China Minzhong Food Corporation

[Stockerman]

I will short China Minzhong and buy back at 30 cents!

Euro crisis will cause everything to drop sharply! Mark my word!

[Bibi]

I will short China Minzhong and buy back at 30 cents!

Euro crisis will cause everything to drop sharply! Mark my word!

Wa, u so confident should say I have shorted and will buy back at 30 cts.

[Stockerman]

Sorry for my poor English.. I am just a farmer..

I will short China Minzhong and buy back at 30 cents!

Euro crisis will cause everything to drop sharply! Mark my word!

Wa, u so confident should say I have shorted and will buy back at 30 cts.

[shanrui_91]

I will short China Minzhong and buy back at 30 cents!

Euro crisis will cause everything to drop sharply! Mark my word!

While Fisher's most important rule no 15 is that management should have unquestionable integrity, it is of no justifiable reason to short just because there is a possibility of fraud. You should not short a company unless there is unquestionable breach of integrity or an extreme high PER.

If you think euro crisis will cause everything to drop, then you will do better in cashing out all your investment than to be fighting with the volatile market. By shorting, you are subjected to margin call as well as all the rumours of euro bond or banking union. The market is always unpredictable unless you happen to be one of the central banker or head of state out there. For the past 2 weeks, almost all the economic data point towards worsening of economic condition, yet our STI has barely dropped much.

If you really believe that stock will drop en mass, should not sti etf be a better target for shorting since you will be removing the risk from the individual company (buyout, share buyback, higher profit or e.t.c)?

[Stockerman]

Dow Jones breaking back below 12,000

Shorted Euro, Aussie
Longed Yen.

AusGroup will drop below 30 cents

**********

US adds 69,000 jobs in May, jobless rate at 8.2%
print |email this article WASHINGTON - The US economy only added a meager 69,000 jobs in May, pushing the unemployment rate up to 8.2 per cent, the Labor Department reported Friday.

The closely watched workforce figures were well below expectations of a 150,000 jobs increase and for the jobless rate to hold steady at 8.1 per cent from April.

The Labour Department also slashed its estimate of April job gains by 33 per cent, to 77,000.

The data showed a nascent recovery in the job market had stalled. In the first quarter, the average job gain was 226,000. In April and May, the average fell to 73,000.

The number of people unemployed rose to 12.7 million, up from 12.5 million in April. -- AFP

[freedom]

However, the main concerns were as such:
1. Late winter issue brings a risk of lower sales
2. Rising receivables of RMB860m - almost 4 times from FY11 RMB230m!
3. Rising inventories of RMB210m - almost 4 times from FY11 RMB53m as well!
4. Rising bank loan debts of RMB582m - more than 50% increase from FY11
5. And lastly, perhaps the major concern, CMZ won't be expanding its farm leaseland for FY12 - a potential strong hit to CMZ business since agriculture biz can only grow strongly through expansion

As mentioned earlier in another post, my main concern about CMZ is not these, but the fact that it seems to be pursuing growth at all costs. And in fact, growth in a strange area as they are prioritizing the sale of fresh vegetables in China where prices are controlled, rather than processed vegetables for export, which can have higher margins and are more price-competitive.

actually from the MD&A, fresh vegetables product has higher margin than processed vegetables.

Q3 2012 report

(9M 2012, 9M 2011, 3Q 2012, 3Q2011）
Revenue

processed business:
- processed vegetables:1,033,448 975,872 481,276 469,963
- others:79,774 68,683 31,839 31,308
subtotal: 1,113,222 1,044,555 513,115 501,271
cultivation business:
- Fresh vegetables: 537,723 379,946 240,063 202,663
- Mushroom spores: 114,400 88,600
subtotal: 652,123 468,546 240,063 202,663


Gross Profit:

processed business:
- processed vegetables:378,312 351,811 166,514 178,673
- others:2,337 13,083 3,859 7,668
subtotal: 380,649 364,894 170,373 186,341
cultivation business:
- Fresh vegetables: 297,791 250,510 140,495 144,565
- Mushroom spores: 17,600 20,181
subtotal: 315,391 270,691 140,495 144,565

