Yamada Green Resources

UOBKayhian on 14 Mar 2012


Investment highlights

• BUY with a target price of S$0.33 due to stronger earnings from a larger production capacity, improved gross margins and increased sales with a wider distribution network. 
• The target price translates to 4.0x 2012F PE, pegged at a 70% discount to Singapore-listed peers’ average. Yamada Green Resources (Yamada) is currently trading at 4.0x FY11 PE and 2.6x FY12F PE vs an earnings growth of 50.0%.

Our view

• Macroeconomic should favour Yamada as the government continues to encourage rural agriculture. To curb food inflation, the Chinese government plans to allocate Rmb1.2t for developing the agricultural industry, improving rural areas and farmers' livelihood this year. At the fifth session of the 11th National People’s Congress, Chinese Premier Wen Jiabao reiterated that the government remains committed in its efforts to boost agriculture production by developing technology and investing in rural infrastructure. We believe Yamada will benefit from such policies as the government can use Yamada as a conduit to encourage corporate high technology farming. 
• Expansion in mushroom cultivation to boost earnings for FY12. Yamada reported a 70.1% surge in revenue for 1HFY12 to Rmb252.0m due mainly to higher sales of self-cultivated fungi as the group almost doubled its shiitake mushroom cultivation base from 2,614mu in 1HFY11 to 5,134mu in 1HFY12. As a result, PBT escalated 130% to Rmb81.2m from Rmb35.3m in the previous period if we exclude the Rmb14.6m valuation gains of the eucalyptus trees in 1HFY11. We believe earnings growth momentum is likely to continue for the second half, particularly so as they have signed on new exclusive distributors for their mushrooms.
• Completed acquisition in the Eucalyptus plantations will improve margins. Yamada reported lower gross profit margins in the fungi segment from 49.8% in 2QFY11 to 42.2%, mainly due to rising raw material cost of synthetic logs. With the acquisition of 21,000mu of eucalyptus trees in Dec 11, it will fulfill 20% of the synthetic logs requirement in FY13 and 50% in FY14, thus controlling cultivation costs and consistency in the quality of their edible fungi. Gross margins are likely to improve going forward.