History:
Japfa has its roots in copra pellet production back in its early history of the Nineteen-Seventies. The Company was established in 1971 under the name PT Java Pelletizing Factory as a 50 - 50 venture between PT Perusahaan Dagang & Industri Ometraco and International Graanhandel Thegra NV of the Netherlands.
In October 1989, in line with its expansion plan, the Company floated its shares on the Jakarta and Surabaya Stock Exchanges. The public listing, followed by a rights issue in 1990, provided the Company with the financial strength to launch into the animal feed industry.
ANIMAL FEED: Japfa subsequently made strategic acquisitions of four companies in 1990-1991:
PT Comfeed Indonesia (animal feed), PT Ometraco Satwafeed (animal feed), PT Indopell Raya (pelletizing) and PT Suri Tani Pemuka (shrimp feed).
POULTRY: A second wave of acquisitions took place in 1992 when Japfa bought PT Multibreeder Adirama Indonesia (poultry breeding), PT Ciomas Adisatwa (poultry processing operation) and the shrimp farming and cold storage operations of Suri Tani Pemuka.
The string of acquisitions transformed the Company into one of the largest and most integrated poultry / shrimp producers in the country.

Poultry:
Japfa’s Poultry Division is one of the most vertically integrated poultry operations in Indonesia. Its proven business strategy has become what is today a blueprint of success which the Company is using in diversifying into other food businesses and expanding into new markets overseas.
The Poultry division is Japfa’s largest revenue contributor accounting for approximately 83% of annual net sales. It is involved in three principal stages of the production chain: feed production, DOC breeding and chicken processing.
Industry Overview

The domestic poultry industry continues to offer one of the brightest growth prospects in Indonesia. The country’s per capita consumption of chicken is currently among the lowest in Asia. For a predominantly Moslem population, poultry forms the major meat diet.
Historically, poultry production in Indonesia has risen at an average rate of 15% per annum in the period from 1989 to the start of the economic crisis in 1997. Post crisis the growth trend has recommenced, underpinned by an increasing population and increased preference for poultry meat.
For a company to truly succeed in the poultry business, it needs to fully integrate its upstream and downstream operations.

This comprises six production activities: raw materials procurement, feed production, DOC breeding, chicken farming, chicken dressing and processing, and distribution.
Upstream Poultry:
In Indonesia, altough there are more than 15 feed companies, two top players (including Japfa) control more than 70% of the total supply.
In a typical poultry feed operation, raw materials account for 90% of the production cost. In 1 kg of poultry feed, half is made up of corn. The remaining ingredients are soybean, rice bran and fish meal. The price of corn thus has a significant effect on the business cost of a feed manufacturer. In addition, only with economies of scale (volume buying) can a feed miller secure raw materials at competitive prices in the international and local grain markets. Furthermore, the transportation cost per unit of raw materials is reduced by volume purchases.
The economic crisis resulted in a rationalization of the key players in the DOC market. Japfa has emerged from the crisis with a larger share of the market. Because of the strong underlying demand for DOCs, there is ample room for growth in both Broiler DOCs and Layer DOCs into the future.
Downstream Poultry:
Downstream poultry production involve the processing and distribution of slaughtered chicken. Almost 85% of poultry in Indonesia are sold as live birds and fresh meat at the traditional wet markets, some of which also act as slaugther yards.
The distribution trend is however fast changing. In recent years, Indonesia’s rapidly growing consumer market has fostered the emergence of fast-food restaurants all over the country. In line with this development, there is also increased demand for poultry processed foods, like chicken nuggets.
Feed Production & Milling

With a total production capacity of about 1.6 million tons per annum, Japfa is one of the leading feed manufacturers in the country commanding over one third of the total market. Of the total feed produced by Japfa today, 10% is used for internal breeding opeations while the rest is sold to local farmers and independent distributors.

The Company attributes its success in feed production to five critical factors: a sophisticated feed technology system, an excellent feed formulation strategy, a strong raw materials procurement capability, a high capacity utilization rate, and unrivalled distribution network.
Japfa places equal emphasis on producing high quality feed and maintaining quality consistency of its feed. The Company boasts of an advanced feed technology system which enables it to implement a stringent quality assurance program. By conducting regular bench-marking activities such as laboratory tests, Japfa stays assured that the quality of its feed is constantly higher than that of its major competitor.
In feed formulation, the Company has a team of qualified nutritionists who are capable of tailoring to a particular set of feed specifications. This capability is a major benefit to customers as a precisely formulated feed produces the best results and is also cost efficient.
As a major player, Japfa is in an advantageous position to secure a stable supply of raw materials at competitive prices from both overseas and local suppliers. It buys corn from the USA, China, South Africa, Brazil, and Argentina through forward contracts, and from local corn producers in East Java and Lampung. The Company’s strong procurement clout has enable it to constanly reduce the level of inventories, thus ensuring customers of fresher products and uninterrupted supplies.
Poultry Breeding

