waste management and utilities Leisure and recreation, and media
2.
ADM is one of the worlds largest agricultural processors of soya beans, corn, wheat and cocoa. It is also a leading manufacturer of bio-energy, namely ethanol and biodiesel. Founded in 1902 and incorporated in 1923, ADM is headquartered in Decatur, Illinois, and operates processing and manufacturing facilities across the United States and worldwide. It is a Fortune 100 company and is listed on the NYSE.
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Key developments
2009 Completed the acquisition of a 17.0% stake in Malaysias Three-A Resources, with the view of forming joint ventures to set up caramel processing facilities in China to serve soya sauce manufacturers. Announced the intention of listing its China business. The listing is currently delayed due until further notice. Formed Joint Venture with Nizhny Novgorod Fats & Oils Group and Delta Exports Pte Ltd to drive expansion into Russia and the CIS countries Completed the merger with Kuok Groups palm plantation, edible oils, grains and related businesses in a deal worth USD 2.7 billion Concluded a restructuring exercise to acquire the edible oils, oilseeds, grains and related businesses of Wilmar Holdings Pte Ltd (WHPL), including interests held by Archer Daniels Midland Asia Pacific (ADM) and its subsidiaries in these businesses, for USD 1.6 billion Formed joint venture with Olam International Ltd and SIFCA Group, one of Africas largest agro -industrial groups with significant interests across palm oil, cotton seed oil, natural rubber and sugar sectors in Africa Successfully launched inaugural USD 600.0 million convertible bonds issue due 2012 Re-quoted on the Singapore stock exchange on August 8, 2006, after a successful equity placement exercise that raised USD 180.0 million Renamed Wilmar International Limited on July 14, 2006 upon completion of the reverse takeover of Ezyhealth Asia Pacific Ltd. Expanded oil palm plantation acreage through the acquisition of a total of 140,000 hectares in Indonesia Concluded a major capacity expansion through completion of 3 refineries, 3 fractionation plants, 4 palm kernel crushing plants, 4 palm oil milling plants and 1 compound fertilizer manufacturing plant. Completed a refinery and a fractionation plant through a joint venture with TSH Resources in Malaysia Acquired a controlling stake in PT Cahaya Kalbar Tbk, an Indonesian producer of specialty oils and fats for cocoa confectionery, baked confectionery, and related beverages and food industry Established first compound fertilizer manufacturing plant Developed and marketed the Sania brand of edible oil in Indonesia Acquired three copra crushing plants in Indonesia Expanded into production of higher value-added downstream products including specialty fats Established refinery operations in Malaysia with the acquisition of one palm oil refinery, and one fractionation plant in Butterworth. Upgraded capacity of both plants upon commissioning Established first palm oil milling plant; purchased first liquid bulk transport vessel
2008
2007
2006
1995 1991
Acquired a land bank of approximately 7,100 hectares and established first oil palm plantation in Sumatra, Acquired two crushing plants and a refinery in Indonesia, commenced work on a second refinery Commenced operations as a palm oil trading company
Indonesia
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Sector overview
Introduction Global oil and fats industry
The global oils and fats industry has undergone major changes over the last four decades. Vegetables oils have replaced animal fats as the major source of cooking oils and fats. World vegetable oil production grew by 5.2% per annum during the period 19982008; vis--vis 1.9% per annum for animal oils and fats, highlighting the increasing usage of vegetable oils. The global vegetable oil market has seen significant growth over the past several years, with the increase in per-capita consumption of vegetable oils in Latin American and Asian nations, and due to the demand from the non-food sector, especially for biofuel production. This growth is lead by China and India in particular, where rising populations, developing economies and the gradual easing of trade tariffs and restrictions have lead to rising demand and consumption. Developed nations, on the other hand, have reached saturation point where per capita consumption of vegetable oils are concerned. There has also been a significant shift in production areas over the last decade, most notable being the fact that the US lost its position as the worlds largest producer of oils and fats. At the same time China and Indonesia gained significant market share in the vegetable oils and fats industry, consolidating Asias position as the major producer of vegetable oils and fats. The other major Asian producers are Malaysia and India.
