Tianyi Fruit 756 - 国信证券(香港)官方网站:中国领先的 … Fruit (756.HK) Januray 9,...

Company Research | HK & China Tianyi Fruit (756.HK)

For ratings definitions and other important disclosures, refer to the Information Disclosures at the end of this report. 1

January 9, 2012

Tianyi Fruit（756.HK） BUY | Share price: HK$1.41 | Target price: HK$1.80 | Upside: +28%

Ripe for growth

Investment highlights

Vertically integrated juice maker with orange cultivation and processing.

Tianyi produces concentrated orange juice and grows fresh oranges. Its

orchid farms provide 30% of the oranges it needs for juice extraction, which

cushions its profit margin against the fluctuations in orange prices.

Tianyi is No.1 in China for concentrated orange juice processing.

Tianyi’s frozen concentrated orange juice (FCOJ) capacity is estimated to

account for more than 50% China’s total capacity. Tianyi’s ability to provide

large volumes of high-quality products helps to consolidate its customer base.

China’s concentrated orange juice demand expected to grow steadily.

The orange juice consumption volume in China is relatively low, but growing

rapidly (14% CAGR: 2007 to 2010). In 2010, China consumed 880,000

tonnes of concentrated orange juice, which was less than 10% of that drank in

the US or Europe, suggesting substantial growth upside in China.

China’s dependence on imports is expected to decline. Seventy-five

percent of China’s concentrated orange juice consumed is imported, mostly

from Brazil. As China’s orange output increases, bottlenecks faced by

domestic orange juice producers will be alleviated. Domestic producers will

offer a growing quantity of home-grown orange juice to replace imports.

Tianyi’s FCOJ production capacity jumped 45% after acquiring Oujing.

Oujing Fruits has expanded its FCOJ production capacity to 10,000 tonnes.

Its capacity utilisation rate is expected to reach 80% in the 2011/12 fiscal year

and as such, Tianyi’s orange juice output is set to double.

Buy rating. China’s concentrated orange juice industry is starting to boom.

As a leading player with advantages in the areas of cultivation, processing

technique and business scale, Tianyi’s growth is expected to surpass that of

the industry. Based on our EPS forecasts, the counter’s PEG ratio is expected

to be 0.52x，indicating huge potential for value investing. We applied a “Buy”

rating with a target price of HK$1.80.

Financial summary

Year to June 2010A 2011A 2012E 2013E 2014E

Turnover (RMB m) 479 455 638 768 835

Growth (%) 3 -5 40 20 9

Net profit (RMB m) 157 154 201 246 272

Growth (%) 65 -2 31 22 11

EPS (RMB) 0.16 0.15 0.17 0.21 0.23

CFO per share (RMB) 0.16 0.18 0.17 0.21 0.23

P/E (x) 9.3 9.6 8.7 7.1 6.4

P/B (x) 1.8 1.5 1.3 1.1 0.9

Dividend per share (HK$) 0.015 0 0 0 0

Source: Guosen Securities (HK)

Analyst

Nanxiang Yang

SFC CE No.:AYJ777 +86 755 61865350 [email protected]

Price performance vs HSI

Source: Bloomberg, data as at Feb 7, 2012

Sales Contact

Dan Weil Global Head of Institutional Sales and Trading Managing Director +852 2248 3588 [email protected]

Chris Berney Managing Director +852 2248 3568 [email protected]

Joe Chan Director +852 2248 3578 [email protected]

Cancy Kong Vice President +852 2248 3538 [email protected]

Jiafeng Li Vice President +852 2899 7281 [email protected]

Shunei Kin Vice President +852 2248 3536 [email protected]

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756 HK (Unit: HK$, LSH) HSI (RHS)

Tianyi Fruit (756.HK) Januray 9, 2012| Company Research | HK & China

Guosen Securities (HK) Brokerage Co., Ltd. 2

1 A vertically integrated company

engaged in orange cultivation and

processing

1.1 Core businesses: concentrated orange juice processing and

fresh orange cultivation

Tianyi Fruit, a Chinese concentrated juice producer and orange grower, was established

in 1993, and was listed on the main board of the Hong Kong stock exchange in 2008.

Tianyi’s core business is concentrated orange juice, and it mainly provides frozen

concentrated orange juice (FCOJ) and FCOJ fibre for Chinese beverage producers. As of

the fiscal year ended 30th Jun 2011, the company’s revenue from the FCOJ and FCOJ

fibre businesses reached RMB152 million and RMB137 million respectively, while

revenue from fresh orange business was about RMB149 million.

