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Stale Quarter for Fresh Vegetables Producer China Minzhong

Ching Minzhong Food Corporation (SGX: K2N), an integrated vegetable processing company based in China, released its third quarter results on Tuesday. Market watchers will remember that China Minzhong was embroiled in controversy over short-seller Glaucus Research Group’s acquisitions last August that the vegetable processer had been engaged in financial impropriety. More information can be found here and here.

For the quarter ended 31 March 2014, revenue had slumped 28.3% year-on-year to RMB690.3 million. Meanwhile, the company’s cost of sales had decreased at a faster rate of 30.3%, causing gross margins to increase from 33.5% in the previous year to 35.5%. The improvement in gross margins wasn’t enough for China Minzhong however, as sharp spikes in operating expenses and taxes (in particular, the latter had jumped by 228% year-on-year to RMB48.6 million) caused net profit to fall by 47.7% to RMB133.2 million.

China Minzhong’s revenue is split into three segments: Processed Business; Cultivation Business; and Branded Business. The company’s total revenue decline of 28.3% was mainly caused by a 37.6% and 29.9% drop in revenue from the Process Business and Cultivation Business segments, respectively. The Branded Business segment was a bright spot in an otherwise stale quarter for China Minzhong as sales went up 96.7% to RMB94.8 million in there. However, the segment is tiny in the grand scheme of things and couldn’t really help improve the fortunes of the company.

As of 31 March 2014, the firm had total borrowings of RMB1.45 billion, a massive increase from RMB635.6 million just nine months ago. The company had taken up long-term borrowings of RMB903.5 million within its current financial year in order to restructure its debts from short term to long term borrowings.

Interestingly, the interest rates for the company’s short-term loans that are due within a year (which make up 38% of its total loans) range from 5.6% to 8.1% per year. Meanwhile, interest rates for its long-term loans is the aggregate of applicable USD LIBOR (the US dollar denominated London Interbank Offered Rate) and 2.6% per annum. China Minzhong finished the quarter with cash and bank balances of RMB3.1 billion.

For the quarter, China Minzhong generated operating cash flow of RMB505.4 million, a big increase of 80.2% over the previous year..

Going forward, the firm sees its expansion into industrialised farming as a step in the right direction and has already kick-started the industrialised farming of champignon mushrooms in its Tianjin and Jiangsu cultivation bases in China. Furthermore, it is experimenting with the use of industrialized farming methodology for other high value crops to capitalise on the rising affluence of China.

Shares of China Minzhong closed at S$0.93 on Wednesday, translating to a historical PE ratio of 6 and a dividend yield of 1%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.