China Minzhong

Kim Eng on 2012

Share price has soared since last week. Minzhong’s share price has soared by 9% since last week, along with some other Chinese agricultural companies on the SGX such as Sino Grandness and People’s Food. Concerns over China’s food inflation could be the reason why investors are rushing for Chinese up-stream food companies.

QE3 triggered more concerns on China’s food inflation. Based on the latest CPI figures from China, Chinese fresh vegetable price increased by 24% YoY in August. We saw this figure standing above 20% in five out of the first eight months this year. The Fed’s latest treasury purchase practice (QE3) has triggered further concerns over China’s inflation.

Minzhong is a direct beneficiary of China’s food inflation. Minzhong is a direct beneficiary of recent rise in fresh vegetable prices. Currently, 38% of the Group’s revenue is from the ‘cultivation’ sector that mainly serves the domestic market, while 62% comes from the mid-stream ‘processing’ business. The ‘cultivation’ sector can directly benefit from the surge in the vegetable prices of the domestic market in China. As for the ‘processing’ sector, Minzhong can pass part of the cost pressure on to downstream customers. Thus, the net effect of China’s food inflation is positive for Minzhong.

Management’s revenue target can be surpassed. Management’s targeted revenue growth for FY13 is around 15% vs our forecast of 12%. We have adopted a conservative stance due to the unpredictable weather conditions in the recent years and uncertainties of Europe. Management’s revenue target is based on the internal food inflation assumption of 5%. If food inflation in China remains high, there is a high chance that the management’s revenue target could be surpassed.

Reiterate BUY. We expect China Minzhong’s free cash flow to turn positive in FY13, as it has passed the peak of its 2-yrs investment cycle. We maintain our BUY rating and target price at SGD1.16 pegged to 4.3x FY13 PER, representing upside potential of 52%.