China Minzhong Food Corporation

[dzwm87]

haha, it wasn't a disappointment statement.

I am still cautiously positive about its prospects.

Btw, an interesting finds:
JF Eastern Smaller Companies - One of JPM Asset Mgmt. Interestingly, as of Jun 2012, CMZ is their top 5 holdings with 2.5% of portfolio. Note that JPM issued an underweight call on May 2012. No opportunity to compare to its past holding % - there might still be a possibility that the fund trimmed down on CMZ. But it does show the irregularities in research report's perspective..

I did a google search for fund letters and found other interesting stuff. Quite a couple of funds had CMZ in their holdings but this JPM is the most interesting find.

Anw, I did a quick modeling for FY12E. I assumed reasonable conservatism.. on FY12 RMb2.3 bn sales with 38% GPM, SG&A cost hiked to 4% of sales & further draw down of RMB150m debt. against all-time low P/E of 2.45x, I arrived at around 50/51c.. will be interesting to see how market reacts to GAM sell-down.

[Jared Seah]

Sometimes there are two sets of analyst reports from the same house.

One for internal prop desk and best customers; while the other for the general public.

Recent Facebook IPO is one example

[yeokiwi]

Haha.. it sure looked like a photoshop with a man and mushrooms.
Zoom in and look at the face.
http://info.sgx.com/webcoranncatth.nsf/V...F000A689C/$file/CMZ_IndustralizedFarming_PressRelease_18Jul12.pdf?openelement

[Curiousparty]

Chinese Ah Tiong again...what to expect?...NAV more than $1 also not worth Mr Market valuing it at 60 cents...

[dzwm87]

Thought it might be good to look at the labor cost perspective.

From their news release:
100 mu of open farmland requires 30 – 40 farmers; a similar 100 mu of industrialized farmland requires only 10 – 20 production workers

You can also get the other metrics from their supplement slides.

Let's look at labor cost per worker per year
.Labor cost for industrialized farmland:
..Assuming gross margin of 60% - COGS = 40% * RMB 400K = RMB 160K
..At 15% of COGS – labor cost = 15% * RMB 160K = RMB 24K/mu
..At 100 mu of farmland, RMB 24K * 100 = RMB 2.4m
..Labor cost per employee = RMB 2.4m / 15 = RMB 160 K per worker per year <----- Earns US$2K per month (pay too high to be true?)

.Labor cost for open farmland:
..Assuming gross margin of 50% - COGS = 50% * RMB 14K = RMB 7K
..At 40% of COGS – labor cost = 40% * RMB 7K = RMB 2.8K/mu
..At 100 mu of farmland, RMB 2.8K * 100 = RMB 280m
..Labor cost per employee = RMB 280m / 35 = RMB 8 K per worker per year <------ Earns US$100 per month (this still seem a little reasonable)

Let's fix revenue and see how much labor cost is needed - a better comparison
.For every RMB 2.8m in revenue,
..For industrialized: based on RMB 400K/ mu revenue yield, this means 7 mu of land is required to meet this revenue. At RMB24K/mu in labor cost – this translates into a gross RMB 168K of labor cost.
..For open farmland: based on RMB 14K/mu revenue yield, this means 200 mu of land is required to meet this revenue. At RMB2.8K/mu in labor cost – this translates into a gross RMB 560K of labor cost.
...There is almost 70% in cost savings!

[yeokiwi]

The effective cultivating area of the industrial farming, due to its stack up design, is probably doubled the open field farm.
So, the area is doubled but the no. of workers is halved??

[dzwm87]

The effective cultivating area of the industrial farming, due to its stack up design, is probably doubled the open field farm.
So, the area is doubled but the no. of workers is halved??

Not necessarily. First of all, it's different products being sold in industrialized & open farmland. Looking at size alone might not be a good justification. In fact, for a given revenue amount, industrialized farm should be smaller in size.

Reduction in workers should not be a surprise at all. At 50% drop, it is not surprising too given that open farmland is just pure labor work for harvesting period.

My concern is regarding the estimated US$2K per month for industrialized farmers. It's too high an amount but I am not sure if my quick estimation is valid at all.

[weijian]

Haha.. it sure looked like a photoshop with a man and mushrooms.
Zoom in and look at the face.
http://info.sgx.com/webcoranncatth.nsf/V...F000A689C/$file/CMZ_IndustralizedFarming_PressRelease_18Jul12.pdf?openelement

haha! i think it is. The same man (but the face's direction is different) is present in AR2010.

---

My concern is regarding the estimated US$2K per month for industrialized farmers. It's too high an amount but I am not sure if my quick estimation is valid at all.

I do not think industrialized farmers command such a high salary currently.

My main concern would be - 'Where is the $ going to come from?'. The PR and press releases talk about better yields/margins/all year round farming and all the (bs), but nowhere did it mention HOW and how MUCH is needed to expand into 5 new bases over the next 2 years?

Based on AR2011, the current Putian facility required ~1.1bil rmb capex. CMZ generates just ~600mil rmb of operating cash flow on an annual basis, which means it has to go to the banks..
CMZ's equity is ~3.5bil rmb (with already 600mil of bank loans) and assume it can gear up to 50%, that will be just 1bil rmb from the banks (Assuming the banks are willing to lend long term, which most probably they are not), and this leaves the door open for capital raising.

At current P/E ratios, this project needs to generate in excess of 50% IRR to barely justify a rights issue.

Convertible bonds then?

(vested)

[d.o.g.]

My concern is regarding the estimated US$2K per month for industrialized farmers. It's too high an amount but I am not sure if my quick estimation is valid at all.

The working seems OK which means that Minzhong's numbers are probably off. US$2k/month is a very good salary in China, especially in a rural area. It doesn't pass the smell test, at least to me.

CMZ's equity is ~3.5bil rmb (with already 600mil of bank loans) and assume it can gear up to 50%, that will be just 1bil rmb from the banks

No way they can gear to 50%. In the 3Q conference call the CFO mentioned that their current loans are secured using RMB 80m (2/3) of their cash. That means that if they pledge their remaining cash on the same terms, they can borrow another RMB 300m at most.

Low season will free up some cash as they collect receivables, but if they use that freed-up cash, next year when high season comes they will run short. So if Minzhong runs into a cash crunch it will not be now (as they are coming off the high season and collecting receivables) but next year (when high season comes and they go cash flow negative). If they go ahead with their capex plans they will simply accelerate the cash drain.

A rights issue is not likely as the management do not fit the profile of tycoons who can stump up their share of cash. So a placement/issue (whether straight equity, straight bonds, convertibles or hybrids) would be my guess.

As usual, YMMV.

[yeokiwi]

My concern is regarding the estimated US$2K per month for industrialized farmers. It's too high an amount but I am not sure if my quick estimation is valid at all.

The working seems OK which means that Minzhong's numbers are probably off. US$2k/month is a very good salary in China, especially in a rural area. It doesn't pass the smell test, at least to me.

One possibility is that the estimation of the manpower does not take into account of the non-farmers in the industrial farming. Basically, since there is a need to build vertical racks, aircon, lighting, water pipes etc in the indoor farm, the industrial farm will probably need electricians, technicians, carpenters, plumbers etc.
So, the effective manpower per mu is actually higher than what the slides mentioned.

Normally, unless machinery is used to aid the farmers, the effective manpower required per mu cannot be less than half or a quarter of the traditional farming.

From the look of the pictures, the harvesting is likely to be done manually.