China Minzhong

Kim Eng on 7 Feb 2013

Anticipating outperformance. China Minzhong is expected to announce its 2QFY6/13 results on 14 Feb 2013. We are anticipating a set of good results with revenue likely to post robust growth. We expect 2Q revenue to come in at CNY800m, up 23% YoY due to more favourable weather conditions. The unusually cold weather in China this winter will not only speed up the growth of champignon mushrooms, Minzhong’s biggest revenue contributor, but also lift the prices of its other vegetables.

Double-digit bottom-line growth should be achievable. Although we are concerned about possible margin compression due to rising raw material costs, inflationary labour costs as well as higher depreciation, we believe Minzhong will still be able to achieve 10-15% bottom-line growth in 2Q. We reiterate our view that  volume growth will be the main growth driver in the next few years despite the decline in margin. In the long run, industrialised farming should help the company mitigate cost pressures and protect its bottom line.

Two issues to watch out for. Minzhong’s big trade receivables used to be a major concern. But there has been an improvement as evidenced in its results last quarter. We expect Minzhong to build on this positive momentum and further improve its operating cash flow during this quarter. Secondly, the company has yet to provide greate clarity on dividend payout or its share buyback plans. If any of this eventuates, we believe investors will appreciate it. We have not factored any dividend assumptions into our forecasts yet. But given the improving cash flow and easing capex burden, we think the first dividend payout since IPO is not completely impossible this year.

Maintain BUY. Minzhong’s share has gained 94% since our BUY call in June 2012. Despite the strong rally, the current valuation of 3.7x FY6/13F PER still seems undemanding. Further upside could come from more good results, dividend payout and/or the re-rating of the Schips sector. Maintain BUY and target price of SGD1.16. Our earnings forecasts are also unchanged. However, we may review our numbers and target price if the company’s results exceed our expectations.