50.0
40.2 34.6 41.7 36.4
47.7
40.0
35.6
30.0
20.5
20.0
15.7 9.2
17.3 10.6
17.0 10.6
18.3
10.0
16.6
16.0
15.8
9.7
16.4
11.6
16.4
0.0
2005
Palm & Palm Kernel
Source: USDA
2006
Soya bean Rapeseed
2007
Sunflowerseed
2008
Cottonseed Peanut
2009
Coconut Olive
During the period from 2005-2009, palm oil and palm kernel oil, together with soya bean oil, have typically accounted for around 64.0% of the global production of the major vegetable oils. Production of palm oil and palm kernel oil witnessed robust growth at 6.1%, while soya bean oil production grew at a relatively slower pace, at a CAGR of 2.2%. As a result, the share of palm and palm kernel oil in total production has gone up from 33.9% in 2005 to 36.8% in 2009. This increase in production has been largely attributed to improving yield performance in all key producing countries, except Malaysia, including Indonesia, Thailand, Colombia, and Nigeria, as well as more mature oil palm areas coming into production in Indonesia. Part of the growth is also the result of a bias towards oilseeds with higher oil content. Oil palm has the highest oil yield, at around 3.43 tonnes/hectare (t/ha), as compared to 0.36 t/ha for soya bean and 0.60 t/ha for rapeseed. The historical price discount for palm oil in relation to other oils also makes it a more attractive option. All of this, together with the overall growth in the vegetable oils industry, contributed to the growth in the palm oil industry.
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2005
2006
2007
Sunflower Oil
Source: IndustryResearch
Rapeseed Oil
2008 (JanJune)
31.5
29.7
29.2
17.4 11.8
on g
In
Ja
20000.0 18000.0 16000.0 14000.0 12000.0 10000.0 8000.0 6000.0 4000.0 2000.0 0.0
4,783.0 5,343.0 15,560.0 15,485.0 16,600.0 15,290.0
5,369.0
5,581.0
2006
2007
Indonesia Malaysia
2008
Others
2009
Source: USDA
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Domestic consumption
India, China, Pakistan, Malaysia, Indonesia and the European Union (EU27) are the major consumers of palm oil, accounting for an average of 62.0% of global consumption during the period 2006-2009. Total domestic consumption has increased in tandem with production over the last four years. The period 2006 to date has seen Indias domestic consumption of palm oil grow at a CAGR of 23.5%, making it the single largest consumer of palm oil globally accounting for 14.2% of total consumption. In addition to the fact the nation has traditionally been a major consumer of palm oil, where it most widely used vegetable oil, consumption growth has also been assisted by factors including the increasing awareness about palm oil and its applications and benefits, and the gradual easing of the import regulations and protectionary tariffs imposed on the commodity. Owing to this, Indias share of global palm oil consumption has risen significantly, from 8.9% in 2006, to 14.2% in 2009. Other than Indonesia and Malaysia, who are also the largest producers, China and the EU-27 are the other main consumers of palm oil. Palm oil, along with soya bean oil, are the major oils consumed in China, who has been the largest consumer of oils and fats since 2003. Palm oil plays a key role in Chinas oleochemical industry, with palm-based oleochemicals accounting for around 40.0% of total production. The growth of the oleochemicals industry, along with favorable demographics and rising per capita income are the major growth drivers behind the increasing consumption of palm oil in China. One of the main drivers for palm oil consumption in the EU is the rising demand for the commodity from the biofuel industry. This follows from the 1997 EU resolution to improve the share of renewable energy in total energy consumption. Concerns over the increasing demand for energy, rising fossil fuel prices, and the threat of global warming have lead the EU to bind its member states to achieving a 10.0% minimum target for the use of biofuels in transport. Though it is one of the most widely used edible oils in the world, it is important to note that the rising affluence of consumers will eventually lead to competition for oil palm as cooking oil, due to its high concentration of saturated fats (51.0%), against substitutes like soya bean (15.0%), as consumers switch to healthier options. However the base-load demand for palm oil in industrial preparation should continue to be sustained as palm oil is the lowest cost option among edible oils, as it is produced in large quantities.
Malaysia, 3,151.0, 7.6% Others, 15,381.0, 37.0% Pakistan, 2,200.0, 5.3% Others, 13,836.0, 39.6%
Source: USDA
Source: USDA
Competitive advantage of palm oil versus other vegetable oils Palm oil has a natural cost advantage versus all other types of vegetable oils. This is due to the fact that once the plantations have started bearing fruit; the variable costs versus other crops are much lower, as it is not an annually cultivated crop. Also, the yields from palm plantations are much higher than other crops. Yields in different plantations may vary, and are driven by better saplings, early year care, and better estate management all of which can improve profitability. Typically, all estates have good and experienced managers, and well set procedures which if adopted should provide for a profitable plantation. The profitability of the plantation companies is largely tied to palm oil prices. However, the price structures can vary, with some plantations selling just FFB, some only processing up to CPO, and some with integrated plants that extract and refine the FFBs into CPO, cooking oil, margarine, biodiesel, specialty fats and other oleochemicals.
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Jan-Mar 08
Apr-Jun 08
Jul-Sep 08
Oct-Dec 08
Jan-Mar 09
Apr-Jun 09
% y-o-y increase
Absolute production in Indonesia has trended up in 2009. This was mainly due to an increase in mature planted area. Productivity in terms of yield has been weakening in Indonesia. Palm oil stocks are lower than normal in the region. Malaysian palm oil stocks were 33.0% lower in June than in the corresponding months of the previous year. This was the worst monthly drop since 2007. Inventories are also currently at the lowest levels since January 2008.
