United Food's (UFood) -Sign of Recovery

United Food's (UFood) FY05 results were marginally below our expectation.
Revenue grew 15% yoy to Rmb3.3b, driven by Soybean Processing. But net
profit declined 25% yoy to Rmb196m. 4Q05 net profit also fell 8.6% yoy but
grew 14% qoq. A final dividend of Rmb0.08 was declared, implying a 33% payout
ratio and a respectable 5% yield.
Quarterly recovery from most sectors in 4Q05. Animal Feed grew 40% qoq
while Processed Meat and Healthcare Products each rose over 20%. We believe
this was due to the sufficient pig supply, favourable pig prices and recovery in
pig rearing.
Signs of recovery in FY06. Pig supply continues to be sufficient, which will support
stable pig prices in 1H06. Price of animal feed and its major ingredient, soybean
meal, also had a nice rebound in Jan 06. We feel positive about the contribution
from two potential projects although they are still conceptual.
Valuation. The stock trades at an undemanding 6.3x FY05 PE and 5.6x FY06 PE,
and a 45% discount to its net asset value of Rmb1.94/share. The decent dividend
yield could support the share price. Potential risks include higher-than-expected
pig prices and the avian flu. We cut our FY06 net profit forecast by 8% to reflect
the uncertainties ahead. However, we believe the downside has largely been
factored in and thus raise our target price to $0.28 (7x FY06 PE, slightly lower
than the average PE of China stocks due to the uncertainties). Given the attractive
dividend yield, improving industrial environment, and reasonable PE range,
we upgrade the stock from HOLD to BUY.