In farming, Japfa enjoys a high level of integration with its subsidiary, PT Multibreeder Adirama Indonesia Tbk. Established in 1985 and publicly listed on the Jakarta and Surabaya Stock Exchanges in 1994, Multibreeder currently operates a number of poultry breeding farms to produce DOCs located throughtout Indonesia. Its annual production capacity is one of the largest in the country, and represents about 20% of the domestic market share. Most of Multibreeder’s DOCs are sold to local commercial farmers.
One of Multibreeder’s major competitive advantage is the provision of specific types of DOCs to best suit customer needs. Closely related to this is the use of strain-specific feed made by Japfa’s feed production plants. To ensure a consistenly high quality output, Multibreeder imports the finest grandparent stock from the world’s leading suppliers such as Aviagen and Lohmann Tierzucht, through which it produces parent stock and final stock, both for layers and broilers.
In staying ahead of the competition, Multibreeder has achieved a high level of operational efficiency. Two particular initiatives implemented in its breeding farms are indeed praiseworthy. (Strength of Poultry breeding) The first is a biosecurity system which has dramatically improved sanitation standards. As a result, the farms now enjoyed higher productivity of the parent stock, low mortality rate, reduced loss through mishandling, as well as consistency in DOC size and weight.
The second system aimed at improving its breeding operations, is a performance benchmarking program. This involves defining quality parameters by which Multibreeder’s DOCs are compared farm-to-farm locally, and also against farms in other countries.
Beef:

The Beef Division operates in the three principal production stages of beef cattle breeding, beef cattle fattening and meat processing.

The Division’s three feedlots are ideally located in agricultural belts in Lampung and East Java where quality feed ingredients are abundant. These feedlots turnoff approximately 150,000 head of cattle every year.

The Lampung Bekri feedlot is recognized as the 1st UNFCCC (United Nation Framework Convention on Climate Change) approved methane abatement project for cattle manure. As a result, our cows leave only a small carbon footprint.

Japfa’s Beef Division, which trades under the brand name “Santori” is the largest cattle breeding and feedlot operation in Asia. The Beef Division is made up of two entities, PT Santosa Agrindo and PT Austasia Stockfeed.
Industry Overview
Beef consumption in Indonesia is predominantly in the form of “bakso” or meat balls which is consumed throughout the year. Consumption however doubles during religious festivities as beef dishes are an integral part of the traditional foods offered during celebrations. Whilst the local cattle herd still provides the bulk of the national beef demand, imported lot fed cattle are capturing a greater market share in the major cities. This is due to the rapid increase in demand for beef which has significantly outpaced the domestic supply capability. However, an increase in demand will not be easily supplied by the local herd due to the longer production cycle. The low per capita beef consumption of less than 2 kg offers tremendous upside growth potential.
Beef Cattle Breeding

Santori has begun to develop a semi-extensive breeding operation next to their Jabung feedlot in Lampung. This is in line with the Indonesian government policy to increase the national herd. The breeding program will be aimed at not only increasing the nation’s herd size but also to improve the genetic pool. The veterinarian team and stockmen provide around the clock supervision of the breeding and feeder herd to ensure the highest cattle comfort and welfare is maintained.
Beef Cattle Fattening (Vertical Integration)

The Beef Division attributes its success in maintaining its position as the outright leader in the industry to its integrated cattle management system of procurement, feed production and distribution.

The company’s management information system (MIS) contains detailed data collected from over one million individual cattle imported over the last decade. This allows the company to trace back to individual cattle producers in Australia and to procure the most suitable cattle for its feedlot operations in Indonesia.

In addition to growing corn on company owned fields, Santori has supply arrangements with farmers and food industries to purchase their by-products to ensure a continuous supply of ingredients for the production of consistent quality cattle feed.

With feed production exceeding 150,000 tons per annum, the Company’s nutritionists and quality control systems are able to convert otherwise low value local agricultural by-products into a high performance feed, achieving a cattle weight gain of 1.5 kg daily.

A network of loyal traders and butchers throughout Java and Sumatra ensures that our cattle are distributed efficiently to traditional markets.
Meat Processing

Approximately 10% of its annual turnoff is processed in the company owned new abattoir in Serang, Banten. In this way, the company can control the entire cold chain operation which enhances meat quality and maximizes shelf life of its “Santori Beef” branded meat products.

