GIC passed the baton to Indofood. Indofood bought the entire GIC’s stake in China Minzhong last Friday through a marriage trade at a price of SGD1.12. This confirms our view of two weeks ago that Indofood will not be satisfied with only 15% control of Minzhong. We view this transaction positively. Maintain BUY with target price unchanged at SGD1.36, pegged to 5x PER.

Share overhang fades. After Olympus Capital placed out its 57m shares in China Minzhong in Dec 2012, there were still two big pre-IPO investors, namely CMIA and GIC, holding an aggregate amount of 126m shares. The transaction drastically reduced this holding to only 32m shares for CMIA alone. Post the transaction, Indofood will hold 29% of China Minzhong, followed by Templeton (11%) and CMIA (5%).

Wish for a more successful marriage this time around. In fact this is not the first time that the Salim Group (the parent company of Indofood) acquires a Chinese company. It acquired six Chinese consumer goods companies in 2004-2006. Some of those acquisitions turned out to be unsuccessful. But this time around, Indofood adopted a more cautious way in our view by acquiring only 29% of the target company in the first step rather than taking over majority holdings. In addition, compared with the previous acquisitions that we mentioned above, China Minzhong is a much bigger company and we believe that Indofood’s investment in Minzhong is also much bigger than its previous deals. Thus we believe Indofood will treat it more seriously this time.

Indofood’s eagerness to secure raw material supply. Indofood increased its share holding from 15% to 29% only two weeks after the placement, which shows its eagerness to secure raw material supply from China Minzhong. The potential revenue which Indofood can bring to Minzhong could be substantial.

29% control may still not be the end. Although Indofood increased its holding to 29%, we think it might still not be the end if Indofood wants to have an absolute control. We maintain our BUY rating and target price unchanged at SGD1.36.

Source: Maybank Kim Eng Research - 04 Mar 2013