Exhibit 1: Tianyi sells concentrated orange juice products under the Summi brand

Self-operated

orange farms

Farmers

Wholesale fresh

oranges

Average-quality oranges

Oranges purchased

from farmers

High-quality

fresh oranges

FCOJ

FCOJ fibre

Orange sac

Source: Company information, Guosen Securities (HK)

Exhibit 2: Nearly 70% of Tianyi’s revenue from juice business

(including FCOJ, FCOJ fibre, and orange sac business)

Exhibit 3: Tianyi’s FY2011 profit was largely flat versus FY2010

Source: China’s General Administration of Customs, Guosen

Securities (HK)


Securities (HK)

32.7%

33.3%

29.9%

3.8% 0.3%

Fresh orange whole-sale

FCOJ

FCOJ fibre

Orange sac

Other businesses

337

479 455

136

264 259

71

158 154

0

50

100

150

200

250

300

350

400

450

500

Jun/09 Jun/10 Jun/11

Revenue (Unit: RMB mln) Gross profit (Unit: RMB mln)

Net profit (Unit: RMB mln)

Unit: RMB mn

Tianyi was established in 1993 and

listed in Hong Kong in 2008.



1.2 Developing the upstream business of orange cultivation

Tianyi is one of only a handful of concentrated orange juice producers with self-operated

cultivation bases in China. Tianyi operated 23 orange cultivation bases in Sanming city

and Nanping of Fujian province in 2007, with a total area of about 30,798 mu1, and

operated a 20,000-mu orange farm in Chongqing in 2009. As at the end of 2010, Tianyi

operated orange farms with a total area of 71,000 mu, of which 21,000 mu were

newly-planted farms in Chongqing (the new farms are expected to become productive in

2013), and about 50,000 mu were productive. The average age of the orange trees on

the farms was 10 to 12 years. For FY 2011/12，the actual productive area has been

reduced to 40,000 mu, as the leases for orange farms with a productive area of 10,000

mu expired. We expect that Tianyi will run self-operated productive orange farms with a

total area of nearly 80,000 mu by 2013, which will enable it to tighten its control over the

supply of fresh oranges.

By operating orange farms, Tianyi is able to guarantee the supply of fresh oranges used

for juice extraction, and stabilise the production costs. The percentage of self-produced

oranges used for juice extraction in its total processing capacity is between 30% and

40%, which could help reduce its sensitivity to material price fluctuations to the greatest

extent possible, and thus to help the company maintain its competitive edge. Given the

high threshold of the industry’s purchasing process, we believe that material availability

will become a huge obstacle for potential entrants in the industry. Therefore, the

possibility of new competitors entering the market is very limited.

Exhibit 4: All of Tianyi’s self-operated orange cultivation bases and processing

factories are situated in China’s major orange-growing regions

Source: Company data, Guosen Securities (HK)

1 1 mu equals about 667 square metres.

Chongqing FCOJ production capacity of 12,000 tonnes, FCOJ fibre production capacity of 30,000 tonnes, orange cultivation area of 20,000 mu, and newly-added cultivation area of 21,000 mu. Sanming and Quanzhou,

Fujian province A combined orange juice production capacity of 10,000 tonnes; orange cultivation area of 20,000 mu.

Huaihua, Huanan province Tianyi acquired 100% interest in Oujing Fruits, and plans to help Oujing expand its capacity to 10,000 tonnes.

Hainan Tianyi looks to acquire tropical fruit cultivation bases.

Major orange growing regions in China

The barrier to entry is relatively high

given the high threshold of the

industry’s orange purchasing

process. As Tianyi is a vertically

integrated producer with its own

orange farms, this will give it a

competitive strength.



Exhibit 5: Orange picking season, and the juice production & sales seasons

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Concentrated orange juice sales season

Fresh orange picking season

Equipment maintenance season

Concentrated orange juice production season


1.3 The per unit area yield of new orange farms in Chongqing will

increase

Since Tianyi introduced new orange varieties developed by the Citrus Research Institute

of China in the newly added 21,000-mu orange farm in Kaixian of Chongqing, it’s

expected that the yield per mu will be lifted significantly. What’s more, the company also

plans to expand the area of self-operated farms in this region step by step, and make

efforts to lock new acquisition targets, in order to tighten its control over the supply of

fresh oranges.

2 An industry leader supplying

high-quality products

During the past 17 years, Tianyi’s production capacity has increased from 5,900 tonnes

of FCOJ in 1993 to 22,000 tonnes of FCOJ plus 30,000 tonnes of FCOJ fibre in FY 2011.

In FY2010/11, it produced 8,834 tonnes of FCOJ, and 18,623 tonnes of FCOJ fibre.

Tianyi has become the No.1 concentrated orange juice maker in China by both capacity

and output.

At present, there are about 13 concentrated orange juice factories in China, most of

which are small-sized plants whose production capacities are less than 2,000 tonnes.

Tianyi owns four of the 13 factories, with a production capacity of over 5,000 tonnes each,

accounting for nearly half of the total production capacity of the whole industry. According

to data released by the company, its actual FCOJ output accounts for about 10% of the

nation-wide FCOJ consumption in 2009, and about 40% of China’s FCOJ output.

