China Minzhong (KimEng)

Event:

Our recent site visit to China Minzhong’s facilities in Putian, Fujian Province, has reinforced our positive view on the group. This is despite market concerns over potential share overhang by its private equity shareholders and corporate governance issues involving Chinese companies listed here and abroad. In our view, Minzhong’s strong fundamentals are intact. The stock is trading at an attractive valuation of 6.1x FY Jun12F PER after a sell-off. Maintain BUY.

Our View:

Minzhong targets to raise fresh vegetable sales by 40-45% in FY Jun12 following the increase in its farmland area. This should give the group’s profitability a boost as the gross margin for fresh vegetables is typically higher at 60%. In particular, the cultivation of high-value products like black fungus could provide a new impetus that may see fresh vegetable sales accounting for half of its overall turnover in the next 3-5 years.

Operations at the new king oyster mushroom cultivation facility in Tianjin City has commenced. Add its existing facility in Shanghai which has a daily capacity of 4 tons, the group’s total capacity per day has doubled to 8 tons. But both facilities are now operating at full capacity and we understand there are plans to increase the total capacity of each to 15 and 24 tons/day by end-2011 and 2012, respectively.

Longer term, organic vegetables may well be the next plateau of growth for Minzhong. The prospects are bright as China’s increasingly affluent population seeks healthier and safer food. Management expects this product segment to make up about 10-15% of the group’s domestic sales once it can achieve at least 30 third-party-owned speciality stores. It currently has seven such stores. The expansion will occur over the next three years or so with the stores mainly located in the coastal regions.

Action & Recommendation

Contrary to market belief, the slide in China’s wholesale vegetable prices in April and May is seasonal in nature and not a major cause for concern. We believe crop prices will remain in a structural uptrend, albeit at a more moderate pace given the current food inflationary environment. Maintain BUY and target price of $2.05, still pegged at 9x FY Jun12F PER.