China Minzhong

Kim Eng on 11 June 2012

Sell-off overdone, maintain BUY. The recent sell-off of China Minzhong following its announcement of the 3QFY6/12 results appears overdone in our view. To be clear, the company is still exposed to Eurozone headwinds, but our worst-case scenario analysis suggests that the negatives have all been priced in. We would watch its next quarterly results for signs of recovery. While we lower our earnings forecasts in a nod to lingering concerns over its European exposure, we maintain our BUY call with a target price of SGD1.16 based on 4.7x FY6/13F PER (25% discount to historical average of 6.3x PER).

Asset quality unlikely to deteriorate. The sharp increase in Minzhong’s trade receivables in 3QFY6/12 is worrying. After all, seasonality can only be part of the reason. We suspect that the other reason is the difficult financial straits its European end-customers are in. That said, we do not think its asset quality will necessarily be adversely affected any time soon.

Cut earnings forecasts for FY6/13 and FY6/14. Our base-case scenario assumes that Minzhong will be able to collect its receivables over time. However, it is also possible that the financial position of its European counterparts continues to worsen, thus leading to a decline in its export orders. We lower our revenue forecasts by 15% for FY6/13F and 20% for FY6/14F, with the net profit forecasts correspondingly cut by 18% and 22%.

Long-term outlook still intact. Vegetable consumption will stay resilient through the economic cycles and we remain confident that Minzhong’s cost advantage will serve as a long-term shield against domestic producers in the European market. The company’s gradual shift towards higher-margin produce such as asparagus, king oyster mushroom and black fungus will also help to mitigate some cost pressures.