Tianyi’s frozen concentrated orange

juice output accounted for about 10%

of China’s 2009 FCOJ consumption

and 40% of output.



Exhibit 6: Tianyi managed to expand its capacity gradually


2.1 Tianyi has maintained a stable client base with high-quality

products

Coca Cola has been Tianyi’s largest client and key strategic cooperation partner since

2002, and Tianyi is the food giant’s key FCOJ provider in China. As most of the FCOJ

producers in China are small-sized companies without self-operated orange farms, the

quality of their products is not very stable, which means it’s very hard for Coca Cola to

find another FCOJ provider capable of continuously supplying high-quality products.

Given all the aforementioned advantages, Tianyi has become Coca Cola’s largest FCOJ

provider in China. In addition, Tianyi has cooperated with its five largest clients for more

than 10 years, and maintained good partnership with them, although it hasn’t signed any

long-term cooperation agreement with them.

Exhibit 7: Tianyi’s five largest clients contributed 51% of FY2011 revenue


2.2 High-quality technology equipment

All of Tianyi’s key mechanical equipments are high-end machines imported from Greece,

5900

9200

12900

22000 22000

32000 30000 30000 30000

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

1993 2007 2008 2009 2010 2011

FCOJ (Unit: tonne) FCOJ fibre (Unit: tonne)

The Quanzhou factory, with a capacity of 5,900 tonnes, was put into operation.

The Sanming factory, with a capcity of 3,300 tonnes, was put into operation.

The Sanming factory expanded its capacity to 7,000 tonnes by Nov, 2008

The capacity of old factories in Fujian decreased to 10,000 tonnes after the restructuring , but 12,000 tonnes of FCOJ capacity and 30,000 tonnes of FCOJ fibre capacity were added in Chongqing.

The acquisition of Oujing Fruits in 2011 lifted Tianyi's capacity by 10,000 tonnes

Unit: tonne

0%

10%

20%

30%

40%

50%

60%

0

50,000

100,000

150,000

200,000

250,000

2005 12months

2006 12months

2007 12months

Jan/08-Jun/09 18months



Income from five largest clients (Unit:RMB 000') Share of total income

Unit: RMB 000'

Tianyi is Coca Cola’s biggest supplier

in China. It’s difficult for Coca Cola to

find an alternative company in China

capable of providing a steady supply

of high-quality orange products.



Germany, Italy and Brazil. Besides, the company has a 10,000-tonne-level refrigerator

used for product storage to support sales.

2.3 High juice yield

Generally speaking, in the Chinese market, 13 tonnes of fresh oranges are needed to

produce one tonne of FCOJ, but for Tianyi, only 11.5 tonnes of oranges are needed,

which means the company’s juice yield is significantly higher than its peers.

2.4 Able to sell products at a premium

While the price of Tianyi’s products is about 5%-10% lower than products imported from

countries such as Brazil and the U.S, given the high quality, their prices are usually 20%

higher than that of its Chinese peers.

3 China’s demand for concentrated

orange juice is expected to grow

steadily

3.1 Orange juice accounts for about 34% of global juice

consumption

Juice drinks make up about 2.7% of the beverage consumption volume across the world.

As the consumption volume of beverages, including multi-vitamin drinks, grape-flavoured

juice, and apple-flavoured juice grew rapidly, the market demand for orange juice has

been eroded in recent years. However, orange-flavoured drinks, which account for 34%

of the world’s total juice beverage consumption, and 0.91% of the global beverage

consumption, are still the most popular beverage around the world. According to data

from the 40 largest importers of Brazilian orange juice, their juice consumption volume

totaled 63.5 billion litres, among which 20.4 billion litres were orange-flavoured drinks,

and about 7.5 billion litres were apple-flavoured drinks. Based on this, it is reasonable to

assume that market demand for concentrated orange juice remains strong.

Tianyi’s juice yield is significantly

higher than its peers, while its selling

prices are usually 20% above its

Chinese competitors.

Orange-flavoured drinks are still the

most popular types of beverage

around the world.



Exhibit 8: The share of juice consumption in global beverage consumption was

relatively stable

Source: Euromonitor, Guosen Securities (HK)

3.2 China’s demand for concentrated orange juice has grown rapidly

According to data from Euromonitor, China’s concentrated orange juice consumption has

grown rapidly in recent years. The consumption volume recorded a CAGR of 14% for the

four years since 2007, when it reached 60,000 tonnes, and it has since increased to

88,000 tonnes in 2011. Based on import data for the first 10 months of 2011, we expect

that the 2011 full-year concentrated orange juice imports approached 70,000 tonnes.

Based on China’s orange juice import data and domestic production condition, we

believe China’s 2011 full-year concentrated orange juice consumption exceeded 90,000

tonnes.

