Deal with rival lifts Lam Soon
WHEN Lam Soon Food went public in July 1991 its share price went from an opening $2.10 to $4.60 within a year on the back of investor enthusiasm for China concept stocks.
But the general weakness of the local equity market coupled with the group's disappointing 1992 interim results saw the share fall to $2.40 before rebounding to its current level of $3.
Brokerage Smith New Court predicts group earnings for 1993 will rebound by 30 per cent to the 1991 level of $83 million. The forecasts are based on softer wheat prices throughout 1993 and the benefit brought in by the co-operation with major rival Hop Hing Oil.
The two companies have reached an agreement to eliminate future price wars and plan to increase edible oil prices by 10 per cent in stages from April to December.
Lam Soon Food is the larger of the territory's two flour manufacturers. The group commands an estimated share of 40 per cent in the local flour market as opposed to 10 per cent for its rival.
In view of the over-supply in the local flour market, Lam Soon Food is expanding rapidly into China. The group is building a factory on a 500,000 square foot site in Shenzhen which will accommodate its flour production and other operations, and is expected to be completed by early 1994.
The new plant will increase the group's production, and its excellent location with good sea and land transport links will enable the group to explore the potentially huge Chinese markets more effectively. Sales to China account for 26 per cent of the group's total flour revenue. Completion of the new plant is expected to lift the China sales portion to more than 40 per cent of group flour turnover by 1995.
Production of edible oil is carried out at the group's 131,000 sq ft factory at Lai Chi Kok which has an annual output of 40,000 tonnes. To expand production, the group has recently started its new oil plant in Panyu, which has an annual capacity of 8,000 tonnes. Moreover, it is building two oil plants in Shekou and Beijing. Annual production capacity will triple to 120,000 tonnes when these plants are completed by early 1994.
The group reported a 23 per cent drop in 1992 earnings to $64 million. Turnover declined by four per cent to $722 million, mainly attributable to an 8.5 per cent contraction in sales of edible oil. The reduction in edible oil revenue was caused by the termination of bulk edible oil trading since 1992 in view of low profit margins.
Smith New Court estimates the group earnings will have a 22 per cent growth to $83 million in 1993, another 18 per cent growth to $98 million in 1994.
The company's share is trading about 11.4 times on 1994 prospective P/E, making the current price attractive.