Yamada Green Resources

UOBKayhian on 11 Sept 2012

Valuation
· Downgrade to HOLD. We expect Yamada to face headwinds going into FY13 as the group has to cope with lower ASPs, higher costs and government disincentives on the group’s harvesting of the Eucalyptus plantations.
· Our target price translates to 2.5x FY13F PE, pegged to 30% discount to the Singapore-listed peers’ average.

Our View
· FY12 revenue and earnings within expectations if we exclude the one-time non-cash devaluation of its Eucalyptus plantations. Yamada had reported a 51.8% increase in FY12 revenue to Rmb553.3m, driven largely by the enlarged land base as the group had almost doubled its shiitake mushroom cultivation base to 5,134mu from 2,614mu previously. However, net profit only increased 23.7% yoy to Rmb139.5m as Yamada has to take a non-cash charge of Rmb28.2m on its 51,200 mu of eucalyptus trees plantation as market value of the trees have fallen. Excluding that, net profit would have come in at Rmb167.7 against our estimate of Rmb169m.
· Yamada is still facing delays in obtaining the logging license to harvest eucalyptus trees due to the new initiatives from the government to suspend all harvesting of natural forests. As Yamada initially had plans to use the eucalyptus trees to fulfill 20% of the synthetic logs requirement, the group now has to spend an additional Rmb40m to make up for the difference in the coming planting session to buy the synthetic logs.
· Margins to be compressed by lower ASP and higher cost. According to management, market prices for shiitake mushrooms have moderated to approximately Rmb6.30/kg from Rmb6.75/kg in FY12 as consumers’ preference have shifted from premium shiitake mushrooms to cheaper vegetables. Costs of the synthetic logs have also increased 10-15% annually, in line with higher cost of raw materials. Therefore, we expect to see a compression of gross profit margins from 37.6% in FY12 to 30% in FY13.
· Yamada did not pay out any dividends for FY12, as management wanted to conserve cash for a new plant in Fuzhou and as well as the unexpected payment of Rmb40m for the synthetic logs since they are unable to harvest the trees due to regulations. This is despite a 20% payout ratio being recommended in the prospectus during listing.