JT 8.2016This article, written by Jennifer Tan (left, Director, Research & Products,  Equities & Fixed Income, at the Singapore Exchange), originally was published in SGX's kopi-C: the Company brew series on 29 April 2016. The article is republished with permission.


Japfa CEOJapfa CEO, Tan Yong Nang. (Photo: Company)

Keeping cows and chickens happy is an important part of Tan Yong Nang’s job description.

The Chief Executive Officer of Singapore-listed Japfa Ltd believes animal welfare is essential to the industrialised agri-food company’s vision of feeding Asia’s developing economies with essential proteins.

“Great milk comes from happy cows,” said Tan, 54.

“Animals that are stressed cannot produce, so we make sure our cows are comfortable in their pens, our chickens have clean coops with low levels of ammonia, and they are physically as well as emotionally healthy.”

To build a good life for its animals, Japfa consulted renowned Colorado cow whisperer and animal scientist Temple Grandin to design its processing yards in 2014, incorporating her famous S-shape design in its beef feedlot in China.

LQM ad141e“We’ve adopted a sophisticated approach to animal health, nutrition, welfare and husbandry – all of which reinforce our high production yields and the quality of our products.”

- Tan Yong Nang
CEO

Japfa Ltd

The S-ramp reduces stress to livestock by taking advantage of natural cattle behaviour.

Grandin also spent two days in Japfa’s dairy farms in Shandong province, inspecting the company’s facilities, operating procedures, and working with its livestock handlers.

“We’ve adopted a sophisticated approach to animal health, nutrition, welfare and husbandry – all of which reinforce our high production yields and the quality of our products,” Tan said.

Japfa aims to capitalise on the rising affluence of middle- and lower income consumers in the region’s emerging markets.

“Per capita consumption of protein in the economies of China, India, Myanmar, Indonesia and Vietnam is still low,” he noted.

“There are over three billion people living in our target markets who account for more than 40% of the world’s total population. To feed them, you need economies of scale, as well as scientific and industrialised methods of farming.”


Integrated Agri-Food Chain

Japfa, which listed on SGX in August 2014, has a market capitalisation of S$1.2 billion. Between 2013 and 2015, it averaged an annual revenue of US$2.81 billion (S$ 3.8 billion), operating profit of US$203.3 million, and core profit after tax and minority interests (PATMI) of US$52.9 million (S$70.8 million). Core PATMI without foreign exchange averaged US$68.7 million (S$93.0 million) over the period.

For Japfa, core PATMI, which excludes biological asset valuation, is an important measure of income attributable to shareholders. The company goes a step further to provide estimated core PATMI without forex that helps shareholders better understand its operating performance.

In the 2016 year-to-date, Japfa shares have generated a total return of 50%, compared with the benchmark Straits Times Index’s (STI) total return of 0.8%.

Japfa CowsJapfa's dairy farm in Malang is the largest in Indonesia.
(Photo: Company)

Backed by two generations of farming experience, Japfa operates industrial-scale farms that are vertically integrated across the value chain – from feed production and breeding to milking and fattening, as well as food processing and distribution.

Japfa’s 58%-owned unit PT Japfa Comfeed Indonesia Tbk is listed on the Indonesia Stock Exchange, and runs the country’s largest dairy farm in Malang, East Java, with 7,900 heads of Holstein cattle.

It operates poultry, cattle and aquaculture breeding farms, as well as animal feed manufacturing plants in the country.

LQM 8F7557Our dream is to become a pan-Asian multinational with a good handle on all the major protein groups.

 

- Tan Yong Nang
CEO

Japfa

In China, the Group owns a hub of five dairy farms in Shandong province, with nearly 55,000 heads of Holstein cattle.

Its premium raw milk is sold to leading producers like Inner Mongolia Yili Industrial Group Co Ltd and China Mengniu Dairy Co Ltd.

It also runs a beef cattle rearing and fattening farm in the province.

In the rest of Asia, Japfa operates poultry and swine feedmills and farms in Vietnam, as well as poultry feedmills and breeding farms in Myanmar and India.

For consumer food, Japfa sells ambient temperature, chilled/frozen meat products and snacks under the So Good, So Nice and Good Sozzis brands in Indonesia, while its Greenfields label is the top choice for fresh milk in the country. It also owns the So Yumm brand for shelf-stable sausages in Vietnam.

“Our dream is to become a pan-Asian multinational with a good handle on all the major protein groups,” said Tan, who was appointed Group CEO on 1 January, 2014.

♦  Developing Expertise, Building Scale

Before joining Japfa, the Bachelor of Arts in Economics graduate from University of Cambridge helmed Delifrance Asia Ltd in 2003, and was named COO of Li & Fung Group in 2005. Prior to that, he established his career with private equity group PAMA, and was part of a senior team responsible for its overall portfolio.

“I love food – otherwise I would not be able to excel in my current role,” Tan quipped with a mischievous smile.

Genuine farming expertise, however, is hard to find and even harder to develop, with an extended payback period, he added.

“There are many farms around, but it’s not easy to translate those into industrialised businesses as most are home-run outfits, and it’s very hard to consistently build scale.”

Japfa

Stock Price

94.5c

Market Cap

S$1.7bn

52-week High Low

42c - 98.5c

Dividend Yield

0.5%

PE

7.2x

Source: SGX StockFacts
(data as of 17 Nov 2016)

Another key element is breeding, which is at the heart of Japfa’s operations.

“Breeding determines the productivity of your offspring and the quality of your products,” he said.

Japfa is focused on bio-security, implementing stringent operating procedures while establishing strategic alliances with global leaders in breeding research. Given mounting concerns over food safety and animal disease, the identification, traceability and tracking of livestock is critical.

