Core Pacific - Yamaichi

NOT RATED China Green (904 HK)

Close Target Strategic focus on branded beverages
China Green (CG) is mainly engaged in seeding, cultivation, processing, and
HK$7.25 --- distribution of fresh and processed vegetable and fruits. CG aims to expand
production capacity of its branded beverage business in the near future.
China / Agricultural products Moreover, management plans to establish supply contracts with chain restaurant
operators/hotels and to deliver quality food products and vegetables to restaurants
in nearby cities with better facility and higher efficiency. The company is trading
25 January 2011 a low valuation due to investors’ concern on corporate governance, strategic
shift in the beverage business, and lingering uncertainty in appointment of
auditors. We expect investors’ worries on branded beverage business will be a
Olive Xia, CFA major drag on short-term share price performance.
Tel: 8621 6886 6902
olive.xia@cpy.com.hk ‹ Integrated vegetable/fruit cultivator and processor. CG is mainly
engaged in seeding, cultivation, processing, and distribution of fresh/
Key stock data processed vegetable and fruits. The company is also involved in the
production and sales of branded food and beverage products in China. Sales
12-month High / Low HK$10.28/4.84 from fresh produce, processed products, and branded food and beverage
1m avg daily vol 3.93m products accounted for 22.5%, 34.6%, and 42.9% of total sales in 1H10,
Issued shares 884m respectively.
Market cap HK$6,409m
P/B FY09 (x) 2.1 ‹ Logistics and distribution business with chain restaurants. The company
ROE FY09 (x) 18.9 set up green food logistics centers in Shanghai and Xiamen. Management
Board lot 3,000 plans to establish supply contracts with chain restaurant operators/hotels
Major shareholder Sun Shao Feng
and to deliver quality food products and vegetables to restaurants in nearby
(45.94%)
Source: Bloomberg
cities with better facility and higher efficiency.
‹ Strategic focus on branded beverage development. The company
launched new grain beverage series (i.e. Cu Liang Wang) in mid-2009. As
Performance 1M 3M 12M domestic consumers become increasingly health conscious, turnover of
Absolute (%) -7.05 -11.80 -24.48
CG’s beverage products jumped 88.5% yoy to RMB350.2m in 1H10 while
Rel (HSI) (%) -11.29 -12.54 -40.03
Source: Bloomberg
gross profit of beverage products rose 87.6% yoy to RMB203.3m. Going
forward, management will continue to expand distribution team and production
capacity in beverage business. However, we are concerned about growth
HK$ shares (mn)
11 140 outlook and margin pressure on branded beverage products given fierce
10 competition and rising expenses.
120
9
‹ Low valuation due to lingering clouds. The company is trading at an
8 100 low valuation at 12.2/8.8x FY09/10F P/E due to investors’ concern on
7
corporate governance, strategic shift in beverage business, and lingering
6 80
uncertainty in appointment of auditors. We expect investors’ worries on
5 60 branded beverage business will be a major drag on short-term share price
4 performance.
3 40

2
20 Key Financials
1
Year to 30 Apr FY07 FY08 FY09 1H09 1H10
0 0 Revenue (RMBmn) 954 1,267 1,548 852 1,110
01/10
02/10
03/10
03/10
04/10
04/10
05/10
05/10
06/10
07/10
07/10
08/10
08/10
09/10
10/10
10/10
11/10
11/10
12/10
01/11
01/11

Growth (%) - 32.8 22.1 - 30.3

Net profit (RMBmn) 346 471 455 280 284
Growth (%) - 36.1 (3.4) 1.4
EPS (RMB) * 0.42 0.51 0.51 0.31 0.32
Growth (%) - 20.5 1.4 3.2
P/E (x) 14.9 12.4 12.2 - -
DPS (RMB) 0.11 0.13 0.13 0.08 0.08
Yield (%) 1.8 2.2 2.2 - -
Source: company data and Core Pacific – Yamaichi
Disclaimer: This report is for information only and is not to be construed as an offer to buy or sell securities. While the report is compiled using sources believed to be reliable, Core Pacific
– Yamaichi International (H.K.) Limited (“CPYI”) does not guarantee its accuracy or completeness. CPYI may update or change any information contained in this report without any notice.
Neither CPYI nor any of the companies of Core Pacific Group nor any individuals connected with the Group shall accept any legal responsibility arising from the use of or reliance upon the
report. The copyright of this report belongs to CPYI and no person may reproduce or publish any part of this report for any purpose without CPYI’s written consent. The authors of this report
are Licensed Representative of Securities and Futures Commission and they guarantee that all the views expressed in this report accurately reflect their personal views. CPYI, any of the companies
of Core Pacific Group, its directors and/or its employees may have positions in, and may effect transactions in securities mentioned herein which may be opposite to the position you take.

