CHINA MINZHONG (Lim&Tan)

We highlight several key points from China Minzhong’s CFO Mr Ryan Siek’s interview with Reuters:

a. the company aims to sell 40-45% more fresh vegetables over the next fiscal year to boost profit margins as fresh vegetables command gross margins of 60% versus processed vegetable’s 30%;

b. the company targets to derive 50% of its sales from fresh vegetables in the next 3-5 years, up from 30% currently;

c. in the fresh vegetable segment, the company is also targeting to increase sales contributions from higher margined and more niche products such as king oyster mushroom, black fungus, asparagus and organic vegetables;

d. the company expects contributions from higher margined king oyster mushroom to increase from the current 8 tonnes per day to 11 by the end of this year and 20 by end of next year;

e. most of their farmland in Fujian has not been impacted by the severe drought situation and besides, their peak harvest season has already ended with the next one expected to restart in Aug/Sept ’11;

f. in their industry, it is normal to have an “Act of God” clause in their contracts with their customers where the company will be protected against any penalties for non-deliveries in the event of crop failures under unforeseen weather conditions;

g. being a leader in their industry, the company benefits from being able to select premium farmland less prone to floods, droughts while having better irrigation and drainage systems to enhance production yields.

COMMENTS
1. The above positive updates and comments from the company will likely be able to help offset some of the recent market concerns. While its true that vegetable prices have fallen a significant 10-15% mom in May ’11, it is nevertheless still on a rising trend from a year and 2 year ago levels of about 15%. M a n a g e m e n t ’ s f o c u s o n i n c r e a s i n g s a l e s cont r ibut ions f rom ni che and hi ghe r ma r g ined vegetables such as king oyster mushrooms, black fungus, asparagus and organic vegetables will likely help insulate them from the decline in the more generic vegetable prices. The recent decline in vegetable prices also comes at a time during the company’s low season with the next peak season starting only in Aug/Sept ’11. And with the recent 20% decline in its share price, we believe the stock is attractive again and are upgrading it to a BUY ahead of next week’s analysts farm visit (to Fujian).