Wilmar Int’l Ltd (OCBC)

Maintain HOLD

Previous Rating: HOLD

Current Price: S$5.33

Fair Value: S$5.68

China price caps still in place. Recent media reports suggest that China is maintaining its price caps on essential food items for now, with some even speculating that the government could keep these caps until Mid-Autumn Festival in early Oct; these measures are part of Beijing's efforts to contain inflation. Earlier in Jun, a Reuters report citing industry sources said that China has lifted the 7-month cap on retail vegetable oil prices; although it notes that it is unclear if cooking oil producers still need government approval to raise prices following the removal of the price freeze.

Unilever may be an exception. On a separate but related note, Anglo-Dutch consumer goods giant Unilever has gone ahead with its product prices despite being asked not to; it was also fined RMB2m, after the government said that the group's planned price hikes contributed to inflationary expectations and also triggered panic buying. While industry watchers note that this could be a sign that price caps are not effective in a market economy, and this could lead to the Chinese government adopting a fresh approach on price controls for consumer goods, they remain divided if other companies would follow Unilever's move.

No impact on Wilmar. In any case, we do not expect the latest developments to have any impact on Wilmar International Limited (WIL), as the company has reportedly said that it was not aware of any change in the government's stance towards the price controls. Furthermore, WIL had earlier revealed that the Chinese government has released some 1.2m tons of subsidized soy beans to WIL (which can be converted into 200k tons of cooking oil); this in an effort to reduce cost pressures on the major cooking oil producers. As such, we believe that its Consumer Product segment's PBT margin per ton should be bottoming.

Maintain HOLD with S$5.68 fair value. Nevertheless, we believe that inflation in China (and other parts of the world, especially in developing countries) could continue to be an issue and we would monitor the situation closely. Meanwhile, the renewed risk of a global economic slowdown (including in China) could also cap the stock's upside potential in the near to medium term. As such, we maintain our HOLD rating and S$5.68 fair value. We would be buyers closer to S$5 as we do see better long-term prospects for the group, buoyed by its recent expansion in the sugar industry; this following the recent planned acquisition of the business assets of Proserpine Cooperative Sugar Milling Association.