Stock Analysis - JUNGDAWN Co., Ltd. , 208140.KQ

Three Line Summary

• They play news on diversifying business by announcing strange patents every 1 ~ 2 years.

• When the duck price falls, it gets fucked. It is not only a duck processing company, but a duck itself.

• The successor of the governing group has not proved his ability yet.

Before We Go

Jungdawn (Hereinafter referred as "The Company") is a duck meat processing company. Seed ducks and ducks for meat are brought up in the main business of the child company, called JD Farm. The seed ducks lays eggs for meat duck. The ducks are raised for 30 to 45 days, and then they are processed and slaughtered. If the chicken has a Harim (Biggest chicken company in Korea) , ducks has Jungdawn? Jungdawn is a duck meat processing and storage company, and it also produces duck down as a byproduct, and it is usually exported to overseas after the initial processing (to the degree that blood and fouls on the feathers). Exported downs are processed again in China or Southeast Asia, then the final product is to be used for the our clothes such as duckdown jumper and outdoor-wear

The Company started as a hatchery of Hajeon in Naju, South Jeolla Province, And since the IMF, there has been a surge in hikers and the expansion of the outdoor market has made the goose down business quite profitable. Duck meat processing is a bit trickier than chickens. So it is efficient to pressure at the factory level, and I have been able to find such a market well. And at the end of 2015, it was merged into a feed manufacturing company called Easy Bio. Easy Bio is a company that produces and sells animal feeds, it will be described later. They seem to be interested in feeds using duck meat by-products in the background of the acquisition. This is in fact more true in that the patent rights acquired by us in July 2017 are "a method for producing duck meat proteolytic enzyme extract and a feed additive composition". When new animal feed ingredients are mass-produced, sales of duck by-products for feed to Easy Bio will be a completely new sales channel. However, it is not known at present whether economic feasibility or mass production is possible.

To know more about duck meat, duck fat has much unsaturated fatty acids, but unsaturated fatty acids are not good for health. It is just like 'less bad' than saturated fatty acids. It doesn't even have to do with low calorie. It is not much popular in the United States or Europe. But It is consumed by the people who wants healthy food. It is popular in China, but they grow up and eat themselves. Therefore, export is considered to be limited, and the meat that can be sold to Islam has an issue on Halal certification. I think it can be a niche market if The Company gets Halal certified.

The above process is the process of producing and selling duck meat in The Company. It is said that the duck breeding is done by the subsidiary, JD Farm, and the rest of the process is on this house. After slaughtering, the meat is processed and distributed / sold, and the down is mostly exported. Prior to 2000, duck slaughter were not systematized in Korea , as it was not until 2003 when government-sponsored livestock affiliation projects approved duck as subsidy target. Since then, it has become a favorable environment to enter the so-called duck factory, and The Company has accelerated its growth and was successfully listed on the KOSDAQ in 2016. The biggest beneficiary of the livestock serialization project started with chicken in the 1980s was Harim, and about 20 years later, Harim became huge. Since the business of duck meat serialization has become somewhat established around 2000, is it going to be soon for Jungdawn to be huge too? Who knows . About 80 percent of the duck meat distribution is being driven by such affiliated companies.

How long should a duck grow? If you raise the duck for 39 ~ 42 days after hatching, the weight will be about 3.4 kilograms. If you slaughter this one, you will get about 2 kilograms of meat. (The price of duck meat is calculated based on 2.1 kilograms, and living ducks are based on 3 kilos.) So what is the duckling? This is funny, you need to get the seed chicks, and the seed chicks come from the seed eggs. After it hatches, it grows up about 6 months and then retire after 250 years of laying eggs in a year. Still, it is a year and a half six months of lifespan. The remaining ducks have a life span of less than 50 days. The chickens and the ducks themselves are owned by the subsidiary, Jidiparm.

The Company's share price has risen considerably due to earnings, as the supply of chicken has decreased due to the outbreak of bird flu in 2016, and the price of ducks has increased considerably. We expect the sales increase to be more affected by unit price hikes. As we have seen, it takes quite a long time to grow the chickens back, it would take six months to a year or more to bring up the poultry back after the occurrence of bird flu. During that period, the supply would of course be reduced. Therefore, 2017 earnings was inevitable. Besides, the duck did not get dumped, only the poor chickens got killed away.