All cattle are halal slaughtered in accordance with Islamic rites under the supervision of the MUI (Indonesian Ulama Council). Meat is graded, air-vacuum packed, aged and branded under the “Santori Beef” brand. Distribution covers all major modern retailers and selected restaurants and hotels. With integration in the overall beef production chain, Santori is able to produce a variety of top quality products of beef, offal and value added products including portion control pre-packs, bakso and sausages.

As part of its long term market development program, the Beef Division has recently introduced a new Wagyu beef product, trading under the brand name of “Tokusen Wagyu Beef”. Produced from imported Australian bred Wagyu cattle, Tokusen Wagyu Beef is the first Wagyu beef product that is produced and processed from an Indonesian feedlot and abattoir.
CSR Section

Global warming and its impact on climate change is a key environmental concern. “Livestock are responsible for 18% of the greenhouse gases that cause global warming - more than cars, planes and all other form of transport put together” (Source: 2006 report called Livestock’s Long Shadow issued by the Food and Agricultural Organization (FAO) of the United Nations).

We are conscious that as the Company’s Beef Division operates the biggest cattle feedlot in Asia, it should be environmentally responsible. Accordingly, the Company has implemented a biogas wastewater management project in its feedlot in Bekri, Lampung.

The Lampung Bekri Biogas Project is the first UNFCCC approved (United Nations Framework Convention on Climate Change) methane abatement project for cattle manure in the world. The anaerobic digester waste management system at Lampung Bekri cattle feedlot will reduce greenhouse gas emissions by over 20,000 tones of CO2 equivalent every year.

Other than contributing to a cleaner environment by reducing CO2 emissions, methane gas captured from cattle manure is able to be further converted to energy to generate power. With manure produced from an average of 15,000 head of cattle, the project can produce up to 1 megawatt of electricity. In this way, the Beef Division is committed not just to minimizing carbon traces in its operations, but also to providing alternative non-fossil energy in support of its energy self sufficiency.
Aquaculture:
Japfa’s Aquaculture Division is managed by a wholly-owned subsidiary, PT Suri Tani Pemuka which is dominant niche player in the local shrimp industry.
Suri Tani has a particular strength in the export of value-added shrimp products and is involved in shrimp breeding and farming, as well as the production of shrimp and fish feed.
Industry Overview

With a stable tropical temperature averaging 26% C throughout the year, Indonesia offers one of the best climates in the world for shrimp farming. Being an archipelago of islands also lends the country to better water conditions surrounding its islands. This conducive feature makes it possible for shrimp farmers to reap at least two harvests per year, which translates into quicker pay back on investment.
The shrimp industry in Indonesia serves primarily the export market. Most of the shrimp produced in Indonesia are exported, mainly to the developed markets such as the US, Japan and Europe. Because shrimp is an expensive source of meat protein in Indonesia, the industry is expected to remain export-oriented until the country’s per capita income improves substantially.
There are a number of local companies engaged in shrimp farming, contributing an annual aggregate production of about 100,000 tons per year. This output makes Indonesia one of the largest shrimp producing countries in Asia after Thailand. Only a few companies including PT Suri Tani Pemuka are major integrated shrimp operators in Indonesia.
Shrimp Processing

The production of downstream shrimp products is Suri Tani Pemuka’s biggest revenue generator. Its vertically integrated shrimp operations have resulted in the company making such high quality shrimp products as ebi sushi, hau kau, shrimp soup and ebi chakin. Most of its sales come from the export markets, the largest being Japan followed by the USA, Canada and Europe.

In addition, it has began to enter the local market, marketing breaded shrimp under the So Good brand. With mounting pressures from the world environment protection bodies which discourage the sourcing of sea-catch shrimps, Suri Tani Pemuka is set to benefit from the rising demand for cultured shrimps. This is evidenced by the increase in the number of international food distributors buying its value-added shrimp products.
Shrimp Culture & Feed Production