However, according to comparable data released by USDA (we believe the data is

smaller than the actual figure, but the comparison won’t be affected), the volume of

concentrated orange juice consumed in the US or Europe is over 10 times more than that

of China. We believe that the rapid growth of China’s beverage industry and the

expansion of juice’s share in beverage consumption will give impetus to the growth of

China’s concentrated orange juice consumption (see our fruit juice industry report).

Exhibit 9: China’s concentrated orange juice consumption data by type


2.80% 2.80% 2.80% 2.80% 2.70% 2.70% 2.60%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2003 2004 2005 2006 2007 2008 2009

White milk Flavoured milk Non-carbonated soft drinks Juices and nectars Carbonated beverages Water Beer Wine Hot tea Hot coffee Others Milk-based beverages

0

10

20

30

40

50

60

70

80

90

2003 2004 2005 2006 2007 2008 2009 2010

Other ** Juice drink (10%)* Nectar (99% TO 10%)* Juice (100%)*

Unit: '000 tonnes

We estimate China consumed 90,000

tonnes of concentrated orange juice

in 2011, rough 10 times less than the

US or Europe, suggesting significant

growth upside in China.



Exhibit 10: China makes up only 3% of the world’s total

orange juice consumption

Exhibit 11: China’s concentrated orange juice consumption is

much lower than that of the EU and the US

Source: USDA, Guosen Securities (HK) Source: USDA, Guosen Securities (HK)

Major importers of concentrated orange juices in China include Coca Cola, Pepsi,

Huiyuan Juice, Dingjin Food, Wahaha, Jiamei, Nongfu Spring, etc, among which Coca

Cola and Huiyuan are the largest importers. These seven companies’ concentrated

orange juice imports account for 70% of China’s total FCOJ imports. According to data

for the past four years from 2008 to October 2011, China’s orange juice imports have

been growing rapidly since 2H 2010.

Exhibit 12: China’s FCOJ imports for the period between 2008 and 2011

Source: China’s General Administration of Customs, Guosen Securities (HK)

4 China’s dependence on imported

concentrated orange juice is expected to

decline

4.1 Brazil and the US are the world’s major concentrated orange

juice producers

892

773

99

67

62 206

EU

The U.S.

Canada

Japan

China

Others

Unit: '000 tonnes

892

773

99 67 62

206

0

100

200

300

400

500

600

700

800

900

EU The U.S. Canada Japan China Others

FY 2010/11 orange juice consumption (Unit: '000 tonnes)

Unit: '000 tonnes

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Ja

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可口可乐百事可乐汇源顶津

娃哈哈佳美农夫山泉

Coca Cola

Wahaha

Pepsi

Jiamei

Huiyuan

Nongfu Spring

Dingjin

Unit: tonnes

Brazil accounts for about 52% of the

world’s concentrated orange juice

output, followed by the US at about

28%.



The concentrated orange juice industry is dominated by Brazil and the US, and the two

countries have maintained a collective share of over 80% in the world’s orange juice

output since 1995. In FY2009/10, Brazil accounted for 52% of the world’s orange juice

output, while the US about 28%.

Exhibit 13: Brazil and the US account for 80% of the world’s concentrated orange

juice output


4.2 About 75% of China’s FCOJ demand is met through imports,

among which about 60% come from Brazil

According to the customs data for the past few years, China’s FCOJ imports come mainly

from Brazil, Israel and the US. Brazil is the largest FCOJ provider for China, with a share

of about 80% in China’s total FCOJ imports, although the share has been gradually

declining in recent years. We believe China’s concentrated orange juice industry is

starting to boom. As a result, China’s dependence on imported concentrated orange juice

is expected to decline.

Exhibit 14: 80% of China’s FCOJ imports come from Brazil Exhibit 15: China’s FCOJ import sources for the first 10 months

of 2011


Securities (HK)


Securities (HK)

0

500

1,000

1,500

2,000

2,500

3,000

1995-1

996

1996-1

997

1997-1

998

1998-1

999

1999-2

000

2000-2

001

2001-2

002

2002-2

003

2003-2

004

2004-2

005

2005-2

006

2006-2

007

2007-2

008

2008-2

009

2009-2

010

Florida production (Unit: '000 tonnes)

São Paulo and Triângulo Mineiro production (Unit: '000 tonnes)

World production (Unit: '000 tonnes)

Unit: '000 tonnes

84.8%

90.9%

85.6%

77.7%

70%

75%

80%

85%

90%

95%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2008 2009 2010 First 10 months of

2011 Total FCOJ import volume (Unit: tonne)

Share of import volume from Brazil

Unit: tonne

47033

11505

1236

527

92

45

38

13

6

0

0 10,000 20,000 30,000 40,000 50,000

Brazil

Israel

The U.S.

