Earnings outlook remains positive. Minzhong has commenced the operation of its new processing facilities, which is situated on a 287mu site in Putian city, Fujian Province. As the group now enters its traditional peak period, we expect the capacity expansion to contribute positively to its bottomline in 2HFY Jun12, in addition to maiden contributions from 22,176mu of new farmland acquired last year.
Drive next phase of growth. The New Industrial Park will effectively boost Minzhong’s processing capacity by about
three times. Backed by a healthy orderbook, we project the new plant will achieve full utilisation within the next three years. There are also cost-savings initiatives such as the channelling of water from a nearby reservoir instead of direct purchase from the government. This will help to improve its operating efficiency in the long run.
Export demand still steady. Notwithstanding the global economic uncertainty, Minzhong did not witness any slowdown in overall demand for vegetables as a food staple so far. In fact, management reckons the total export orderbook will be higher in FY Jun12 compared to last year. The ability and flexibility to switch between various processing methods also enables the group to seize new opportunities in different regions of the world at short notice.
Removal of VAT on vegetable distribution. The Chinese government is considering removing its value-added tax (VAT) on the distribution of vegetables to rein in rising food inflation. The lifting of VAT would lower the cost of sales for wholesale retailers but has no direct implication on upstream players such as Minzhong. Having said that, it does signal a policy shift away from containing prices and towards encouraging supply growth, which is still positive for the group.
Fundamentals are intact. These latest developments reinforce our view that earnings momentum will remain firm for the group in the next 2-3 years. We maintain our Buy rating and target price of $1.47, pegged at an undemanding 6x FY Jun12F PER (in line with its historical mean).
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