Following up from my previous post on CMZ, I had the privilege to have a call with their IR manager Dave Tan, to better understand the effects of the late winter.
Below are the key notes from the conference call – please a note if you are interested for the full version. I am now vested in CMZ and remain confident that their prospect does not warrant its current low share price.
- The late winter effect should not warrant such a strong fall in stock price (till date 45% price plunge)
- Sales & earnings growth are still expected for FY12
- Risks to catalyst are the likely decrease in margins & strong negative FCF trend
- Any substantial decline in its balance sheet quality can also pose further sell down risk
- Sales from late winter is just a mere shift in earnings to 4Q and no spillover expected to hit to FY13
- Mgmt expects sales to be RMB2.4 billion and PAT of RMB640 million – GPM to be 38% and NPM to be 26% – below FY11 result (which was considered to be a good year) but still better than FY10 (though GPM is lesser)
Late Winter Issue:
- Late winter led to rollover of RMB200m sales
- From mgmt: Estimate is based on orders that have been contracted, and not sales that we are hoping to get.
Trade Receivable Issue [3Q – RMB862.5m]:
- Timing issue. As of April, RMB180m of RMB860m (20%) has been collected. IMO, collection was so-so given the credit term of 30-60 days
- There was extension of credit terms but only to long-working customers and account for less than 5% of TR
Inventories Issue [3Q – RMB214m]:
- A bulk of inventories increase is mainly attributed by the sales rollover issue – mainly in finished products
Bank Borrowing Issue [3Q – RMB582.1m]:
- High loans was a result of the late winter. Late sales receipt meant they need to take on loans to maintain their WC
- Bank loans will be the most desired financing option for now
- CMZ has a total of RMB1.2bn credit facilities – of which 50% is yet untouched.
- Long term net gearing should be around 15-20% – unlikely for them to return to net cash position as all IPO proceeds had been used up
- No land expansion in 2012 but it will continue in 2013
- Mainly geared towards indoor industrialized farming which require less labour cost and allows all-year-round harvesting
Key Inherent Business Risks:
- Business model seemed to have a risk if there is any late season or poor harvest since loans are paid on a rolling basis. How they mitigate this will depend largely on how well they can grow all-year-round vegetable crops – that’s a strategic shift they are embarking in 2013. But such model risk should be the same for all agricultural products.
- Business burning up FCF – Mgmt stated that positive FCF should set in for the next 2-3 years before a new round of CAPEX starts to set in