Holland

Italy

Greece

Hong Kong

Spain

Costarica

Taiwan Import volume (tonne)

Unit: tonne



4.3 The anticipated growth of China’s fresh orange processing

volume will boost the growth of domestic FCOJ production

According to data released by USDA, China’s fresh orange production in FY 2010/11 was

5.5 million tonnes, among which 180,000 tonnes of fresh oranges, only 3.3% of the total,

were used for processing. Provided that all the 180,000 tonnes of fresh oranges were

used to produce FCOJ, and 11.5 tonnes of fresh oranges are needed to produce 1 tonne

of FCOJ, China’s concentrated orange juice output should be 16,400 tonnes (actual

production could exceed 20,000 tonnes), accounting for 0.71% of the world’s

concentrated orange juice output.

We believe that the main reason why the percentage of fresh oranges used for

juice extraction is so small in China is that Chinese people are used to eating

fresh oranges. In the future, the consumption structure of fresh oranges will

undergo adjustments, along with the changes in people’s consumption habits

and the manufacturing technique, and the share of orange juice consumption

will rise accordingly. As a result, the percentage of fresh oranges used for juice

extraction will continue to increase, and could possibly rise to 15% in the next

five years.

Exhibit 16: The percentage of fresh oranges used for processing is only 3.3%

Unit: ‘000 tonnes

Output Imports Total supply

Exports Wholesale fresh

oranges

Oranges used for

processing

2008/09 6,000 66 6,066 155 5,729 182

2009/10 6,500 80 6,580 158 6,220 202

2010/11 5,500 85 5,585 95 5,310 180

Source: USDA, Guosen Securities (HK)

Exhibit 17: China accounts for only 0.7% of the world’s concentrated orange juice

output

Source: USDA, Guosen Securities (HK)

The raw material bottleneck faced by the orange juice production industry will be

eased. China is a major fresh orange producing country of the world with a long

history of orange cultivation, accounting for 8.7% of the world’s fresh orange output

in FY 2009/10. However, the output of sweet oranges, which are especially suitable

for juice extraction, was not high, as only 2 million tonnes of sweet oranges were

produced in China in 2010. Therefore, material scarcity is a bottleneck restraining

the development of China’s concentrated orange juice processing industry.

According to Citrus Research Institute of China, China’s output of sweet oranges

62.3%

27.9% 3.7%

3.2%

1.0%

0.7% 1.4%

Brazil

The U.S.

Mexico

EU

South Africa

China

Others

As consumer habits and

manufacturing technique changes,

the consumption of fresh oranges will

undergo adjustments.



used for juice extraction will double from that of 2010 by 2015, easing the material

bottleneck faced by the concentrated orange juice processing industry.

Exhibit 18: China accounted for 8.7% of the world’s fresh

orange output in FY2009/10

Exhibit 19: China’s output of sweet oranges used for juice

extraction will increase significantly

Source: USDA, Guosen Securities (HK) Source: The Citrus Research Institute of China, Guosen Securities

(HK)

5 Tianyi’s FCOJ production capacity rose

45% after acquiring Oujing Fruits

5.1 FCOJ production capacity of Tianyi Fruits has increased to

10,000 tonnes

Oujing Fruits is a fruit juice company established in 2007 with an annual orange

processing capacity of 40,000 tonnes, and an annual orange juice production capacity of

6,000 tonnes. Besides, Oujing has a 20,000-mu fruit cultivation base to ensure the supply

of raw materials, and Coca-cola Beverages (Shanghai) is its sole client. Tianyi Fruits

announced in September 2011 that it would purchase 100% interest of Oujing for

HK$390 million. After closing the deal, Tianyi has helped Oujing to expand its juice

production capacity to 10,000 tonnes.

5.2 Raw material supply is guaranteed with high orange output

Oujing Fruits is headquartered in Western Hunan province, with a million mu-level citrus

cultivation base situated around it, producing huge amounts of oranges every year.

Before the acquisition, Oujing was basically operated at its full capacity, and its capacity

utilisation rate was kept above 80% after the completion of the acquisition. What’s more,

Oujing plans to build three main citrus production bases in China, including one in the

mid to up-stream of Yangtze River, one in Fujian/Zhejiang/Jiangxi area, and one in

Hunan/Guangxi area, in order to ensure the stable supply of raw materials.

5.3 Company profit is expected to climb

According to the acquisition agreement, the profit after tax of Oujing Fruits for the

financial year ending 31 Dec 2011 will not be less than RMB35 million. It’s expected that

Oujing will produce about 8,000 tonnes of FCOJ in FY 2011/12, which could add nearly

RMB120 million to Tianyi’s annual revenue and over RMB35 million to its profit.