100% of Suri Tani Pemuka’s shrimps are cultured to support its internal production, especially of value added products. The Company owns and operates 400 hectares of shrimp farms in East Java and 1,000 hectares in South Kalimantan. In its constant endeavors towards improving the quality of its shrimps, Suri Tani Pemuka has established a multi-species hatchery in 1996 to produce high quality shrimp fries. Located on the pristine waters of North Bali, this first-of-its-kind hatchery is a distinct competitive advantage as it enables the Company to breed exactly the right shrimp species for a particular customer or market.
This innovative facility contributes positively to the Company’s bottom line as the specially cultured shrimp fries reduce mortality rate, thus generating costs savings and higher margins. Suri Tani Pemuka total shrimp fry production capacity exceeds 200 milion per annum.
The Company’s aquaculture feed production exceeds 50,000 tons, is sold to independent aquaculture farmers in Indonesia.
Of the total feed production, 80% is fish feed while the balance is shrimp feed. In the near future, Suri Tani Pemuka plans to further expand its shrimp and fish feed production, especially in other parts of the country.
Other Business:
Japfa’s investments in strategic businesses are aimed at leveraging on its fundamental business of animal feed production. These strategic operations enable Japfa to improve its product quality and overall competitiveness, while maximizing profit margins across the board.
Animal Vaccine Research and Production - Vaksindo

In September 2008, Japfa acquired one of the leading research-based animal vaccine producers in South-East Asia, PT Vaksindo Satwa Nusantara. This is a key portion of Japfa’s integration strategy to enhance its state-of-the-art biosecurity measures. This also allows Japfa to provide a total poultry solution to its customers, from DOC to feed to poultry health needs.

There are only a limited number of research based animal vaccine producers around the world. Indonesia is one of a handful of countries researching Avian Influenza, and Vaksindo is one of only 3 companies in Indonesia with the ability and facilities to research H5N1.

Established in 1982 as the first privately owned veterinary vaccine manufacturer in Indonesia, Vaksindo was created out of a vision to bring world quality vaccine to Indonesia. This is achieved through an extensive 26 years of production experience which enabled the company to add value to its vaccines so as to meet international standards. In addition to the local market, Vaksindo exports approximately 25% of its products to a number of countries in the Middle-East and Asia-Pacific markets.

Vaksindo produces international quality veterinary vaccines based on current and practical research through best production practices. It produces 14 types of active and 6 types of inactivated poultry vaccines and large animal vaccines against Anthrax, Septicaemia and Brucellosis.

Vaksindo has a highly skilled and experienced production team. Vaksindo dedicated research and development activities ensure constant upgrading of its production technology and innovations. The quality vaccine products was initially derived from Vaksindo’s Specific Pathogen Free (SPF) eggs produced from its own chicken farm which has passed the most stringent quality control standards. Further production processes are disinfection, harvesting and sterility tests which are in compliance with the good manufacturing practices. In addition, Vaksindo’s animal testing facilities meet the Biosecurity Level 3 (BSL3) criteria which is only comparable to the other two research entities in Indonesia.

Vaksindo has developed an extensive nation-wide marketing and distribution network to serve its customers throughout the major poultry areas in Indonesia. Its field force of trained veterinarians and technicians provide comprehensive service, consultations and product information directly to farmers. Poultry Processing

Japfa’s poultry processing operations rank among one of the largest in the country. It owns processing plants in Tangerang, Lampung and Surabaya, which together have the capacity to handle 6,000 birds per hour. The chickens for processing are sourced from independent farmers, contract farmers and Japfa’s commercial farms.
By using state of the art processing plants, Japfa is able to meet the stringent customer demand for consistency, freshness and hygiene. Japfa products have been certified as having met the higest quality standards.
Because of its commitment towards quality excellence, the Company has successfully built a base of institutional customers such as fast-food restaurants and supermarkets chains which account for about 70% of Japfa’s total output.

Woven Bags Manufacturing

In a move to further integrate its operations, Japfa acquired a woven sack factory in 1990. At the time, its output was only 10 milion sacks a year. Since then, its production capacity hasprogressively increased in line with Japfa’s expansion in the feed production business. In 1995, the factory was relocated to bigger premises in East Java where additional manufacturing machinery was installed.
Today, with efficiency improvements in its production line, the woven bag factory produces about 24 milion sacks a year, of which 80% are used to pack Japfa’s animal feed. The balance 20% is exported.

Trading

The trading arm of Japfa plays a supporting role to its poultry business by procuring raw materials for internal feedmill operations. Lower margin trading activities will continue to decrease as the Company steps up its activities in higher margin product lines.
Although the trading activities are small in terms of profit contribution, they are pivotal to the overall performance of the feed business. For in the light of a fluctuating grain market where critical shortages can sometimes happen, the success of the trading arm in securing sufficient supply of raw materials makes all the difference (while other feed manufacturers have to shut down operations). Hence, in leveraging on its knowledge of the grains market, the trading arm is indeed an integral part of Japfa’s feed business.

