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China Minzhong by JPM 25 August 2010

China Minzhong by JPM 25 August 2010

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Asia Pacific Equity Research
25 August 2010
China Minzhong FoodCorporation Limited
Overweight
CMFC.SI, MINZ SP
FY10 results: higher ASP drives revenue growth
 
Price: S$1.27
Price Target: S$1.60
Previous: S$1.45
SingaporeFood & Food Manufacture Ying-Jian Chan
AC
(65) 6882-2378ying.jian.yj.chan@jpmorgan.comJ.P. Morgan Securities Singapore PrivateLimited
Jasmine Bai
(852) 2800-8559 jasmine.d.bai@jpmorgan.comJ.P. Morgan Securities (Asia Pacific) Limited
1.051.201.35S$
 Aug-09Nov-09Feb-10May-10Aug-10
 
Price Performance
CMFC.SI share price (S$FTSTI (rebased)
YTD1m3m12mAbs 5.8%-2.3%12.4%5.8%Rel 4.9%-0.8%5.1%-6.1%
 
China Minzhong Food Corporation Limited (Reuters: CMFC.SI, Bloomberg: MINZ SP)
Rmb in , year-end Jun FY08AFY09AFY10AFY11EFY12E
Revenue (Rmb mn) 6341,0581,4231,8462,397Net Profit (Rmb mn) 217.4288.1367.5483.0634.2EPS (Rmb) 0.400.520.670.881.16EPS (Recurring) (Rmb) 0.330.510.700.881.16DPS (Rmb) 0.000.000.000.000.00Revenue growth (%) 42.4%66.9%34.5%29.7%29.9%EPS growth (%) 82.9%32.5%27.6%31.4%31.3%EPS (Recurring) Growth 101.9%53.9%37.1%26.2%31.3%ROE 36.8%33.8%22.4%19.1%20.5%P/E (x) 16.012.19.57.25.5P/BV (x) 4.93.51.51.31.0Dividend Yield 0.0%0.0%0.0%0.0%0.0%
 
52-week Range (S$) 1.35 - 1.09Mkt Cap (S$ mn) 697.33Mkt Cap ($ bn) 0.50Price (S$) 1.27Date Of Price 24 Aug 10Free float (%) 56.4%3-mth trading volume (mn) 1.073-mth trading value (S$ mn) 1.303-mth trading value ($ mn) 0.19FTSTI 2,923Exchange Rate 1.36Fiscal Year End Jun
Source: Company data, Bloomberg, J.P. Morgan estimates.
See page 5 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm mayhave a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
 
Earnings ahead of expectations
: Excluding fair value losses of Rmb15million, core net profit of Rmb383 million (+37% Y/Y) was 13%/5% aheadof JPM/consensus estimates. GP margin remained steady at 40.4%. Cashconversion cycle improved from 75 days in FY09 to 61 days in FY10largely attributed to shortening of inventory turnover days. Champignonmushrooms, capsicums and German chives remain the top 3 productscontributing 34%/12%/9% of group sales. The strong result was driven byboth strong volume and higher ASP. Yield per mu continued its uptrend,which we estimate increased by 48% to c.Rmb17,618 due to continual shiftin product mix to higher value product e.g. king oyster mushroom.
 
Processed vegetables – higher ASP but weaker margin
: Processedvegetables revenue/GP was +33%/+17.4% Y/Y on the back of 35.4%increase in ASP. However, sales volume declined 2% due to changes inproduct mix which saw lower fresh-packed vegetables volume. Highervolumes of brined products led to GP margin declining from 37.3% to32.9%. Processed vegetables account for 68%/55% of FY10 revenue/GP.
 
Fresh vegetables – Stronger volume and margins
: Fresh vegetablesrevenue/GP was +37.7%/+67.5% Y/Y driven by 24.8% volume increaseand 10.4% increase in ASP. GP margin improved from 46.1% to 56%.Fresh vegetables account for 32%/45% of FY10 revenue/GP. Its plantationswere unaffected during the recent floods in China due to their locations,which allowed Minzhong to partly benefit from the higher vegetable spotprices for it non-contracted production volume (~20% of total production).
 
Planting to accelerate in FY11E
: Total planted area was only 1,850muhigher than FY09 due to deliberate slowdown during the downturn.Management maintains its planting target of 90,000mu over the next 3 years.
 
Raised PT and earnings estimates
: We believe Minzhong will be able tocontinue delivering ASP and volume growth with its organic/GAP certifiedproduce favored by its export customers as well as domestic consumers whoplace great importance on food safety. We raise our FY11E/FY12E earningsestimate by 13%/12% and raise Jun-11 PT to S$1.60.
 
