Three-A Resources - All ready to feast in China BUY

- We re-iterate our BUY recommendation on Three-A Resources (3A) but clip our fair value from RM1.70/share to RM1.50/share, based on a target PE of 20x FY13F revised earnings as we impute in a more conservative utilisation rates based on progressive earnings contributions from 3A’s maiden China plant. Our target PE is close to China consumer peers’ average of 18x. 

- Following a recent meeting with management, our longterm conviction in 3A is reinforced – its structural transformational growth is firmly on track. We understand commercial production of its ‘blueprint’ manufacturing hub in Qinhuangdao, China, is scheduled to kick-off this June. 

- The group is in the midst of fine-tuning its machineries at the state-of-art facility which boasts 13,600m² total floor area. As present, installed HVP production line with a capacity of 6,000MT p.a. is already more than 3x the size for equivalent produce in Malaysia. To underline our growing confidence, expansion plans for an additional 6,000MT (+100%) has already been targeted for completion by end-FY13F.   

- More importantly, produce in China is expected to yield higher margins due to:- 

1) A strong focus on higher value products such as HVP powder (hydrolysed vegetable protein) vs. HVP liquid and; 

2) Absence of quality competition within the local market. 

- Contrary to perception, most local producers operate on a much smaller scale, while a few bigger ones lack international accreditation. In contrast, 3A adheres to European standards, and hence, is expected to enjoy better pricing power.

- We estimate earnings contributions from the China plant to rise from 5% in FY12F to 23% next year, with FY13F being the inflexion point. Earnings near term will remain predominantly Malaysia-driven, given enlarged capacities from the 2^nd  caramel colour plant (+4,000MT or 100%) and an average utilisation rate of ~70%. 

- Valuation is attractive and the current weakness in share price is an excellent opportunity to accumulate the stock. As it is, 3A’s forward PER of 15x is at a deep 20% discount to the stock’s 5-year mean of 19x. Further, we see material upside to our earnings forecast from the potential expansion to other geographical locations in China

Source: AmeSecurites