-6-
Core Pacific - Yamaichi 25 Januray 2011

Integrated vegetable/fruit cultivator and processor

Integrated vegetable/fruit cultivator and processor. China Green (CG) is mainly engaged
in seeding, cultivation, processing, and distribution of fresh/processed vegetable and fruits.
The company is also involved in the production and sales of branded food and beverage
products in China. CG’s total sales rose 22.1%/30.3% yoy in FY09/1H10 to RMB1,548m
and RMB1,110m, mainly because of robust growth in branded beverage business. Sales
from fresh produce, processed products, and branded food and beverage products accounted
for 22.5%, 34.6%, and 42.9% of total sales in 1H10, respectively.

Table 1: China Green: turnover breakdown

Year to 30 Apr (RMBmn) FY08 FY09 1H09 1H10
Total (before internal elimination) 1,547.7 1,900.9 851.8 1,075.8
Fresh produce 410.6 460.5 206.1 242.2
Processed products 628.5 749.4 353.4 372.3
Branded F&B 508.6 691.0 292.3 461.3
% of total (before internal elimination)
Fresh produce 26.5% 24.2% 24.2% 22.5%
Processed products 40.6% 39.4% 41.5% 34.6%
Branded F&B 32.9% 36.4% 34.3% 42.9%
Source: company data and Core Pacific – Yamaichi

Fresh food cultivation. As of Apr2010, CG has 43 cultivation bases with total area of
approximately 92,700 mu (85,200 mu in vegetables, 4,500 mu in fruits, and 3,000 mu in
organic rice) and total cultivation capacity of 380,000 tonnes per year. The cultivation bases
are located in Fujian, Zhejiang, Hubei, Hebei, and Jiangxi provinces. CG produces sweet
corn, radish, hairy beans, leeks, broccoli, and various vegetables and fruits for domestic and
overseas markets. Sweet corn, radish, and hairy beans are major products accounting for
38.1% of total fresh food sales. Due to encouraging domestic demand, domestic sales
represented 84.4% of CG’s fresh food sales in 1H10. The company operates farmland through
long-term lease contracts, which helps to maintain an average rental cost of RMB400-500
per mu. As a result of increasing ASP of fresh vegetables, GPM of fresh food division gained
4.9ppt yoy to 50.4% in 1H10.

Processed food maintained steady growth on overseas demand. As of Oct2010, CG

operates 12 processing plants with total capacity of 604,800 tonnes. CG’s canned, frozen,
and water-boiled sweet corn products were well-received by consumers. Export sales
accounted for 92.1% of total processed food sales in 1H10.Turnover in processed food
division maintained steady growth at 5.4% yoy in 1H10 as the company leveraged on stable
demand from Middle East, South and Central America, and Africa.

Logistics and distribution business with chain restaurants. The company set up green
food logistics centers in Shanghai and Xiamen. Management plans to establish supply contracts
with chain restaurant operators/hotels and to deliver quality food products and vegetables to
restaurants in nearby cities with better facility and higher efficiency.

Table 2: China Green: GPM and OPM

(%) FY07 FY08 FY09 1H09 1H10
GPM 52.2 53.4 51.7 51.8 51.9
OPM 37.7 40.3 35.5 41.8 37.3
Source: company data and Core Pacific – Yamaichi

-7-
Core Pacific - Yamaichi 25 Januray 2011

Strategic focus on branded beverage

Strategic focus on branded beverage products. The company launched new grain
beverage series (i.e. Cu Liang Wang) in mid-2009. As domestic consumers become
increasingly health conscious, turnover of CG’s beverage products jumped 88.5% yoy to
RMB350.2m in 1H10 while gross profit of beverage products rose 87.6% yoy to RMB203.3m.
GPM in beverage division maintained at 58.1% in 1H10.

Management aims to expand market coverage of branded beverage products to Guangdong,

Auhui, Jiangsu, and Xinjiang in addition to existing markets in Fujian, Jiangxi, Zhejiang,
Hubei, and Hebei. Total production capacity has been increased to 72,000 tonnes per year
at Oct2010 from 56,000 tonnes per year at Apr2010. Going forward, management will continue
to expand distribution team and production capacity in beverage business. CG earmarked
RMB579m in capex for new beverage factories and expansion/enhancement of existing
beverage production lines in FY11. Moreover, CG will spend RMB95-110m in advertising and
promotional expenses in FY11. However, we are concerned about growth outlook and margin
pressure on branded beverage products given fierce competition and rising expenses. As a
new entrant in the beverage market, the company may face escalating competition from
major players in the near future, in our view.