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30.0%
10.0%
(10.0%)
% change y-o-y Source: Malaysian Palm Oil Board Source: Broker Research
% change y-o-y
Lower Stock/Usage ratios expected to affect supply and pricing During recent months, stock/usage ratios have been relatively low in the region when compared to their historical levels. This trend is expected to continue going forward. One reason for the lower stock/usage ratios that are currently prevailing is due to the yield normalization phenomenon that usually occurs the year after a bumper crop - in this case 2008. But the situation has been made worse by the poor weather conditions that have affected harvests, and pollination. This situation is expected to keep CPO prices in the upper bracket for the short term. CPO supply, however, is expected to rebound in 2010 and 2011 owing to an increase in mature hectarage in Indonesia, as well as in other non-dominant CPO producing nations such as Papua New Guinea.
13.5% 13.0%
Stock/usage ratio
Source: Broker Research
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Demand for palm oil India and China are the leaders
India and China together accounted for over 36.0% of palm oil imports during the year ended October 2009. Both nations have large, growing populations, and imports have grown apace over the years. The increase in per capita incomes in these nations, urbanization, as well as the gradual abolishment of protectionary tariffs and other import restrictions have played their part in the rising demand for palm oil. The drought in northeast China and the delayed monsoons in India have affected soybean production in these countries in 2009. This translates into increased edible oil imports, of which palm oil has traditionally had a significant share.
Palm oil imports: 2005 - 2009 ('000 MT)
8000.0
6,300.0
6000.0
4,975.0 3,800.0 2,899.0
4000.0
2000.0
0.0 2006
Source: USDA
2007
India China
2008
2009
2007-08
China
2008-09E
2009-10E
Stockpiling in China The Chinese government has been stockpiling food since the start of 2009. One of the primary reasons behind this is the concern that another food crisis like the one in 2008 would cause severe social unrest in the country. The Chinese stockpiling of palm oil, soybeans, and corn has been recorded by the USDA and industry experts such as Oil World, with the primary buyer being COFCO, the state owned agency responsible for food purchases.
Indian liberalization India completely liberalized palm oil imports during 2008, in what was the culmination of a long process of gradual liberalization that began more than a decade ago. The 80.0% tariff that was previously in place was imposed to protect Vanaspati, a local oilseed. The events that triggered the removal of the tariff in 2008 were the food crisis and the elections in the same year. Given the example set by its precedents, the current global recession has increased the likelihood of protectionary tariffs being imposed by nations to protect their domestic markets. But in the case of India and China, the reinstatement of palm oil tariffs seems unlikely. As a result of the food crisis that peaked in 2008, both nations may have a vested interest in allowing free trade of agriculture. Reimposition of palm oil tariffs would drive up the cost of living at a time when food prices remain elevated.
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Jul05
Jan06
Jul06
Jan07
Jul07
Jan08
Jul08
Jan09
Jul09
Source: Bloomberg
25.0
20.0
15.0
10.0
5.0
0.0
Source: Bloomberg
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El Nio and CPO production Hotter temperatures and reduced precipitation affects oil Palms by reducing the proportion of female flowers that yield more oil. There have been three El Nio episodes in the past three decades, in 1983, 1997, and 2006. All three incidences of the El Nio effect have had a deep-seated effect on CPO production, resulting in an average drop of 3.0% in production. In each case, it was also observed that the market reacted to the fall in production, where the average price of CPO in the incidence year rose by 43.0%. Below is an analysis of CPO production and prices, as well as overall CPO yields during El Nio years.
CPO production growth and prices during El Nio incidence years
20.0% 1,200.0 1,000.0 800.0 10.0% 600.0 5.0% 400.0 0.0% 200.0 82/83 84/85 86/87 88/89 90/91 92/93 94/95 96/97 98/99 00/01 02/03 04/05 06/07 -
15.0%
(5.0%)
CPO Production Growth (%) Dark blue bars indicate El Nio incidence years. Source: Broker Research
Overall CPO Yield Black arrows indicate El Nio incidence years. Source: Broker Research
Average
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The above table charts the overall CPO yield over the last 27 years to show the drop in yields during years that have had episodes of El Nio. Overall CPO yield is calculated by multiplying FFB yield (Fresh Fruit Bunches, used to derive CPO, harvested per hectare) with CPO yield (CPO yield per hectare of plantation), thus eliminating the variation brought about by the increase in the planted area over the period. The mean of the data set is 3.24 tonnes per hectare and the standard deviation is 0.22. The yield fell 0.39 tonnes per hectare (two standard deviations from the mean) in 1982-83, which was the worst case of El Nios disruption of productivity. In 1997-98, the impact was one standard deviation below the mean. However, the impact was the mildest in 2005-06, when the y-o-y change stood at 0.22 tonnes per hectare, whereas the yield continued to be one standard deviation above the mean. A review of the data highlights the impact of incidences of El Nio, followed by decline in production growth, resulting in major price fluctuations in the market. Even in the most recent and mildest case, which occurred in the 2006-07 period, the y-o-y drop in yield was around a quarter of a tonne per hectare, which translates into a 7.0% drop in production, assuming that the planted area remains the same.
