no slide title · 2010. 12. 6. · brandon ng, cfa. 3 repeat of 2007-08 food crisis? s&p gsci wheat...

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Important Disclaimer

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Global Food Inflation&

How to Profit From It

Brandon Ng, CFA

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Repeat of 2007-08 Food Crisis?

S&P GSCI Wheat Index +58% from Jun 10

S&P GSCI Corn Index +66% from Jun 10

China’s Sep Vegetable CPI +17% yoy

Basmati Rice Index +23% from Mar 10

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Not Just The Weather…

Source: Food and Agricultural Organization of the United Nations

...But due to 2 more important reasons:

•High oil prices and the emergence of bio fuels as substitutes

•Long-term fundamental demographic shifts

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Energy Market a New Driver for Food Prices• 42% US maize used for

ethanol in 2010

• Renewable fuels to comprise at least 8% of motor fuels in 2011

• High corn demand leads to more resources allocated to cultivation of the crop

• High energy prices lifts food price

Source: United States Department of Agriculture

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Increasing World Calorie Intake• Calorie consumption is highly

price elastic at low income levels

• Income per capita of China and India expected to increase at hit US$20k by 2030

• 2.3b, or 37% of world population will be consuming more!

Source: Food and Agricultural Organization of the United Nations, EIU Market Forecasts and Indicators

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More Meat – Putting Things into Perspective

82.8b kg pork 414b kg cereal*

• If 2.3b people were to start consuming 100g (315 cal) more of minced pork daily...

• It will mean each person consumes 36kg of pork a year

• and an additional 82.8b kg of worldwide pork consumption a year...

• 1kg pork = 5kg cereal• Equals to 414b kg of cereal• That’s 18% of the 2,273b kg

world cereal production in ‘08!

2.3b peopleSource: World Bank, Financial Times, UOB Kay Hian* Cereal includes wheat, rice, maize, barley, oats, rye, millet, sorghum, buckwheat and mixed grain

Investments Key to Unlocking Supply Constraints• Developing countries

produced 69% world cereals in 2008

• And obtained 36.7% lower yields compared to developed countries

• Investments in developing countries crucial to increasing supply

• Urbanisation also expected to cannibalise on arable farmland

Source: World Bank, International Monetary Fund, UOB Kay HianClassification of developed and developing countries is based on IMF classification

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The Signs Are Starting to Show…• Sinochem attempted to block

BHP Billiton’s US$39b bid for Potash Corp

• UN FAO forecast food imports would hit US$1.02t, up 15% from ‘09, warns of hard times ahead

• According to international food policy of research institute, climate change will push food prices to double by 2050

• China’s food inflation in October is up 10% yoy, measures to curb inflation on the line

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Stock Picks

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China Minzhong – Background

Source: China Minzhong

• Leading vegetable processor in the PRC with numerous cultivation bases in China. CMZ distributes its products to over 25 different countries

• Fresh vegetable sales contributed to 32.3% of FY10 revenue with processed vegetables sales contributing the rest

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China Minzhong – Background

Source: China Holiday.com

• 2 cultivation base in Fujian, 1 in Yunnan, 1 Sichuan and lastly Inner Mongolia

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China Minzhong – Business Model• CMZ secures yearly contracts

with clients on volume and price before starting to cultivate its plantation and engaging contract farmers

• CMZ will sell fresh vegetable produce to pre-processing agents for sorting, cleaning and processing before repurchasing it (80% of what is being sold) for use as raw materials for processed products

• 100 types of processed vegetables including air-dried, freeze-dried, fresh-packed and brined products.