Undemanding valuation on lingering clouds. The company is trading at a low valuation

at 12.2/8.8x FY09/10F P/E due to investors’ concern on corporate governance, strategic
shift in beverage business, and lingering uncertainty in appointment of auditors. We expect
worries on branded beverage business will be a major drag on short-term share price
performance.

Table 3: Comp valuation

Stock Price Mkt cap P/E (x) P/B (x)
code (HK$) (HK$m) FY09 FY10F FY11F FY09 FY10F FY11F
China Green 904 HK 7.25 6,409 12.2 8.8 7.1 2.1 1.8 1.5
Asian Citrus 73 HK 8.86 10,750 12.9 10.1 8.0 2.0 1.9 1.6
Tianyi Fruit 756 HK 2.40 2,450 30.8 10.1 8.8 3.8 - -
Haisheng Juice 359 HK 1.06 1,336 13.2 6.4 5.6 1.5 1.2 1.0
Andre Juice 2218 HK 0.425 1,813 28.1 35.9 18.0 1.6 1.5 1.5
Source: Bloomberg and Core Pacific – Yamaichi

Investment risks
Execution risk in rebranding of beverage products. CG rebranded corn milk beverage
and integrated it into “Cu Liang Wang” brand. The new beverage brand has 12 varieties in
different flavors. Thus, CG’s corn milk products retreated from supermarkets from Aug2010.
The company replaced the shelf space with new grain beverage products, which received
satisfactory market response in 1HFY10. We believe suspension of corn milk sales in the
supermarket channel will be mildly negative for sales growth as sales in supermarkets only
accounted for 22% of total corn milk sales. According to management, CG still provides
corn milk products to traditional channels such as restaurants, air-flight catering service
providers, and county-level small-scale retail stores. Furthermore, a new sweet corn based
beverage will be launched in Mar2011. The new product will be positioned at high-end non-
milk beverage market. Nevertheless, we expect near-term negative impact due to the
uncertainty in rebranding and repositioning.

Margin pressure in branded beverage division. GPM in branded beverage division

maintained at a high level (58.1% in 1H10) due to strong consumer demand. However, we
expect pressure on margin squeze arising from heightened competition and rising marketing
expenses.

-8-
 Core Pacific - Yamaichi 25 January 2011

Profit and loss (consolidated) Balance sheet (consolidated)

Year to 30 Apr (RMBmn) FY07 FY08 FY09 1H09 1H10 As at 30 Apr (RMBmn) FY07 FY08 FY09 1H10
Revenue 954 1,267 1,548 852 1,110 PPE 475 523 896 1,246
COGS (456) (590) (748) (410) (534) Interests in leasehold land 83 152 229 222
Gross profit 498 677 800 442 576 LT prepaid rentals 94 113 857 807
Other income and gains 24 58 23 6 12 Non-current assets 652 789 1,982 2,274
Fair value gains from 15 20 19 47 48 HFT financial assets 0 139 0 0
biological assets Inventories 14 26 22 62
Distribution and selling expenses (93) (125) (152) (79) (115) Biological assets 39 43 50 91
Administrative expenses (84) (119) (142) (60) (107) Current portion of LT prepaid rentals 34 38 43 51
EBIT 360 510 549 356 414 Trade and other receivables 51 35 50 110
Finance costs (14) (27) (54) (28) (74) Bank balances and cash 1,051 2,098 1,435 2,097
PBT 346 484 495 328 340 Current assets 1,189 2,379 1,599 2,411
Income tax 0 (13) (40) (48) (56) Total assets 1,841 3,168 3,581 4,685
NPAT 346 471 455 280 284 Due to directors 1 6 2 2
Dividends 91 125 114 70 68 Trade and other payables 22 24 82 65
EPS (RMB) 0.42 0.51 0.51 0.31 0.32 Tax payable 68 55 10 19
Current liabilities 91 85 94 87
Convertible bonds 65 843 897 1,287
Deferred tax liabilities 0 0 17 60
Cash flow (consolidated) Non-current liabilities 65 843 914 1,346
Year to 30 Apr (RMBmn) FY07 FY08 FY09 1H10 Share capital 89 92 92 92
CFO 444 572 569 408 Reserves 1,597 2,148 2,481 3,160
Purchase of PPE (126) (174) (461) - Total equity 1,686 2,240 2,573 3,252
Payments of LT prepaid rentals (65) (61) (793) - Total liabilities and equity 1,841 3,168 3,581 4,685
Others 11 (118) 67 -
CFI (180) (353) (1,187) 327
Issuance of CB 0 912 0 -
Proceeds from exercise of share options 44 35 5 -
Dividends paid (84) (103) (127) -
Interest paid (5) (0) 0 -
CFF (45) 843 (122) (1,016)
FCFF 218 1,062 (740) (281)

Sources: company data and Core Pacific - Yamaichi

-9-