China MinZhong

China MinZhong: Announced 2Q12 results which were below bullish estimates. Rev at Rmb650.8m, +19.4% yoy and +80.1% qoq, while net profit at Rmb 174.7m, +11.8% yoy and +87.5% qoq. Strong qoq performance was largely attributed to seasonal patterns. Margins took a hit, with gross margins at 36.6% vs 39.9% yoy, while operating margins also slumped at 29.6% vs 34.3% yoy.

Results was driven by better performances in both the Group’s cultivation and processed business segments, with processed business segment contributing 59.3% of total rev in 1H12 while cultivation business segment accounted for the remaining 40.7%.

The arrival of the winter season whose cool temperature is essential for the cultivation of Grp’s peak season crops, was delayed in this financial yr, resulting in the rollover of some sales from 2Q12 to 3Q12. Correspondingly, the delayed winter led to a late start in the cultivation of champignon mushrooms, the Grp’s largest product by rev.

Bottom-line however took a hit, on back of increased SG&A, Interest expenses and a loss in value of biological assets. Income tax expense however decreased by 68.3% or Rmb 20.8 m, to Rmb9.7m due to a higher proportion of the income being tax exempted. As a result, grp’s effective tax rate decreased to 5.2%

Going forward, grp remains positiveo n prospects and continues to see healthy demand for its vegetable products in both the domestic and overseas mkts. Capitalizing on the rising demand, Grp has also officially commenced operations at its New Industrial Park, with a processing capacity of approximately 3 times its existing capacity. On the cultivation end, approximately 22,000 mu of new farmland is expected to start contributions in FY2012.

At current price, valuations are undemanding, with grp trading at 6.1x FY12E P/E