China Minzhong

Kim Eng on 28 Aug 2012

Results better than expected. Minzhong announced its FY6/12 results on 27 Aug, which is better than expected. Full year revenue came in at RMB2.6b, up 33.2% yoy while net profit grew by 19.9% yoy to RMB679.6m. We maintain our positive view on the company and BUY recommendation with target price of SGD1.16.

Domestic cultivation business drove the growth. Minzhong’s FY12 results reaffirmed our view that Minzhong would gradually achieve a more balanced business model as its domestic cultivation business grew faster than its export business. For FY12, domestic cultivation revenue increased by 64.5% vs 19.1% growth in export business. Gross profit of domestic business also registered higher growth of 50.7% yoy vs only 2.5% for export business.

Account receivables should not be a big issue. A sharp increase in account receivables was a concern before the results. However, the situation is better than expected. Although account receivables remained high at RMB967m in FY12, Minzhong actually has managed to collect around RMB220m since end FY12 and we do not think there is any material default risk associated with the remaining receivables.

Expecting higher yield even without adding more farmland. Yield per mu increased significantly in FY12, mainly because the farmland that Minzhong acquired two years ago is approaching optimum yield. Thus, we expect higher production volume going forward even without adding more farmland.

Positive free cash flow and dividends this year? We expect higher operating cash flow and less Capex in FY13, thus the first positive free cash flow in three years. We cannot rule out the possibility that Minzhong will pay dividends or buy back shares in FY13. Although we have not put in any dividends payments or share buyback forecast as our base case, we believe such actions will boost the valuation if they eventuate. We maintain our BUY call with unchanged target price of SGD1.16 pegged to 4.35x FY13 PE.