Wilmar International Limited

OCBC on 1 Oct 2012

Wilmar International Limited (WIL) recently announced a 50-50 JV with US-based Kellogg Company to make, sell and distribute cereal, snacks and savory snacks in China. Overall, we do see potential in the JV. For one, it would allow WIL to monetize its extensive distribution channels in China. However, initial contribution will likely be small and become more meaningful in 2014. Secondly, the JV could allow WIL to diversify into the manufacturing of snacks and other food items, which could in turn act as ready customers for its upstream products. But given the lack of more immediate benefits, we maintain our HOLD rating and S$3.06 fair value.

JV with Kellogg in China
Wilmar International Limited (WIL) recently announced a 50-50 JV with US-based Kellogg Company to make, sell and distribute cereal, snacks and savory snacks in China. WIL will contribute its infrastructure, supply chain scale, extensive sales and distribution network in China as well as local China market expertise to the JV. Kellogg will contribute a portfolio of globally recognized brands and products (including Kellogg’s and Pringles brands), along with deep cereal and snacks category expertise to the JV. Together, these two companies hope to leverage on their complementary expertise to maximize marketing and manufacturing synergies.

China snack market to hit US$12b
According to Kellogg, China’s snack food market is expected to reach ~US$12b by end-2012, up 44% from 2008. However, we understand that the snack market is currently pretty fragmented and competitive. And because Kellogg currently does not have any manufacturing facilities in China, it needs to import them in from places like Thailand and South Korea, further raising the price. Then there is also the need to “localize” the products to suit the taste of the Chinese consumers. As such, WIL expects the JV to distribute the products to the larger first-tier cities first; and over time, it would move into manufacturing these snacks in China.

Chance to maximize extensive distribution channels
Overall, we do see potential in the JV, which is still subject to customary conditions, including regulatory approvals by the Chinese government and anti-trust approvals. For one, it would allow WIL to monetize its extensive distribution channels in China. However, initial contribution will likely be small and become more meaningful in 2014. Secondly, the JV could allow WIL to diversify into the manufacturing of snacks and other food items, which could in turn act as ready customers for its upstream products. But given the lack of more immediate benefits, we maintain our HOLD rating and S$3.06 fair value.