Minzhong NDR post placement. We hosted a China Minzhong Non-deal road show after Minzhong’s share placement to Indofood. During the road show, management discussed in details the industrialized farming model, the potential synergies with Indofood, the use of the placement proceeds as well as dividends. We listed the questions which gained the most interest below:

• Some investors asked questions about this round of placement. According to the management, this deal roughly started since late December last year when Indofood approached China Minzhong through some agent. After about two months discussion both parties managed to agree on the placement price of SGD0.915.
• On the question why Indofood only acquired 14.95% of China Minzhong, management shared with investors that according to SGX rule, an EGM needs to be held before any entity buys more than 15% of a company’s shares in the first block. Management also did not rule out the possibility that Indofood would buy more shares in the future.
• In terms of potential synergies with Indofood, management indicated that the most direct impact on China Minzhong in the short term would be that Minzhong could potentially supply some dried vegetables such as carrot, chili and chives to Indofood as the raw materials for its instant noodle products. Note that Indofood is one of the biggest instant noodles producers in the world with annual outputs of around 15b packs. In the middle term, the likely cooperation between China Minzhong and Indofood includes Indofood leveraging on Minzhong’s experience in industrialised farming and farmland management to develop vegetable cultivation in Indonesia. Indofood has large area of farms and the cooperation for both sides on this front is quite encouraging. In the long term, Minzhong could help Indofood to penetrating into China market in the form of some JV.
• Investors were also keen on Minzhong’s industrialised farming model. Management explained to us that the industrialised farming could significantly reduce the company’s reliance on labor and increase the yield. Facing the continuously rising labor cost, this business model could potentially give Minzhong certain competitive advantage.
• Most of the investors were keen on the dividends policy of the company. The management suggested that they were planning some dividends in FY6/13 but the amount were not decided yet.

Remain positive. We continue to like China Minzhong for its prosperous growth outlook and undemanding valuation. The dividends payment will be the biggest catalyst for the share price. At current low PE multiple, even a small payout ratio could give an attractive dividends yield. Maintain BUY with target price SGD1.36, pegged to 5x FY6/14 PER.

Source: Maybank Kim Eng Research - 21 Feb 2013