GPM:

processed business:
- processed vegetables: 36.6% 36.1% 34.6% 38.0%
- others: 2.9% 19.0% 12.1% 24.5%
subtotal: 34.2% 34.9% 33.2% 37.2%
cultivation business:
- Fresh vegetables: 55.4% 65.9% 58.5% 71.3%
- Mushroom spores: 15.4% 22.8%
subtotal: 48.4% 57.8% 58.5% 71.3%

I would not say processed vegetables for export market would fare better than price controlled fresh vegetables. In the free market theory, eventually, either additional tax will be imposed on processed vegetables for export to help domestic market or too much supply in the processed vegetables for export to suppress the price and margin.

[D123]

actually from the MD&A, fresh vegetables product has higher margin than processed vegetables.

...

I would not say processed vegetables for export market would fare better than price controlled fresh vegetables. In the free market theory, eventually, either additional tax will be imposed on processed vegetables for export to help domestic market or too much supply in the processed vegetables for export to suppress the price and margin.

Okay, there goes my theory that CMZ's processed vegetables should command higher margins than their fresh vegetables.

[@freedom
Thanks for digging out the numbers and the clarification, I should have checked them myself earlier.]

Anyway, just to clarify, in my last two posts, I was not stating explicitly that margins of processed vegetables are higher than the margins of fresh vegetables for CMZ. Instead, I was trying to say that intuitively, it would make more sense for processed vegetables to have higher margins than fresh vegetables.

This is because I think that from an economic point of view, fresh vegetables are commodity goods and usually such goods do not command fat margins because of low barriers to entry, lack of differentiation etc. And from a political point of view, if a government has the power to influence prices, logically it has the incentive to keep prices low and feed the masses rather than let agriculture-producing corporations profit. I doubt that the common folk will be happy if corporations were earning anything more than low single digit net margins on the fresh produce that they are selling to the masses. Especially when they are commonly available vegetables like mushrooms, chives and broccoli that can be grown at home. Even in a pseudo-communistic and paternalistic country like China, I would not count on the government daring to push their people too far when it comes to food. Like the Romans once said, in order to rule and appease the masses you need two things - bread and circuses.

Now, to expand on the numbers provided by freedom, here are the segment information for CMZ, taken from the annual reports and IPO prospectus:

Processed vegetables (2007 - 2011)
External sales (RMB M) 312, 412, 724, 963, 1,331
Segment results (RMB M) 28, 72, 227, 264, 358
Margin (%) 9, 17, 31, 27, 27

Fresh vegetables (2007 - 2011)
External sales (RMB M) 133, 222, 334, 460, 599
Segment results (RMB M) 108, 159, 147, 250, 319
Margin (%) 81, 72, 44, 54, 53

Total group net margins (2007 - 2011)
26.7%, 34.3%, 27.2%, 25.8%, 29.4%

I can hardly believe the numbers myself as I type them out. The segment results margins of fresh vegetables totally blow those of fresh vegetables away. Now let's look at some US comparables. They may not be a perfect comparison but at least they provide a point of reference.

Dole Food Company - EBIT margins (2006 - 2011)
Fresh fruit - 2.6%, 3.6%, 5.7%, 6.3%, 2.5%, 3.4%
Fresh vegetables - (loss), (loss), 0.1%, 1.5%, 3.5%, 3.1%
Packaged foods - 9.7%, 7.7%, 6.1%, 10.1%, 9.5%, 8.1%

Del Monte - EBIT margins (2006 - 2011)
Processed food - 9.9%, 8.0%, 7.6%, 10.0%, 11.2%, 10.8%

Chiquita Brands - EBIT margins (2009 - 2011)
Bananas - 8.4%, 4.2%, 6.3%
Produce other than bananas - 2.2%, 2.1%, (loss)
Salads and healthy snacks - 5.3%, 9.3%, 0.7%

Seneca Foods - EBIT margins (2009 - 2011)
Fresh fruit and vegetables - 4.1%, 6.9%, 2.8%

It would be more useful to compare with agricultural companies in other countries as well. Nevertheless, I simply thought of the first food company that came to my mind, which was Dole, and took a glance at their 10-K to see what I could find. The other companies came up because they were listed as Dole's competitors (I love 10-Ks). There were also many other companies but my google searches revealed that they were private companies. I'm referring to Duda Farm Fresh Foods, Ocean Mist Farms, Tanimura & Antle and Nunes Company Inc.