The Malaysian Natural Resources and Environment Ministry, as well as the Australian Bureau of Meteorology have issued El Nio alerts on the basis of data supporting the above indicators. Both agencies expect El Nio to set in sometime during 2009. The International Research Institute for Climate and Society (IRI) has predicted the possibility of a mild to moderate El Nio to be 85.0% for the months of September 2009 through February 2010.
Major El Nio Episodes
35 25 15 5 -5 -15 -25 -35 -45
1979
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
Conclusion
The onset of El Nio in the near future is expected, but as yet uncertain. If it does occur, however, it is expected to have an adverse effect on CPO production, especially in South-East Asia. Though it is not the only determining factor, uncertainty and speculation about CPO production are expected to maintain or push up CPO prices in the near term. Given the rising demand for palm oil and its derivatives, any decline in CPO production due to adverse weather conditions will exert an upward pressure on CPO prices.
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75000.0 60000.0
59,000.0 48,800.0
57,000.0
57,000.0
45000.0 30000.0
46,200.0
40,500.0 32,000.0
15000.0 0.0
2006
2007
USA Brazil
2008
Argentina
2009
China has cemented its place as the worlds leading soya bean importer. Its imports have grown nearly 46 times from 0.8 million MT in 1994, to 38.1 million MT in 2009. Chinas soya bean shortage has increased significantly over the years, from almost nil in 1991 to almost 38.0 million MT in 2009, making China the most important market for key exporters such as USA, Brazil, and Argentina. Soya bean shortages for other major importers such as Japan, the EU, and Mexico have remained quite stable in the past, consequently these regions are not likely to increase their import share in the future.
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Others, 22,389.0, 11.7% United States, 45,234.0, 23.6% Source: USDA Source: USDA United States, 47,324.0, 25.6%
Soya oil and soya meal have different dynamics in relation to their own fundamentals. While soya oil competes globally as edible oil with palm oil, rapeseed, and sunflower oil, among others, soya meal is primarily a product for the feed industry, competing with other feed ingredients such as corn and other coarse grains. Moreover, crushing may not be able to satisfy the domestic demand for either or both commodities, thereby impacting their prices differently. In China, for instance, crushed soya beans are generally adequate to satisfy the demand for soya meal, but the nation still has to import a significant proportion of its soy oil consumption. As a result the availability of imports of soya bean may also affect soya oil prices, whose movement may be different to that of soya meal prices that are driven by local crushing intensity. The prices of soya beans and its end products in China behave differently from those in the global markets, mainly because of government intervention in the trade markets. Chinese authorities tend to control the pricing of raw soya beans and those of end market consumer products, forcing process to move differently from those of global markets. As a result, margins of Chinese do not move in sync with global crushing margins. Complementarity of US and South American soya bean exports to China South America and the US are thought to be complementary soya bean suppliers to China due to their different harvest seasons. The harvest season for US soya bean is October and November, while for South America it is during March and April. Soya bean stocks reach their highest levels just after their respective harvest seasons. Therefore the soya bean trade in the Chinese import market is divided into two periods. During June-October, South America exports freshly harvested soya beans to China, incurring marginal storage costs. On the other hand soya beans exported from the US are more expensive due to higher storage costs resulting from storing the beans well after the harvest season. Thus, the South American exports to have a price advantage vis-vis US soya bean exports. The situation is reversed during the November-May import period in China, which is just after the US harvest, making the South American soya beans more expensive due to storage costs. These trends imply that South America and the USA are seasonal complementary soya bean suppliers to China, with each dominating during different halves of the year. Conversely, this also indicates that China may have more bargaining power over both parties with respect to prices. Any increase in export prices from one party could result in increased imports from the other. To balance the situation, key Chinese soya bean crushers like Wilmar typically rely on more than one soya bean supplying country to reduce supply risk.
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Margins and crushing intensity The incentive to crush soya bean at full capacity is more when margins are greater. If the margin decreases or becomes negative, the crushing continues at a slower pace as the incentive to crush is lower. As a result, as crushing margins increase, there is increased demand for soya beans, and this leads to gradually firming prices of soya bean. On the flip side, when margins start decreasing, there is a fall in demand for soya bean, resulting in softening of prices. The correlation between meal, oil, and raw soya beans is not perfect. Crushing plants maintain seed inventory for crushing based on their holding capacity and strategy. Some plants may hold inventory to last several months, while some may hold a few weeks of inventory at any given time. Crushing intensity can be driven by increased demand for either soya meal, or oil. Crushers may increase intensity even if the demand for a particular product, either meal or oil, is low or flat, but demand for the other commodity is high. When crushing margins start increasing due to increased demand for oil or meal, companies with large inventories can crush from stock rather than purchasing the raw material from the spot market. As a result, rising margins do not always translate to an immediate gain in soya bean spot prices.
