A view of the building in Seoul where CJ Cheiljedang has offices. (Photo: CJ)

CJ Cheiljedang Corp. on Nov. 11 reported its third-quarter net income of 17.1 billion won (US$ 14.6 million), down 85.9 percent from a year earlier on sales of 5.858,1 trillion won, up 18.5 percent YoY.

The company said in a regulatory filing that it posted 272.7 billion won in operating profit for the quarter, compared with 265.2 billion won a year ago.

A huge increase in sales came about as a result of the takeover of Swan’s Co., U.S. frozen food production and distribution company and the company doing well in the HMR market.

CJ was known to have submitted a $2.5 billion (2.8 trillion won) offer in an undisclosed bid. if the deal is done, it will be the company’s biggest-ever M&A. In 2011, CJ plunked down 1.91 trillion won to acquire CJ Logistics.

The improvement in profits has been slow mainly due to the rises in the prices of raw materials and operational expenses with net profit down to 17.1 billion won from 120.8 billion won in the same period last year because of the borrowing to takeover Swan’s.

Three key factors to watch for in 2019 - Key considerations:

(1) Processed foods unit’s response to rising domestic agricultural commodities prices;

(2) potential flour price increase at foodstuff unit; and

(3)improvements in amino acid margins.

 - (1)CJCJ began producing instant rice (brand name: Hatban) at its hub factory located in North Chungcheong Province in October 2018. Its instant rice sales for 2018 are forecast to expand 28.1% yoy to W410.0bn, but CJCJ will inevitably face some cost pressure going forward, given that the government has decided to keep rice prices at W196,000 per 80kg bag until 2022.

This burden will likely cool the competition in the market, pushing CJCJ to come up with ways to respond to this situation such as ironing out a new rice purchasing strategy. Or it could try to boost its market share by aggressively ramping up production.

- (2) Prices of wheat, the most common base for flour, have reached the highest level in three years, meaning that flour prices could be raised in 1H19.

 - (3) China’s amino acid exports will grow led by increased export tax rebates.

Furthermore, the country’s amino acid production facilities are growing driven by government subsidies for corn farms.

Nevertheless, we could see a gradual improvement in margins if CJCJ reduces manufacturing cost by developing new strains and/or boosting the efficiency of its production processes.