SINGAPORE (Apr 6): CIMB Research believes China’s plan to slap a 25% import tariff on soybean imports from the US amid an escalating tit-for-tat trade spat could be potentially negative for China-based soybean crushers Wilmar International and Golden Agri-Resources.
See: Trade tensions escalate as Trump proposes US$100 bil in new China Tariffs
“The proposed 25% import duty on US soybean is potentially negative for China-based soybean crushers as this will raise their raw material costs,” says analyst Ivy Ng Lee Fang in a note on Thursday.
“Based on broad assumptions, we assess that potentially up to 10% of Wilmar’s pretax profit and 1-2% of Golden Agri’s pretax profit could be impacted by China’s move,” she adds.
According to Ng, Wilmar's oilseeds and grains division made up 46% of its pretax profit in FY17.
Its soybean crush business in China is estimated to account for around 60% of its oilseeds and grains profit before tax. In addition, an estimated 35% of the raw material for Wilmar’s soybean crushing business in China comes from the US.
Meanwhile, Ng opines that the potential import duties on US soybean is not expected to impact Golden Agri's earnings materially, as its oilseeds crushing business only accounted for 1.2% of the group's FY17 EBITDA.
The analyst also points out that Golden Agri is in the midst of disposing its oilseeds and assets operations in Tianjin.
“We think China-based soybean crushers will source more soybean from other exporters like Brazil and Argentina as a cheaper alternative to US soybean. This could also result in a rerouting of US soybean via third countries to China if logistics costs are lower than the tariff rate,” Ng says.
“As the 25% duty does not apply to soybean meal and oil, there are concerns that China’s livestock-feed producers could start importing soymeal and soy oil in lieu of beans. As such, the tariff move could potentially help oilseeds crushers based outside China at the expense of Chinese players unless a similar 25% tariff is applied on other soybean-related products later,” she adds.
However, Ng clarifies that it is too early to gauge the extent of the earnings impact on Wilmar and Golden Agri as the import tariffs are not yet cast in stone.
As such, the brokerage is maintaining its ratings and forecasts on the companies, pending further developments.
CIMB has an “add” call on Wilmar with a target price of $4.10, and a “reduce” call on Golden Agri with a target price of 31 cents.
As at 1.01pm, shares of Wilmar are trading 3 cents up at $3.13, and shares of Golden Agri are trading flat at 34.5 cents.
