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weijian Wrote:(4) My guess is that the numbers used in FY11 ppt for FY10 for 'processed veg' and 'fresh produce' were stripped of the contributions from 'mushroom pores' and 'others'. In FY2010 ppt, both ('mushroom pores' and 'others') were consolidated in 'fresh produce' and 'processed veg' respectively. Hence this explains the discrepancy.

Hi weijian, thanks for the audit. I double checked the numbers myself and reached out to the company for verification, and yes, what you said is correct. They have changed the definitions of the categories because the mushroom spores command very low margins compared to their other fresh vegetables so they decided to carve it out.

Under processed food, they have also carved out the lower margin individually quick frozen ("IQF") products from other higher margin processed vegetables. They did not elaborate what these other higher margin processed vegetables were.

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IMHO, the risks involved in investing in China Minzhong's business model are numerous and pertinent.

(1a) Will they be able to continue securing new farmland to expand production? This seems pretty dependent on the wishes of the Fujian authorities.
(1b) How much will the farmland cost? Already, costs of land leases have almost doubled from RMB 6,000 per mu in 2007 to RMB 10,000 per mu in 2011. Current land use rights carried on books likely understate replacement costs.

(2) Labour costs have also risen substantially in China over the same period of time. This would likely increase the replacement costs of the factors of production. Thus, land improvement costs and operating lease payments carried on books also likely understate replacement costs. We know for example that land improvement costs have risen from RMB 8,000 per mu in 2007 to RMB 14,000 per mu in 2011 (company's estimates).

(3) The government has intervened before in the prices of vegetables to keep costs of living low for the masses. Clearly, China Minzhong is not a price setter.

(4) One would expect exported goods to command a higher margin, given the total cost of production and shipping to Europe is still 30% - 50% of the same costs that European farmers would incur to produce the same good. Yet, the company has reiterated its desire to ramp up sales to the Chinese domestic market and to achieve a 50-50 split between domestic and export markets. I sense pressure here from the Chinese government to support the local market. Again, this signals a lack of flexibility to pursue profits.

(5) The company has very very very favourable tax rates from the government. Perhaps this is in return for the company's support of the domestic market. Without the tax exemptions, effective tax rates would be 25% instead of the current 13%. How long will this last?

(6) Even in many other growth industries, companies usually pay a nominal sum of dividends. This practice is good in many ways. It shows people that the money is there. It enforces discipline in making budgets and capital projections. It reminds managers of the company's profit-making purpose.

There are companies out there who have tripled their revenues and quadrupled their profits in 8 years, through acquisitions and regular capex, and still pay dividends year in and year out. Dividends may fluctuate, but they are generally commensurate with the overall growth trend. China Minzhong has refused to pay a dividend in pursuit of growth. If there are truly concerned about long term corporate governance and being stewards of capital, shouldn't they pare back expectations (their own and all external stakeholders') and opt for a slower growth rate? If you can only double instead of tripling your production in 4 years, I'm sure investors will still be very happy.

So all in all, what does this mean for the valuation of the company? For one, current reported net profits bear depreciation costs that are significantly lower than what can be expected going forward. Whether or not prices can rise to fully compensate for that is unclear and, in my opinion, unlikely. A valuation exercise for CMZ should thus carry a larger than usual margin of safety in my opinion.


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I have wondered about the position of the Chinese government on these agricultural companies. Why would they allow full tax exemption on the sales of fresh produce? Is this the best way to keep prices low and affordable for the masses? Let's list out the ways to keep prices low:

(1) Set a price ceiling
(2) Subsidize factors of production
(3) Tax breaks

(If you have more suggestions, please do share.)

Out of these three options, (3) is probably the most palatable since the costs are not immediate, and can be more easily removed. However, it does represent a cost to the government. It is just that this cost is in the loss of future cash flows rather than a present disbursement of cash.

Taking a step back, it might also not be a bad idea to allow the privatization of such capital-intensive industries that (a) serve mainly local markets and (b) have a wide impact on society. The government can indirectly influence its operational objectives while sending the bill for expansion to foreign investors. But what is good for the Chinese government and its people may not necessarily be good for investors. A lack of dividend for example, casts doubt over when investors will see the returns on their investment.

CEO added 100,000 shares at $0.585 per share to boost his stake slightly to 6.3%.

http://info.sgx.com/webcorannc.nsf/Annou...endocument

Interestingly, Lim & Tan 3Q 12 report mentioned that the Management is confident in seasonal recovery in 4Q 2012 and expects to report 20% profit growth for FY 2012.

http://www.remisiers.org/cms_images/rese...nzhong.pdf [Report]

(Not Vested)

the way I see what China Minzhong is aiming for growth is not sustainable. just one delayed winter harvest, the balance sheet already stretched so much. Can't imagine what would happen if they continued to acquire more farmland. Any mishap will destroy its balance sheet completely.

