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Dongfang, China Dairy: cash cows worth another look
Dongfang Modern Agriculture (DFM, $2.36)
Come the next cultural revolution, when all assets are seized from the capitalist running dogs, Criterion will deny ever writing this.
But just quietly: he’s warming to the theme of exposure to on-the-ground Chinese agriculture as an alternative to our highly-priced export focused food plays.
Dongfang grows oranges, tangerines, pomelos and camellia across 8500ha in Jiangxi province’s Special Citrus Zone, which offers tax-free status.
Another advantage is that water is free and plentiful and labour is cheap, which is pertinent given the orchards are terraced and not suited to mechanised harvesting.
China’s second-biggest citrus grower — albeit with a market share of under 2 per cent — Dongfang this month opened an office in Brisbane as a beachhead to acquire local assets.
Management is especially interested in buying an olive operation, not so much for the output but for the processing know-how.
This would be applied to refining camellia oil, which is popular for stir frying in China because it has a higher burning point than olive oil.
Having listed last October and raised $39 million, Dongfang this month reported steady net earnings of $82m for calendar 2015, on revenue of $199m (up 26 per cent).
The output of 250,000 tonnes exceeded expectations, as did the quantum of the maiden dividend of 5c a share.
Dongfang has $135m of cash and no debt. “In coming years we will use the earnings to buy more plantations and more plantations mean more profits every year,’’ says CEO Charles So. We can’t argue with that, but our biggest quibble remains on the liquidity side: 26-year-old squillionaire Hongwei Cai owns 80 per cent of the company.
The land is also leased rather than owned. This sovereign risk would be ameliorated with some freehold Australian land.
FIRB willing, Dongfang has $80m to spend on worthy assets.
Broker Patersons forecasts current year earnings of $97m and values the stock at $2.08.
This implies an earnings multiple of around nine times, compared with around 25 times for local vegie grower Costa Group (CGC).
While few investors here have heard of Dongfang, the company’s $920m market valuation is just a shade under Costa Group Holdings.
Mr So acknowledges the pain felt by investors in many of the 50 or so Chinese stocks that listed on the ASX in recent years. “In the past Chinese companies didn’t perform well,’’ he says. “We want to prove to people we are the good one.’’
Criterion rates this one a buy. But if it all goes pear (or pomelo) shaped, we never said it …
China Dairy Corporation (CDC, 23c)
This one’s a similar proposition, but just substitute orchards in the south for bovines in China’s extreme northeast.
China Dairy runs 33,000 cows in Heilongjiang Province, but makes a commission on the output of 16,000 cows owned by individual farmers.
The company this week unveiled earnings of $US26.7m ($37m) on revenue of $US71m, with nary a farmgate milk price protest in sight.
Investors were treated to an interim dividend of little over half a cent.
As with Dongfang, China Dairy is also a veritable cash cow with $US35m of readies on hand.
The stock has edged up 15 per cent since listing in April. A speculative buy for those tiring of the local dairy travails.
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