CMZ key takeaways from management meeting

Valuation
- Maintain BUY but with a lower target price of S$1.10, pegged at its 3-year average PE of 4.6x to 2015F earnings (4.9x previously). Catalysts include supply contracts between MINZ and Indofood, higher dividend payout to match Indofood’s dividend payout of 40% and investment in industrialised farming in Indonesia for the longer term.

Financial highlights
- MINZ reported a 25.8% yoy decline in net profit to Rmb250.3m in 1HFY14 despite revenue rising 4.6% yoy, driven by higher sales in the cultivation (+15.3% yoy) and branded business (+10.5% yoy) segments. Revenue from processed vegetables declined 3.8% yoy mainly due to reduced orders for fresh-packed products.

- Gross profit fell 2.7% yoy to Rmb486.8m with gross margin declining 2.3ppt to

What happrn to China Minzhong

Glaucus Research Group California

CHINA MINZHONG FOOD CORPORATION LIMITED (“Minzhong” or the “Company”) is a Peoples Republic of China (“PRC”) based producer of fresh and processed vegetables. In our opinion, Minzhong closely resembles Chaoda Modern Agriculture (SEHK: 0682) (“Chaoda”), another Fujian-based vegetable producer that has been halted since September 2011 under widespread allegations of fraud. We believe that Minzhong, like Chaoda, has so significantly deceived regulators and investors about the scale of its business and its financial performance that we expect trading in its shares to be halted and its shares to be worthless.

1. Fabricated Sales. Publicly available filings indicate that Minzhong fabricated sales figures to its top two customers.

a. Top Customer Incorporated After The Track Record Period. Corporate registry records show that a Taiwan-based food distributor, which was supposedly Minzhong’s largest customer in the pre-IPO track record period (2007-2009), was only incorporated in November 2009, suggesting, in our view, that Minzhong simply fabricated the sales figures in its Prospectus.

b. SAIC Filings Indicate Faked Sales. SAIC files show that Minzhong’s second largest customer, which purportedly accounted for RMB 142 million in sales in 2009, had zero revenues and zero COGS in 2009.

c. Undisclosed Related Party. Minzhong reported in its Prospectus that its top

China Minzhong support resistance

China Minzhong Non-deal road show feedback

Minzhong NDR post placement. We hosted a China Minzhong Non-deal road show after Minzhong’s share placement to Indofood. During the road show, management discussed in details the industrialized farming model, the potential synergies with Indofood, the use of the placement proceeds as well as dividends. We listed the questions which gained the most interest below:

 Some investors asked questions about this round of placement. According to the management, this deal roughly started since late December last year when Indofood approached China Minzhong through some agent. After about two months discussion both parties managed to agree on the placement price of SGD0.915.

 On the question why Indofood only acquired 14.95% of China Minzhong, management shared with investors that according to SGX rule, an EGM needs to be held before any entity buys more than 15% of a company’s shares in the first block. Management also did not rule out the possibility that Indofood would buy more shares in the future.

 In terms of potential synergies with Indofood, management indicated that the most direct impact on China Minzhong in the short term would be that Minzhong could potentially supply some dried vegetables such as

Expect another strong quarter from CMZ

Anticipating outperformance. China Minzhong is expected to announce its 2QFY6/13 results on 14 Feb 2013. We are anticipating a set of good results with revenue likely to post robust growth. We expect 2Q revenue to come in at CNY800m, up 23% YoY due to more favourable weather conditions. The unusually cold weather in China this winter will not only speed up the growth of champignon mushrooms, Minzhong’s biggest revenue contributor, but also lift the prices of its other vegetables.

Double-digit bottom-line growth should be achievable. Although we are concerned about possible margin compression due to rising raw material costs, inflationary labour costs as well as higher depreciation, we believe Minzhong will still be able to achieve 10-15% bottom-line growth in 2Q. We reiterate our view that volume growth will be the main growth driver in the next few years despite the decline in margin. In the long run, industrialised farming should help the company mitigate cost pressures and protect its bottom line.

Two issues to watch out for. Minzhong’s big trade receivables used to be a major concern. But there has been an improvement as evidenced in its results last quarter. We expect Minzhong to build on this positive momentum and further improve its operating cash flow during this quarter. Secondly, the company has

CMZ share buyback mandate may boost share price

Background
CMZ is a leading and internationally accredited integrated vegetables processor in China. It has numerous cultivation bases and distributes its products to over 25 countries. Some of CMZ’s fresh produce have been certified “organic” by BCS Oko-Garantie GmbH.

