Not vested yet. Concerned about high steel prices..
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From DMG:-
Mechanization the key solution to food shortage
China Farm Equipment (CFE) announced that it will accelerate its capacity expansion plans to cater to growing demand. Demand for food is on the rise and mechanization is the key to production increase. We expect further CFE earnings growth in FY08, driven by the company’s plans to increase its current production capacity. We have a target price of S$0.98, up from our earlier S$0.73.
Strong government support backs expansion plans. As food prices continue to rise, the productivity of the agricultural sector in China will continue to be a primary focus of the government. On 22 April 2008, the Chinese government announced
that it will spend an additional RMB25.3b on subsidies for farm equipment and boost its agriculture expenditure to RMB587.8b. The government sees the importance of mechanization and increasing output, therefore we expect the government’s continued support to make farm equipment more affordable for farmers.
Acceleration of CFE’s production capacity will provide greater revenue. CFE announced yesterday that they expect to see an increase in its farming equipment production capacity from existing 7k units to 10k units annually by FY09. The company will also increase the production capacity for diesel engines’ from 200k units to 300k units annually by 2H08. Furthermore, CFE will also increase the production of farming trucks from 5,000 units in FY08 to 7,000 units in FY09.
Revenue and net profit to jump. Taking these key factors into consideration, we have raised our forecast for its revenue which in turn raises its net profit. Previously we expected CFE’s FY08 revenue to grow 16% to RMB459.3m, we now have
forecasted revenue to grow 18% in FY08 to RMB467.3m, and to grow about 20% in FY09 to RMB560.1m. Previously we had expected CFE’s net profit to grow 27.2% to RMB90.7m in FY08 and 15% in FY09. Our new forecast, based on the increased capacity, will see its net profit jump to RMB98.8m (38.6% increase) in FY08, and to RMB136.8m in FY09.
Risk. We see the government’s increased expenditure as a positive boost to CFE’s growth. It is clear that the Chinese government’s emphasis is on mechanization and increasing output of the entire agriculture sector. We expect demand for food to far outweigh any risk in its plans to expand its production capacity.
Overall positive outlook. CFE is in an enviable position as the shortage of food has increased food prices which in turn is currently creating the need for large scale commercial farming. To meet demand for agriculture produce, mechanization is the
solution. The government is helping farmers purchase farm equipment at an affordable price. Mechanization is the key to efficiently providing more food to feed the Chinese population and the growing demand from the world as well.
Maintain Buy. At S$0.585, it is trading at 7.1x FY08 P/E. We have a price target of S$0.98, based on 12.5x FY08P/E which is a PEG of 1x. Maintain BUY.