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China Minzhong: Good results produced long black candle!

Monday, May 13, 2013

Share price of China Minzhong opened higher at $1.11 and touched $1.12 today before closing much lower at the end of the day at $1.025.

Why has Mr. Market turned bearish on China Minzhong? Did the company report dismal results? No, on the contrary, results although not stellar are pretty encouraging.

China Minzhong actually saw a 5.9% increase in net profit to RMB 255 m for 3Q FY2013. This was on the back of higher revenue which increased by 27.7% to RMB 962.2 m.

Both cultivated and processed vegetables segments did well. Driven by growing domestic demand, the former's revenue improved 36%, year on year, while, driven by export demand, the latter's revenue improved 22%. Revenue from other processed products improved some 51.5%, reflecting strong demand for China Minzhong's branded products which include beverages.

What do all these tell me? The business is growing rather nicely. Then, why is Mr. Market selling down the stock? I have no idea and it really doesn't bother me. What matters is what I am going to do and I am definitely not selling.

With lowering share price, valuation is becoming cheaper. Do I want to sell something cheap? Or would I rather buy something cheap?

Technically, however, a long black candle, an engulfing one in this case, no less, is very bearish. We could see share price declining even more as I have little doubt that this could have brought out the shortists amongst us.

It would, therefore, not surprise me if the recent low of 96.5c should be retested if the gap covers at $1.005. Immediate support is provided by the 20d MA at $1.025.

Of course, we don't want to catch a falling knife. Even if we believe that fundamentals are good, to wait and see could be a better thing to do now. What am I waiting to see?

See if price should retest 96.5c. See if volume dries up as price goes lower. See if the momentum oscillators form higher lows especially if price should form a lower low.

Cheap could get cheaper and I am sure everyone likes to buy a good stock cheaper. However, there is nothing wrong with buying cheap and buying again even cheaper later on (or is there)?

See China Minzhong's 3Q FY2013 results: here.

You might also be interested in these blog posts:
1. China Minzhong: Bought more at $1.025.
2. How to tell if a company is a potential takeover target?
3. Teach yourself fundamental and technical analysis.


JCK said...

"a 5.9% increase in net profit to RMB 255 m for 3Q FY2013. This was on the back of higher revenue which increased by 27.7% to RMB 962.2 m."

I have not read the whole report on the financials yet but does the above tell a story?

A 27.7% increase in revenue BUT only a 5.9% increase in net earnings. Whats the reason here?

AK71 said...


Well, net profit margin saw a reduction from 32.0% to 26.5%, year on year.

Higher cost of sales and finance cost are the main culprits here.

Nonetheless, numbers are expected to further improve from here as the company now begins to harvest the fruits of its earlier investments. :)

Ray said...

I believe the market is reacting to poor manufacturing results from China yesterday. Also, bears were waiting for a reason to sell...probably an over-reaction ... just have to wait and see :)

AK71 said...

Hi Ray,

As long as we know what we have to do whichever way the market goes, we will be OK. :)

seefei said...

Hindsight... A buy opportunity!

AK71 said...

Hi seefei,

See the last paragraph of this blog post. Hahaha... ;p

Hedge. :)

meesiam said...

Can I side track and ask a qns on how u would allocate ur money in war chest should there be an opportunity? All in? In what kind of stock reit for cash flow or blue chip for capital appreciation?


AK71 said...

Hi meesiam,

If I see value, I will buy. If I see very compelling value, I will buy more. That is all I can say.

I don't have any hard and fast rule as to how much of the money in my war chests will go to investments for income or for growth. :)

seefei said...

AK, just to clarify something with you. CMZ account receivable had ballooned from RMB 132.8 M to 1,099.9 M. Reason given is 3rd qtr seasonal high sales.
I did not check with earlier quarter but just like to know is this within acceptable limit. Or this has been highlighted in earlier quarter like delayed harvest due to extended winter. The aging of the receivable has 84% falling within 90 days term. What is the industry norm for aging for CMZ? Is the term given generous or an industry norm.

Thanks in advance.

AK71 said...

Hi seefei,

Trade receivables as of 31 Dec 2012 was RMB913.857m. As of 31 Mar 2013, it was RMB1,099.863m. Increased RMB186m or 20%.

With a higher volume of business, receivables increasing is reasonable. As long as payments are made within 90 days, the higher receivables are not an issue, I feel.

AK71 said...

China Minzhong Food:

Its large-scale vegetables origination and processing business in China is well poised to grow given a burgeoning population and urbanisation trend.


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