Event
China Minzhong’s share price has fallen by 34% from its March peak despite delivering robust earnings trajectory in tandem with rising food inflationary environment. We attribute the weakness to the fact that its overseas-listed agricultural peers are now trading at depressed valuation given a slew of negative corporate governance issues. In contrast, Minzhong has been very forthcoming in its disclosure, providing investors with detailed capex plans and land leases. Maintain BUY.
Our View
To recap, Minzhong recently posted 4Q11 net profit of RMB96.9m (+32.9% YoY), which came in above our and market expectations. The significant jump in FY11 ASP for the processed vegetable to RMB18.72/kg provided the main surprise notwithstanding a 13.6% decline in sales volumes. Turnover from other processed products also surged almost 4-fold to RMB46.6m, mainly due to robust domestic demand for branded products such as vegetable and fruit beverages.
As for the fresh vegetables segment, revenue increased by 49.4% YoY to RMB130.1m, thanks to a 43.3% rise in cultivation volume. However, gross margin shrank by larger-than-expected 13.2ppt to 55.5% in 4Q11, which arose from higher initial cost incurred to prepare the newly-acquired farmland. According to management, the contraction was made worse especially during the last quarter when cultivation activities were also at the low peak season.
Minzhong is making good headway in its expansion into the higher value products including organic vegetables, king oyster mushrooms and black fungus (see figure 1). Meanwhile, it has been extending its footprint across Fujian province with the setting up of six organic specialty stores since its first harvest of organic vegetables last November. We expect to see increasing revenue contributions from this segment going forward.
Action & Recommendation
We maintain our BUY recommendation with a lower target price of $1.85, pegged at an undemanding 8x FY Jun12F PER (from 9x previously).
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