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Small-cap school: Special lecture on poultry industry

April 10, 2014 14:07|April 10, 2014 14:08
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Rivalry between large players

Why should we focus on the poultry industry?
It is not simply because Cheon Song-yi, the main character of Korea’s hit
drama My Love From the Stars, eats fried chicken and drinks beer
(dubbed chi-mec) when she feels blue or on snowy days. The real reason
is the poultry industry still has room to benefit from an ongoing reshuffle
led by integrated poultry firms and changing demographic and dietary
habits. We believe the industry consolidation pushed up the prices for live
broilers (shipped to slaugterhouses or integrated poultry firms after being
raised by farmers) and slaughtered chickens. In line with more singleperson
households and larger elderly population, demand for food delivery
services and high-protein foods is mounting (chicken is a popular delivery
dish and considered high in protein). The chicken slaughtering volume has
grown steadily over the past decade at 4.8% CAGR. We forecast the
industry will grow 4.5% in 2014F.

2014 matters: Prepare for a boom without supply glut
As poultry firms struggled with a bird flu outbreak in 1Q14, they are
unlikely to improve as fast as they did in 2013. However, 2Q14 should be a
meaningful time to invest. Typically, the 2Q and 3Q are peak periods
because they feature the three hottest days (or bok in Korean) according
to the 24 solar terms. Koreans regard chicken stew as a dish to weather
the heat, especially around the bok days, which explains surging poultry
demand in 2Q and 3Q. Aside from the seasonal factor, the poultry industry
will likely benefit from global sporting events such as the 2014 FIFA World
Cup Brazil and the Incheon Asian Games. Previously, such sporting events
have pushed up the quarterly slaughtering volume by an average 8.4%.
Thus, we believe it is timely to buy poultry stocks now that 1Q14 earnings
have bottomed and the abovementioned benefits are likely on the way.

Getting the most from the poultry shuffle: Dongwoo, Harim and Maniker
We analyzed the poultry industry’s competitive landscape based on
earnings and market shares over the past decade. The study leads us to
select Dongwoo as the top pick for its relatively attractive valuations. We
also like Harim, the industry leader with the biggest production capacity in
Korea, and Maniker, which will likely drive up earnings with aggressive
business strategies in 2014.
*Source: Korea Investment & Securities Co.
*Pls refer to the attached file for the full text.