Taking into account the spike in pork prices, CIMB-GK have reduced their FY07-08 earnings estimates by 3-5% and their tp to $2.60 from $2.70, still based on 30x CY08 PER. Synear remains undervalued to other market leaders in the F&B space, which are trading at more than 30x CY08 PER.

30x PER may not be unusual for China listed stocks, but I think those listed here command a lower valuation.

Our view

China?s new consumers suffer the same ?cash-rich, time-poor? problems as

consumers the world over ? and Synear?s doubling of frozen food capacity is

aimed at tapping these new customers. We forecast fast-growing earnings at a

reasonable multiple, and initiate with a STRONG BUY on fair value of S$2.68.

Anchor themes

We believe that China?s consumers have begun a great leap upwards ? to higher

disposable incomes and once-in-a-generation spending growth: some 60mn people

have already made the leap to income of US$3,000 pa and we believe another

350mn are right behind. Broadly, all consumer stocks should benefit.

With rising incomes changing lifestyles, convenience will be the main trend for the

food industry in future, leading to higher demand for easy-preparation meals

 

Synear Food Holdings (S$1.94) - Initiating coverage ? Feeding China's voracious appetite

Ramping capacity to extend market leadership. Synear is the market leader for quick freeze food in China, with a 15-20% market share. Supported by its vast sales and marketing network of 546 distributors servicing over 20 Chinese provinces, the company plans to extend its market leadership by establishing manufacturing facilities in Shenyang, Chengdu, Guangzhou and Huzhou. Synear is expected to raise production capacity by 83% to 660,000mt p.a. by end-FY08.

Focus on enhancing the ?Synear? brand name. In addition to capitalising on the strong ?Synear? brand name and the tremendous market potential in China, the company is focusing on strengthening its brand equity. A more reputable brand would allow the company to sustain its strong growth momentum as repeat customers increase and customers are more willing to try Synear?s new products.

Able to raise ASP and expand margins. The strong ?Synear? brand name has allowed the company to increase its ASP to offset the impact of rising costs. It also managed to shift its sales mix towards premium products such as its ?Shoudatianxia? dumplings, the most expensive in China (almost double the price of the regular dumplings). This is paving the way for higher product prices and sustainable margin expansion.

Initiating coverage with Outperform and target price of S$2.60. Our target price is based on 30x CY08 earnings, in line with peer average. We see the current discount as unjustified given Synear?s market leadership position and strong growth potential, supported by rosy industry prospects and a clear expansion strategy. With a potential upside of 34%, we initiate coverage on Synear with an Outperform recommendation.