China Minzhong Food Corporation

[cfa]

PT Indofood Sukses Makmur is an big company , their investment in CMZ is rather negligible as compared to their shareholder fund.

[d.o.g.]

Is it fine to put down the reasons on why CMZ was selected for investment?
Have you gone on a plant tour organised by CMZ?

The numbers looked good, and were consistent with Chaoda and China Green. Olympus, being a private firm, would have had partners' capital at risk, and should have done their homework. GIC staff weren't investing their own money, but GIC had the resources to pay for expert opinions. Pricing didn't seem expensive either. These were viewed as mitigating factors and sufficient grounds to break the rules of thumb.

But after both Chaoda and China Green were discredited, there was no peer left for comparison. Without a usable reference I was left with only GIC's due diligence - which I belatedly realized would only have been valid at the time that GIC first invested back in 2006. Ditto Olympus. So I bit the bullet and quit.

I didn't go on a plant tour organized by the company. It wouldn't have helped since there's no way you can see a meaningful percentage of 52,000 mu on a single visit, and they can choose to bring you to the one processing plant (out of 5) that is actually real. Site visits are useful only if you can visit/survey the site covertly, or the site in question constitutes a large percentage of the group's activities.

Lessons learnt the hard way are not easily forgotten. Live and learn.

[minimax]

Here are my thoughts on what we can learn from the China Minzhong saga and also as a rebuttal to forummers who wants to apply value investing to S-chips :

1) Most S-chips are trading at low single-digits P/E (2x to 7x) irregardless of whether they are loss-making, profits-making (albeit zero-growth) or showing healthy growth in profits. This situation has our value-investing brethren giddy with excitement as clearly the market is inefficient and has lump the good with the bad and is undervaluing the S-chips showing healthy profit growth.

STOP! That's not the reason why the market is undervaluing the S-chips which are showing healthy profit growth. The reason is that the market is doubting the veracity of S-chips' financial statements. The S-chips market is basically a market for lemons (en.wikipedia.org/wiki/The_Market_for_Lemons) and fund managers have basically withdrawn from investing in S-chips because it is impossible to differentiate the legit S-chips from the fake S-chips.

2) I want to also talk about the difference between Enron-style accounting fraud (where the red flags are in the financial statements) and Worldcom-style accounting fraud (where management just plain cook the books) and how in value investing we want to avoid Enron-style accounting fraud but accept that Worldcom-style accounting fraud is part and parcel of investing. Except that this is totally irrelevant to S-chips investing and please just accept that the market for S-chips is also the market for lemons and move on with your life.

3) Margin of safety does not mean what you think it means. I have not seen Warren Buffett use the concept of margin of safety to handicap the chances of a company being a fraud or not.

I can go on and on but life is short and I think Warren Buffett's rule that in investing, you really want to focus on those investments that are one-foot hurdle ("To the extent we have been successful, it is because we concentrated on identifying one-foot hurdles that we could step over rather than because we acquired any ability to clear seven-footers.") have never been more applicable to S-chips.

Happy value investing and peace out.

[freedom]

even you go through all the facilities covertly, you still can't make sure the facilities really belongs to the company you invest or someone else. There has been cases that certain Chinese companies sold their assets to two different owners.

[d.o.g.]

even you go through all the facilities covertly, you still can't make sure the facilities really belongs to the company you invest or someone else. There has been cases that certain Chinese companies sold their assets to two different owners.

You have to check the land titles too of course. And probably talk to the truck drivers to find out who they think they're working for etc.

[yeokiwi]

Is it fine to put down the reasons on why CMZ was selected for investment?
Have you gone on a plant tour organised by CMZ?

The numbers looked good, and were consistent with Chaoda and China Green. Olympus, being a private firm, would have had partners' capital at risk, and should have done their homework. GIC staff weren't investing their own money, but GIC had the resources to pay for expert opinions. Pricing didn't seem expensive either. These were viewed as mitigating factors and sufficient grounds to break the rules of thumb.

But after both Chaoda and China Green were discredited, there was no peer left for comparison. Without a usable reference I was left with only GIC's due diligence - which I belatedly realized would only have been valid at the time that GIC first invested back in 2006. Ditto Olympus. So I bit the bullet and quit.

