Cultivating strong sales

Two consecutive quarters of strong sales bode well for China Minzhong,
ahead of its peak season. At 47% of our FY13 estimate and 44% of
consensus numbers, 1H convincingly beat our expectations, thanks to
surprisingly strong yields from new farmland.



2QFY13 earnings amounted to 28%
of our full-year forecast. We raise
FY13-15 EPS by 7-9% to incorporate
1H’s strength. Our target price is
raised for the higher earnings and a
higher CY14 P/E of 4x on par with
the sector (previously 3x) as the
sector re-rates. We upgrade it from
Neutral to Outperform, with the key
catalyst being the potential payment
of dividends later this year, given its
increased cash.



1H12 highlights
Strong cultivation sales driven by a
higher-than-expected yield for new
farmland that began seeding two
quarters ago are responsible for most
of the earnings outperformance.
Processed sales also contributed,
with export orders increasing, but
had a lesser impact.
Although processed gross margins
are lower yoy, the upward trajectory
since 4Q12 suggests that the worst is
over for export sales. The slight dip
in fresh margins was brought about
by a different product mix due to
new farmland.
Expenses were well controlled but
earnings rose less than sales because
of a spike in depreciation and
amortisation due to 1) depreciation
charge for the Putian Industrial Park
kicking in and 2) new farmland that
began seeding in 2HFY12.


Improving cash position
1H13 operating cash flow came in at
Rmb578.3m, much higher than the
Rmb337m earnings due to prompt
collection of 2Q sales. As a result, net
gearing fell to 5% from 15% at
end-FY12.


Upgrade to Outperform
We estimate Rmb550m of free cash
flow this year on the back of around
Rmb1.1bn of operating cash flow and
management’s capex guidance of
Rmb550m. Should a modest 20% of
earnings be paid out, CY13 yields
would be a strong 6%.


Outperform Target S$1.35  

CIMB  

CHINA MINZHONG
S$1.02-CMIN.SI

  2Q to Dec ’13 profit rose 24% yoy to Rmb216mln,
bringing 1H to Dec ’13 profit up 26% to Rmb337mln,
accounting for 44% of consensus full year estimate of
Rmb759mln.
  This is about 10% higher than their usual 40/60 split
and at yesterday’s briefing, management had attributed
this to the early start to the winter season versus last
year’s relatively later start.
  The key positive takeaway from this set of result is
the robust operating cash flow which surged 335%
yoy to Rmb578mln as most of the overdue receivables
were collected back, helping to allay concerns of bad
debt provisions.
  As a result, cash position rose significantly from
Rmb42mln to Rmb442mln. Debts total Rmb650mln
against shareholders funds of Rmb3.93bln.
  Looking ahead, management remains optimistic of
prospects citing the continued robust demand for
higher valued vegetable crops such as black fungus,
king oyster mushrooms and organic vegetables as well
as their more normal crops such as champignon
mushrooms, German chives and capsicums.
  The 3-fold increase in processing capacity at their new
plant is expected to be phased in starting in the middle
of this year and is expected to be completed by the
end of the year. Another 20-25% of new cultivation
land is expected to reach maturity this year which
would continue to support growth of the fresh
produce.
  Capex of Rmb550mln for the rest of the year is
expected to be funded internally.
  Management also hinted of declaring a maiden final
dividend (although the exact amount has not been
decided) when full year results (to June’13) are
announced sometime in Aug ’13.
  This should continue to sustain interest in the S-Chip.
  We are expecting 15% growth in profit to
Rmb782mln for full year ending June’13, translating
to an undemanding forward PE of 3.6x.
  Upgrade to BUY.


