Olympus Capital passed the baton. Olympus Capital, a private equity fund, has sold its entire stake of 57m shares in China Minzhong through a private placement last Thursday at SGD0.80 per share. The shares were snapped up by a group of institutional funds and high net wealth investors. Top management also raised their stakes. In our view, this placement is a positive for Minzhong as it removes a long-term share overhang on the company without adding too much selling pressure in the open market.
Senior management raises holdings. In a show of solidarity, management took advantage of the vendor share placement to increase personal stakeholdings. CEO Lin Guorong raised his stake from 6.35% to 6.37% while CFO Siek Wei Ting’s total stake went up from 5.46% to 5.49%. This clearly signals management’s confidence in the company’s fundamentals and the attractiveness of its share price.
Share overhang fades. Olympus has invested in China Minzhong since 2006. Given the closed-end nature of private equity funds, it is a natural progression for private equity firms to liquidate their investments post-IPO and return capital to their investors. More importantly, last week’s placement has helped resolve the issue of share overhang Minzhong has been grappling with, not to mention the new institutional investors it has brought on board. Prior to the placement, Olympus and CMIA,
two of Minzhong’s pre-IPO investors, together held 16% of total shares outstanding. The placement drastically reduced this holding to only 5.74% for CMIA alone.
Reiterate BUY. We continue to like Minzhong for its growth prospects. Given the difficulties Europe is facing, the company has striven to expand its revenue base by seeking out new customers abroad and leveraging the growth potential in Chinese domestic consumption. We are looking at an average of 15% EPS growth for the next three years. As it stands, Minzhong’s share price is deeply undervalued at the current 2.9x FY13F PER. Reiterate BUY with the target price unchanged at SGD1.16.
Investment theme revisiting. In our view, Minzhong is turning into a more healthier business model. It is mainly reflected in the following three aspects:
• Less reliance on Europe. Given the difficulties Europe is facing, the company has striven to expand its revenue base by seeking out new customers abroad and leveraging the growth potential in Chinese domestic consumption. Now the company is less exposed to Europe than before.
• Saving operational cost via industrialized farming. Minzhong adopts industrialized farming method for certain high-margin produce such as king oyster mushroom to save operational cost especially labour cost. By investing in industrialized farming, Minzhong will be at a better position than peers in facing rising labour cost and lack of labour source in China.
• More driven by organic growth. Minzhong has passed the peak of its heavy investment cycle. The investments made during the past two years starts to bear fruit. We expect less capital expense and positive free cash flow going forward.
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