25.20%

12.10%

8.70%

6.40% 6.00%

5.10%

4.90%

3.40%

3.30%

25.00%

Brazil

United States

China

India

Mexico

Egypt

Spain

Indonesia

Iran

Others

80

150 200

400

700

0

100

200

300

400

500

600

700

800

2006 2008 2010 2015F 2020F

Output of sweet oranges used for juice extraction (Unit: 10,000 tonnes)

Unit: 10,000 tonnes

Coca-cola Beverages (Shanghai) is

Oujing Fruits’ sole client.

Oujing Fruits plans to build three

more citrus production bases in

China, which would ensure stable raw

materials supply.

Oujing Fruits will contribute over

RMB35 million to Tianyi’s annual

earnings.



Exhibit 20: Oujing Fruits enjoyed rapid income growth Exhibit 21: Oujing’s expense ratio has fallen during the past

three years

Source: Company data, Guosen Securities (HK) Source: Company data, Guosen Securities (HK)

6 Fresh orange output is expected to

rebound; orange juice price could

remain stable

6.1 China’s fresh orange output is expected to rebound

According to Tianyi’ s senior executives, as China’s fresh orange output declined in

FY2010/11, the purchasing volume of fresh oranges underwent a industry-wide decrease,

and Tianyi’s concentrated orange juice output fell accordingly. We expect that China’s

fresh orange output will rebound 30% in FY2011/12. Excluding the impact of acquired

capacity, Tianyi’s fresh orange processing volume will rebound to a greater extent.

6.2 FCOJ price is expected to be relatively stable

FCOJ prices in US futures markets maintained a growth trend in the past two years, and

were hovering at around the level of US$170/lb most recently. At the same time, China’s

FCOJ import price was at a relatively high level at the end of last year. In view of the

anticipated price changes caused by factors such as whether, we expect that Tianyi will

slightly lower its FCOJ price this year, possibly by 5% to 10%.

Exhibit 22: FCOJ futures price fluctuated near record high in

2011

Exhibit 23: China’s FCOJ import price

Source: Wind, Guosen Securities (HK) Source: China’s General Administration of Customs, Guosen

Securities (HK)

19,458,248

52,497,178

85,658,470

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

80,000,000

90,000,000

Dec/08 Dec/09 Dec/10

Revenue of Oujing Fruits (Unit: RMB 000’)

Unit: RMB 000’

-5%

0%

5%

10%

15%

20%

25%

Dec/08 Dec/09 Dec/10

Selling and distribution expense ratio

Administrative expense ratio

Finance expense ratio

0

50

100

150

200

250

Jan/0

0

Aug/0

0

Ma

r/0

1

Oct/01

Ma

y/0

2

De

c/0

2

Jul/03

Fe

b/0

4

Sep/0

4

Apr/

05

No

v/0

5

Jun/0

6

Jan/0

7

Aug/0

7

Ma

r/0

8

Oct/08

Ma

y/0

9

De

c/0

9

Jul/10

Fe

b/1

1

Sep/1

1

Closing price of ICE orange juice futures (Unit: USD/lb)

Unit: USD/lb

0

500

1,000

1,500

2,000

2,500

3,000

Ja

n/0

8

Apr/

08

Jul/08

Oct/08

Ja

n/0

9

Apr/

09

Jul/09

Oct/09

Ja

n/1

0

Apr/

10

Jul/10

Oct/10

Ja

n/1

1

Apr/

11

Jul/11

Oct/11

FCOJ import price (Unit:US$/tonne)

Unit:US$/tonne

We expect China’s fresh orange

output to rebound 30% in FY2011/12

and for Tianyi’s fresh orange

processing volume to recover by a

greater magnitude.



7 Profit forecasts and investment

suggestion

7.1 Profit forecast

We expect that, as Tianyi’s FCOJ production capacity expands significantly in FY2011/12,

the orders from clients could double from the previous year. Besides, FCOJ fibre orders

will also double, and the capacity expansion of its new factories in Chongqing will help it

fulfill orders. The expiration of the lease of its 10,000-mu orange cultivation base in

Sanming will lead to the decrease of the company’s orange cultivation area, but in

consideration of the increase in per unit area yield, Tianyi’s fresh orange output won’t

show significant decrease.

It’s expected that the price of Tianyi’s processed products will fall by 5% to 10%, while the

price of oranges used for juice extraction will fall by 15%-30%. Assuming that the former

falls 10% and the later falls 20%, we can see that the gross profit margins of Tianyi’s

processed products will actually rise. We expect the company’s revenues for the three

years from FY 2011/12 to FY 2013/14 will be RMB638 million, RMB768 million and

RMB835 million respectively.

