Company info: it is the 2nd largest food processing company in China, business in oilseed processing (68% of revenue), rice trading & processing (13% of revenue), wheat processing (8% of revenue), bio-fuel (7% of revenue) and brewing material (4% of revenue), a total of 5 segments.
Financial info: 1H07 revenue growth 54% (good, esp without bio-fuel, the growth are still strong), gross profit margin rise from 1H06 7.0% to 1H07 8.6% (good cost management); P/E ratio 18.5, 07 forward P/E 13 and PEG 0.37 (good compare to most China based corp); D/E ratio 118% (a little too high). Due to the government announcement to give quota on crude corn oil project in June, its stock price falls from $7.33 to $5.0 now, 32% drop from peak.
Sector: In 2005, food amount more than 35% of total living expenditure in China, as GDP & personal disposable income continue to grow, I expect consumers will seek greater choice and increase demand nutritional, convenient and hygienic quality food. Unlike food retail stores with lots of competition, food processing industry is upstream business with lack of competition & difficult to get into business; therefore, the main challenge will put on 1) raw material pricing; 2) cost management on refinery and 3) how to improve machine efficiency and capacity
Outlook: In 2H07, after the government put limitation on its crude corn oil project but it can continue to use sweet potato & tapioca to produce fuel ethanol. It discovered the way to turn corn stem to fuel ethanol, a project with less gross margin but harmless to the environment, which is good, so I expect its bio-fuel sector continue to grow. Its management also will invest additional $ to research on ways to increase gross margin in all line of business.
Risk: 1) growth heavily reply on the future government policy on bio-fuel, but this only contributes 7% of the total revenue; 2) raw material price will most likely rise next year.
Conclusion: $5.0 current price is very attractive, my target price is $6.7 and I do not hold any shares of this company.
