China Minzhong

China Minzhong: CIMB maintains O/p with $1.27 TP, in anticipation of a re-rating as corporate governance concern eases. House investor relations participated in CIMB’s annual Asia Pacific conference in Kuala Lumpur on 19-20 June and the key takeaways from meeting with investors are: 1) The cultivation business rather than the processed business will drive earnings. And to capitalise on this, it will be ramping up industrialised farming facilities. Management is targeting to open three new facilities in Tianjin, Jiangsu and Sichuan. 2) Indofood is likely to get a board seat but this tie-up will take time to yield significant impact on earnings. Supply contracts for the processed business can be achieved within six months but the potential JV to build cultivation facilities in Indonesia will take time. 3) The board is seriously considering paying dividends in FY13 but nothing is firm yet. It is possible that Minzhong will look to match Indofood’s 40% payout over time. FY13 operating cash flow is guided to be about Rmb700m-800m. CIMB note that the key re-rating catalysts will be Indofood getting a board seat and dividends. These two events should ease corporate governance concerns. Although free cash flow in FY13 will be low given management guidance that free cash flow will hit a below-expectation Rmb1b. A 10% payout would translate into a yield of 2.2%.