Despite recovery in soybean and palm oil prices, the biggest risk in Wilmar's outlook lies in softer Chinese demand this year. News of continued Chinese government support in buying domestic soybeans is raising our concern of rising stock levels; while crushing margins kept falling. We expect Wilmar's M&P PBT/MT to drop by 49-55% this year; and current share price level is unjustified. While maintaining our TP, our rating on the counter is now cut to Fully Valued on valuation grounds.

Risks not yet priced in. Herd reduction in the cattle and poultry industries in the US and elsewhere means that global demand for soybean meal is dropping. Crushing margins have hence come off, and our forecast calls for Wilmar's earnings to drop by c.38% this year.

Increasing Chinese reserves? Chinese government's announced purchases of domestic soybean for state reserves at a time when global supply is forecast to recover y-o-y raises our concern of rising stock levels there. While release of state reserves is under the discretion of the government, potentially ample supply of soybean oil should reduce demand for imported palm oil. Hence, the threat is also on flat to lower palm and lauric processing margin this year.

Near-term share overhang. Recent streamlining of Wilmar's shareholding structure has resulted in c.664m increase in free float ? up from 13.7% to 24.1% (left over from previous RTO and transfer of IPT assets), which we believe may pressure near term share prices of Wilmar, should they unload in the near term.

TP retained, rating cut to Fully Valued. We maintain Wilmar's valuation at 10.8x (low-cycle PE) FY09F EPS, which yields a TP of S$2.50. Given the potential 15.3% downside from current price, we now cut our rating to Fully Valued from Hold.