Thai Union Frozen Products

Thai Union Frozen Products Plc (TUF)

Investment thesis
Following our visits to shrimp farms in which TUF has equity stakes, we believe that the Thai shrimp industry bottomed out in 1H13 and is in recovery mode. Shrimp farmers now have an improved success rate at dealing with EMS disease. TUF’s shrimp-raising associates started using bio-plus bacteria to consume food that normally would have been eaten by EMS bacteria, boosting farm output during the past three months. Our TRADING BUY rating stands, premised on an ongoing 2H13-FY14 operational shrimp recovery.  
Visits to the TUH’s hatchery farm and the TMK’s raising farm
We visited two shrimp farms—Thai Union Hatchery Co Ltd (TUH) in Phang-nga and TMK Farm Co Ltd (TMK) in Trang—on Nov 21-22. TUF has effective stakes of 26% in TUH and a 21% in TMK through its 51% stake in Thai Union Feedmill Co Ltd (TFM), which holds 51% of TMAC Co Ltd (TMAC), a shrimp hatchery and farming unit. TMAC has a 100% stake in TUH and an 80% stake in TMK.
TMAC acquired TUH in June 2013 to produce and distribute Nauplius (NP) baby shrimp and post-larvae (PL) 10- to 12-day-old shrimp. TUH has three hatcheries: 1) Phang-nga (annual capacity of 12,000m NP and 1,000m PL), 2) Songkha (annual capacity of 900m PL) and 3) Chacheongsao (annual capacity of 600m PL). Phang-nga represents two thirds of total hatchery capacity. TMAC bought TMK in June 2013 to operate two shrimp farms and produce white shrimp in Trang.
EMS survival rate has improved since mid-year
Management estimates that global shrimp supply is currently in deficit to the tune of about 10% as a result of EMS—down by 50% (by 250 tonnes) in Thailand and by 30% (by 200k tonnes) in China, but up by 10% (by 50k tonnes) in Vietnam and by 30% (by 10k tonnes) in Malaysia. TUF believes the Thai shrimp industry bottomed out in 1H13 and will gradually improve through 2014—250k tonnes in 2013, 300k tonnes in 2014, 400k tonnes in 2015 and 500k tonnes in 2016. The industry is building competence at dealing with EMS.  
TMK uses bio-plus bacteria to consume food that would normally be eaten by EMS bacteria, shortening the life cycle of the microbe that causes the disease. As such, output has risen MoM in each of the past three months. TMK targets FY14 output at the TMK2 farm jumping about 190% (to 490 tonnes). Productivity and survival rates have risen 10-15% since mid-year—the shrimp survival rate is now 65% and the yield is about two tonnes per rai.