Business:
Japfa Ltd. is a leading agri-food producer focused on feeding emerging Asian markets. The Group produces protein staples such as chicken, beef and milk, as well as protein-based consumer food products. From its headquarters in Singapore, Japfa operates its businesses in the fast growing economies of Indonesia, China, India and Indo-China. Backed by two generations of farming experience, it operates industrial-scale farms which are vertically integrated with its downstream food processing operations.

1. 3 Operating segments: 1. Dairy - Dairy products (5% of revenue, 32% of profit after tax) 1. Dairy farming 2. Milk processing 3. Branded milk distribution 4. Geographic areas- China (raw milk production & distribution to premium milk market), Indonesia (dairy production & distribution i.e greenfield brand), Southeast asia & hong kong (distribution) 1. Animal Protein - Poultry, Swine, Beef, Aquaculture (87% of revenue, 67% of profit after tax) 1. Animal feed 2. Breeding 3. Commercial farming 4. Geographic areas - Indonesia (poultry, beef and aquaculture), Vietnam (poultry and swine), Myanmar (poultry), India (poultry), China (beef) 1. Consumer foods- Chicken, Beef, Seafood, UHT milk (8% of revenue, 1% of profit after tax) 1. Ambient temperature 2. Chilled/ frozen 3. geographic areas - Indonesia, Vietnam 1. Strengths: 1. Large scale standardization of operations to create efficiencies and facilitate replication, use of superior breeds of animals, sophisticated approach to animal husbandry, animal health and nutrition, including a strong focus on bio-security 1. Economies of scale and cost savings 2. Resources and technology 3. Consistently high quality animal protein products 4. able to replicate easily in new emerging markets (Vietnam, India, Myanmar and Dairy market China) 1. Vertical integration - from animal feed production → Breeding → Food processing 1. more opportunities to capture value at different points on the value chain + continue to diversify business = able to realise favourable profit margins compared to less integrated farming operations peers 2. Greater food security and traceability for their products → especially for premium pricing in protein businesses and food segment 3. Extensive knowledge of the risks and opportunities involved at each stage of value chain → knows which entry point to target to get into new market 1. Current market positions for each business segment: 1. Poultry 1. fully integrated and industrialized business model: from manufacture of poultry feed, to breeding and commercial farming, to the processing of chicken meat and the marketing of branded processed foods. 2. 2013 - market shares in Indonesia of 25.1% by production capacity of DOCs and 21.9% by volume of poultry feed (excluding aqua feed), second-largest market share in Indonesia, with the next- largest poultry feed producer holding a market share of 5.5%. 3. Vietnam, where we had a 22% market share in 2013 by number of broilers produced. 1. Dairy 1. one of a small group of leading, industrialized producers of premium raw milk in Indonesia and China that is of the highest quality in terms of nutritional and safety standards. 2. Indonesia - 1. we use all of our premium raw milk in our downstream consumer dairy businesses to produce fresh milk and premium cheeses marketed under our Greenfields brand. Greenfields brand was the market leader for premium fresh milk in Indonesia, with an estimated market share of 38.4% by value. 2. the largest dairy farm operation by volume of premium fresh milk produced, and we use our raw milk to produce premium fresh milk and other premium downstream dairy products that we sell directly to consumers. 3. China - 3. In China, we sell our premium raw milk to processors in the rapidly developing premium dairy market. 4. average price of our milk was RMB 4.51 per kilogram, approximately 25% higher than the average market price of milk across ten key production regions in China 1. Consumer food 1. Indonesia - consumer food segment has the second-largest market share in frozen consumer food and the third-largest market share in ambient-temperature food. Further, also source milk from third parties in Indonesia to produce UHT milk for the mass market segment in Indonesia in ready-to-drink small convenience packs under the Real Good brand.

Risks:

Production: * Outbreak of livestock diseases * price of animal feed raw materials, especially corn * Constant supply of good genetics for it’s animal production segment * Natural Disasters & Adverse weather

Sales: * Exchange rate fluctuations, exchange control, exchange policies by govt * hedging of currencies * restrictive govt policies on Price & Volume of production and sales * product safety, quality related risks * Limited LT sales contracts → volatility of sales * Economic conditions in Vietnam, China, Indonesia, India and Myanmar

Firm: * High debt * Failure to comply with environmental regulations (Vietnam, China) * Title & Leasehold rights over land uncertain (China, Indonesia, Vietnam) * Rising operational costs (energy costs, Labor costs) * Tax disputes over accounting policy regarding a substantial amount of tax * Rising competition in all business segments (Dairy- local chinese large scale premium milk producers, foreign MNCs; Animal protein- Thai huge ass guy; Consumer food- other competitors in the market) * Growth strategy risks → might stretch resources too much * Fluctuating fair value estimates of livestock * Labor laws