China Minzhong: Strong 4Q results but uncertain global outlook weighs (DMG)

(BUY, S$1.20, TP S$1.68)

4QFY11 net profit of RMB97m (+33% YoY, -63% QoQ) was ahead of our RMB85m projection,

driven by 45% revenue growth to RMB416m on strong fresh and processed vegetable

contribution. This was offset by a 5ppt dip in GPM to 40% with higher cost incurred for preparing new farmland. FY11 full-year RMB567m net profit was above ours and streets’ expectation of RMB562m and RMB545m respectively. During results briefing, management highlighted RMB appreciation and China banks’ recent stringent review of overseas Letter of Credit as key risks. In anticipation of a possible replay of global slowdown, MINZ is preparing for higher brined mushroom production, similar to its 2008-09 mitigating efforts. Given the uncertainty over in US and Europe, we revise our FY12F-FY13F earnings estimates down by 5%-3% to RMB768m-RMB1,098m, and peg a lower target multiple of 6x (old: 9x). We continue to like MINZ as it will likely remain a key beneficiary of current high food inflationary environment, and management’s strong execution post-listing since Apr10, delivering quarterly results that were either within or exceeded consensus expectations. Maintain BUY with a lower TP of S$1.68 (old: S$2.28), pegged to 6x FY12F.

45% top line growth. Fresh and processed vegetable grew 50%-27% to RMB130m-RMB239m

respectively. Fresh vegetable ASP and volume improved by 4% and 43% to ~RMB3,900/tonne

and 33,003 tonnes on a better product mix and larger land area. Due to shift towards highervalue portfolio, processed ASP increased 45% to ~RMB19,000/tonne although volume

contracted by est.20%.

5ppt GPM dip to 40%. GPM dipped 5ppt to 40% mainly due to higher cost incurred in preparing

new farmland for the coming Sep planting season, which resulted in lower fresh vegetable GPM

of 55% (4Q10: 68%). Processed vegetable GPM remained stable at 36%.

Farmland acquisition. We note that MINZ has expanded its conventional farmland by 30,700

mu to 58,600 mu as of Jun11, in-line with its guidance since IPO. The company has also added

810 mu of fungus cultivation facilities for king oyster mushroom and black fungus. MINZ

explained that under a controlled environment, fungus can be grown in shelves and harvested

throughout the year. Hence, its 810 mu of new fungus cultivation facilities would approximate to 7,250 mu of conventional farmland. For FY12, MINZ will shift its farmland capex into 2H12 to ensure sufficient working capital during 2Q-3Q peak period.