Excerpts from SAC Capital initiation report
Analyst: Lam Wang Kwan
|An Undervalued Chinese Kiwifruit Producer
Established in 2009, Shenshan cultivates and sells kiwifruits in China. Its output accounts for 0.1% of China’s total kiwifruit production of ~3m tonnes in 2019.
Shenshan (previously Dukang Distillers Holdings Ltd) was listed in July 2021, when baijiu operations were sold back to major shareholder Wang Peng, in return for the kiwifruit operations at a valuation of RMB1.1bn.
No cash or shares were issued. A new management team came on board.
About 40% of planted areas are mature acreage. Shenshan operates 9 plantations in Chibi City, Hubei Province, the PRC, with total planted area of 241 hectares.
Of these, about 40% are mature acreage (between 5 to 10 years). The remainder are immature plants of below 4 years.
Harvesting of kiwifruits begins after 4 years of cultivation, and harvest takes place every Sep/Oct.
It produced 3,769 tonnes in FY21, at a yield of 40.3 tonnes/mature hectare. The products are sold in China via wholesalers, distributors and ecommerce retailers.
About 34.6% of total 696 hectares have been planted. The land use rights expire in 2058 and 2059.
This includes a 42-hectare plot of land which it does not yet have valid rights of use, which accounts for ~6% of total acreage and 11-13% of production volume.
Shenshan also holds the rights to 65,000 sqm of industrial land which houses the office and packing facilities.
To raise production output, Shenshan jointly develops farmland with land owners, or engages farmers to provide contract farming.
For instance, it has a non-binding 30-year MOU with Chibi Green Industry Development Investment Co., Ltd to develop a 333-hectare land.
Chibi Green will provide RMB150m investment while Shenshan will develop and operate the plantation.
|Initiate BUY with TP of S$0.70. Our earnings estimates only factored in organic growth from its owned plantation over the next two years.
Gross margin is expected to improve from its current ~13% due to the economies of scale with growing mature acreage.
However, we expect net margin to maintain at ~43% as Shenshan invests in brand building and network expansion.
Seeka Ltd, the largest kiwifruit producer in Australia and New Zealand with a 26% market share trades at forward PE of 12.3x and EV/EBITDA of 6.4x.
Taking into account Shenshan’s nascent brands, shorter operating history and trading track record, we accord a FY22E EV/EBITDA of 2.6x to arrive at our TP of S$0.70. This translates to FY22E P/E of 5.1x.
Full report here