Nutryfarm International Limited (NUF SP)
Company Update: 9 July 2021
Turnaround in 2021: Diversifying into the “King of Fruits” business
⦁ Background information. Nutryfarm produces high quality nutrition and health food products for consumers in China. These products are formulated mainly from natural traditional medicinal herbs from across the Americas, Europe and New Zealand.
⦁ 2021 – Satisfying China’s love for durians. Global Agricapital Holdings Pte. Ltd., a subsidiary of Nutryfarm, entered into several purchase agreements to sell fresh durians from Thailand to major Chinese fruit importers, satisfying heavy consumer cravings in China.
2020 financials
The group was in a loss-making position for the annualized 12 months ended 30 Sep 2020, with losses at HK$32.3mn. However, losses were reduced from the previous year of HK$93.2mn. Revenue decreased from HK$44.0mn in FY2019 to HK$41mn in FY2020, representing a 6.8% dip. This was mainly due to the advertising restrictions imposed by the Chinese authorities on nutritional products, as well as more stringent inspections on marketing strategies of nutritional products since the start of 2019. Additionally, the Covid-19 pandemic impacted sales as well as focus was shifted to combating the disease and import shipments were slowed down. The group was in a positive net cash position of HK$ 8.7mn for the 18 months ended 30 Sep 2020.
Turnaround from Durian
In 2021, the group entered the durian distribution business to sell Thailand-sourced durians into China. This largely boosted 2QFY21’s results with revenue at an outstanding HK$40.9mn, almost equivalent to full year revenue for FY2019 as well as full year FY2020’s annualized revenue. The group managed to pivot into profits of HK$0.46mn in 2QFY21 compared to losses of HK$5.0mn in the prior year. Before 2QFY21 when the durian business took off, the group recovered slightly in 1QFY21, with losses reduced to HK$0.96mn from HK$3mn in the prior year.
Tapping on China’s love for durians
According to the Ministry of Agriculture and Cooperatives of Thailand, the Chinese appetite for Thai durian remains strong despite the coronavirus pandemic. China imported 575,000 tons of durians worth RMB14.7bn (US$2.2bn) from Thailand in 2020, up 78% YoY. China was the top export market for Thailand in 2020 and this continued to grow in 2021. According to Kasikorn Research Center, in the first 5 months of 2021, Thailand saw its fresh durian exports total US$1.8bn, up 45.2% YoY. This was attributable to the robust export growth boosted by the strong demand from the Chinese market.
3QFY21’s top line expected to grow
Given the strong demand in 2QFY21, Nutryfarm fulfilled and secured more orders in 3Q21. The company recently fulfilled its obligations to Shanghai Yuqu for the purchase and shipment of 180 containers of fresh durians amounting to RMB117mn. It has also secured an additional sales agreement with Moonda of approximately RMB195mn for 300 containers of fresh durian. With healthy demand from China, we expect 3QFY21 sales to increase.
Nutryfarm’s experience and track record
China’s top e-commerce platform, JD.com recently entered the durian business in 1H21. Despite JD’s big branding, Nutryfarm has a greater competitive advantage given that their new CEO, Mr Cheng, has approximately 7 years in the durian trade. This experience has helped to ensure the group’s quality of durians.
Valuation
We used food distribution and manufacturing peers for comparison given that the durian segment is now major component of its business. Distribution peers are trading at average of 21.9x PE while manufacturing and distribution peers are trading at 17.2x PE. However, as Nutryfarm is currently loss-making, we will give an update after its next quarterly update in August 2021 when its financials incorporate the revenue from the durian business.
Risks
Emerging competitors; Demand for durians may not be sustained.
