People Food - 1Q09 Earnings Fell 69.9%

Company Overview — While mgt believes profit margins could potentially recover in 2H09 if there is a gradual increase in hog prices, operating environment this year is challenging and it is difficult to make up for the 69.9% earnings decline in 1Q. Mgt is more optimistic on the FY10 outlook. The market has factored in only a modest 8.9% earnings decline this year. Share price dropped 11.5% this year, compared to China Yurun's 31.5% gain. People's Food trades on 5.5x consensus FY09E estimate with Rmb1.1bn net cash.

Business Strategy — Maintain slaughtering capacity. Focus on downstream processed products operation. Began upstream integration into hog farming.

Industry Overview — While Pork represents over 60% of China's total meat consumption, its supply is still very fragmented with the top three operators accounting for less than 4% of the market supply. China hog prices have become much more volatile in recent years, which cause significant swings in food supplier margins.

Competitive Analysis — Large scale in slaughtering operating. Also downstream integrated with its own brand of processed meat products. Began upstream integration into hog farming.

Recent Results — 1Q09 net profit fell 69.9% yoy on 15% revenue decline. While Fresh Pork revenue rose 12.4% yoy, Frozen Pork, High Temp Meat Products and Low Temp Meat Products fell 31.8%, 21% and 8% respectively.

Strengths — Large operating scale. Free cash generation. Net cash.

Weaknesses — Volatile hog supply. Animal illness and food safely issues could affect consumer confidence.

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