China Minzhong: Indofood is a new substantial shareholder.

The reason for China Minzhong's trading halt in the last session has been published.

Indofood is paying 91.5c per share to take up a 14.95% stake in China Minzhong. Indofood is, of course, a leading food producer in Indonesia and some of us are familiar with their instant noodles in Singapore.

This surprise development is strongly positive for China Minzhong as they receive funds for further expansion of industrial farming facilities which will raise productivity and lower costs, making them more competitive. Industrial farming also means greater accountability and ease of audit which in turn should raise investor confidence.

There is also expected synergies between Indofood and China Minzhong, both established food companies in their respective countries of Indonesia and China which have huge populations which, of course, have to be fed.

However, before we send in the lion dancers and drums, Indofood is buying into China Minzhong through the purchase of new shares to be issued. So, unlike what happened in December last year when Olympus Capital Holdings sold its 10.3% stake for 80c a piece to various institutional funds and HNWIs, Indofood's buying into China Minzhong is dilutive for current shareholders.

The new shares which are being issued at a discount of about 10% from market price will water down the valuation of China Minzhong's shares by about 13%. On a per share basis, everything else remaining constant, we would see a lower EPS and a higher PER, for instance.

So, from a valuation perspective, if Mr. Market should go into protest mode on Monday and sell China Minzhong's shares at 90c a piece next week, it is actually not any cheaper than buying the shares at $1.03 this week.

If Mr. Market should go into a buying frenzy because of this development and push the share price to gap close at $1.20 per share, we should note that $1.20 is actually the old $1.38 from a valuation perspective. So, if we had a target price of $1.38 to sell, we should sell at the gap close of $1.20.

Of course, if we believe that this tie up will add fuel to the growth trajectory of China Minzhong, then, a higher PER becomes more acceptable. If Mr. Market believes this, it will be reflected in a much higher share price.

Unfortunately, there is no way to tell in which direction and by how much share price would move. We can only tell what this latest development means for the valuation of the stock.

See press release: here.

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