Thailand Hemp Is Gaining Popularity Ever since Thailand allowed hemp to be produced

Thailand Hemp Is Gaining Popularity Ever since Thailand allowed hemp to be produced, imported as seeds and exported in various forms on 29 Jan 21, several parties, especially food companies, have shown keen interest in launching hemp-related products in 2H21. Although these hemp-related products are expected to gain strong acceptance from consumers, the earnings contribution to food companies this year would remain insignificant. Maintain MARKET WEIGHT. Our top picks are SAPPE, CPF and TVO.

WHAT’S NEW

• Hemp is now a new cash crop of Thailand. The Thai government aims to make hemp a new cash crop. The difference between hemp and marijuana is that more than 1% of marijuana’s dry weight is tetrahydrocannabinol (THC), while less than 1% of hemp’s dry weight is THC. As a psychoactive ingredient, THC is restricted to medical use only, or banned outright. Moreover, cannabidiol (CBD) is also found in both hemp and marijuana.

CBD is used as a medical or functional ingredient in a varied range of products, from food to cosmetics. Hemp can be produced, imported as seeds and exported in various forms in Thailand since 29 Jan 21. Meanwhile, marijuana is still classified as a narcotic and can only be produced for medical usage or for studies. Hemp offers a huge range of benefits. Its fibre can be turned into textiles.

As a food, hemp is highly nutritious and acts as a powerful antiinflammatory, antioxidant and pain reliever. Hemp is also considered a perfect, or complete, protein. This means it contains all 20 amino acids, including nine that the human body cannot produce. Food and Drugs Administration has already allowed the use of hemp leaves, seeds, roots and trunk for cooking. The rules and regulations for CBD and THC contained in packaged food and cosmetics are expected to be announced in Apr 21.

• Hemp prices are quite high. Hemp needs 3-4 months to grow, and most plantation areas are located in the north and the north-eastern parts of Thailand. Hemp can be grown both indoor and outdoor. Currently, domestic market price of cannabis inflorescence stands at Bt30,000-45,000/kg, while hemp oil price is about Bt100,000/kg. Note that growers can grow an unlimited amount of hemp, but to obtain the licence to grow hemp, they must first submit to authorities their marketing plans that include details such as they intend to sell the hemp.

• Many food and agriculture companies are now involved in the hemp business. The global legal cannabis market size is expected to reach US$104b in 2024. The market value of cannabis infused drinks in 2019 was over US$200m, with an expected CAGR around 38% through 2029. Several food and agriculture companies are now involved in the hemp business: a) Sri Trang Agro (STA) will develop its own hemp plantation with an initial area of 100-200 rais by this year, and this is expected to expand to 1,000-2,000 rais in the near future. Note that net profit from hemp plantation would be about Bt1m per rai per year.

• a)STA claims to be the biggest hemp grower in Thailand. b) SAPPE plans to create a JV with a hemp plantation company to secure its raw material for hemp-related products, which would be food, drinks and dietary supplements. c) Charoen Pokphand Foods (CPF) has collaborated with Maejo University to carry out advanced research and development opportunities for hemp production in Thailand. d) Carabao Group (CBG) plans to launch hemp energy drinks. e) NR Instant Produce (NRF) will launch a hemp house which sells hemp-based products, aiming to form a café-style hub under a franchise business model. In addition, commerce company RS also plans to launch eight SKUs of hemp-related products in 2H21 (hemp oil, dietary supplement and functional drinks). RS expect these hemp-related products to generate a total revenue of Bt2b per year.

ACTION

• Maintain MARKET WEIGHT. Although hemp-related products are expected to gain strong acceptance from consumers, the earnings contribution to food companies this year would remain insignificant, as most hemp-related products are expected to be launched only in 2H21. Furthermore, we believe it will be difficult for new hemp growers to be able to generate net profit within 2021 as they still require profound knowledge for growing hemp. Our top picks in the food sector are SAPPE, CPF and Thai Vegetable Oil (TVO).

• SAPPE (BUY/Bt26.00/Target: Bt35.00). We think the consumer health consciousness trend and hemp consumption trend would directly benefit SAPPE’s earnings in 2021-22. We project 2021-22 earnings growth at 23% and 14% respectively. For 1Q21, sales are expected to increase qoq but drop yoy from the high base. However, we expect 1Q21 earnings to grow both yoy and qoq on the back of the low earnings base in 1Q20 brought about by a forex loss of Bt26m. BUY with a target price at Bt35.00, pegged at 20x 2022F PE or +0.5SD to its 5-year mean

• CPF (BUY/Bt29.25/Target: Bt35.00). We project 1Q21 net profit at Bt6,297m, up slightly by 3% yoy but down 2% qoq. Overall business would be healthy thanks to high swine prices in both Thailand and Vietnam. 1Q21 sales would decline by 13% yoy and 20% qoq due to the impact of the deconsolidation of its China feed business. 1Q21 gross margin would be 17.3%, down slightly from 18.3% in 1Q20 due to lower margin of its overseas aquaculture segment, especially since its shrimp business in India is expected to be weak as a result of the COVID-19 pandemic. 1Q21 cost-to-income ratio would be 10%, unchanged yoy and qoq. BUY with a target price at Bt35.00, pegged at 12x 2021F PE or its 5-year mean.

• TVO (BUY/Bt31.00)/Target: Bt44.00). We expect TVO’s 1Q21 earnings to come in around Bt600m, rising both yoy and qoq. Key drivers are higher ASPs of both soybean meal and soybean oil. We think 1Q21 gross margin would be around 14%, up both yoy and qoq. We expect 2021 earnings to grow ~30% yoy thanks to an uptrend of soybean meal prices and soybean oil prices. BUY with target price at Bt44.00, pegged at 16x 2021F PE or +1SD to its 5-year mean. SECTOR CATALYSTS • Economic recovery should stimulate meat demand and increase consumption power. ASSUMPTION CHANGES • None.

ESSENTIALS

• COVID-19 outbreak in Thailand is expected to subside in 2H21. We believe the COVID19 pandemic would ease in 2H21 thanks to vaccine deliveries in many countries, including Thailand. This would be positive to economic recovery in Thailand in 2H21.