China Minzhong Food Corporation

[Musicwhiz]

It has averaged 25-30% ROE over the past 4 years.

China Minzhong is a 'National Leading Dragon Head Enterprise' since 2002. This gives it access to prime cultivation land at favorable prices as it is recognized as one of the industry's leaders.

Hi thanks!

I assume the high ROE is achieved without excessive leverage?

Just one more curious question - if China Minzhong command such clout and are market leaders in their field, why choose to list in Singapore where valuations are generally lower, instead of Hong Kong?

[Nick]

It has averaged 25-30% ROE over the past 4 years.

China Minzhong is a 'National Leading Dragon Head Enterprise' since 2002. This gives it access to prime cultivation land at favorable prices as it is recognized as one of the industry's leaders.

Hi thanks!

I assume the high ROE is achieved without excessive leverage?

Just one more curious question - if China Minzhong command such clout and are market leaders in their field, why choose to list in Singapore where valuations are generally lower, instead of Hong Kong?

It is in net cash position. Though I am not sure how long this will last judging by its massive capex this year in expanding its cultivation bases.

Personally, I think it would have listed in SEHK if not for GIC 16.5% stake in the Group.

[Musicwhiz]

It is in net cash position. Though I am not sure how long this will last judging by its massive capex this year in expanding its cultivation bases.

Personally, I think it would have listed in SEHK if not for GIC 16.5% stake in the Group.

OK, thanks. Good to know GIC is turning vegetarian! I always felt they were too "carnivorous" for my liking.....

[Musicwhiz]

Business Times - 13 May 2011

HOT STOCKS
China Minzhong shares dive on talk of placement

Company notes share sales by two substantial shareholders

By LYNETTE KHOO

SHARES of China Minzhong took a sharp fall in active trading yesterday on speculation that a share placement was underway, triggering a query from the Singapore Exchange (SGX) yesterday.

The counter fell by as much as 12.4 per cent intraday before closing at $1.66, 12 cents or 6.74 per cent below Wednesday's closing. It was also the second most actively traded stock, with 62.4 million shares having changed hands.

In response to SGX's query, China Minzhong said it is 'not aware of any other possible explanation for the trading activity' but noted the sale of shares by two substantial shareholders.

One of them, Olympus Leaf Holdings Limited, entered into a sale and purchase agreement to sell 40 million shares to JP Morgan (SEA) yesterday, paring its stake to 10.4 per cent from 17.7 per cent.

Another substantial shareholder High Focus International Limited (HFIL) sold 5.78 million shares in the open market on May 10, which was disclosed on May 11, bringing its stake in China Minzhong to 6.87 per cent from 7.86 per cent.

HFIL is 28.7 per cent-owned by CMIA China Fund II, which had a legal spat with its fund manager CMIA Capital Partners over an allegedly unauthorised share swap in October 2007 involving the now-delisted and insolvent firm FerroChina.

But talks of a share placement in China Minzhong were circulating in the market since Wednesday afternoon, said a broker who declined to be named.

Other brokers attributed the fall to the recent decline in vegetable prices, which could hit China Minzhong's average selling prices going forward.

DBS Vickers downgraded its rating on China Minzhong to 'hold' from 'buy' and lowered its selling price expectation for the fourth quarter ending June 30. But the brokerage still raised its fiscal 2011 projected earnings for China Minzhong to factor in the strong third-quarter earnings and raised its target price to $2.03 from $1.80.

For the third quarter ended March 31, China Minzhong posted a 92.9 per cent surge in net profit to 261.1 million yuan on the back of stronger sales and higher gross margins as it shifted towards a higher-value product portfolio.

Revenue for the third quarter grew 34.3 per cent to 703.9 million yuan, underpinned by growth in both its processed vegetables and fresh vegetables produce segments.

[D123]

A few concerns that I have about China Minzhong:

1. The tax exemptions on its subsidiaries will all be over by end of FY11. After that, the tax rate will be 25%, like for most corporations in China. Given their current effective tax rate of 15%, they will need to increase pre-tax profits by about 13% to make up for the tax increase.