The price of duck is strong compared to last year. One of the ridiculous articles, "Duck meat can clean up the fine dust in your throat and lung" and so on. It's just a marketing. Of course, duck meat has nothing to do with fine dust . If the oil is washing fine dust, let's just drink a cheap soybean oil. Is there anyone who wipes it with cooking oil when cleaning the desk dust? However, since two years have passed since 2016, the supply of chickens and other chickens isgetting back. Therefore, price of chickens and ducks are likely to stabilize downward. Of course, it will continue to rise for a while longer than before bird flu. But the good times are gone. Last year, this year's company performance is not bad, but it would have some question mark on sales after that.

It is a steadily growing market.The Company's duck fresh meat sales amounted to 49 billion won in 2017, accounting for 60% of total revenue. Therefore, The Company is directly affected by sales of duck meat. Demand is steadily increasing, and prices fluctuate by 15-25% per year. There is a lineup of re-processed foods such as duck slices and smoked herbs flavored ones, but it comprises only 25% of total sales, and product prices are only a little bit higher. It may be considered as a good business , but if the price of duck goes up, the sales of re-processed food prices may not be easy to be adjusted , so they may have loss from it. Even if the value of the duck is low, The Company cannot raise price of re-processed ones easily. In any case, it is not very effective for a hedge against a risk of fresh meat price fluctuations. For example, duck price had risen 30% in 2017 compared to 2015, but processed food prices have risen only by an average of 3%, while when ducks fell by 15% in 2016 compared to 2015, their prices fell by an average of about 5%. The bottom line is that hedging is so effective to cover their dependency on raw duck price. Duck price is the most important thing in their revenue.

The duck processing capacity of The Company is 9,600 tons per year, 6500 tons of duck down, and 2256 tons of smoked slices per year. The operating rate is between 70 ~ 85% for slaughter, 20 ~ 30% for duck down, and 65 ~ 85% for smoked slices. Although sales in 2017 have risen due to high duck price, the utilization rate has been reduced from 86% to 71%. If you look at the numbers, I wonder if duck business is really advancing. The numbers are good because price of ducks has been up quite much. And as of April 2018, duck prices have risen more than 10 percent from 2017. It tells that demand still prevails over supply.

The stock price goes well with the earnings. Maintaining earnings is the key, but the price of ducks is important. Demand is limited and export of fresh meat is difficult. It is like the reason why Hanwoo doesn't have much popularity as Wagyu from Japan. There is no distribution network, and there is no quality assurance, but the price is expensive. So what's new business? There is no new business in the business report, but why did they patented the enzyme for feed? It's the largest shareholder, Easy Bio. It seems that there was an idea about animal feed from duck byproducts like duck intestines or bones. I am far from sure wheter it can be commercialized, but I think they're trying. Personally, I don't feel much difference between to make feeds from duck by-products andt to make feeds from chickens.

Sales in 2015 are KRW 57.6 billion , and sales in 2017 is KRW 80 billion. But what if you calculate roughly 2015 sales by 2017 duck price? it will be about KRW 72 billion. So, the growth potential of the business is about 5 percent per year. But at the end of 2017, the price of ducks and international duck down prices were quite high. The Chinese bird flu occurred in 2014 and the Korean one in 2016 are seeing their effects going now. then? If the existing business practice is maintained, it is not going to be much attractive.

The Company's research and development expenses are decreasing every year to about 0.2% of sales. R & D expenditure of about KRW 150 million per year has been executed. I think they are just making a duck food for retail. With KRW 150 million, about two employees may be just trying to cook it.

Major Stakeholders and Directors

The largest shareholder is Easy Bio, which was listed in 2016 after the acquisition. Easy Bio Group actually has a lot of child companies. It is the beginning of the group that the founder ran his own ranch for about 3 years and joined Purina Korea for 10 years and set up a livestock feed company. It is a company that has a long history of business and has been doing fine. In the picture below, the right is Chairman JI Won-cheol. On the left is the president of Seoul National University.

