China Minzhong Food Corporation

[Nick]

Up 13% to 61.0 cents with 20 million shares traded. Good news coming up ?

(Not Vested)

[dzwm87]

Quite shocked too. I thought it should hover below 60c till the next quarter result release.

Probably some speculative punting given today's bullish conditions..perhaps some fund took a position.. or probably call back from any possible short positions?

Nonetheless, nothing fundamental has improved - at least from the public eyes. It may fall back to its usual trading range for the next few weeks.

*vested*

[Bibi]

I dont think its due to any good news. Pfood is another china stock which has been whacked down recently and today up a hefty 15% on high volume.

[dzwm87]

There was a KE report calling for a "buy" call.

That's probably the reason for the surge recently.

I've read the report and though it focuses on the concerns regarding European risks, it didn't cover much on other concerns such as CMZ's balance sheet weakness, profit visibility & future expansion plans.

*vested*

[BeDisciplined]

Pfood large volume on that day was due to large married deal...different from Minzhong. Pfood is rather illiquid with a few thousand shares transacted per day.

[Stockerman]

DBS has downgraded to hold at 60 cents (from $1.45)...If El Nino comes around and play havoc with CMZ, then it will be in deep trouble...




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‘High chance’ of El Nino this summer

ST reported that Japan’s weather bureau had put up a warning statement on its website that its climate models indicate a strong possibility that the El Nino weather pattern, often linked to heavy rainfall and droughts, will emerge this summer. The United States Climate Prediction Centre had said last week that El Nino may strike as early as the third quarter of this year, raising the odds of weather-related havoc being wreaked from North and South American to Asia.

[dzwm87]

Just read the DBS report. Some of its key pointers:

- Slow growth prospect: CMZ is no longer meeting its 120,000 mu of farmland by FY13/14. As of date, they had only acquired less than 50% of the target. Instead, they will be moving towards industrialized farming.

My opinion: I think mgmt did right in not choosing to meet the target. In fact, I will see it as a huge downside risk if they had went ahead with the expansion. Imagine the leverage they have to take on in order to hit the additional 60,000+ mu of open farmland. Moving onto industrialized-style is a strategic move in the long run as it will mitigate against seasonal weather risk - like the recent late winter. It will reduce CAPEX amount and free up much CF. DBS lacks the figure but ballpark estimate for industrialized farming - cost will be 20x more with expected yield to be 25x more (on a per mu basis).

- Slower-than-expected sell through of FY12 crop: DBS expects 10% of FY12's sales to be spilled over to FY13 due to weak normalization of the recent later winter effect.

My Opinion: I can't rebut the forecast since I do not have a magic crystal ball. The IR personnel I had spoken to expect a FY12 sales of RMB240m subjected to their level of optimism. IMO, the key for long term investor is not whether sales can flow through within FY12. Instead, the concern is whether any of their customers has defaulted on payment. 2011 was an inflation year so agricultural commodities tend to do well. To use 2011 as a comparison will be too demanding of an expectation. For the upcoming FY12 results, it will be more important to detect any signs of receivables impairment/provision.

Moreover, CMZ's structure is one which minimizes the risk of commodity price volatility. Their demand-oriented structure means they are less likely to be building on their stock on a speculative manner. Moreover, sales agreement are negotiated on a fixed price basis for both suppliers and customers - eliminating risk of any "in between" price volatility spike in the agricultural product. Their dual fresh & process approach also means that in the case of poor agricultural prices, fresh vegetables can be processed and stocked up till market conditions are better (but on the trade off of lower margins).

- Higher cost concerns: DBS thinks that labor & fertilizer costs will continue to rise in the near future. Labor cost has increased by 50% while fertilizer cost has risen 20%. Amortization has also surged due to higher land improvement cost.

My Opinion: No doubt, the mentioned factors will continue to be a huge cost pressure on its profitability. In the near term, such costs are sticky and I don't see how CMZ is able to mitigate it. In the medium term, I suspect the move to industrialization farming will help to release some pressure. Clearly, this is an area worth digging deeper into.

- Higher Receivable Days: CMZ's receivable days increased from 66 to 84 days and DBS believes it is likely to remain at that level.

