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SGX

China Minzhong (CMZ) – Post 2012 3Q Conference Call

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.

Conclusion:

  • 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

Key Takeaways:

  • 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:

  1. Late winter led to rollover of RMB200m sales
  2. 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]:

  1. 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
  2. There was extension of credit terms but only to long-working customers and account for less than 5% of TR

Inventories Issue [3Q – RMB214m]:

  1. A bulk of inventories increase is mainly attributed by the sales rollover issue – mainly in finished products

Bank Borrowing Issue [3Q – RMB582.1m]:

  1. High loans was a result of the late winter. Late sales receipt meant they need to take on loans to maintain their WC
  2. Bank loans will be the most desired financing option for now
  3. CMZ has a total of RMB1.2bn credit facilities – of which 50% is yet untouched.
  4. 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

Expansion Prospect:

  1. No land expansion in 2012 but it will continue in 2013
  2. Mainly geared towards indoor industrialized farming which require less labour cost and allows all-year-round harvesting

Key Inherent Business Risks:

  1. 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.
  2. 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
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