“To have traceability, you need to have control of your upstream operations. Animal life cycles are long, and breeding operations could span four generations. It’s not easy to build that up well, and consistently,” he added.

Since livestock farming is intensive in nature, disease control is always a priority, particularly in Asia. This is less of an issue in US and Europe, as those continents are less densely packed, and population and livestock are usually not in close proximity, Tan noted.

“We spend a lot of money ensuring disease doesn’t get into the farm – humans shower three times a day to get into a breeding farm, we have a team of vets and our own animal vaccination facility,” he added.

“The large scale of our operations allows a wider geographical spread of our livestock farms, which mitigate the spread and impact of disease.”


Wind in the Sails


Longer term, Japfa’s growth outlook is bright, Tan said.

The company plans to add another hub of five farms, with a holding capacity of 60,000 cattle, in Inner Mongolia. There, it has completed a sixth farm with 9,000 heads of cattle, and milking operations began in the first quarter.

Its swine business is experiencing aggressive growth in Vietnam, while demand for raw milk continues to expand in China.

Myanmar also offers good potential due to under-consumption of proteins in the country, he said. “In Indonesia, protein consumption is low, but in Myanmar, it’s next to nothing.”

Japfa is also well-placed to grow its consumer foods division, given the leading positions of its brands.


Japfa dairyfarmJapfa's milk processing plant with world-class standards in productivity and bio-security. (Photo: Company)
“Consumers are still buying from the wet market today, but when customers switch to the supermarket and convenience store, we’ll be able to tap on it. Our sails are ready – we’re just waiting to catch the wind,” he added.

Likewise, aquaculture will continue to gain relevance, Tan said. Japfa operates five aqua feedmills, as well as several fish and shrimp hatcheries in Indonesia.

“Farmed fish are overtaking catch in the wild. It is likely that for the next generation of consumers, they will be eating more farmed fish than sea catch.”

Looking back, Japfa’s decision to expand beyond its Indonesian roots was instrumental to its growth, Tan said.

“Eight years ago, Japfa was very Indo-centric. I saw the opportunity to grow the business across geographies and across protein classes – not only to run a profitable enterprise, but also to impact people’s lives for the better.”


♦  Get Your Hands Dirty

It’s all about being bold in setting goals, and having the tenacity to overcome challenges that arise. “I’m quite stubborn that way,” he smiled.

In the same vein, Tan enjoys building enterprises. “Isn’t it better to construct the clock, rather than just tell the time?”

Since his previous roles in finance and private equity were mostly transactional or passive in nature, he felt the urge to “get my hands dirty”.

“I wanted to put my money where my mouth was – build something, see the results of that labour, and Japfa gave me just that opportunity,” he added.

The next milestone was a public listing. Historically, the company had used internal cash and borrowings to expand.

“We needed other sources of capital to get to the next phase of exponential growth, and that’s why we went for the IPO in Singapore – equity funding is a key avenue for us,” he said.

Japfa packagedfoodJapfa's consumer food business has facilities to manufacture and process chilled or frozen poultry, beef, and seafood.
(Photo: Company)

Apart from his passion for management, Tan, who has a daughter, 21, and a son, 16, places a premium on intellectual curiosity.

“Many people are intelligent, but they waste it by not using their brains or thinking, and that really pains me,” he said. “Everyone must learn how to learn – continuously.”

This also forms the basis of problem-solving in any organisation, he added.

Needless to say, Tan rarely loses sleep over any hiccups. “Things that are out of my control are things I do not worry about. I just make sure we have a buffer – if anything goes wrong, we can still survive.”

He believes that in running a business, there are very few situations in which no options are available. “Usually there are solutions, if you think hard or are creative enough,” he said.

“A creative solution doesn’t have to be an Einstein formula – once you challenge the assumptions, you should be able to find the answer.”

 

Financial results

Year ended 31 Dec
(US$ m)
FY2015 FY2014 FY2013
Revenue 2,787 2,948 2,697
Operating Profit 216.6 191.5 201.8
Core PATMI without forex* 88.6 56.8 60.7

 

Quarter ended 30 Sep
(US$ m)
3Q2016 3Q2015 YoY Change
Revenue  788.0 695.3 13.3%
Operating Profit 105.4 65.8 60.1%
Core PATMI without forex* 42.0 27.9 50.9%

Source: Company data

*Core PATMI is derived by excluding changes in the fair value of biological assets and extraordinary items. 
Core PATMI without forex further excludes foreign exchange gains and losses.




Outlook
  • RQM ad141eWhile the Indonesian rupiah has strengthened in 1Q 2016, the Group expects the currency to remain volatile in the near term. In Indonesia’s poultry market, fluctuations in day-old chicks (DOC) and broiler prices are expected, due to the seasonal and cyclical nature of the industry.
  • In view of China’s economic slowdown, raw milk prices are expected to remain sluggish in the near term, while feed raw material costs are likely to soften. Other Asian markets could also continue to see fluctuations in raw material costs and selling prices.
  • The Group will keep a close watch on the competitive and regulatory landscape, to anticipate and mitigate any challenges. It remains focused on building on its fundamentals and executing its diversified growth strategy to sustain long-term growth momentum.


Japfa Ltd

Japfa is an industrial agri-food company that specialises in producing quality dairy, protein staples (poultry, beef, swine & aquaculture) and packaged food in Asia. Their business model links three distinct stages of the value chain – Upstream (Feed & Breeding), Midstream (Milking & Fattening) and Downstream (Processing & Distribution). It employs over 30,000 people across an integrated network of modern farming, processing and distribution facilities located in Indonesia, China, Vietnam, India and Myanmar. Japfa is headquartered in Singapore.

The company website is: www.japfa.com

For its 3Q2016 financial statements, click here.


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