 
 2
Asia Pacific Equity Research
25 August 2010Ying-Jian Chan(65) 6882-2378ying.jian.yj.chan@jpmorgan.com
Company Description P&L sensitivity metrics
EBITDA EPSimpact (%) impact (%)Processed vegetables volume growth assumption FY11E: 10%Impact of each 5 ppt increase 2.2 2.4Processed vegetables GP margin assumption FY11E: 32%Impact of each 1 ppt increase 2.0 2.1Fresh produce volume growth assumption FY11E: 30%Impact of each 5 ppt increase 1.7 1.8Fresh produce GP margin assumption FY11E: 50%Impact of each 1 ppt increase 1.0 1.1
Source: J.P. Morgan estimates.
Price target and valuation analysis
China Minzhong is an integrated vegetableprocessor in China. Its operations arestrategically located across variousprovinces. As part of its integratedoperations, it possesses cultivationcapabilities which allow the company tomanage the supply of fresh vegetables andsupply raw material for the processingoperation.
Revenue breakdown
Our PT of S$1.60 is based on 10% discount to our DCF-derived fair value using aWACC of 12.7% and long-term growth rate of 2%. 10% discount accounts for thelower trading liquidity and the potential valuation discount accorded to Singapore-listed China companies.Risk free rate: 4.0%Market risk premium: 8.0%Beta: 1.2Cost of debt: 6.0%Terminal “g”: 2.0%
WACC: 13%
Source: Company reports
Net income: J.P. Morgan vs consensusRMB MM J. P. Morgan Consensus
FY11E 483 494FY12E 634 695Our Jun-2011 PT implies 9x/7x FY11E/FY12E P/E. Key downside risks to our pricetargets include: (1) upward pressure on land costs in China; (2) decline in vegetableprices; (3) negative impact on export sales if any food safety issue is reported inChina; while we see upside risks from stronger food inflation trend in China.FY13E 834 853
Source: J.P. Morgan estimates, Bloomberg.
Peer valuation comparable
Last Market P/E (x) P/B (x) EPS Growth Div Yield ROECompany Ticker Price (LC) Cap (US$ mil) 2010E 2011E 2010E 2011E 2010E 2011E 2010E 2011E 2010E
Chaoda Modern Agriculture 682 HK 6.71 2,753 4.5 4.0 1.0 0.8 -5.1% 11.3% 1.8 2.3 20.6China Green (Holdings) Ltd 904 HK 8.65 984 11.4 9.1 2.4 2.0 18.1% 25.8% 2.4 3.0 20.2China Foods 506 HK 5.55 1,993 26.2 20.6 2.8 2.5 3.9% 27.4% 1.3 1.7 9.5China Agri-Industries 606 HK 9.97 5,179 14.3 11.8 2.4 2.1 35.2% 21.0% 1.8 2.2 15.5China Huiyun Juice 1886 HK 5.66 1,069 28.1 22.8 1.5 1.5 -334.7% 23.3% 0.8 1.1 5.3China Mengniu Dairy 2319 HK 21.95 4,905 23.4 18.8 3.9 3.7 20.1% 24.9% 0.9 1.2 16.2China Yurun Food 1068 HK 26.95 6,114 21.6 18.3 5.4 4.2 14.4% 18.2% 1.3 1.6 22.5Uni-President China 220 HK 4.42 2,046 21.4 17.2 2.2 2.3 -8.2% 24.4% 2.3 2.7 9.5Tingyi 322 HK 19.16 13,769 31.6 25.9 9.4 8.1 13.0% 21.8% 1.6 1.9 26.8Want Want China 151 HK 6.03 10,247 26.7 21.0 10.4 9.3 20.8% 27.6% 2.6 3.4 36.9
China Minzhong Food MINZ SP 1.26 500 8.1 6.2 2.1 1.4 30.2% 31.3% 0.0 0.0 16.7
Average 18.9 15.3 4.2 3.6 14% 23% 1.6 2.0 19.4 
Source: J.P. Morgan estimates, Bloomberg.Priced as at 24 August 2010.
 
 3
Asia Pacific Equity Research
25 August 2010Ying-Jian Chan(65) 6882-2378ying.jian.yj.chan@jpmorgan.com
Table 1: China Minzhong key financial and operational data
Rmb in millions (unless otherwise stated)
FY10 FY09 Y/YRevenue 1,422.6 1,057.8 34.5%
- Processed 962.5 723.9 33.0%- Fresh 460.0 334.0 37.7%% Revenue 100% 100%- Processed 68% 68% -0.8ppt- Fresh 32% 32% 0.8ppt
Gross profit 574.3 423.6 35.6%
- Processed 316.6 269.8 17.4%- Fresh 257.7 153.8 67.5%% Gross profit 100% 100%- Processed 55% 64% -8.6ppt- Fresh 45% 36% 8.6pptNet profit (reported) 367.5 288.1 27.6%
Net profit (core) 382.7 279.1 37.1%Total planted area (mu) 52,131 53,981 -3.4%
- Vegetables 26,111 27,961 -6.6%- Bamboo 26,020 26,020 0.0%
Volume (tonnes) 227,065 201,492 12.7%
- Processed 89,965 91,679 -1.9%- Fresh 137,100 109,813 24.8%% Volume 100% 100%- Processed 40% 46% -5.9ppt- Fresh 60% 55% 5.9ppt
Yield per mu (Rmb) 17,618 11,944 47.5%
Source: Company data.
Table 2: Update on use of IPO proceeds
Item Proposed (S$MM) Utilized (S$MM)
Increase of production and processing capacity 56.9 11.0Increase cultivation capacity by acquiring or leasing new farmlands andfor the related land improvement costs51.5 14.3General working capital 27.1 27.1
Total 135.5 52.4Net IPO proceeds raised 135.5Remaining 82.8
Source: Company reports.
Management guided that capexof FY11E will be c.Rmb700million (c.S$140 million). Capexamount not fulfilled by remainingIPO proceeds will be funded byinternally generated cash andbank borrowings.

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