(BUY, S$0.185, TP: S$0.32)
2Q11 net profit of RMB7.4m (+12% YoY; -89% QoQ) was above our RMB5m projection amid a seasonally low quarter as a result of higher 2Q revenue of RMB55m (our estimate: RMB48m) with RMB5m maiden contribution from black fungus. Fresh fungus’ GPM dipped by 3ppt to 42% due to imperfect pass-through of increase in raw material costs, while processed food’s GPM recovered by 3ppt to 31%. With new farmland acquisition of 840mu in Jun11, we revise our farmland assumption up to 5,134mu (old: 4,300mu), resulting in higher FY11F-FY12F earnings estimates of RMB146m-RMB193m (old: RMB126m-RMB175m) respectively. However, we reduce our target multiple to 4.5x FY11F P/E (old: 6x) on the back of weak sentiment towards small cap S-Chips counters. We continue to expect strong 4Q11 net profit growth of 78% to RMB72m to provide the next upside catalyst, though share price is likely to remain flattish during a seasonally low-key 3Q. Maintain BUY with a reduced TP of S$0.32 (old: S$0.37).
33% revenue growth. Shiitake mushroom revenue was RMB14m (2Q10: RMB6m) because of a larger cultivation area of 2,614mu (2Q10: 2,213), a higher ASP of RMB7.2/kg (2Q10: RMB6.0/kg) and a slightly longer growing season in 2Q with a cooler weather. Black fungus made its maiden contribution of RMB5m. Processed food revenue was stable at RMB36m (2Q10: RMB35m).
5ppt GPM gain. GPM gained 5ppt to 35% due to a favourable sales mix towards fresh fungus, which made up 35% of 2Q11 revenue (2Q10: 14%). However, shiitake mushroom GPM dipped 3ppt to 42% due to imperfect pass-through of increase in raw material costs i.e. synthetic logs. Black fungus GPM was 41%, while processed food GPM recovered 3ppt to 31% on better selling prices.
High farmland assumption. We now assume a larger cultivation area of 5,134 mu (old: 4,300 mu), which forms our key revenue growth driver. We expect net profit of RMB2m in 3Q11, before staging a strong surge to RMB72m in 4Q11.
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