CHINA MINZHONG - First Amongst Equals (Lim&Tan)

S$1.41-MINZ.SI

The key points during last week’s analysts farm visit (where 5 sell side analysts and 1 buy side analyst attended):

• The 15-20% month on month declines in vegetable prices in Apr-May’11 is no different from past years as it is the end of the peak harvesting period where supply of vegetables will have to be sold as they are perishables;

• vegetable prices have since rebounded about 10-15% due to droughts and floods widely reported in China, but prices are nevertheless still on multiyear up-trend;

• notwithstanding the above, the company would be less impacted as their top selling products such as champignon mushrooms, german chives and capsicums have been pre-ordered (hence prices have been fixed a year ago) by overseas customers;

• the contributions from fresh vegetables will also be less impacted as they focus on niche and higher margined vegetables such as king oyster mushrooms, black fungus and organic vegetables;

• as for concerns over floods and droughts in China, our visit to their normal and organic farmlands in Fujian where 50-60% of their farmlands are based did not suggest any risks;

• management said that because they are considered the leader in their industry and they are able to pay above market rates for their farmlands, the government officials have reserved better located farmlands for them which are usually on higher areas, away from flood prone areas and they also have their own irrigation systems to provide water all year round;

• as an indication of their leading position in the industry, they have been conferred “Dragon Head Enterprise” and the Fujian government has set aside 160,000mu of organic farmland for them over the next few years;

• notwithstanding near term concerns, management remains confident of their growth prospects going forward expecting to maintain their 30% growth forecast, underpinned by farmland and processing facility expansion, increasing contributions from higher margined vegetables such as king oyster mushrooms, black fungus, organic vegetables and asparagus;

• unlike cooking oil which is supplied by a few key players, vegetables suppliers are highly fragmented with the top 5 suppliers only accounting for less than 5% of supplies in China and vegetables being perishable in nature will be less likely to enable the government to implement price controls;

• with regards to the recent escalation over corporate governance issues, management had disclosed all their farmlands, the exact locations, lease expiry dates and names of their lessors, being the only one in the industry to do so amongst its peers listed globally;

• and on share overhang concerns, management disclosed that Olympus who sold 40mln shares last month at $1.70 each has verbally told them that they will not be selling anymore shares in the next 12 months (till May’12). While CMIA who still owns 6.53% of the company will likely continue open market sales like what they have been doing in the past few months, we note that it had not done much damage to the share price in the past when they had done so;

• the only concern is GIC who still own 16.92% of the company, but management believes that having gotten special permission from the Ministry of Finance for a board seat on the company as well as to stay on as a shareholder after IPO, they would likely remain long term shareholders. Having recouped their investment cost during the sale of vendor shares during the IPO in Apr’10, GIC’s existing 17% stake costs close to nothing;

• the recent E-Coli scare in Europe if extended could be beneficial to the company as they sell only processed vegetables there and consumers could switch to eat more processed vegetables if they are fearful of eating fresh vegetables.

Valuations and Recommendations

While near term concerns could continue to limit share price performance, continued delivery of robust results, positive industry updates such as food security concerns in China and management’s continued commitment to better corporate governance practices will likely see medium term uptrend for the company’s stock price. We thus maintain our BUY recommendation.