Why Has China Minzhong Food Corporation Limited Surged By 23% in One Month?

Although we don’t believe in focusing too much on short-term market movements, we do like to keep an eye on changes as they might be an indication that some interesting developments may be happening with a company.

With China Minzhong Food Corporation Limited (SGX: K2N) seeing its share price surge by 23% to S$1.06 over the last 30 days, are there significant changes happening within? Let’s take a look.

A new beginning or the end of it all

China Minzhong, a vegetable processor based in China, had gained notoriety back in August 2013 when its business-model was heavily criticized by a short-seller (a short-seller is someone who bets that shares would fall).

The short-attack caused a panic in the market, driving China Minzhong’s shares down by almost half to S$0.53 in just one day. But, any pain was rather short-lived as a few days later, the Indonesia-based conglomerate Indofood Sukses Makmur Tbk, which was already a substantial shareholder in China Minzhong back then, offered to take the Chinese company private at S$1.12 per share.

The privatization eventually didn’t go through, although Indofood still managed to end up with almost four-fifths of China Minzhong.

After the short-attack happened, China Minzhong started turning in uninspiring business results. As you can see in the table below, its sales and profits were growing at high double-digit rates for a number of years up to FY2013 (financial year ended 30 June 2013). Since then however, revenue and profits have declined steadily.

China Minzhong's business growth

Source: S&P Capital IQ

In China Minzhong’s latest quarterly earnings release for the quarter ended 30 September 2014, the deterioration continued as revenue had decreased by some 24% year-on-year to RMB487 million. There was a bright spark though as the company managed to bump up its profit by 19% to RMB57 million.

In any case, the weak business performance that China Minzhong had displayed after the short-attack also seemed to have weighed on its share price – after Indofood’s privatization offer ended, China Minzhong’s shares started drifting steadily lower, reaching a bottom of S$0.80 per share on 19 December 2014.

But, things changed on 31 December 2014. That day, it was announced that Indofood might be selling a 52.9% stake in China Minzhong to China Minzhong Holdings Ltd (CMHL) for S$1.20 per share. CMHL is an investment vehicle linked to Lin Guo Rong, who happens to be the chief executive of China Minzhong. If and when the Indofood deal goes through, CMHL would also have to make an offer to buy all of China Minzhong’s shares that are not part of the deal.

With the sudden announcement, China Minzhong’s shares had spiked by 20.9% to S$1.04 on 2 Jan 2015 itself. Since then, the company’s shares have hovered around that range, climbing slightly higher to their current price of S$1.06 each. Such movements make it seem that the market’s expecting CMHL to make a takeover offer for China Minzhong at a similar price level to the Indofood deal.

Foolish Summary

Banking on a takeover at a certain price would certainly not be a prudent or smart way to invest. As it is, there’s no confirmation yet on even whether the Indofood deal is going through. With China Minzhong (or any other company for the matter), any merits for investment would still have to depend on the value of the business itself.

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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 writer Stanley Lim doesn’t own shares in any companies mentioned.