Yamada Green Resources (KimEng)

Business overview: Yamada Green is a major supplier of edible fungus such as shiitake mushrooms and black fungus. It operates one of the largest shiitake mushroom cultivation bases of approximately 4,292 mu in Fujian Province, China. The group also supplies its processed food products to overseas markets.

Recent development: For 1Q11, Yamada posted a net profit of RMB63.1m, up 17.6% YoY on the back of 31.4% growth in revenue to RMB164.0m. The improved turnover was mainly due to higher sales of shiitake mushrooms as well as maiden contribution from its newly-leased black fungus cultivation land. Gross margin however, shrank by 4.3ppt to 44.9% in 1Q11 as a result of costlier raw materials for its processed food products.

Our view:
ASP growth should continue. In 1Q11, the ASP for fresh shiitake mushrooms rose by a further 6% from RMB6.6/kg to RMB7.0/kg. We expect ASP growth to continue in tandem with the rising disposable income of Chinese consumers and their greater emphasis on green and healthy products.

High-value product cultivated. Yamada has introduced black fungus in a bid to reduce its over-reliance on one product. In February this year, it signed a lease agreement for an existing cultivation plot, measuring 86 mu, with an annual production capacity of 2,800 tonnes of black fungus. This is a higher-margin food product which should contribute positively to Yamada’s bottomline.

Expansion of cultivation base. In April this year, Yamada secured its single largest block of mushroom cultivation land of 1,678 mu. Despite the slight delay given the rising land costs, the new cultivation base is expected to be ready in time for the next harvest season between September this year and April next year. With this latest acquisition, Yamada’s total shiitake mushroom cultivation base is estimated to increase significantly by 64.2% to 4,292 mu.

Trading at a discount to peers. The stock currently trades at only 4x FY11 PER, based on Bloomberg estimates. This is a discount of more than 25% against its peers such as China Minzhong (6.5x forward PER) and Sino Grandness (4.5x PER).