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Similarly, the variation in crushing utilization due to supply and prices of raw materials also affects the margins of crushing plants. The supply of raw soya beans affects the amount available for crushers, thereby affecting the supplied quantity of meals and oils to the consumption markets. In conclusion, profitability in the soya bean crushing sector is basically a play on margins, which depend on the supply of raw material as well as demand for the end-products. Crushers try to lock in margins by taking up hedging positions complementing their production strategy. But since the buying of soya bean is a continuous process which varies depending on the prevailing market strategy of either crushing more or less, it is not possible to achieve a perfect hedge. Also, processors cannot completely control margins as there are a large number of processors, and the industry is very competitive.
China crushing margins need not move in line with global crushing margins Margins for global soya bean crushers are generally higher around July-September, the harvest season for the US and South American regions. However, margins are lowest for Chinese crushers during this period, and peak during the period between October and February. At the same time, global soya bean crushing margins are low when Chinese margins are at its peak. A key factor contributing to this effect is the government intervention in raw material and end-product pricing in China, which force prices to move differently.
RMB/MT USA peaks: June, September China peaks: October, February 1,000.0 800.0 600.0
140.0
120.0
400.0
100.0
80.0
60.0
40.0
(600.0)
20.0
(800.0) (1,000.0)
Jan03 May03 Sep03 Jan04 May04 Sep04 Jan05 May05 Sep05 Jan06 May06 Sep06 Jan07 May07 Sep07 Jan08 May08 Sep08 Jan09 May09 Sep09
0.0
Market view places a premium on intelligence and size Players in the crushing industry take a fundamental view on prices for both raw soya beans as well as soya meal and soya oil prices. However, very few market players have the scale and market significance to effectively determine the drivers for price movements in the markets. Also, with scale, the ability to vary crushing intensity and store raw soya beans increases, which is an important factor in capturing the spread from the market. For this reason, larger market players are expected to deliver better margins as compared the smaller ones who have less visibility.
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Recent correction in soya bean prices Soya bean prices have corrected in the past few months following indications of favorable production in key regions of Brazil and Argentina. Acreage data indicates a strong probability of a bumper harvest in the US, while El Nio weather patterns favor crop plantation in South American regions, indicating strong production next year. The impending rise in soya bean production has already been factored in the futures markets, where it is actively traded, leading to the recent correction in soya bean prices.
Chinese de-stocking may exert further pressure on soya bean prices The Chinese government has tried to auction its excess inventory of soya beans a few times in the past few months. However, Chinas domestic soya bean prices are higher than global prices, making the domestic inventory less attractive. According to some market data sources, the Chinese government is expected to offer subsidies to domestic crushers as it looks to unload its soya bean inventory before the US harvest. This may make buying from the domestic market more attractive to crushers, thereby reducing the demand for global soya bean supplies. Additional supply of soya bean could put further pressure on prices.
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Conclusion The shortage in soya bean supply has lead to lower supplies of soya meal and soya oil, resulting in increased spread, and the strengthening of crushing margins owing to strong soya meal and soya oil prices. Although crushing margins have been strong over the last couple of months, crushing intensity is low due to lower availability of soya bean for processing, keeping in mind that fresh stock from the US harvest will not reach the markets until December -January. Since fresh stock will not be available before December, the outlook on soya meal and soya oil will remain tight. In addition, given the bearish outlook on soya bean prices, crushers may postpone purchases to take advantage of lower prices later on. This would put further pressure on soya meal and soya oil supplies, leading to higher prices. Also, the probable onset of El Nio could impact palm oil production, increasing the demand for soya oil, which is a close substitute. Ultimately, near-term crushing margins are likely to remain strong until supply of soya meal and soya oil pick up, aided by strong soya bean production.