Exhibit 24: Gross margin assumption

2009A 2010A 2011E 2012E 2013E

High-quality whole-sale fresh oranges (%) 65.4 - - - -

Whole sales fresh oranges (%) 42.5 57.0 46.2 47.3 48.3

Oranges used for FCOJ production (%) 49.0 60.7 50.9 51.8 52.8

FCOJ (%) 45.5 34.7 42.0 42.0 42.0

FCOJ fibre (%) 62.2 55.7 60.7 60.7 60.7

Orange sac (%) 86.5 86.5 - - -

Others (%) 24.2 19.9 - - -

Total gross profit margin (%) 55.1 56.6 49.8 49.9 50.2


Exhibit 25: Output assumption

Unit: tonne 2009A 2010A 2011E 2012E 2013E

Wholesale fresh oranges 93,166 64,671 62,519 99,000 109,000

self produced oranges used for processing

53,111 59,868 62,519 99,000 109,000

FCOJ 11,217 8,834 16,784 17,624 18,505

FCOJ fibre 20,021 18,6 3 33,520 35,196 36,956

Orange Sac 280 221 - - -




Exhibit 26: Revenue assumption

RMB 000’ 2009A 2010A 2011E 2012E 2013E

High-quality wholesale fresh oranges

44,308 - - - -

Wholesales fresh oranges 140,483 149,534 115,534 186,611 209,570

Oranges used for FCOJ production 24,473 47,894 40,012 64,627 72,578

FCOJ 33,443 152,244 260,337 278,821 298,617

FCOJ fibre 136,895 136,949 221,857 237,609 254,480

Orange sac 18,641 17,150 - - -

Others 6,542 1,427 - - -

Revenue 504,785 505,198 637,741 767,668 835,245


7.2 Valuation suggestion

We believe Tianyi’s capacity expansion will help it achieve economies of scale, and lower

its expense ratio. Besides, Tianyi is exempt from income tax in accordance with

favourable agricultural policies. We expect that the company’s profits for the three years

from FY2011/12 to FY2013/14 will be RMB201 million, RMB246 million and RMB272

million respectively, with a CAGR of 21%; EPS will be RMB0.17, RMB0.21 and RMB0.23

respectively, with a CAGR of 14.5%. The closing price of HK$1.41 reflects prospective

P/E ratios of 6.8x, 5.6x, and 5.0x respectively for the next three fiscal years.

China’s concentrated orange juice industry is an emerging industry with good growth

prospect. As a leading company in the industry with advantages in aspects of cultivation,

processing technique, business scale, etc, Tianyi is on course for higher growth. Based

on our forecasts of Tianyi’s EPS CAGR in the next three years, and its stock price, the

company’s PEG ratio is expected to be 0.52x，indicating that there is huge potential for

value investing. We apply a HK$1.8 price target for Tianyi, representing a FY2011/12F

PE of 8.7x, and a potential upside of 28%.

7.3 Risk factors

The output of major FCOJ producing countries, such as Brazil and the U.S.

increases. Tianyi’s pricing power is mainly affected by factors including the price of

FCOJ futures, prices of import and export goods, etc, and the output increase in

major orange juice producing counties could cause FCOJ prices to slump, and the

market share of imported FCOJ will rise accordingly.

Fresh orange output declines, or fresh orange price climbs. Tianyi’s juice

production depends mainly on the purchasing volume of fresh oranges used for

juice extraction. If there is an industry-wide orange output reduction caused by

factors including climate changes, Tianyi will face raw material shortages, and its

self-operated orange cultivation bases will also face the problem of output reduction.

If the price of fresh oranges climbs, Tianyi’s gross margin will be squeezed.

Adjustments of agricultural policies. Tianyi has been exempt from income tax

since the beginning of 2011, but it is still uncertain whether the authority will make

adjustments to the taxation policies of agricultural companies, which will possibly

increase Tianyi’s tax burden.



Demand in the beverage industry weakens. If the production of fruit juice drinks

is restraint by food safety problems or other negative issues, the demand for

concentrated juice will decline.

Appendix 1: Income statement

RMB 000’ 2010A 2011A 2012E 2013E 2014E

Revenue 479,333 455,185 637,741 767,668 835,245

Cost of sales (293,807) (313,908) (393,917) (506,533) (555,569)

Gross profit 185,526 141,277 243,824 261,135 279,676

Grain from changes in fair value of biological assets less estimated point-of-sale costs

77,125 113,142 73,789 121,773 139,605

Other revenue 3,843 7,290 0 0 0

Interest income (24,618) (24,288) 0 0 0

Distribution costs (24,618) (24,288) (33,391) (40,578) (43,941)

Administrative expenses (45,362) (52,540) (63,774) (76,767) (83,524)

Other operating expenses (258) (688) (1,275) (1,535) (1,670)

Profit from operations 196,256 184,193 219,172 264,028 290,145

Finance costs (1,798) (18,450) (18,000) (18,000) (18,000)