(17-05-2012, 08:15 PM)Nick Wrote: [ -> ]CEO added 100,000 shares at $0.585 per share to boost his stake slightly to 6.3%.

$58k is only worth 1/10 of a peanut in Spore context.

No more share sales announcement from GAM. Neither from any major shareholders (Tetrad Ventures, Olympus Leaf, Templeton, Franklin etc). Wonder who is sellling the millions?

seemed like the plunge has stabled a little..

The CEO purchased may have done the trick ?

http://www.remisiers.org/cms_images/rese...nzhong.pdf - Lim & Tan wrote a short report.

CEO bought more than 100k shares...

Does anybody know what is SGX regulation on the number of days by which a substantial shareholder must update its change in equity of a listed company?

How come Prudential can afford to only update their change in equity due to a January transaction now?

My advice to all S-Chip investor better dont believe too much into all china stock books?

You're risking your hard earned savings in stock which are not like the tier 1 level (HK and Shanghai chinese stock) and many of these professional investor have seed money parked in at very cheap price. I read somewhere that there is seed money of TMSK inside CMZ at price way below IPO and even at today price.

So any IPO of S-chip here in Spore is a avoid. The business may be real on going concern but we have all seen how money are swindled and never will be recovered in the course of pursuing justice by our SGX. I question the legality of our SGX and our legal system to protect investor interest for S-chip concern?

Not only is SGX destroying our society by NOT carefully vetting Co. seeking listing here, it is destroying the faith of foreign/Local institution that have long trusted our way of governing, ie punishing Co. and its directors. Of late, did we not see local Co. like JEL that were broken recover. Not only the director recover himself from real debt situation, the Co. survived.

Do your own rational thinking. SGX and the legal apparatus cannot save any Co. from fraud, but SGX can permit RTO for market to bring life back to local SPore Co. All the S-chip that failed will see RTO but if they are injected with China business again, they will NOT survive also. Even Ocean Sky (spore Co.) RTO is questionable intention of China Co. wanting to seek Spore listing?

I m not saying that CMZ will fail but just reminding all that the road down for most of the S-chip is a spiral down that have no recovery plan, if things get very ugly.

In my history of investing in Spore, I have never seen anything like this. From Amcol (asia food & property to Unifiber (Poh Lian) the RTO could be resurrected and thrive, but not the S chip. Too many are lying in our market with suspension and unknown status. ID resign after pocketing fees for years!
who are these ID?

We had our own local institution also, many that invested in S chip that have no exit possibility and when such funds are lost, the market liquidity drop BIG TIME.

SGX is not acting in the interest of the public if it continue to seek listing of S-chip in Spore.

By writing the message i hope that we keep ourselves alive (thereby SGX alive) in the right direction by reminding all that this is a reality of the market place and we must stamp out risk by doing it right from gov level to the man in the street.

We are no match for S-chip fake IPO, it can have all the real business, power backing (perhaps of ex-chinese Communist cadre linkage - we may never know for sure??) and everything dressed up for 2-3yrs of good profit but once after listing, all these so called - frugal bosses who raised from peasant status lost ability to manage the business?? from China Aviation to Celestial food (templeton even took photo with) the business founder/pioneer suddenly overnight destroy the faith of man in the street. We do not know the people we read about behind the Co. anymore?

This is last frontline that the ppl behind the Co. that made the call for direction and are key to its success failed badly. So be mindful of what you read in China may not be the real truth. It is a cut throat market place in China. The guy could not have succeed without the backing of ????

Lastly, think again if CMZ nos. do make sense, why is its shares falling like a knife (the pattern is very clear from all S-chip), once the IPO did not make it as a institution / local favorite, the big time Ck probably have other design?? The Chin na man from China is a different breed that Oldman Lee has time and again failed to analyst, which the man in the street is now very fearful avoiding. Dont look at FACE value, think hard of motive?

Yes its like Agatha Christy!! They have Big Motive, design grandeur that is very frightening. Imagine this - all the fraud money leaving Spore to the hands of these Chinese and then re-park into our country as legal money in real estate? Isnt it wonderful? You lost all your money and they and our G?? had the best laughed at your expense!! Yes all the money that is flooding from China into Spore is your hard earned money that has now become familiar with the Stupidity of the system that you contribute to their success. Of course our legal system will not find them otherwise it will lead to paralysis of our monetary policy!! Billions lost many more billions find their way into our banking system making cheap loan and expensive land bidding possible.

So when Snr. Lee said many years ago subtly did you pay attention "Sporean better dont sell your property"? He foresaw that light years ago. He didnt engineer it - it just happens!