Market Calls

PUBLISHED : Monday, 03 October, 2011, 12:00am
UPDATED : Monday, 03 October, 2011, 12:00am


China Yurun Food (1068) had a huge week. The hog farmer and vendor of meat products issued a stock exchange announcement last Monday saying that negative press reports and rising materials costs will hurt profits. The firm's shares promptly fell 31 per cent on the day.

In a throwback to China's 2008 melamine scare, management acknowledged last month that one of its hogs bought from a farm tested positive for clenbuterol, a banned substance. This followed a National Business Daily report on September 1 that Yurun products contained clenbuterol. Yurun has been battling negative publicity all year. An article in Next Magazine in June said it relied on government subsidies to prop up its profit margin, and the issue was picked up by 21 Century Media in August.

Jacqueline Ko (Kim Eng) says the profit warning caught her off guard.

'The profit warning was a big surprise and it was quite different from where the company had guided the market,' Ko says. 'It will hurt sentiment.' She added that analysts have adjusted Yurun's figures and target price substantially.

She says investors were taken aback by the fact the profit warning came so soon after three Yurun executives sold shares in the firm. 'Three of the senior management exercised their stock options on August 24, less than a month before the profit warning,' Ko says. 'Investors are very upset with that.'

Emma Liu (Nomura) is positive on Yurun. She says the stock has been sufficiently sold to be cheap and therefore attractive.

'I am still positive on the company ... It is suffering from negative news flow,' Liu says. 'The share price collapse has more than factored in the bad news.'

But she does wish the firm had given a more detailed description of how bad it expected its third quarter to be. It held a conference call for analysts last Monday after it issued the profit warning. She says the firm would not give a detailed breakdown on its third-quarter expectations because its September numbers remain unaudited.

When asked if the firm should have provided better disclosure on why the three Yurun executives sold company shares so soon before the profit warning, she hesitated a little before answering. 'I don't expect that Chinese companies can explain much on this issue [the sale of shares]. Everyone would say it was a personal decision,' Liu says.

Titus Wu (DBS Vickers) maintains a 'fully valued' rating on Yurun. ('That means sell,' he says.)

He says the firm has complained of negative publicity, but he sees more fundamental problems with the pork industry, such as the high cost of hogs. Wu expects that it will take the industry at least six months to get costs under control and recover its former profitability. He is also sceptical that Yurun will be able to repeat recent years' stellar growth as it already has a lot of increased capacity to put to use.

As for the insiders' share sales, Wu was underwhelmed by the firm's explanation of events during Monday's call with analysts.

'The chairman said he did not know anything and thought it was a personal action of the managers. He thought the managers selling shares did not know of the profit warning,' Wu says. 'The CEO not knowing of the profit warning ... is impossible.' Wu says that Zhu Yiliang, chief executive of Yurun, was one of the insiders selling shares. He adds that Zhu is the brother of the chairman.