Profit before taxation 194,458 165,743 201,172 246,028 272,145

Income tax (36,212) (11,975) 0 0 0

Profit for the year 158,246 153,768 201,172 246,028 272,145

Profit attributable to minority shareholders

1,693 0 0 0 0

Profit attributable to equity shareholders of the Company

156,553 153,768 201,172 246,028 272,145




Appendix 2: Balance sheet

RMB 000’ 2007A 2008A 2009A 2010A 2011A

Cash and cash equivalents 16,451 67,783 193,121 429,074 555,996

Other short-term investments

0 0 2,678 2,650 0

Receivables 43,727 122,513 65,103 39,468 50,279

Accounts and notes receivable

38,687 113,784 63,702 36,446 43,765

Other receivables 5,040 8,729 1,401 3,022 6,514

Inventories 59,207 33,060 9,561 4,534 7,925

Other current assets 14,978 14,770 69,828 57,074 62,303

Total current assets 134,363 238,126 340,291 532,800 676,503

Net value of fixed assets 19,003 27,459 108,360 142,711 158,897

Land use rights 20,919 11,878 39,167 137,869 134,687

Other non-current assets 0 0 5,913 5,100 120,350

Total non-current assets 39,922 39,337 153,440 285,680 413,934

Total Assets 174,285 277,463 493,731 818,480 1,090,437

Accounts and bills payable 231 202 9,960 10,467 8,210

Tax payable 12,125 15,137 3,304 4,764 0

Short term and long term liabilities due in the current period

14,975 17,000 0 0 255,816

Other current liabilities 7,650 5,425 8,968 7,255 10,265

Total current liabilities 34,981 37,764 22,232 22,486 274,291

Long term liabilities 0 35,000 5,100 138,589 5,100

Other non-current liabilities 6,913 2,459 11,725 23,670 21,310

Total non-current liabilities 6,913 37,459 16,825 162,259 26,410

Total liabilities 41,894 75,223 39,057 184,745 300,701

Common equity 18,000 730 8,791 8,822 8,971

Reserves 101,152 181,240 445,783 624,913 780,765

Share premium 0 17,270 146,374 149,444 165,961

Retained earnings 96,875 150,733 233,957 378,010 514,268

Other Reserves 4,277 13,237 65,452 97,459 100,536

Total common equity 119,152 181,970 454,574 633,735 789,736

Owner’s equity attributable to parent company

119,152 181,970 454,574 633,735 789,736

Minority interest 13,239 20,270 100 0 0

Total owner’s equity 132,391 202,240 454,674 633,735 789,736

Total liabilities and equity 174,285 277,463 493,731 818,480 1,090,437




Stock ratings, sector ratings and related definitions

Stock Ratings:

Buy: A return potential of 10 % or more relative to overall market within 6 – 12 months.

Neutral: A return potential ranging from -10% to 10% relative to overall market within 6 – 12 months.

Sell: A negative return of 10% or more relative to overall market within 6 –12 months.

Sector Ratings:

Buy: The sector will outperform the overall market by 10% or higher within 6 –12 months.

Neutral: The sector performance will range from -10% to 10% relative to overall market within 6 –12 months.

Sell: The sector will underperform the overall market by 10% or lower within 6 – 12 months.

Information Disclosures

Interest disclosure statement

The analyst is licensed by the Hong Kong Securities and Futures Commission. Neither the analyst nor his/her associates serves as an

officer of the listed companies covered in this report and has no financial interests in the companies.

Guosen Securities (HK) Brokerage Co., Ltd. and its associated companies (collectively “Guosen Securities (HK)”) has no disclosable

financial interests (including securities holding) or make a market in the securities in respect of the listed companies. Guosen Securities

(HK) has no investment banking relationship within the past 12 months, to the listed companies. Guosen Securities (HK) has no

individual employed by the listed companies.

Disclaimers

The prices of securities may fluctuate up or down. It may become valueless. It is as likely that losses will be incurred rather than profit

made as a result of buying and selling securities.

The content of this report does not represent a recommendation of Guosen Securities (HK) and does not constitute any buying/selling or

dealing agreement in relation to the securities mentioned. Guosen Securities (HK) may be seeking or will seek investment banking or

other business (such as placing agent, lead manager, sponsor, underwriter or proprietary trading in such securities) with the listed

companies. Individuals of Guosen Securities (HK) may have personal investment interests in the listed companies.

This report is based on information available to the public that we consider reliable, however, the authenticity, accuracy or completeness

of such information is not guaranteed by Guosen Securities (HK). This report does not take into account the particular investment

objectives, financial situation or needs of individual clients and does not constitute a personal investment recommendation to anyone.

Clients are wholly responsible for any investment decision based on this report. Clients are advised to consider whether any advice or

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sell or a solicitation of an offer to buy or sell the securities mentioned.

This report (including any information attached) is issued by Guosen Securities (HK) Brokerage Co., Ltd, a member of Guosen Securities

Co., Ltd. Some parts of the report may have been originally published in Chinese, within the People’s Republic of China, by Guosen

Securities Co., Ltd. That material has been reviewed, translated and, where applicable, adapted by Guosen Securities (HK) Brokerage

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