It said although it was impressed with KFB’s expansion in China, it was uncertain over its margins in the long term given the volatility of the prices of raw materials such as sugar and crude palm oil.

The research house, which downgraded KFB to trading buy (from buy) with a new target price (TP) of RM1.64 (from RM1), expects KFB to get full contribution from its China plant when the facility reaches full capacity in three years.

“However, we advise investors not to chase the stock past this TP as we believe the share price has somewhat priced in the current exuberance over the China plant,” it said in a note.

It said that KFB’s venture in China, via Kawan Food (Nantong) Co Ltd, commenced operations recently.

The research house said with the China plant, KFB would be able to capture a big market share and ease production constraints at its over-utilised Shah Alam factory and double its current capacity.

“We believe there is a huge market potential for frozen food in China given the rise in average annual income and higher ownership of fridges and fridge-freezers,” it added.

OSK noted that sales of frozen food in China had increased in value to 94.5 billion yuan (RM47.25 billion) in 2008.

The research house also noted that refrigerator sales had climbed when China started to subsidise home appliance purchases, with rural sales surging 50% year-on-year.

It expects the total frozen food market projected to grow by over 30% in the next five years to more than 130 billion yuan.

OSK reckoned that the food industry in China would thrive as food consumption forms a major part of the expenditure of the average Chinese, who utilised more than 40% of his disposable income on food and beverage.

Kawan Food closed one sen higher to RM1.41 yesterday.

This article appeared in The Edge Financial Daily, October 8, 2009.