2. Chaoda current operates as a fully tax-exempt corporation, so they pay almost zero taxes. They claim this is in part due to their status as a State Level Dragon Head Leading Agricultural Enterprise. I thought China Minzhong also has the same designation? If so, why can't they get tax exemption as well? (Another relevant question is how long will Chaoda's tax-exempt status last?)

3. Their reported figures of receivables turnover is lower than the figures I got. Here are the figures, with mine in brackets.
2007 - 80 (71)
2008 - 43 (118)
2009 - 50 (71)
2010 - 78 (45)
2011 - 60 (88)
But perhaps I made a calculation error. Anyone with similar figures?

4. My impression is that they have spent almost all their IPO money in capital expenditure, notably in payments for land leases and prepayments for land improvements and equipment. I think cash flow from investing activities came to about RMB1bn for first 3Q in 2011, while they raised about RMB1.2bn last May. Given that the corresponding increase in leasehold land is only about 30,000 mu, on target for their 30,000 mu annual increment, but short of their goal of 90,000 mu at the end of 3 years, does that mean that they will need to raise additional funds soon for further purchases?

Note that the cost of land has been rising steadily for the past 4 years - 610/mu in 2007 to 910/mu in 2011. Including equipment and land improvements, it was estimated that they need about RMB20K to RMB22K per mu in investments. At about 30,000 mu increment per year, they will need about RMB660 mn per year for the next two years to keep up with growth plans. Right now, I estimate them to have about RMB600mn in free cash, so technically they can afford another 30,000 mu. But given the price increase in agricultural land, the RMB660mn might be too low.

They have also said in the Kim Eng interview that banks in China do not accept agricultural land as collateral so it is hard to find debt-financing for agricultural land purchases. So equity-financing is more likely.

So the question is if they can keep up with the stated growth plans, and if not, what would the impact be on the bottom line?

[Nick]

Hi D123,

With regards to their investment target, I would estimate that they require: 60,000 mu X 22K/mu = 1.32 billion RMB over the 2 years to achieve the ambitious target of tripling their farmland within 3 years from its IPO. You are right that they cannot turn to debt financing to purchase farmland so equity financing is always possible (and I expect them to turn to it eventually). As long as the EPS continues to rise, there is no issue here.

Estimated Cost: RMB 1.50 billion (revised it upwards)
Cash in Bank now: RMB 0.67 billion

The difference will amount to approx 0.83 RMB billion. However, at the moment, the company maintains strong cash generating ability and I think this could be channeled to land acquisition.

Operating Cash-flow
FY 09: RMB 214 million (Net Profit: RMB 283 mil)
FY 10: RMB 599 million (Net Profit: RMB 391 mil)
9M 11: RMB 332 million (Net Profit: RMB 480 mil)

I think it is highly likely (as long as revenue continues to remain stable at least) for them to generate around RMB 400 million cash annually. This will be sufficient in meeting their capex. I wouldn't rule out equity fund raising either. We must also note that as each year passes, the farmland would also increase which means cash generating ability should rise if vegetable prices do not tank.

Personally, I think a PER of 5-6 would be a decent point of entry. Anything more could be very risky.

[Musicwhiz]

Looks like a positive announcement from China Minzhong (see attachment).

I have a few questions though:-

1) What are gross margin for king oyster mushrooms compared to other types of mushrooms? Is there really a substantial premium on selling price vis-a-vis normal mushrooms?

2) Production capacity has increased to 8 tons/day from previous 4 tons/day. What is the capex involved and how much opex increase does this increase in production capacity bring about?

3) What is the new plant's utilization % on average?

4) With the planned ramp-up to 24 tons/day by end-2012, is there sufficient sustained demand for so much supply? Would this affect prices?

5) How many competitors are there in this market segment, and are they also commanding similar gross margins and do they have the same production capabilities/expertise?

