China Minzhong - Outlook promising (OCBC)

Not Rated

Current Price: S$1.54

Leading integrated vegetable producer. We recently visited the farm operations and processing facilities of China Minzhong (CM) in Putian City, Fujian province, China. China Minzhong, a fully integrated vegetable producer, was established in 1971 as a collectively owned enterprise called Chengxiang Dehydration and has been listed on the SGX Mainboard since 15 Apr 2010. It has processing and cultivation facilities in many locations across China like Shanghai, Yunnan, Tianjin and Inner Mongolia, and exports to over 26 countries globally. CM's revenue grew at a CAGR of 49.8% from FY08 to FY10.

Improving results. For 9MFY11, revenue grew 33.2% on the back of higher sales volume and average selling prices, coupled by improving yields from maturing and new farmlands. CM's gross profit rose 42.4% to RMB635.6m while net income rose 59.5% to RMB469.8m. Gross and net margins also increased by 2.7 and 5.1 percentage points respectively. Revenue contribution by segments remained relatively consistent as compared to the same period last year with processed and fresh vegetables comprising around 69% and 31% respectively.

CM unaffected by recent vegetable prices fluctuations. Vegetable prices had fallen by more than 10% in Apr due to seasonality factors related to increased supplies. However, prices have since rebounded strongly after a series of droughts and floods devastated cultivation lands (CM's plantations were unaffected) and reduced overall production outputs. CM is generally sheltered from such fluctuations as sales orders and prices for most of their top selling products (e.g. German chives, champignon mushrooms, capsicums) are determined prior to the start of cultivation. It also has the ability to pass on cost increases due to its market leadership. Furthermore, CM also focuses on higher-margin fresh vegetables like the king oyster mushrooms and black fungus, which provides them with better price cushions. Near-term fluctuations aside, the long-term outlook for vegetable prices are on an upward trend due to the continued loss of arable land and potential dire weather patterns, and should bode well for CM.

Outlook promising. The expected increase in its cultivation capacity and new processing facilities will provide strong growth catalysts for the company as it positions itself to take advantage of the uptrend in vegetable prices. It also intends to continue its shift towards higher-margin products like king oyster mushrooms due to the fact that it has a competitive advantage in this niche market as the product's higher technological requirements and technical know-how puts competitors a few years behind them in terms of production scale. CM is currently trading at 6.7x trailing EPS and is rated as BUY by seven out of eight BUY analysts with an average target price of S$2.15. We do not have a rating on CM.