The news: It was reported that share price of Sino-Forest recovered strongly over the past two days after two institutions - Wellington Management Co and the Mandolin Fund upped their stake in the company. The Mandolin Fund, run by New Zealand-born billionaire Richard Chandler, said on Wednesday it now controls 10.9 percent of Sino-Forest's issued and outstanding shares.
Our thoughts: We believe that the news flow is positive for S-Chips, in particular China Minzhong (MINZ SP, BUY, TP S$2.28) whose share price is down some 30% from its recent peak due to negative sentiment towards the PRC agriculture space. With S-Chips trading at trailing 1.05x P/B, near its next support at 1.0x P/B (or -1SD to its historical mean of 1.5x), we could see selective buying interests.
At S$740m market capitalisation and S$5m average daily traded value, MINZ is one of the few promising S-Chips that offer a visible earnings growth profile over the next three to five years, largely driven by farmland expansion from 27k mu in FY10 (FYE Jun) to 128k mu by FY13. Since its listing on SGX in Apr-10, MINZ has reported quarterly results that came in either within or exceeded consensus expectations. As the company continues to deliver on its growth strategy, we believe MINZ could potentially reward investors with multiple returns in the midterm. Nonetheless, key risks to our recommendation include slower-than-expected farmland expansion, natural disasters, extended period of pre-IPO share overhang and continued negative sentiment towards China-based agriculture players. At projected 40% net profit CAGR from FY10 to FY13F, MINZ currently trades at undemanding 5x FY12F P/E and offers ~50% upside potential to our TP of S$2.28, which is pegged to 9x blended FY11/FY12 P/E.
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