Lim &  %Tan Securities  

LEADING INDONESIAN PACKAGED FOOD PRODUCER ACQUIRES 14.95% STAKE IN CHINA MINZHONG


Singapore, 15 February 2013 – China Minzhong Food Corporation Limited (中 国 闽 中 食 品 有 
限 公 司 ) (“China Minzhong” or “Company” and together with its subsidiaries, the “Group”)
(SGX: K2N.SI  Bloomberg quote: MINZ SP), today announces the allotment and issue of
98,000,000 new ordinary shares in the Company (“New Shares”) to PT Indofood Sukses
Makmur Tbk (IDX : INDF) (the “Subscriber” or “Indofood”) at S$0.915 per New Share (the
“Subscription Price”) (the “Proposed Subscription”).
The Subscriber is a company incorporated in Indonesia and is listed on the Indonesia Stock
Exchange. Indofood’s and its subsidiaries’ (“Subscriber Group”) operation ranges from the
production of raw materials and their processing through to consumer products in the market.
Their business activities can be classified into four complementary Strategic Business Groups,
namely:
(a) Consumer Branded Products Group, which is led by PT Indofood CBP Sukses Makmur
Tbk (" ICBP" ), a company incorporated in Indonesia and listed on the Indonesia Stock
Exchange. ICBP is one of the leading packaged food producers in Indonesia, producing
a wide range of packaged food products including noodles, dairy products, food2
seasonings, snack foods as well as nutrition and special foods for infants and children
and milk products for expectant and lactating mothers 
(b) Bogasari Group, which is primarily a producer of wheat flour and pasta 
(c) Agribusiness Group, which is led by Indofood Agri Resources Ltd, a company
incorporated in Singapore and listed on the Singapore Exchange Securities Trading
Limited (“SGX-ST”). The Agribusiness Group is a vertically integrated and diversified
agribusiness group that engages in the business of oil palm plantations and edible oil
and fats. In addition, the Agribusiness Group is also involved in the cultivation and
processing of rubber and sugar cane as well as other crops  and
(d) Distribution Group, which covers the distribution of the majority of the Subscriber
Group's consumer products as well as third party products.
The Subscription Price represents a discount of 9.93% over the weighted average price of the
Company’s shares of S$1.0159 for trades done on the SGX-ST for the full market day on 14
February 2013. The New Shares will represent approximately 14.95% of the issued and paidup share capital of the Company immediately following the completion of the Proposed
Subscription. The net proceeds of approximately S$85 million will be used for the Company’s
planned expansion of its industrialised farming operations and the balance thereof will be
used as general working capital.
Commenting on this, the Group’s Executive Chairman and CEO, Mr. Lin Guo Rong (林 国 荣 )
said, “We are pleased to attract the keen interest from our new shareholder. With Indofood’s
long-standing track record in the food industry and China Minzhong’s experience in
agriculture and food processing, there are a lot of potential synergies between our businesses
such as strategic cooperation in supply chain and product distribution in the fast moving
markets of China and Indonesia. Our strongholds in different geographical regions and
product segments will open the door to new business opportunities and we look forward to3
leveraging on each other’s strengths and experiences to broaden our market exposure in the
future.”
China Minzhong recently announced its 2QFY2013 financial results, reporting a 23.6% rise in
net profit to RMB215.8 million, on the back of a 32.3% increase in revenue to RMB860.9
million. This was underpinned by improved performances across both the Group’s Cultivation
and Processed business segments.  

 

Cultivating strong sales

Two consecutive quarters of strong sales bode well for China Minzhong, ahead of its peak season. At 47% of our FY13 estimate and 44% of consensus numbers, 1H convincingly beat our expectations, thanks to surprisingly strong yields from new farmland.

2QFY13 earnings amounted to 28% of our full-year forecast. We raise FY13-15 EPS by 7-9% to incorporate 1H’s strength. Our target price is raised for the higher earnings and a higher CY14 P/E of 4x on par with the sector (previously 3x) as the sector re-rates. We upgrade it from Neutral to Outperform, with the key catalyst being the potential payment of dividends later this year, given its increased cash.

1H12 highlights

Strong cultivation sales driven by a higher-than-expected yield for new farmland that began seeding two quarters ago are responsible for most of the earnings outperformance. Processed sales also contributed, with export orders increasing, but had a lesser impact.

Although processed gross margins are lower yoy, the upward trajectory since 4Q12 suggests that the worst is over for export sales. The slight dip in fresh margins was brought about by a different product mix due to new farmland.

Expenses were well controlled but earnings rose less than sales because of a spike in depreciation and amortisation due to 1) depreciation charge for the Putian Industrial Park kicking in and 2) new farmland that began seeding in 2HFY12.

Improving cash position

1H13 operating cash flow came in at Rmb578.3m, much higher than the Rmb337m earnings due to prompt collection of 2Q sales. As a result, net gearing fell to 5% from 15% at end-FY12.

Upgrade to Outperform

We estimate Rmb550m of free cash flow this year on the back of around Rmb1.1bn of operating cash flow and management’s capex guidance of Rmb550m. Should a modest 20% of earnings be paid out, CY13 yields would be a strong 6%.