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High prices may drive an increase in output in the edible oil sector; but an increase in supply is unlikely to reduce prices as significantly as in the past because of the potential biodiesel market. Due to the strong correlation between CPO and crude oil, the main price determinant in this situation is the relative price of crude oil. Vegetable oils are more likely to become cheaper (for the food industry) if there is a drop in crude oil prices, than if there is drop in demand, or a rise in supply. The current demand growth for food and oleochemicals is around 3.0-4.0% a year, and is driven mainly by income and population growth. However, given the limited supply of land available for cultivation, the ability to meet this demand over the long term may be limited. As a result, the prices of oils and fats may break away from the constraints of relative crude oil pricing over a long-term horizon of around 10 or more years, depending on the scale of demand growth, the cultivated acreage, and improvements in productivity. Edible oil and overall food price re-flation From 1950 until just recently, demand growth in agricultural commodities did not keep up with the ability of farmers to produce. The result was a long-term decline in inflation-adjusted food prices. Together with growing per capita income around the world, these declines in real prices lead to the affordability of sufficient nutrition as well as a more varied diet. This gradual increase in overall demand for grains and oilseeds, combined with a decline in investment in agricultural productivity lead to a reversal in the decline in real food prices during the period after 2003. Yet, adjusted for inflation, food prices are still close to historical lows. These factors coupled with structural trends in demand, supply, and demographic dynamics would suggest that the correction that is witnessed in food prices could be a near-term event, and once food prices have adjusted, food prices will continue its multiyear agflation.
Long-term demand and supply With annual income levels having reached USD 5,000.0-10,000.0 range globally (adjusted for purchasing power parity), food consumption levels have grown disproportionately. India, and China, with their large populations, increased urbanization, and higher incomes are pushing up the global demand for food. On the supply side, research forecasts suggest that incremental production will continue to grow slower than the past two decades. Barring a major move into GMO crops, this demand supply equilibrium is expected to drive up yields significantly, and food prices in nominal terms are likely to be strong over the next decade.
Biofuels a note
The application of vegetable oils, including palm oil, as a feedstock for biofuels has lead it to become an important contributor to increase in marginal demand, and consequently, a driver of prices. Until 2005-06, energy prices affected agricultural primarily by way of influencing production and input costs, particularly fertilizer and diesel prices. But due to the increasing correlation between the energy and commodity markets, fuel prices influence production costs as well as crop demand. An Ethanol plants ability to pay for corn, and a biodiesel plants ability to purchase vegetable oil are directly influenced by the prices of crude oil and other fossil fuels. Though traditionally the pricing of vegetable oils were determined by mutually independent factors like the weather in different regions of the world, and import and export taxes, the prices of the various edible oils have displayed an increasing degree of correlation over the past 24-30 months. However the technology behind extracting biofuels from vegetables and vegetable oils is still in its nascent stages, and presently, there is much speculation as to what the industry will ultimately turn to for its feedstock/technology/end product of choice. At the same time, there is a consensus that biofuels will be a key component in meeting energy needs for transport in the future. In the longer term, the success of biofuels depends on petroleum based fuel prices as well as three other variables that directly affect the profitability and the environmental impact of biofuel. The three factors are 1. 2. 3. Cost and availability of feedstock Government regulation, and Conversion technologies
All of the above are currently in a state of flux, so any investment today will ultimately also depend on how these factors, which are also interrelated, evolve.
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Feedstock costs and consequences Feedstock costs, which accounts for between 50.0-80.0% of biofuel production costs, vary significantly by region, and so its price volatility has a marked impact on the producers returns. When the feedstock is fungible with food, as in the case of corn and vegetable oils, the demand and supply dynamics of biofuel producers may not be the only factors affecting prices. Government regulations, export-import trade flows, local demand and supply dynamics, and famines also affect prices. As a result, using food for feedstock is a potentially sensitive issue, especially in cases where there is an unprecedented rise in prices. In addition to this, environmental concerns by developed nations, who have raised the issue of the destruction of rainforests for cultivation, has lead to the use of non-food, fast growing crops like Jatropha, that are capable of growing well in relatively arid lands. But on the other hand, the environmental impact resulting from the cultivation of such fast growing trees and plants is as yet unknown.
Government regulations Subsidies, tariffs, research grants, and mandates have helped drive both demand as well as profitability of the biofuel industry. Government policies have so far been positive for the biofuel sector, but are evolving and likely to change, thereby making regulatory changes a major risk factor for the industry. Since vegetables oils account for a majority of productions costs, biodiesel margins are very dependant on subsidy policies and feedstock pricing, particularly as supply is expected to exceed demand in the near term.
Conversion technologies In the commodities industries, the last entrant usually has the advantage of access to the newest technologies in an industry that is driven by the lowest cost of production. However, players who can sign up feedstock supply contracts and end market contracts may derive the benefits of an early start as land and other resources are limited, especially considering that feedstock costs vary greatly by geography, making some regions more viable for biofuel production than others. New conversion technologies will significantly increase production costs, but ultimately the high initial capital investment is offset by the lower costs of the feedstock that replaces the conventional ones. Given the number of options available to biofuel manufacturers, in time they are expected to diversify in terms of geographies and technologies and move towards greater vertical integration.
