Investment Highlights

·                  Maintain BUY and target price of S$1.00, based on 3.1x FY14F PE, pegged to Singapore-listed peers’ average.

·                  Positive share price catalysts include PE expansion, share buybacks or even a dividend payout, which the company has been considering since the last financial year.

·                  We increase our FY13 net profit forecast by 1.6% to Rmb788.5m on higher revenue despite lower gross margin due to the higher cost of production.

What’s New

·                  We met up with the management of China Minzhong Food (CMZ) recently for an operational update. 

·                  In the cultivation business, we expect revenue to grow 18.9% yoy in FY13, driven by an improvement in yield as its farmland matures over the next two years. Although this is significantly lower than the growth in FY12, it is expected as the group did not add any new agricultural farmland for the year. In FY12, revenue for this segment jumped 64.5% yoy as the group enjoyed full-year contribution from the doubling of the farmland in FY11.

·                  In industrial farming, the group now produces an average of 28 tonnes of king oyster mushrooms per day. With an ASP of Rmb12/kg, this segment can contribute Rmb125m in revenue, or 4.0% of FY13’s total revenue.  CMZ has recently incorporated a wholly-owned subsidiary in  Jiangsu,China, which owns a 100-mu site for  industrial farming.  Discussions on expansion plans are still ongoing but we expect revenue contribution from this subsidiary in FY14. 

·                  On the processed food segment, we expect a revenue growth of 30% yoy this year, driven by an increase in production from the new industrial park. The industrial park will have three times the current capacity and CMZ will slowly ramp up production capacity over the next two years. However, we expect gross margins to be compressed in FY13/14 as the group will only reap economies of scale upon full utilisation but meanwhile have to incur overheads and depreciation expenses in the initial phase.

·                  CMZ has also diversified into other markets for processed food, such as  Japan  and  Taiwan, to mitigate the higher credit risks from European clients. Although this will benefit the group’s financials in the longer term, we expect lower average selling prices and a compression in margins inevitably to gain market share. 

Share price catalysts

·                  Management has been authorised to carry out share buyback of up to 10% of issued capital. Although the group has yet to initiate the share buybacks, any smallest purchase from the open market would represent management’s confidence on the company’s prospects. 

UOB Kay Hian