My Opinion: Mgmt did mention it was a timing issue due to the late winter and as of April, RMB 180m out of 9MFY12 A/R RMB 860m had been collected. Some customers had also requested for credit extension but this account for 5% of A/R. Typically, 2Q & 3Q tends to be a seasonal peak for its A/R (can be verified from 2011 trend). If we factor away the RMB 180m late winter effect & the 5% A/R credit extension, we can see that A/R increased 26% qoq as compared to FY11 18% qoq increase. I can't be certain of this and perhaps the full FY12 results might reveal more information. Instead what we should be aware of is that: (1) what is (again) the extent of receivable provisions (if there is any) & (2) I don't think late collection of A/R will create pressure on its WC requirement. In any case if CMZ fails to collect its A/R, there are still sufficient bank facilities (50% of RMB 1.2bn) for them to tap on.

So how does it go from here?
IMO, in the long term, CMZ's shift towards a more industrialized farming strategy is one to be well-favored. As China moves towards a higher urbanization, there will definitely be a lack of labor supply for farmers. Industrialized farming lowers the need for labor demand. Moreover, it allows an all-season harvesting. this means that risk of the late winter effect should be minimal. In the near term however, I will view the revenue contribution of its 22,176 mu of farmland to be its biggest sales driver. The amount attributes to be about 37% of its total farmland. As of March 2012, only 50% of this 22K mu had started contributing to sales. Apart from the other 50%, it should be noted that this 20K mu of farmland has yet to hit optimal yield as well. It typically takes around 2 to 3 years of gestation before it hits max yield (1st year: 60% of mature yield, 2nd year: 80% & 3rd year: 90%). Subjected to how much sales the 60% of maturity is able to yield, we can expect a 30% and 13% in sales for the respective 2nd & 3rd year. Thus, even as CMZ is going through a consolidation phase, I believe the 22K mu of farmland can provide the sufficient growth potential to cushion through.

Overall, without a doubt, there are many uncertainties regarding CMZ. But given the price plunge, it is now priced at an attractive offer. There is sufficient liquidity to ensure this S-chip is able to bounce back given the realization of any positive catalyst. Moreover, the 10% increase stake by Franklin Templeton should prove to be a reinforcing indicator as well.

*vested*

[Stockerman]

Fund houses does not know the business better than a lot of the shrewd investors out there...their buying up when prices are low doesn't mean that the stock will revive and pull out...

it is one of their many counters...if one dies, they have many others...

[dzwm87]

Fund houses does not know the business better than a lot of the shrewd investors out there...their buying up when prices are low doesn't mean that the stock will revive and pull out...

it is one of their many counters...if one dies, they have many others...

Indeed, hence open market purchase from fund houses should never be an anchoring decision factor for an investment. However, it can be one of a reinforcing indicator. IMO, i normally consider two main factors while evaluating fund house/insider mgmt share purchases:

1. What's the absolute dollar amount being spent? For insider mgmt, we can draw a comparison to its annual remuneration (i.e. is he/she spending just one month or close to their annual salary?) For fund houses, we can draw against their AUM.

2. Opportunity cost analysis: Yes, some of these fund houses/mgmt are indeed rich but then again, there is an opportunity cost for everything. If the investment is so bad, it is only logical for them to allocate capital elsewhere. However, for insider mgmt, a different perspective should be applied if it's under a fraud suspicion.

Templeton aren't cornerstone investor during CMZ's IPO so they are solely OM net buyers. I estimate that they have probably allocated some S$45m to acquire CMZ's approx. 10% stake. We can easily take a look at their fund portfolio by googling it. On a scale of 1 to 5 with regard to its portfolio weight (1 being the most), I suspect CMZ is around 2 to 2.5

[weijian]

DBS has downgraded to hold at 60 cents (from $1.45)...If El Nino comes around and play havoc with CMZ, then it will be in deep trouble...

From my observations, a big portion of forumers here are too clever to listen to or believe in analyst recommendation and target prices.

A key catalyst for CMZ's stock price is to change its forecast of NOT paying dividends, assuming the balance sheet gives repaired by full year 2012.