HSU FU CHI (Lim&Tan)

S$4.00-HFCS.SI

􀁺 Hsu Fu Chi (HFC) which requested for a suspension of trading in its shares yesterday said that they are engaged in preliminary confidential discussions with Nestle S.A (Nestle) in relation to a possible transaction which may or may not lead to an offer being made.

􀁺 A spokesperson from HFC was quoted in Business Times as saying that HFC has been engaged in talks with several parties including Nestle on a potential long term strategic partnership and these interactions have taken place with several other parties from Japan, Europe and US for years.

􀁺 The attractiveness of HFC is their widespread and self-owned distribution networks across major cities in China.

􀁺 HFC has been ranked top 3 confectionary seller in China by several rating companies over the last few years.

􀁺 HFC’s track record has been consistent and impressive since 2004 when its sales was only Rmb1.4bln versus last year’s Rmb4.3bln while its profit grew from Rmb169mln to Rmb602mln.

􀁺 HFC which was listed by Cazenove in late 2006 at 85 cents has seen its share price perform strongly since early 2009 when it hit bottom at 60.5 cents. It has since been on a consistent uptrend, hitting its all time high of $4.40 on 30 June ’11 before pulling back to $4 currently.

􀁺 At S$4, its market cap is S$3.18bln, trailing PE is 24x and based on consensus expectations of 12% growth, forward PE would decline to 21x.

􀁺 In comparison, Nestle is capitalized at US$215.6bln with trailing PE at 20x and forward PE at 16x.

􀁺 But HFC’s peers in Hong Kong and Taiwan are trading at 25-30x PEs.

􀁺 If the Hsu family who collectively owns 56.48% of the company accepts Nestle’s offer, it would trigger a mandatory general offer.

􀁺 Other notable shareholders include Baring Private Equity (14.81% stake) who bought their stake from Transpac at $1.50 a share in early 2010 and Arisaig Partners (8.95%).

􀁺 The Hsu family would also have to consider whether the Chinese authorities who had blocked Coca Cola’s acquisition of Hui Yuan Juice last year would allow them to sell their controlling stake to Nestle.

􀁺 Trading liquidity in HFC’s shares had not been fantastic with average volume of about 150K-200K in the last 6-12 months.

􀁺 Our view since mid 2009 has been that HFC is an attractive and ideal candidate for dual listing in Hong Kong or Taiwan as its peers there are trading at almost 2-3x its valuations despite similar size and return profiles.

􀁺 Our last recommendation in Feb ’10 was a BUY when the stock was around the $2 level.