Easy Bio Group has some affiliates that are listed in exchange, such as Maniker, Dongbu Hanneng Palm Story, etc., and also has some unlisted companies. The overall group profit and loss fluctuates depending on the price of pigs and poultry. The feed business serves as a cash cow for the group, with Easy Bio selling about KRW140 billion and operating profit of about KRW 22 billion. The total market value of Easy Bio is around KRW 410 billion. The group seems to play a role as a holding company. Ji Won-Chul , Ji Hyun-wook, and Sun-hee Sung (wife of founder) have about 20 percent stake.

Son Ji Hyun-Wook, a 40-year-old, graduated from Seoul National University and graduated from the US with a master's degree in Architecture. He then majored in real estate at Cornell MBA and was introduced as an M & A specialist. Even though real estate finance and M & A are categorized as the same IBD, but if real estate finance is close to asset management, M & A is more to corporate advisory. When Ji Hyun-wook joined Easy Bio, the group's M & A activity became more frequent, and they felt like to show the son's M & A specialty to reduce investor concerns. After graduating from college, he went to the University of Washington to attend graduate school of architecture and came back to Korea. He joined Gansam partners to do architectural design. Then he went to Cornell MBA.

It seems that there is not much that Ji Hyun-wook Jee did for The Company except for M & A related works. The main objectives of M&A are diversifying its business and generate synergy. Synergy? It's mirage. That is the reality of synergy. If you go to the MBA and take M & A classes, your professor will likely to tell you that synergy never happens for the most of M&A. However, it seems to be half successful in terms of vertical integration.

In terms of subjective (not objective), his father is the perfect professional specimen in the industry. He studied animal science in Seoul National University , the most prestigious school in Korea , and ran his own ranch after graduation. Then he went to a global feed company and made director's position in 10 years. He is the elite of the livestock industry and one of the best ones. No one can argue that. If the founding chairman continues to manage the group, I will just buy the share without asking more. But the successor is an error. He made a succession and extended his group too fast. He mostly succeeded in M&A , but it does not seem easy to maintain. It is understandable of the old man's love for his son. But he'd better think twice.

Valuation Note

With the duck price in 2015, I think that the revenue in 2017 may be recalculated to KRW 63 billion and the operating profit is about KRW 6 billion. Then, assuming that the current business capability is maintained, even if you give a multiple of 12, the market size should be more than KRW 70 billion. The current share price seems little bit exaggerated. Appropriate price seems to be about KRW 70 ~ 75 billion. Then the stock price should be adjusted 10 to 15 percent lower. The current share price is slightly over priced in my opinion. But that does not mean that stock prices will not go higher. This section is a corporate value memo, not a stock price forecast memo. I do not know what value investment is. You must be "buying when price goes up and selling when it goes down". And when prices move without reason, The direction of the movement is the right direction in most cases.

Financial Matters

The market cap is estimated at 80 billion won. Sales are estimated at KRW 80 billion. With a 10 percent drop in duck prices, sales will drop to KRW 75 billion. With sales of KRW 80 billion and an operating profit of KRW 11 billion, the company achieved sales of KRW 57.6 billion in 2015 and an operating profit of KRW 5.1 billion. Conversely, if sales fall by 10 billion, operating profit is likely to fall by 3 billion. And SG & A expenses are rising steadily. In 2015, it increased from KRW 6.4 billion in 2015 to KRW 8.1 billion in 2017. Considering that the factory utilization rate has fallen steadily, only the fixed cost has increased without much reason. It feels like that they're hoping for a duck price to rise naively.

The assets are amounted to KRW 54.6 billion and liabilities are KRW 33.1 billion. The debt ratio is about 160%.

Company owned real estate is worth about KRW 14 billion. The book value of them is KRW 14 billion, and the market price may be higher. Investment property is about 1.4 billion. If mark to market is conducted, it can be worth about KRW 20 ~ 30 billion. But keep in mind that corporate real estate is not shareholders' in Korea.

If I am the CEO

I will make halal food from ducks and bring it to Islamic countries for sale. Dietry is literally a habit. It does not change easily. Since there canot be a sudden big hit from duck business , the answer is stable management. I do not think it's good idea of duck collagen cosmetics. I would be better off focusing more on existing business now and think other opportunities once company gets stabilized financially.