Monday, April 15, 2013

China Minzhong: Eat your Veggies and Pass the Noodles (MKE)


China Minzhong
Buy (unchanged)
Share price:SGD1.085
Target price:SGD1.36 (unchanged)
Eat your Veggies and Pass the Noodles

A leading integrated vegetable processor. China Minzhong is a leading integrated vegetable processor in China. It offers more than 100 types of processed vegetables and exports to more than 20 countries. It also produces fresh vegetables for the domestic market. Despite its high-quality assets and good business model, Minzhong’s shares are trading at a deep discount of only 4.4x PER.


Good quality business but valuation at deep discount. We like Minzhong for its good quality business but undemanding valuation. It has one of the biggest vegetable processing capacities in China and being able to export its products to the US and Europe for decades is proof of its product quality. In recent years, the company has focused on a more balanced business model by developing the domestic consumer market and reducing its reliance on exports.

Caught the eye of Indofood. Indeed, Minzhong’s good quality assets and undemanding valuation have attracted the attention of Indofood Sukses Makmur Tbk, which then acquired a 15% stake via a share placement on 15 Feb 2013. Only two weeks after the placement, the Indonesian packaged food producer raised its stake to 29% by taking over the Government of Singapore Investment Corporation’s (GIC) entire holdings in Minzhong. We think Indofood will likely increase its holdings further to secure a majority control of the company.

Is privatisation possible? We understand that Minzhong’s good quality vegetable processing capacity is what attracts Indofood. Given the stock’s current low valuation and the potential synergies between the two companies, we cannot rule out the possibility that Indofood will privatise Minzhong someday. The shareholding structure will also make any such move more feasible in our view.

Maintain BUY. Our BUY recommendation is premised on Minzhong’s prosperous growth outlook and undemanding valuation, rather than privatisation as the base case scenario. Our TP of SGD1.36 is pegged to 5x FY14F PER. But we believe any attempt to take the company private will further unlock value for shareholders.

A leading integrated vegetable processor. China Minzhong is a leading integrated vegetable processor in China. It offers more than 100 types of processed vegetables and exports to more than 20 countries. It also produces fresh vegetables for the domestic market. Despite its high-quality assets and good business model, Minzhong’s shares are trading at a deep discount of only 4.4x PER.

Good quality business but valuation at deep discount. We like Minzhong for its good quality business but undemanding valuation. It has one of the biggest vegetable processing capacities in China and being able to export its products to the US and Europe for decades is proof of its product quality. In recent years, the company has focused on a more balanced business model by developing the domestic consumer market and reducing its reliance on exports.

Caught the eye of Indofood. Indeed, Minzhong’s good quality assets and undemanding valuation have attracted the attention of Indofood Sukses Makmur Tbk, which then acquired a 15% stake via a share placement on 15 Feb 2013. Only two weeks after the placement, the Indonesian packaged food producer raised its stake to 29% by taking over the Government of Singapore Investment Corporation’s (GIC) entire holdings in Minzhong. We think Indofood will likely increase its holdings further to secure a majority control of the company.

Is privatisation possible? We understand that Minzhong’s good quality vegetable processing capacity is what attracts Indofood. Given the stock’s current low valuation and the potential synergies between the two companies, we cannot rule out the possibility that Indofood will privatise Minzhong someday. The shareholding structure will also make any such move more feasible in our view.

Maintain BUY. Our BUY recommendation is premised on Minzhong’s prosperous growth outlook and undemanding valuation, rather than privatisation as the base case scenario. Our TP of SGD1.36 is pegged to 5x FY14F PER. But we believe any attempt to take the company private will further unlock value for shareholders.

Is privatisation possible? We cannot rule out the possibility that Indofood will some day privatise Minzhong. Our reasons are as follows:
1. Minzhong’s integrated vegetable processing capacity is what has attracted Indofood, in our view. Indofood raised its stake in the company to 29% only two weeks after first acquiring a 15% holding. This shows its eagerness to secure a bigger control of the company. However, we do not think 29% is the end of the story. Indofood will likely continue to increase its holdings or even privatise Minzhong if it wants absolute control of the company.

2. Minzhong’s current cheap valuation also makes it a good candidate to be privatised. The stock is trading at 4.4x PER and 0.9x P/BV vs Indofood’s corresponding valuations of 18.6x and 2.8x. In our view, the huge valuation gap between the duo will benefit Indofood’s shareholders if an acquisition eventuates.

3. Minzhong’s shareholding structure is also favourable for a privatisation. Indofood already owns 29% of the company, followed by Templeton (14%) and CMIA (5%). Management owns about 5% of the company. We understand that CMIA, as a pre-IPO investor, has been investing in Minzhong since 2004 and given the nature of private equity firms, it is a natural progression for them to liquidate their investments post IPO and return the capital to their investors. Thus, it should not be too difficult for Indofood to take over CMIA’s share in the future. With the top four shareholders accounting for 51% of the company, privatisation would seem a lot more feasible in our view.


Source/Extract/Excerpts/来源/转贴/摘录: Maybank Kim Eng Research
Publish date: 11/04/13

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