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Segment Analysis
Merchandising & processing Palm and laurics Revenue for the current quarter was stood at USD 3.5 billion representing a 30.0% decline when compared to the same period last year. This was mainly due to lower demand for agricultural commodities during the period. The segment also witnessed tighter margins due to increased competition from other players as a result of the weakening demand. Profit before tax for the quarter decreased by 36.7% as compared Q3 2008. Despite the Groups weaker performance during the quarter, pretax profit for 9M 2009 increased by 11.0% or USD 56.1 million as a result of the strong performance of the segment during the first half of the year. Merchandising & processing Oilseeds and grains A 12.0% increase in sales volume during the quarter was offset by lower commodity prices. As a result, revenue for Q3 2009 fell 13.0% to USD 1.9 billion. Pretax profit for the 9M 2009 also fell 24.0% to USD 41.7 million due to tighter margins mainly due to forex gains that were recorded for the same period during 2008. Consumer products The segment witnessed higher sales volumes, as well as improving margins during the quarter, though segment growth may be largely attributed to improved margins. Revenue for the quarter was down 14.0% at USD 1.0 billion. The Group instituted a price cut of between 8.0-16.0% during the quarter owing to falling commodity prices. Despite the lower revenue, pretax profit for the period was 40.0% higher at USD 29.1 million mainly due to the fact that margins in China were affected during the corresponding period in 2008, as a result rising raw material prices and price intervention measures taken by the Chinese government. Though revenues were down 26.0% for 9M 2009, pretax profits rose by more than 2.5x, from USD 49.0 million to USD 169.0 million as a result of sharp improvements in segment margins when compared to 9M 2008. Plantations and palm oil mills Revenues for the quarter ended September 2009 was down 7.8%, at USD 292.3 million, due to lower average CPO prices. At the same time, the segments pretax profit for the quarter rose sharply by 47.9% to USD 111.4 million. The stronger profit for the segment was mainly due to higher production volumes, lower production cost per MT, and some forward sales at higher prices. Higher production volumes due to maturing hectarage resulted in a 10.5% rise in FFB production as compared to Q3 2008. Revenue for 9M 2009 stood at USD 792.7 million, while pretax profits rose by 14.4% over the same period last year boosted by strong performances in Q2 and Q3 2009.
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Risk factors
Delay/Expiry of China Listing
A weak IPO market in China and Hong Kong has been cited as the reason for the delay Wilmars China listing. Its stock witnessed a relative weakness in price following the announcement. Wilmar has a January 2010 deadline by which it has to list its business, failing which the Group will have to restart the process. Any direction regarding the listing is expected to be a key stock catalyst in the near term.
El Nio
The bullish outlook on CPO prices in the industry is partly based on decreasing production resulting from an episode of the El Nio phenomenon. Forecasted profitability and margins may therefore be affected if it does not occur. On the other hand, the onset of El Nio could lead to an increase in the demand for soya oil, which is a close substitute for palm oil, which could ultimately benefit soya bean crushers and refiners like Wilmar.
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Trading risk
The Group also takes active commodity trading positions to hedge its raw material price risks as well as to realize opportunistic gains in price volatility. With Wilmar having historically posted substantial paper trade gains, as well as some losses, this component of its business operations adds a degree of uncertainty to earnings. However, the size and scale of Wilmars business enables it to maintain an extensive ground network that provides useful market intelligence to its trading unit, which may mitigate some of the trading risk.
Natural disasters
Bad weather and crop disease, particularly if centered on Wilmars plantations, can be detrimental to productivity. Animal disease can impact demand for soya meal.
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Current industry fundamentals represents a Best of both worlds scenario for Wilmar
Wilmars oil palm activities are concerned with the entire value chain of cultivation, processing, refining, and consumer packaging of palm oil products. With regard to soya bean and oilseeds, the Group is involved only in crushing refining, and other midstream/downstream activities. The outlook on the oil palm sector is positive, with CPO prices set to rise in the short-term. On the other hand, an increase in supply of soya bean due to bumper harvests in the US represents an opportunity for crushers like Wilmar to boost margins on the back of lower prices and sustained demand for soya bean and its derivatives.
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Valuation analysis
We have initiated our coverage of Wilmar International Ltd. with a Buy rating and a price target of SGD 7.22, which is 16.7x our forecasted 2010 EPS, or 12.7x 2010 EBITDA. Our valuation reflects the volume growth that we believe Wilmar will achieve over the course of the forecast period. We expect the Group to achieve our target valuation in the near to medium term. Potential price triggers, in our view, would be the announcement of the IPO date for Wilmars China business, as well as any definitive news regarding the probable onset of El Nio weather conditions at the end of the year. Public comparable analysis We have conducted a Public Comparable analysis as part of our valuation. Wilmars comparable set consists of South-east Asian players involved in one or more of upstream/midstream/downstream activities in the palm oil sector. Though Wilmar is expensive in relation to its peers, we believe that the relative valuation is justified owing to its unique business model. Wilmars combination of size, varied revenue streams, and vertical integration is relatively unmatched by any of peers. This premium is reflected in Wilmars current share price.
