reason why Minzhong cheong!

Maiden dividends? (CIMB)

We came away from Minzhong痴 meeting with investors at our annual Asia Pacific conference with the belief that Indofood is likely to take a board seat and management may pay a dividend.

These could ease corporate governance concerns. We make no changes to our earnings estimates. We raise out target price to a 10% premium to sector average (4.5x CY14 P/E) in anticipation of a re-rating as corporate governance concern eases. Maintain Outperform with dividends as a key re-rating catalyst.

What Happened

Minzhong痴 investor relations manager, Dave Tan, participated in CIMB痴 annual Asia Pacific conference in Kuala Lumpur on 19-20 June. The key takeawaysfrom his meeting with investors are: 1) it will be the cultivation business rather than the processed business that will drive earnings. And to capitaliseon this, it will be ramping up industrialised farming facilities. Management is targeting to open three new facilities in Tianjin, Jiangsuand Sichuan. 2) Indofoodis likely to get a board seat but thistie-up will take time to yield significant impact on earnings. Supply contracts for the processed business can be achieved within sixmonths but the potential JV to build cultivation facilities in Indonesia will take time. 3)The board is seriously considering paying dividends in FY13 but nothing is firm yet. It is possible that Minzhong will look to match Indofood痴 40% payout over time. FY13 operating cash flow is guided to be about Rmb700m-800m.

What We Think

The key re-rating catalystswill be Indofood getting a board seat and dividends. These twoevents should ease corporate governance concerns. Although free cash flow in FY13 will be low given management guidance that free cash flow will hit a below-expectation Rmb1bn,we think dividends are still possible because of Indofood痴 Rmb455m cash injection. A 10%payout would translate into a yield of 2.2%.

What You Should Do

We have an Outperform call given the strong possibility of dividends.