Anyway, the numbers from those US companies seem more logical to me, (or maybe just more logically appealing). From my glance through Dole's 10-K, their operations seem similar to CMZ, so I would expect the two companies to be facing similar economics. Thus, it is jarring to me that CMZ can earn >50% segment margins on their fresh produce when bigger and older companies are earning low single digits (I assume segment results are equivalent to EBIT). Even on a net profit margin basis, CMZ's figures in the twenties and thirties are simply astounding compared to the US comparable companies' low single digits, or most other companies for that matter.

Now, I am NOT accusing CMZ of fraud. Rather, I think that there must be some interventions in the Chinese agriculture market that are allowing this to happen. It could be that the government is allowing food prices to rise in hope of the benefits to the corporations eventually filtering down to the labourers and allowing their wages to rise. Perhaps the historically low costs of factors of production like the machinery that was made with cheap labour, the plant that was built by cheap labour, and the land that was sold cheap by land owners because they were on low wages anyway, played a part. What we do know for sure is that Chinese agricultural companies are treated very favourably by the government. For example, the Fujian government has set aside large swaths of land (more than 100,000 mu if I remember correctly) for CMZ for future expansion. Also, CMZ has super favourable tax rates - 0% - on fresh vegetables.

Perhaps this is all part of a government plan to aggregate and industrialize farmland and agricultural production quickly. In my earlier post, #144, I alluded to the possibility that the government is helping the private agricultural sector paint a nice picture of themselves in order to attract private investment for expansion. This remains my best guess. However, as an investor, I would prefer a slow and steady approach based on economics, over a fast and furious one guided by the invisible hand of government. And if I know that I can produce processed foods that command "landed prices that are 1/10 to 1/3 of the local price in Amsterdam" (CMZ IR's words, not mine), I know where my capital will be deployed. Anyway, if anything goes wrong with my venture, I will be the one footing the bill, not the government.

[freedom]

I think processed vegetable should have an average margin, rather than better margin than fresh produce. Like in any commodity business, upstream, higher risk, volatile, but could be higher margin; mid stream, lower risk, consistent but lower return. fresh produce probably can have better margin for some time, but could have very bad margin in another time or bad harvest any time. The risk involved kinda gives it a better margin.

the higher margin exhibited by CMZ could be a fraud. however, in US, it could be a more competitive market. All the companies can have a lot of land and good farming technology. In China, it is very different. The farmers could have very little land and bad farming technology. As there are much more farmers than advanced agriculture companies, the price probably is set by the low productive farmers than the advanced agriculture companies. In a way, it could give the large agriculture companies a strong profit margin.

[Underdogger]

Well I strongly believe that few months down the road , a few more S chips will bite the dust again .... Will CMZ be one of them?

Hope muddy research can shed some light soon..

I think processed vegetable should have an average margin, rather than better margin than fresh produce. Like in any commodity business, upstream, higher risk, volatile, but could be higher margin; mid stream, lower risk, consistent but lower return. fresh produce probably can have better margin for some time, but could have very bad margin in another time or bad harvest any time. The risk involved kinda gives it a better margin.

the higher margin exhibited by CMZ could be a fraud. however, in US, it could be a more competitive market. All the companies can have a lot of land and good farming technology. In China, it is very different. The farmers could have very little land and bad farming technology. As there are much more farmers than advanced agriculture companies, the price probably is set by the low productive farmers than the advanced agriculture companies. In a way, it could give the large agriculture companies a strong profit margin.

[Stockerman]

Heard rumours that auditors were sent to china to check on a number of S chips .....is CMZ one of them ?

Can someone help to confirm ?