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China Minzhong – Business Model


• Makes profit in both segments• Ensures quality control in raw

materials

• Enjoys tax breaks as profits from unprocessed crops is tax-free

Rmb

1 Cost in growing fresh vegetables (Labour, land amortisation etc)

100

2 Selling price to pre-processor and fresh market (GPM: 56%)

227

Gross profit 127

3 Mark up of 5% by pre-processor 238

4 Cost in processing 50

5 Selling price to customers (GPM: 33%) 430

Gross profit 142

Total gross profit 269

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China Minzhong – Revenue breakdown (Rmbm)


• Processed vegetables sales make up more than 65% of revenue due to higher ASP

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724963

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2007 2008 2009 2010

Processed Vegetables Sales Fresh Vegetables Sales

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China Minzhong – Global Customer Base


• 66% of the revenue is from overseas sales

• 83% of the sales are denominated in Rmb with 16% in US$

• 83% of sales in 2010 from repeat customers

• Processed food that end up as raw materials with Campbell’s, Unilever and Nestles

34%

49%

9%

8%

PRC markets

Export distributors

Asia (ex PRC) and otherregionsAmericas and Europe

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China Minzhong – Main Products


• Top 3 products are champignon mushrooms (34%), capsicum (12%) and German chives (9%)

• Mushroom is 1/3 selling price in Europe

• Capsicum is 30% lower than local selling price

• German chives has 8 harvest in Yunnan compared to 4-5 in Germany

• Growing is seasonal, as such growing and harvesting is Sep to Nov and Mar to May Revenue peaks from Oct to Apr

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China Minzhong – Revenue Drivers


• Targets to acquire 30,000mu or 20m sqm of agriculture farmland per year.

• Currently, the provincial government of Putien City is reserving 160,000mu of cultivation farmland for CMZ to grow organic vegetables.

• Pays 10 years of lease for farmland to secure the rental rates

• Approximately S$51.5m will be used for land acquisition

• Added 8,300 mu in 1Q10

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• S$56.9m will be used to expand processing capacity

• Building a new processing facilities with different processing methods including air drying, freeze-drying and brining.

• Currently, the facilities are running at 80% utilization rate

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• Higher margin products like asparagus, king oyster mushroom

• Cultivation of organic products that sells at 3x the ASP with only 1.5x increase in costs. Gross margins about 70%

• Currently, organic products stands at 5% of revenue and CMZ targets to grow it to 20%

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China Minzhong – Financials (Rmbm)


• Revenue grew 34% yoy in FY10 to Rmb1.42b driven by strong growth in both the processed food and fresh vegetables segments.

• Gross profits rose 35.6% yoy to Rmb574.3m with gross margins sustained at 40.4%

• Net profit increased 27.6% yoy to Rmb367.5m

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China Minzhong – Financials (Rmbm)


• We forecast CMZ’s 2011 revenue to grow by 22.3% yoy to Rmb1.74b, led by higher ASP and sales for premium products like king oyster mushrooms and organic vegetables

• CMZ’s net profit is estimated to jump 35% yoy in 2011 to Rmb495.3m on better gross margin, controlled selling and distribution costs, as well as lower interest expenses

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China Minzhong – Financials


Key FinancialsYear to 31 Dec (RMBm) 2009 2010 2011F 2012F 2013FNet turnover 1,057.8 1,422.6 1,740.8 2,202.2 3,039.0EBITDA 410.8 535.4 613.2 768.4 1,067.2Operating profit 343.7 432.7 586.9 742.6 1,043.6Net profit 288.1 367.5 495.3 628.7 882.1EPS (RMB cent) 113.0 113.0 92.1 116.9 164.1Net margin (%) 27.2 25.8 28.5 28.5 29.0Dividend yield (%) 0.0 0.0 0.0 0.0 0.0P/E (X) 5.8 5.8 7.1 5.6 4.0P/B (X) 2.1 1.5 1.3 1.0 0.8ROE (%) 28.8 16.1 17.8 18.4 20.5Source: China Minzhong, Bloomberg, UOB Kay Hian

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China Minzhong – Valuations• BUY with a target price of

S$1.80

• Pegged to 8.0x 2011F PE, 20% discount to its Singapore-listed peers’ average

• Trading at an undemanding valuation of 9.0x 2011F earnings and 6.7x 2012F consensus earnings

