China MinZhong

China MinZhong: CIMB upgrades to Buy with $0.81 TP after plant visit. Note that Minzhong has identified five potential cities where it can build similar facilities to cater to the growing popularity of king oyster mushrooms. House believes shift in focus to industrialized farming is good both from a business and a corporate governance perspective. Firstly, the decreased reliance on labour (only 15% of COGS compared to 40% for open field farming) mitigates an expected 15% annual increase in labour cost. Secondly, industrial facilities are fenced up, making it easier for auditors to verify the assets. The invoiced nature of the transactions with distributors also makes it easier to reconcile vs cash nature of open farmland transactions. This should increase investor confidence and facilitate a shift to a big-4 auditor. Harvesting in this purpose-built facility gives it two advantages: namely bigger-sized mushrooms, which translate into higher ASP, and full-year harvesting, which allows it to reap a 70% gross margin in the off-season for open field farmers compared to 55% in-season. Minzhong is undoubtedly cheap at 2.5x CY12 P/E vs. its peers at 3.3x P/E.