China Minzhong is the 11th company targeted by Glaucus, founded in 2011 by former investment banker Matt Wiechert, who then roped in his University of Chicago schoolmate, lawyer Soren Aandahl. Shortsellers such as Glaucus borrow shares to sell in the hope of the price going down so the shares can be bought back cheap for a profit.

The firm's attacks have been hit and miss. Its most recent attack was on New York Stock Exchange-listed real estate website SouFun Holdings in April. But SouFun has since doubled in price.

A notable success was Hong Kong-listed China Metal Recycling. In January this year, Glaucus alleged the company misled the market about the size of its business. Trading in China Metal was immediately suspended. After investigations, Hong Kong's Securities and Futures Commission recently moved to have the company wound up, with provisional liquidators suing the company's husband-and-wife founders for fraud.

China Minzhong was targeted probably because it met the aggressive growth metrics and other statistical outliers that Glaucus had said it screens for to find targets. In its 2012 annual report, the company noted that in the last five years, its revenue had grown at a compound annual growth rate of 41.9 per cent a year, while net profit grew at an average of 33.1 per cent a year.

In its financial statement for the period ended March 31, 2013, China Minzhong reported a 38 per cent rise in revenue to 2.4 billion yuan (S$502 million), and a 16.5 per cent increase in net profit to 592 million yuan.

The company went public in April 2010 at a price of $1.20 a share. Glaucus focused on what the company said were its top customers and suppliers in the initial public offering (IPO) prospectus.

Two major customers, Hong Kong Yifenli Trading and Putian Daziran Vegetables Produce, were singled out. Glaucus said a search on the website of the ICRIS companies registry in Hong Kong showed that Yifenli, which China Minzhong said contributed to its sales from its fiscal year 2007 onwards, was incorporated only in November 2009. Yifenli was a Taiwan-based food distributor according to China Minzhong, but Glaucus claimed it could not find any trace of the company being registered in Taiwan.

Meanwhile, filings with China's State Administration for Industry & Commerce also purportedly show that Putian Daziran had zero revenues and cost of goods sold in 2009. Glaucus said Daziran's inventory balance did not change in 2010, allegedly proving it was not buying vegetables from China Minzhong. It added that Daziran's supervisor Lin Guo Ping was also the legal representative of a Minzhong subsidiary, a connection that was not disclosed.

Glaucus also alleged that China Minzhong fabricated payments to Cheng Du Shu Feng Nong Ye, its largest supplier pre-IPO. The company had been deregistered and stripped of its business licence in February 2010, two months before China Minzhong went public, Glaucus said.

Glaucus then said that upon considering that China Minzhong sells to middlemen before a commoditised product reaches consumers, its yearly fresh produce segment pre-tax margins of 63 per cent to 90 per cent were abnormally high. It also highlighted alleged red flags: increasing receivables and negative free cash flow of one billion yuan since its IPO.

China Minzhong Food | CIMB
Ceasing coverage 

MINZ SP / CMFC.SI | S$1.02 
Mkt.Cap: US$519.20m | Avg.Daily Vol: US$2.33m | Free Float: 56.40% 
Food & Beverages | Author(s): Kenneth NG, CFA +65 6210 8610, Mou Hua LEE 
--------------------------------------------------------------------------------

We share Glaucus Research?s concerns about MINZ?s reliance on capital markets for cash generation and ballooning receivable days. We cease coverage of MINZ, with our last rating being Outperform with a target price of S$1.27 (5x CY14 P/E, its peer average).

What Happened 
Glaucus Research, an independent US-based research house, this morning issued a sell report on MINZ, alluding to its reliance on debt & equity financing as a primary source of cash generation ballooning receivables ?fabricated? sales and ?suspicious? capex. MINZ?s stock subsequently tanked 50% and trading in its shares has been halted. 

What We Think 
We have been sharing Glaucus?s concerns for some time, especially the first two. MINZ had issued new shares (98m) to Indofood on 15 Feb 13, at S$0.915 apiece or 0.7x its FY12 book value. It soon followed this up with an unsuccessful attempt to issue bonds on 8 Mar 13. We found this intensive capital-raising worrying. The company?s willingness to dilute EPS at such an unfavourable price suggests to us a desperate need for cash when this shouldn?t have been the case. Capex was supposed to be lower this year (according to guidance) with positive free cash flow anticipated by us. Further, Olympus Capital, one of its major shareholders before IPO, had disposed of its remaining 10.3% stake on 6 Dec 12. It is hard to believe management was not aware of both Indofood?s and Olympus Capital?s intentions, considering their transactions were back-to-back. If Indofood?s expertise had been what MINZ was solely after, management could have arranged for Indofood to take over Olympus?s stake. Pressure from investors to pay dividends probably weighed on the company. We sensed that it was going to pay dividends for the first time this quarter, which could have catalysed its share price hence, our previous Outperform. However, we believe raising equity from Indofood to pay dividends would have compromised the quality of any payout, as it could have represented a mere ?transfer? of cash. We were also worried by its spiking receivable days. FY12 receivable days were 85, up from 45 in FY10 and 43 in FY11. See our report: Look beyond the stellar earnings. 