CY10E EV/EBITDA vs. CY08A-10E EBITDA CAGR
25.0%
Cheap
20.0%
Wilmar International
15.0%
10.0%
Indofood Agri Resources Kuala Lumpur Kepong (KLK) IOI Corp.
5.0%
0.0%
2.0x 4.0x 6.0x 8.0x 10.0x
Astra Agro Sime Darby
Source: Reuters, Independent Research
12.0x
14.0x
16.0x
18.0x
(5.0%)
(10.0%)
Expensive
Discounted Cash Flow analysis As part of our valuation, we conducted a Discounted Cash Flow Analysis of Wilmar International based on the EBITDA Exit multiple method as well as the Perpetuity Growth method. Our two stage DCF analysis discounts cash flows for a further five periods beyond the financial models forecast horizon of 2014. Our main assumption for the period 2015-2019 is decelerating revenue growth from 14.0% in 2015 to 10.0% in 2019.
SGD 12.5 SGD 10.5 SGD 8.5 SGD 6.5 SGD 4.5 SGD 2.5 SGD 0.5
9.35
Valuation Method DCF (EBITDA) DCF (Perpetuity Growth) EV/EBITDA 2010 Price/Earnings 52-Week High/Low
Average Value Weight 8.26 7.68 5.82 6.37 4.63 30.0% 30.0% 20.0% 20.0% 0.0%
Target Price
7.18 Current Price SGD 6.32 5.55 4.50 3.67 2.26 DCF (EBITDA) DCF (Perpetuity Growth) EV/EBITDA 2010 Price/Earnings 52-Week High/Low
SGD 7.22
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Equivalent Perpetuity Growth Rate 10.0x 4.2% 4.7% 5.2% 5.6% 6.1% 10.5x 4.5% 4.9% 5.4% 5.9% 6.4%
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Net Debt Discount Rate 10.0% 10.5% 11.0% 11.5% 12.0% as of 09/30/09 $3,579.6 3,579.6 3,579.6 3,579.6 3,579.6
Equivalent Terminal EBITDA Multiple 4.0% 9.6x 8.9x 8.3x 7.7x 7.2x 4.5% 10.6x 9.7x 8.9x 8.3x 7.7x 5.0% 11.7x 10.6x 9.7x 9.0x 8.3x 4.0% $6.05 $5.42 $4.88 $4.41 $4.01
Share Price 4.5% $6.52 $5.80 $5.19 $4.67 $4.23 5.0% $7.09 $6.25 $5.56 $4.98 $4.48
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(1) Enterprise Value = Market Value of Equity + Short-term Debt + Long-term Debt +Minority Interest + Preferred Equity - Cash and Equivalents.
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Disclosure appendix Stock Rating Key: 5-STARS (Strong Buy): Total shareholder return, is expected to outperform the broad market benchmark by a wide margin and we highly recommend that investors buy the stock. 4-STARS (Buy): Total shareholder return, is expected to outperform the broad market benchmark and we recommend that investors buy the stock. 3-STARS (Hold): Total return is expected to be in line with the overall expected market return in the short and long term and we do not recommend a Buy or Sell. 2-STARS (Sell): Total shareholder return is expected to underperform the broad market benchmark and the stock is not anticipated to show a gain. 1-STAR (Strong Sell): Total shareholder return is expected to underperform the broad market benchmark by a wide margin and the stock is anticipated to falling in price on an absolute basis. Other important disclosures: This material is based upon information that we consider to be reliable, but TresVista does not warrant its completeness, accuracy or adequacy and it should not be relied upon as such. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue. TresVista is not responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results. With the exception of information regarding TresVista, reports prepared by TresVista personnel are based on public information. TresVista makes every effort to use reliable, comprehensive information, but we make no representation that it is accurate or complete. We have no obligation to tell you when opinions or information in this report change. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, other professionals in TresVista. Prices, values, or income from any securities or investments mentioned in this report may fall against the interests of the investor and the investor may get back less than the amount invested. Where an investment is described as being likely to yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate. Where an investment or security is denominated in a different currency to the investor's currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. About TresVista Financial Services: TresVista Financial Services Pvt. Ltd. is a Mumbai-based firm that provides research, analytics, M&A advisory, and other customized services. TresVista partners with financial institutions globally to enable them to rise above the competition in todays crowded marketplace. Through our team of highly trained associates, our clients are able to increase and manage their operational capacity in a cost-effective manner. TresVistas role is to be decided upon by the clients needs and the tasks at hand, be it exploring an arbitrage opportunity, analyzing prospective investments, or conducting due-diligence on a cross-border acquisition. TresVistas flexibility is instrumental to its goal of helping clients reach higher heights. Our clientele include investment banks, private equity firms, hedge funds, debt lenders, and other financial services institutions.
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