The news: Aiming to blunt a sharp rise in pork prices, China's Ministry of Commerce said Friday that it will release some pork reserves onto the market. It also plans to boost stocks from current levels around 200,000 metric tons at a gradual pace, likely so that releases of pork from its reserves will have a greater impact on price levels in future. At the current level, China's pork reserves, set up four years ago, are equivalent to a tiny fraction—about 0.4%—of annual pork consumption of 50 million tons, underscoring the difficulties the government faces in using such stockpiles to manage demand. The moves come after pork prices reached record levels last month, rising 57% from a year earlier and far outpacing a 6.4% rise in the country's consumer price index—itself the quickest pace of increase in more than three years.
Taking aim specifically at boosting pork supply, China's cabinet said Wednesday it would resume a RMB2.5b investment program to support large-scale pig farms, and provide a subsidy of RMB100 per sow. But the measures may take four to six months to show results, in line with the amount of time it takes to rear a pig for slaughter, analysts say.
Our thoughts: With PRC meat consumption growth expected to reach 61kg per person by 2015 (2009: 54kg), we believe that China Animal Healthcare (CAL) will continue to benefit from current tight supply situation as China aims to increase food production in the near term to curb rising food prices. We project 25% earnings growth in FY11, driven by contribution from two new vaccines i.e. food-and-mouth disease and blue ear. We maintain BUY with TP of S$0.42, pegged to 7x FY11F EV/EBITDA.
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