What You Should Do 
We are ceasing coverage of the stock.

• FerroChina â?? Delisted
• China Printing & Dyeing â?? Delisted
• Fibrechem Technologies â?? Suspended
• Beauty China â?? Delisted
• Oriental Century â?? Delisted
• China Sun Bio-chem â?? Suspended
• Celestial NutriFoods â?? Suspended
• Sino-Environment â?? Delisted
• China Milk Products Group â?? Suspended
• KXD Digital Entertainment â?? Suspended
• China Hongxing Sports â?? Suspended
• Hongwei Technologies â?? Suspended
• China Gaoxian â?? Suspended
• Sino Techfibre â?? Suspended
• China Sky Chemical Fibre â?? Suspended
• Sinopipe â?? Suspended

impact from Minzhong concerns

Reuters Bloomberg Exchange Ticker

INDF.JK INDF IJ JKT INDF

ADR Ticker ISIN

PIFMY US45577X1054

________________________________________________________________________________________________________________

Deutsche Bank AG/Hong Kong

This research has been prepared in association with PT Deutsche Bank Verdhana Indonesia. The opinions contained in

this report are those of PT Deutsche Bank Verdhana Indonesia.

Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should

be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should

consider this report as only a single factor in making their investment decision.THE VIEWS EXPRESSED ABOVE

ACCURATELY REFLECT PERSONAL VIEWS OF THE AUTHORS ABOUT THE SUBJECT COMPANY(IES) AND ITS(THEIR)

SECURITIES. THEY HAVE NOT AND WILL NOT RECEIVE ANY COMPENSATION FOR PROVIDING A SPECIFIC

RECOMMENDATION OR VIEW IN THIS REPORT. FOR OTHER DISCLOSURES PLEASE VISIT

http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=INDF.JK MICA(P) 054/04/2013.

Price at 23 Aug 2013 (IDR) 6,250

Price target - 12mth (IDR) 8,250

52-week range (IDR) 7,850 - 5,350

Jakarta Comp. Index 4,169.83

Reggy Susanto, CFA

PT Deutsche Bank Verdhana Indonesia

Research Analyst

(+62) 21 318 9527

reggy.susanto@db.com

Adi Putra

PT Deutsche Bank Verdhana Indonesia

Research Associate

(+62) 21 318 9543

adi.putra@db.com

Stock data

Market cap (IDRbn) 54,878

Market cap (USDm) 4,878

Shares outstanding (m) 8,780.4

Major shareholders CAB Holdings

(51.53%)

Free float (%) 48

Avg daily value traded

(USDm)

6.557

Source: Deutsche Bank

Key data

FYE 12/31 2012A 2013E 2014E

Sales (IDRbn) 50,059 55,111 58,811

Net Profit

(IDRbn)

3,261.2 3,257.1 3,559.8

DB EPS (IDR) 371 371 405

PER (x) 14.0 16.8 15.4

Yield (net) (%) 2.7 2.4 2.4

Source: Deutsche Bank

Strong profit +13% YoY and + 36% QoQ despite weak agribusiness

INDF booked 2Q13 profit of Rp981bn on sales of Rp14tr (+10% YoY, +9%

QoQ, please see table). Profit and EBIT (+8% QoQ) grew strongly QoQ despite

agribusiness turning into the red, showing INDF?s integrated nature. The CBP

business (45% of sales) was +13% YoY in 2Q13, Bogasari (27% of sales) +22%

YoY on 12% volume growth, Agribusiness (21% of sales) -11% YoY, while

Distribution (8% of sales) +21% YoY. Agribusiness now accounts for c. 8% of

profit, hence maintain Buy as risk-reward balance looks attractive.

Concerns on China Minzhong, but financial impact limited

Share price of China Minzhong (MINZ SP, NR, CP:SGD0.53), which is 29.3%

owned by INDF, fell by 48% on the back of a research report released by

Glaucus Research Group. Recall that INDF paid SGD195mn for the stake

(average price of SGD1.01). MINZ only accounts for 2.2% of INDF's sum-of-the

parts and profit would be lower by 4% in 1H13 if we exclude MINZ. In the

extreme case that INDF has to write down the whole investment, profit in 2013

would go down by 38% and book value by 7.5%. Management reiterated that

it deems its investment in MINZ as " prudent" and they have done " extensive

due diligence" including a recent trip to China. Though the financial impact

from MINZ is limited, we worry more about the potential reputational impact

on INDF should the allegations in the report be substantiated.