The news: China Minzhong (MINZ) announced the successful commencement of operations at its new king oyster mushroom cultivation facility in Tianjin City, PRC, which has a 4 tonnes/day production capacity, bringing its total capacity to 8 tonnes/day. Its facilities in Tianjin and Shanghai are currently operating at full capacity. Given the closed-room, temperature and humidity controlled environment, MINZ is capable of cultivating king oyster mushrooms throughout the year, and looks to benefit from traditional supply shortage during off-peak summer production periods with expected higher selling prices and better gross margins. MINZ targets to increase its total king oyster mushroom cultivation capacity to 15 tons/day by end 2011 and 24 tons/day by end 2012.
With regards to recent shares transactions by its private equity shareholders namely Olympus Leaf and CMIA, MINZ explained that it is natural for private equity firms to have exit strategy given the closed end nature of the funds. The announcement noted that board representatives from Government Investment Corporation of Singapore, Olympus, and CMIA continue to express optimism in the Company’s expansion plans and remain confident in its business prospects.
Our thoughts: We view the expansion plan for king oyster mushroom positively given a) its high gross profit margin of close to 70% and b) a daily capacity of 24 tonnes by end 2012 could see the segment making up close to 5% of MINZ’s revenue. Despite concerns over share sales by its private equity shareholders, share price is up 18% YTD and 34% since its IPO at S$1.20 per share. We continue to like MINZ’s attractive agriculture thesis and believe share price will react positively to its earnings momentum amid a lighten share overhang situation. Maintain BUY at TP of S$2.28.
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