Current Price : S$1.380Target Price : S$1.800

Currency Price Market PE PBCap 2009 2009

Company (mil) (X) (X)CHINA GREEN 904 HK HKD 7.910 6992.72 10.52 1.95CHINA HUIYUAN 1886 HK HKD 5.600 8276.54 73.89 1.51CHAODA MODERN 6820HK HKD 6.300 21046.26 4.59 0.81UNI-PRESIDENT 220 HK HKD 4.890 17601.29 21.42 2.34BEIJING SHUNX-A 000860 CH Rmb 25.130 11020.51 41.98 4.20COFCO TUNHE CO-A 600737 CH Rmb 13.900 13977.84 68.74 4.45Average 36.86 2.54

CEREBOS PACIFIC CER SP SGD 4.740 1495.82 14.50 3.79SUPER GROUP LTD SUPER SP SGD 1.310 730.64 11.34 2.27PAN-UNITED CORP PAN SP SGD 0.515 288.85 14.44 1.05SYNEAR FOOD HLDG SYNF SP SGD 0.220 302.50 10.16 0.49PEOPLE'S FOOD PFH SP SGD 0.715 808.18 18.41 0.80SINO GRANDNESS SFGI SP SGD 0.380 99.44 5.28 1.69Average 12.35 1.68CHINA MINZHONG MINZ SP SGD 1.380 742.28 6.20 1.65Straits Times Index 3200.36 12.62 1.76Source: Bloomberg, UOB Kay Hian

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China Minzhong - Chart

Source: Nextview

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Sino Grandness - Background

Source: Sino Grandness

• Integrated manufacturer and supplier of canned fruits, vegetables and drinks

• Leading exporter of canned asparagus, long beans and canned mushrooms

• 4 production bases in Shandong, Sichuan, Shanxi and Yunnan

• OEM producer

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Sino Grandness – Business Model• SGF will secure annual and

seasonal orders confirmation from customers before planting season

• It will then negotiate with farmers and farming collectives

• Raw materials are processed within 24 hours of delivery at production bases to ensure freshness and thus the inventory levels for raw materials are minimal


Annual and seasonal

confirmation from customers

Farmers and farming

collectives to agree on volume,

size and price

Harvested vegetables are

processed within 24hrs

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Sino Grandness – Seasonality


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Sino Grandness – Global Customer Base• 77.7% of the revenue is from

overseas sales

• Risk of Rmb appreciation caused SGF to focus on new beverage division to sell in PRC market


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Sino Grandness – Main CustomersAsparagus, • More than 10 years of

relationship

• Globally renowned distributors and retailers


long beans and lychees

Lidl is one of the leading European discount supermarket chains that operates >8,000 stores in >20 countries. It is the top 6th food retailer worldwide, generating sales of about 59b euro in FY08. www.lidl.co.uk

22.3%

Mushrooms Calkins & Burke is a provider of food products to majorretail and food services distributors throughout the world; sells products under its own brands and customers’labels. www.calbur.com

10.3

I Schimdt Asparagus, long beans and mushrooms

Food retailer and distributor in Europe. Sino Grandness’ canned asparagus and long beans are sold under house label “Mikado”.

9.4%

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Sino Grandness – Revenue Drivers• Increase total production

capacity from 22,000mt to 41,000mt

• Invest Rmb150m to set up a new plant in Hubei Province with 30,000mt capacity

• To produce canned fruits and vegetables initially, followed by bottled juices

• The company is running at 70% utilization rate currently


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Sino Grandness – Revenue Drivers• New beverage products to

complement current business model

• Herbal drinks recorded Rmb51.8m in FY09

• (鲜绿园) or mixed-fruit juice and vegetable-fruit juice through signing distributorship agreements with 16 distributors from Beijing, Guangdong, Hunan, Hubei, Jiangxi, Xinjiang and Gansu Provinces


