Fujian Sunner Development:Chicken meat prices likely to increase in Q416

Q316 net profit up 44% QoQ, missing our estimate.

    Sunner's Q1-Q316 revenue was Rmb6.14bn, up 21.4% YoY, net profit was Rmb503m,up 244% YoY, and EPS was Rmb0.45. Q316 revenue was Rmb2.22bn, up 18.4% YoY,and net profit was Rmb257m, up 44% QoQ (positive turnaround YoY), missing ourestimate. The company also announced its full-year earnings guidance, with 2016 netprofit in the range of Rmb700m-900m.

    Price increases likely in Q416, with negative factors fully reflected.

    Hit by supply pressure, consumption weakness and a sharp increase in imports, chickenmeat prices undershot market consensus in Q316, but we believe the recent share pricecorrection has fully reflected this factor. For Q416, we expect a new rally in whitefeatherchicken meat (baby chick) prices, considering: 1) the arrival of the peak periodfor elimination of breeder birds that had undergone induced moulting after October2015; 2) weakened impact of imports; 3) decline in downstream inventory; and4) recovery in demand. According to the Ministry of Agriculture, white-feather chickenmeat prices stopped declining in the fourth week of October, with a rise of 0.7% fromthe previous week.

    Maintaining our optimistic outlook for 2017.

    Following the marked decline in grandparent breeder imports in 2015-16, the positivefundamentals are feeding through from the grandparent to the parent to thecommodity generation in the value chain. Based on the production cycle (a 14-monthfeed-through period from grandparent to commodity generation), we estimate thatchicken meat supply will further contract in 2017 (2016/17E gap is 7%/25%). Coupledwith the down cycle of raw grain prices, we remain optimistic about the company'ssustained earnings growth next year.

    Valuation: Maintain price target of Rmb35.79, Buy rating.

    Our DCF-based price target of Rmb35.79 assumes 7.4% WACC and implies 18x 2017EPE. We maintain our Buy rating.