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I manage a private portfolio, of the same name as my blog, that pursues a fundamental value oriented strategy focusing on developing and frontier markets in the Asian region. The fund focuses on countries that have progressive foreign investment policies, young and growing populations, and... More
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  • China Minzhong - Worth 3x The Current Price Once Farmland Matures 0 comments
    Jan 27, 2013 7:55 PM

    Fair Value = S$2.70, currently trading at S$1.04

    I've had a couple of readers request that I look at China Minzhong. It appeared on my original Singapore screen but I passed it up because of the S-Chip link. I subsequently decided to have another look at the company and since it's had a bit of a run lately, I thought I'd see if it's justified on valuation grounds or just a victim of the January effect.

    Thesis
    China Minzhong is a leading vertically integrated vegetable processor in China currently trading at 4.0x 2013F earnings. As the free cashflows continue to grow with earnings and market begins to understand and appreciate the business China Minzhong has the potential to see a rerating and failing that the growing earnings will mean an investor will still be compensated for the risk taken.

    As the current farmland matures and begins reach its potential yield, China Minzhong would be worth almost 3x the current price. In an optimal scenario China Minzhong could be worth 10.0x FY2013F earnings, in line with other small caps trading in Singapore. This isn't a huge ask for a business that has been showing a 42% CAGR in revenue and fairly stable margins over the past 4 years.

    Variant View / Issue
    The margins are too good to be true (GM = 38.4%, NM = 26.5%), suggesting that the earnings themselves are also an accounting manipulation.

    Realistically, you could expect these margins from a vegetable grower and the RoE of 19%, isn't exceptionally above what you'd expect from a stable business.

    Introduction

    China Minzhong was established in 1971, which was named as the "National Leading Dragon Head Enterprise" by the Chinese government in 2002. China Minzhong has two key business segments; Processed Vegetables and Fresh Vegetables. The Processed Vegetables segment produces over 100 types of processed vegetables that are air-dried, freeze-dried, brined and freshpacked. The products are distributed across 26 different countries and regions including the Americas, Asia and Europe.

    (click to enlarge)

    Key Shareholders

    China Minzhong was listed at S$1.20 in April of 2010 and has had a tumultuous journey since then because of an overhang and accounting scandals reducing the credibility of S-Chips. 2 out of 3 of the funds that were shareholders at the IPO needed to sell their combined 16% position in 2012 because of mandate requirements. The substantial increase in supply weighed on the price until recently.

    The third fund that remains in the fray is GIC, under the alias of Tetrad Ventures, which currently holds slightly under 17% and is under no mandate obligation to sell the position. GIC's involvement increases the confidence in the credibility of the numbers because of GIC's track record and Singapore's views on corporate governance and accounting credibility.

    Combined, Management hold 13.6% of China Minzhong and used the placements last year to increase their positions. Franklin Templeton also hold >13% of the company so any prospective investors would be in good company.

    Management

    Management appears to be very experienced with Lin Guo Rong, CEO and Executive Chairman, having been with the company for >37 years. He was named as one of the "Top One Hundred Entrepreneurs" by the China Media Development Institute as well as having received numerous other awards. Wang Dazhang, CFO, has also spent >37 years with the company and had previous experience in the vegetable growing industry before joining.

    Valuation

    I've tackled the valuation using a back of the envelope approach to determine what the revenue and profitability would look like if all of China Minzhong's land used for Cultivation was mature and cross checked this with the current multiples for peers.

    (click to enlarge)

    (click to enlarge)China Minzhong - Valuation

    Peers Sino Grandness and Yamada are trading at 4.6x and 2.4x earnings respectively, so a 3x multiple for MINZ doesn't appear demanding. I believe that if China Minzhong doesn't invest in any more farmland, as their existing farmland matures the business is worth at least S$2.70/share.

    Conclusion

    Overall, I believe that China Minzhong still has some room to run and as it continues to grow the valuation will continue to play catch up. This could be a great opportunity to pick up a high quality small cap before the institutions learn hear about the story.

    If you have any questions or comments, please contact me here.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: I am currently long MINZ SP Equity - K2N or MINZ aren't choices the Seekingalpha boxes will let me select to make the appropriate disclosure

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