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Sino Grandness – Financials (Rmbm)• Revenue to grow 34% yoy

in FY10 to Rmb603m driven by strong growth in both the vegetables and beverage segments

• Beverage segment’s revenue of Rmb56.3m for 3Q10 was comparable to the Rmb57.2m reported for 1H10

• We expect net profit to increase 67% in 2010 to Rmb110.5m


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Sino Grandness – Financials


Key FinancialsYear to 31 Dec (RMBm) 2008 2009 2010F 2011F 2012FNet turnover 330.3 450.6 603.7 678.6 831.8EBITDA 72.2 95.4 159.4 173.5 215.2Operating profit 66.0 86.6 144.4 158.8 199.2Net profit 52.7 66.2 110.5 121.5 152.3EPS (RMB cent) 30.0 36.1 41.7 45.8 57.5Net margin (%) 16.0 14.7 18.3 17.9 18.3Dividend yield (%) 0.0 2.5 1.9 4.2 5.3P/E (X) 7.3 6.0 5.2 4.8 3.8P/B (X) -- 1.9 1.4 1.1 0.9ROE (%) 24.3 23.4 26.6 23.1 23.3Source: Sino Grandness, Bloomberg, UOB Kay Hian

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Sino Grandness – Valuations• BUY with a target price of

S$0.60

• Pegged to 7.5x 2010F PE, 40% discount to its Singapore-listed peers’ average

• Trading at an undemanding valuation of 4.2x 2011F earnings and 3.9x 2012F consensus earnings

Current Price : S$0.375Target Price : S$0.600


Currency Price Market PE PBCap 2009 2009

Company (mil) (X) (X)CHINA GREEN 904 HK HKD 7.910 6992.72 10.52 1.95CHINA HUIYUAN 1886 HK HKD 5.600 8276.54 73.89 1.51CHAODA MODERN 6820HK HKD 6.300 21046.26 4.59 0.81UNI-PRESIDENT 220 HK HKD 4.890 17601.29 21.42 2.34BEIJING SHUNX-A 000860 CH Rmb 25.130 11020.51 41.98 4.20COFCO TUNHE CO-A 600737 CH Rmb 13.900 13977.84 68.74 4.45Average 36.86 2.54

CEREBOS PACIFIC CER SP SGD 4.740 1495.82 14.50 3.79SUPER GROUP LTD SUPER SP SGD 1.310 730.64 11.34 2.27PAN-UNITED CORP PAN SP SGD 0.520 288.85 14.44 1.05SYNEAR FOOD HLDG SYNF SP SGD 0.220 302.50 10.16 0.49PEOPLE'S FOOD PFH SP SGD 0.715 808.18 18.41 0.80CHINA MINZHONG MINZ SP SGD 1.380 742.28 6.20 1.65Average 12.51 1.67SINO GRANDNESS SFGI SP SGD 0.375 99.44 5.28 1.69Straits Times Index 3200.36 12.62 1.76Source: Bloomberg, UOB Kay Hian

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Sino Grandness – Chart

Source: Nextview


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China Minzhong and Sino Grandness

Source: Bloomberg

China Minzhong1Q11

Sino Grandness3Q10

Exports 66% 77%

Receivable days 60 days 82days

Debt Net cash 4.8%

Cash level Rmb1.2b Rmb26m

Equity Rmb2.3b Rmb348m

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China Minzhong and Sino Grandness

Source: Bloomberg

China Minzhong1Q11

Sino Grandness3Q10

Broker calls 6 Buys 4 Buys

Target price 1.72 0.59

IPO 1.20 0.29

Current Price 1.38 0.38

Est PE 8.06 5.28

Free Float 46% 50%

THANK YOUTHANK YOU

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no slide title · 2010. 12. 6. · brandon ng, cfa. 3 repeat of 2007-08 food crisis? s&p gsci wheat...

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