Investment Highlights
• Maintain BUY and target price of S$1.00, based on 3.1x FY14F PE, pegged to Singapore-listed peers’ average.

• Positive share price catalysts include PE expansion, share buybacks or even a dividend payout, which the company has been considering since the last financial year.

• We increase our FY13 net profit forecast by 1.6% to Rmb788.5m on higher revenue despite lower gross margin due to the higher cost of production.

What’s New

China MinZhong Big Overhang Removed

Target price: SGD1.16


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,

China Minzhong jump back

Yesterday.....

China Minzhong is down 9.4% at S$0.77 in strong volume accounting for 6.6% of shares changing hands on the SGX, dropping below the S$0.80/share price of a block trade of 57.231 million shares, or about 10.3% of shares outstanding.

"It has probably resulted in more shares in the market, so there's now an overhang issue," says an analyst who declined to be named.

GIC, Franklin Templeton Investments Corp. and Olympus Capital Holdings Asia are the only three shareholders with at least that many shares and Olympus Capital held a stake of the same size as the block trade.

The company said it was unable to comment at this time; GIC couldn't immediately be reached for comment. Orderbook quotes suggest the stock's intraday low of S$0.76 may offer support.

Today.....

Earnings Hit By Higher Costs And Lower Efficiencies From New

Investment Highlights
• Maintain BUY with a lower target price of S$0.86, based on 3.4x 2012F PE, pegged to Singapore-listed peers’ average.
• Share price has slumped 30% following its 3QFY12 results which came in lower than market expectations. Management has cautioned that they may not be able to meet the internal FY12 profit growth target due to higher cost of production despite higher revenues and ASP.
• We also cut our FY12/13 earnings by 2.8/17.3% respectively.

Financial Results
• China Minzhong Food (CMZ) reported a 7.8% decline in net profit to Rmb240.8m for 3QFY12 mainly due to the late arrival of the winter season and the kicking in of additional operating expenses from the new industrial plant. Climate change has led to a delay in the cultivation and harvesting of its key product - champignon mushrooms, which resulted in sales being booked in April instead of March. Management has highlighted that for Apr 12, CMZ’s revenue already rose by approximately

China Minzhong earnings momentum remains strong

Maintain Outperform with a slightly lower TP (6x CY12 P/E, now pegged to the stock’s short listing history rather than the broad FTSE China Index. We also lower our FY12-14 earnings estimates by 1-17% on more moderate farmland-expansion plans.

Largely immune to the West
A slowdown in demand from the West and an appreciating yuan won’t derail Minzhong’s earnings growth much, we believe. There are no signs of a slowdown in export demand so far. The company also has the flexibility to switch to fulfilling orders from South America at short notice. Management did this successfully in 2009. Its cost advantage is also unlikely to be eroded as ASPs for key crops are 20-50% those of European comparables.

Ready for next phase of growth
Its recently launched processing facility at Putian built at a cost of

China MinZhong driving next level of growth

Target price of $1.47

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

China Minzhong net profit up 78% y-o-y to RMB93m

DMG - TP S$1.68

China Minzhong’s 1QFY12 reported net profit up 78% y-o-y to RMB93m

The news: China Minzhong’s (MINZ) net profit grew 78% to RMB93m on 37% revenue growth to RMB361m and 7.7ppt gross profit margin gain to 40.7%. Revenue from processed vegetables increased by 25.9% to RMB132.8m (1QFY11: RMB105.5m) due to a shift towards a higher-value processed vegetables portfolio, which increased ASP by 53.5%. Revenue from fresh vegetables produce increased by 94.0% to RMB156.6m (1QFY11: RMB80.7m), due to higher cultivation volume of 38,160 tonnes (1QFY11: 26,941 tonnes) and ASP growth of 37%. The shift towards higher value added products also lifted MINZ’s GPM.

Our thoughts: MINZ’s net profit of RMB93m (+78% y-o-y, -4% q-o-q) was ahead of our RMB80m projections mainly due to better-than-expected expenses. Although revenue of RMB361m was below our assumed RMB428m, gross profit of RMB147m was relatively in-line on a higher value product mix. We maintain BUY and TP S$1.68 for now.