(Not Vested)

[Nick]

It is good to see the company's growth plans coming into fruition. The planned expansion into higher value products like oyster mushrooms and black fungus were highlighted in the 3Q 2011 statement:

China Minzhong continues to benefit from the strong global demand for both fresh and processed
vegetables, underpinned by increased urbanization, rising affluence, strategy in targeting at
higher-value products (such as king oyster mushrooms and black fungus) and superior efficiency
from corporate farming as opposed to individual farming.

In Aug 2010, the Management released the following announcement detailing the cost price of each planned expansion and acquisition - http://www.chinaminzhong.com.sg/referenc...5AUG10.pdf - the Tianjin mushroom facility cost $17.8 million.

Management has highlighted that the plants are working at full capacity currently which implies good demand. I am confident in the Management's ability to expand into new product stream judging by the consistently high gross margins:

FY 07: 31.0%
FY 08: 36.7%
FY 09: 40.0%
FY 10: 40.4%
9M 11: 42.0%

I will leave the day to day operation management in their hands with a sharp eye on the end results. Let's see how the latest initiative will impact the FY 12 results.

On another note, the Management has spoken about the latest placement of existing shares from its IPO cornerstone investors. It mentions that as PE Funds, they are expected to liquidate their investments after IPO and return capital to their shareholders. New and existing institutional investors has increased their stake and they remain optimistic over the Company's future -

Board representatives from Government Investment Corporation of Singapore (“GIC”), Olympus,
and CMIA continue to express optimism in the Company’s expansion plans and remain confident
in its business prospects.

Time will tell whether are they (and myself) right or wrong to be optimistic !

(Vested)

[Musicwhiz]

Hi Nick,

Thanks for the information. The gross margin improvement is certainly impressive!

I will probably put Minzhong on the backburner for a while, observing the numbers and other pertinent details. While it is impressive for gross margins to grow, my concern is also with net margins as well.

That's the fun of investing - no one is hurrying you and you can take your time to observe, analyze and ruminate before you take action.

Have a great week!

[Musicwhiz]

Business Times - 01 Jun 2011

Key shareholders confident, says China Minzhong

Company says it is natural for equity firms to liquidate investments

By MINDY TAN

CHINA Minzhong Food Corporation yesterday said that its substantial shareholders have confidence in its prospects, despite recent share transactions.

In a recent response to a query by the Singapore Exchange (SGX) on the stock's substantial price fall, the company noted the sale of shares by two substantial shareholders - Olympus Leaf Holdings which entered into a sales and purchase agreement to sell 40 million shares to JP Morgan (SEA) and High Focus International Limited (HFIL) which sold 5.78 million shares in the open market. HFIL is 28.7 per cent owned by CMIA China Fund II.

In a statement yesterday, Lin Guo Rong, executive chairman and chief executive of China Minzhong, noted that it is natural for private equity firms to liquidate their investments, post-IPO, and return capital to investors.

He added that apart from the recent placement of 40 million shares, Olympus had not sold any shares since the company's IPO in April last year.

The company added that Olympus, along with board representatives from GIC and CMIA, continue to express confidence in China Minzhong's prospects.

GIC is currently China Minzhong's largest shareholder, with a total stake of 16.92 per cent, while Olympus holds 10.28 per cent and CMIA 6.53 per cent.

GIC declined to comment when contacted.

Lee Chong Min, managing director for CMIA Capital Partners, said: 'We feel China Minzhong is very attractively priced. We have been divesting our stake slowly not because we're not optimistic, but because as a fund, we have a certain fund life, anywhere between five to 10 years. Some of the earlier funds that we managed are approaching the end of their fund life. So we do have to divest. But that divestment has nothing to do with our view of the company.'

China Minzhong's shares took a sharp dive in active trading on May 12. The counter closed at $1.66, down 6.74 per cent, prompting the SGX query.

Separately, the company yesterday announced the successful commencement of operations at its new king oyster mushroom cultivation facility in Tianjin City, which will allow it to double capacity to eight tonnes per day.

The company targets to increase its total king oyster mushroom cultivation capacity to 15 tonnes per day by the end of 2011 and to 24 tonnes per day by the end of 2012.

The stock closed trading at $1.61 yesterday.