China Minzhong

Kim Eng on 18 Feb 2013

Indofood comes! China Minzhong announced issue of 98m new shares by way of private placement to Indofood Sukses Makmur Tbk, a leading Indonesian packaged food producer, at SGD0.915 per share. The new shares will represent 14.95% of total shares outstanding following the placement. Upon the completion of the deal, Indofood will surpass GIC becoming the biggest shareholder of Minzhong.

The alliance with Indofood should benefit Minzhong. Indofood is a leading packaged food producer in Indonesia. With the support from this strategic shareholder, Minzhong could not only expand its revenue by supplying raw materials to Indofood, but also leverage on Indofood’s distribution network to march into fast-growing Southeast Asia market.

Upgrade earnings forecast. We raise our revenue and net profit forecast for the next three years on the back of the potential synergies generated from the deal. Despite the dilution in EPS due to the enlarged share base, we believe China Minzhong can leverage on Indofood’s strength and experiences to accelerate its growth thus offset the dilution effect and protect minority shareholders’ interest.

15% control might not be the end of the story. Indofood’s acuqitision track records shows that it usually prefers to controlling the majority of the targeted companies. Thus we suspect that 15% stake in China Minzhong is probably not the end for Indofood. In our view it is highly possible that in the future Indofood will acquire more shares in open market or from other big shareholders such as GIC through another placement. We even cannot rule out the possibility of a privatisation offer by Indofood some day in the future.

Maintain BUY and raise TP. We continue to like China Minzhong for its prosperous growth outlook and undemanding valuation. Better use of the proceeds from the placement would be a catalyst for the stock. We still believe some dividends payment in FY13 is possible. At current low PE multiple, even a small payout ratio could give an attractive dividends yield. Maintain BUY with target price SGD1.36, pegged to 5x FY6/14 PER.