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Home  Story Archive 2008 CHINA FARM: What 6 analysts say after plant trip
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CHINA FARM: What 6 analysts say after plant trip |
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Written by NextInsight team
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Thursday, 31 July 2008
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 Riedel Research analyst Chew Boon Leong checks out a CFE harvester.
All photos by Pearl Peng
A BUNCH of Singapore analysts recently made a trip to Hunan, China, the province which is the largest grain producer in China with a market share of 13%.
They visited China Farm Equipment (CFE), which manufactures machinery for the agricultural sector.
An analyst even went as far as to drive one of the trucks! Talk about a hands-on experience. Here are excerpts of their reports:
DMG & Partners:
Our case for CFE lies within its expansion plans and its R&D projects which in our view will provide more room for growth in the coming years.
Seeing all of its plants at first hand and even test driving one of its most sellable 2.0 tonnage 4 by 4 diesel Juzhou trucks further establishes our BUY rating for CFE. We are convinced that CFE will be able to maintain good and steady growth in FY08 and FY09 despite rising raw material prices. By FY10 we believe that CFE will see strong earnings through its new diesel engine plant being fully utilized. Maintain BUY with a target price of S$0.88.
UOB Kayhian:
Though CFE’s margins are under pressure to some extent due to rising raw material prices, we believe its efficient operations and management, as well as product innovations, will help the company improve profitability. With the strong demand in the agricultural sector supported by the government’s policies, as well as CFE’s established brand name and distribution network, CFE is likely to benefit from the industry boom. Maintain BUY with a target price of S$0.74, representing 10.5x 2008 PE.
 Diesel engines from a CFE manufacturing line.
Lim & Tan Securities:
Based on the strong order books, capacity expansion plans and incremental contributions from the new Hunan Juzhou truck division, net profit is expected to increase 20% this year to RMB85mln, putting its forward PE at 6x. Hong Kong-listed peer First Tractor which commands a lower ROE (8% versus China Farm’s 25%), net profit growth rate (15% versus China Farm’s 20%) and net profit margin (3% versus China Farm’s 15%) is trading at 10x PE.
Even if we factor in the current weak market sentiment, given China Farm’s superior ROE, net profit growth and margin relative to First Tractor, we believe the stock should at least be valued in line with First Tractor’s 10x PE which yields an upside potential of 67% or 70 cents per share. Maintain BUY.
 Phillip Securities analyst James Koh giving the thumbs up to CFE diesel engines.
Phillip Securities:
Beneficiary of strong government support: In a sign of support for the agriculture sector, the government has announced record subsidies for 2008. The Group’s harvesters qualify for such subsidies, making them more affordable for farmers.
Capacity expansion plans to match anticipated demand: With a vision to become a leader in the agricultural machinery industry, the Group has recently forayed into the agricultural trucks business and is set to unveil its new planter machines. Expansion plans are also underway for its existing businesses to cater to the anticipated uptrend in demand.
Initiate coverage with a buy at fair value of S$0.53: Our 12-month target price implies a P/E of 8X FY08 estimated earnings and 0.5X PEG. We think the Group deserves a further re-rating if overall equity market conditions improve and when it can adequately address its key risk of rising steel prices. Steel is currently the the Group’s main cost component, representing approximately 85% of cost of goods sold. Rising steel prices, as evident in recent years, will pose a threat to the Group’s profitability.
Westcomb Securities:
Good earnings momentum, even after conservative margins forecast. CFE’s profitability in the coming quarters will very much be dependent on its ability to pass on rising cost, mainly steel which has risen 13% year-to-date, to its customers. To ease the margin pressure faced, management has:
~ Increased average selling price of its farming equipment and diesel engines by 7% &15% in 2Q08 respectively
~ Introduced new harvester model which command higher Gross Profit Margin (“GPM”), adding approximately 3% to overall GPM.
~ Internal cost cutting to improve GPM by 2~3% in 2008F and 2009F. We understand that CFE remains confident in maintaining its gross margins. To be conservative, we assumed overall GPM to dip from 26.4% in 2007 to 24.0% and 23.0% in 2008 and 2009, on inflationary pressure, leading to earnings CAGR of 17% for 2007-09F.
Initiate with BUY recommendation and target price of S$0.60. We value CFE at 9x FY08F EPS, pegged below the peer’s average PE valuation of 13.3x FY08F EPS to take into consideration CFE’s smaller marketcapitalization and risk of rising raw material cost. We believe our valuation is undemanding given CFE’s:
1) Strong return of equity of 43.8% vs average of 19%
2) Higher net profit margin of 18.0% vs average of 5.9%. At 2008F and 2009F P/E of 6.6x and 5.5x respectively, valuations appear attractive. With a potential upside of 41.2% to its current share price, we initiate coverage with BUY.
 Hundreds of combine harvesters ready for delivery to customers.
Riedel Research:
* CFE’s stock price has corrected in line with the stock market
* CFE has been raising its production capacity and its increased output has been well absorbed; Company is planning further capacity expansion and acquisition which will propel the Company’s growth.
* China’s government is promoting the growth of the agriculture sector and is encouraging farm mechanization so far as providing farmers with subsidies to buy farm equipment
* The main risks are changes in government agricultural policies and the rising cost of raw material
* CFE is trading at 2008 and 2009 blended PE of 5.9x; using the two years’ earnings and the 20% discount to the peer average PE of 9.7x, we derive fair PE value of 7.8x. We derive price target of S$0.55, upside 32%. BUY.
Recent story: CHINA FARM: Brokers maintain 'buy'; consensus price target 74 cents
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