2011年1月18日 36页


China Consumer Staples
Food: When Inflation Stays Stronger for Longer
 Upside Risk to Food Inflation — We first discussed the return of food inflation in
Feb 2010 (https://www.citigroupgeo.com/pdf/SAP34647.pdf). China wholesale
agriculture prices accelerated sharply in 4Q10, and food inflation rose from 3.7%
in Jan-10 to 11.7% in Nov. Food prices look to remain high in 1H11 on supply
shortage and speculation from excess liquidity. Food inflation is positive to
upstream food companies, and we see risk in downstream companies’ earnings.
However, there will be opportunities for downstream leaders who can raise prices
when input cost stabilizes. Top picks are China Green (0904.HK), Modern Dairy
(1117.HK), and China Yurun (1068.HK). Top Sell Tsingtao Brewery (0168.HK).
 Government Policy Response — China interfered with retail prices of selected
food products during the last inflationary period in 2008. The policy response so far
has been mild, mainly targeting soft commodities speculation. The government
has asked the four major edible oil producers not to raise retail prices before
March. We also see restraints from other downstream producers on raising prices.
 Upstream Food — Agriculture companies are the primary beneficiaries. Upstream
food processers also see direct cost pass-through. Upstream companies in
general enjoyed recovery in product prices and margins expansion in 2010. While
product prices look to stay high in 1H11, comps will be more difficult in 2H11 on a
higher base unless food inflation continues to rise ahead of expectation this year.
 Downstream Food — We cut FY10/11 earnings by 2-8/%. We expect 5-15% raw
material and other variable costs (labor, utilities, etc) to increase in 2011. To
maintain flat margin from 2010, downstream companies need to raise prices by
mid-to-high single digits. Top buy Yurun: hog slaughterer benefits from hog prices
inflation and pork processing. Top sell: Tsingtao Brewery: 1) beer sector to see
stronger cost increase in 2011; 2) Shifted focus to market share in inflation
environment, which could hurt profit more.