BUY maintained. China Minzhong announced a mixed set of 3QFY6/13 results. Strong revenue was partly offset by rising cost, which resulted in only 6% net profit growth. Apart from the results itself, we are quite optimistic on the likelihood of the first dividend payout since IPO next quarter. We continue to like Minzhong’s growth outlook and the alliance with Indofood. Maintain our positive stance on the company and keep our target price unchanged at SGD1.36. Current 3.8x FY14 PER seems not justified for a double-digit growth company in our view. The next catalyst for the stock will be the potential dividends next quarter.

Below expectations. 3Q revenue came in at RMB962m, up 28% yoy. Despite the strong top line growth, the bottom line growth of 6% was disappointing. This was mainly due to rising cost pressure from raw materials and additional depreciation from new plant in Fujian. As a result, net profit margin dropped by 5.5ppt to 26.5%. But the margin erosion is within our expectation and we still believe that a low double digit full year EPS growth is achievable given that 9M net profit has achieved 16.5% yoy growth.

Top line to drive forward growth. The strong revenue growth was one of the highlights in the results. Quarterly revenue increased by 28% yoy while 9M YTD revenue increased by 38% yoy. Quarterly revenue could have increased more if without the abnormally high base last year due to the late winter season. This shows that the company’s previous investments start to bear fruit. Alliance with Indofood is also expected to bring more business to the company. Facing the declining margin, we believe that the revenue growth could pick up strongly enough to support the growth in the future.

First dividends could come soon. Management has not made a commitment to pay dividends yet but we are optimistic on the likelihood of the first dividends payout next quarter. Indofood, which is now the single biggest shareholder of Minzhong, has a payout ratio of roughly 40%. Management did indicate that Indofood might push Minzhong to gradually match a similar payout ratio in the long term. In our view, investors should not expect big dividends any time soon as the company still has to expand but any dividends will be welcomed by the market. On our calculation, at current low PER, even only 10% payout ratio for this year could give a yield of 2.2%, which is appropriate for a growth company.

Source: Maybank Kim Eng Research - 14 May 2013