I didn't go on a plant tour organized by the company. It wouldn't have helped since there's no way you can see a meaningful percentage of 52,000 mu on a single visit, and they can choose to bring you to the one processing plant (out of 5) that is actually real. Site visits are useful only if you can visit/survey the site covertly, or the site in question constitutes a large percentage of the group's activities.

Lessons learnt the hard way are not easily forgotten. Live and learn.

Thanks for the valuable account.
VB is an amazing forum with forum members sharing unselfishly on investing methodology and experiences.

[Wildreamz]

One of Warren Buffett's famous success story is his investment in PetroChina, which is now the 4th largest company by market cap.

He bought it in 2002 and sold in 2008 at a profit of 880%.

http://xfinity.comcast.net/slideshow/fin...etrochina/

From my understanding, the PetroChina IPOed on NYSE in 2000 (http://www.nyse.com/listed/ptr.html). I think the difference here is that they are a State-owned company and has a market cap of $37 billion when he purchased it?

[minimax]

One of Warren Buffett's famous success story is his investment in PetroChina, which is now the 4th largest company by market cap.

He bought it in 2002 and sold in 2008 at a profit of 880%.

http://xfinity.comcast.net/slideshow/fin...etrochina/

From my understanding, the PetroChina IPOed on NYSE in 2000 (http://www.nyse.com/listed/ptr.html). I think the difference here is that they are a State-owned company and has a market cap of $37 billion when he purchased it?

last time I checked, PetroChina isn't an S-chip.

[Wildreamz]

last time I checked, PetroChina isn't an S-chip.

I know that; the similarity here is that both companies are from China, listing in a foreign company and recently IPOed, I suspect, jurisdiction in the case of fraud is equally challenging (damn, this should be the last red flag I need..).

I just want to learn the difference, hope you understand.

[AlphaQuant]

I didn't go on a plant tour organized by the company. It wouldn't have helped since there's no way you can see a meaningful percentage of 52,000 mu on a single visit, and they can choose to bring you to the one processing plant (out of 5) that is actually real. Site visits are useful only if you can visit/survey the site covertly, or the site in question constitutes a large percentage of the group's activities.

in 2011, KimEng sent some blokes on a site visit as well.

*****************************

Our recent site visit to China Minzhong’s facilities in Putian, Fujian Province, has reinforced our positive view on the group. This is despite market concerns over potential share overhang by its private equity shareholders and corporate governance issues involving Chinese companies listed here and abroad. In our view, Minzhong’s strong fundamentals are intact. The stock is trading at an attractive valuation of 6.1x FY Jun12F PER after a sell-off. Maintain BUY.

Our View:
Minzhong targets to raise fresh vegetable sales by 40-45% in FY Jun12 following the increase in its farmland area. This should give the group’s profitability a boost as the gross margin for fresh vegetables is typically higher at 60%. In particular, the cultivation of high-value products like black fungus could provide a new impetus that may see fresh vegetable sales accounting for half of its overall turnover in the next 3-5 years.

Operations at the new king oyster mushroom cultivation facility in Tianjin City has commenced. Add its existing facility in Shanghai which has a daily capacity of 4 tons, the group’s total capacity per day has doubled to 8 tons. But both facilities are now operating at full capacity and we understand there are plans to increase the total capacity of each to 15 and 24 tons/day by end-2011 and 2012, respectively.

Longer term, organic vegetables may well be the next plateau of growth for Minzhong. The prospects are bright as China’s increasingly affluent population seeks healthier and safer food. Management expects this product segment to make up about 10-15% of the group’s domestic sales once it can achieve at least 30 third-party-owned speciality stores. It currently has seven such stores. The expansion will occur over the next three years or so with the stores mainly located in the coastal regions.

Action & Recommendation
Contrary to market belief, the slide in China’s wholesale vegetable prices in April and May is seasonal in nature and not a major cause for concern. We believe crop prices will remain in a structural uptrend, albeit at a more moderate pace given the current food inflationary environment. Maintain BUY and target price of $2.05, still pegged at 9x FY Jun12F PER.