Strong profit growth. Minzhong announced its 1QFY6/13 results yesterday. 1Q revenue increased by 70% yoy to RMB613.4m and net profit increased by 31% yoy to RMB121.6m, in line with our expectation. Strong yoy growth was mainly due to the low base of last year. Considering 1Q is normally Minzhong’s trough season, we should be able to see higher earnings delivery in the coming quarters. Maintain BUY and target price SGD1.16.

Sector performance. Processed business recognized the strongest growth (128% in revenue and 69% in gross profit). The growth is driven by new export customers and sales spillover due to the delay in mushroom harvesting season from last year. Cultivation business registered 27% growth in revenue but a slight decline in gross profit.

Expanding new revenue sources. 1Q profit growth was mainly driven by higher volume as Minzhong expanded its revenue sources. It secured new export customers in Japan and Taiwan for its processed vegetable in this quarter. It also achieved surprising growth (more than 400% yoy) in its own-branded beverage sales. Going forward, we expect cost pressure will still weigh on gross margin, but volume growth would support the profit growth.

Better cash collection, stronger balance sheet. We saw significant improvement in Minzhong’s cash collection in recent two quarters. In 1Q, trade receivables decreased to RMB894m from RMB967m last quarter. In fact, 70% of trade receivables by the end of last quarter were collected back. The quality of receivables remains healthy and we believe the customer default risk for Minzhong is minimal. Better cash collection resulted in stronger balance sheet. In this quarter, Minzhong’s cash balance increased to RMB324m from only RMB66m last quarter.

Reiterate BUY. We believe Minzhong’s share price is deeply undervalued at current 2.86x FY13 PER. We are confident Minzhong’s free cash flow will turn positive this year and the stronger balance sheet makes some dividends payment or share buyback possible. Re-rating can be expected if such practices materialize.

Source: Maybank Kim Eng Research - 15 Nov 2012