- DFM.ASX is a most remarkable consumer staples company
- Grows and harvests citrus and camellia fruit produce
- Have you ever seen better financials and outlook than for this company?
- Calendar 2014 earnings A$57m gave 525% return on paid-up capital
- Earnings were 33% on shareholder funds (net assets)
- Four year pre IPO CAGR EPS growth was 39%pa
- ALL WITHOUT ANY DEBT
- This is not a start up
- DFM.ASX is a market leader with just 1.1% market share in a highly fragmented industry
- DFM.ASX wants to grow much bigger - grow with it!
- Market of 1400m people can’t get enough of its products
- IPO minimum A$39m subscription met – just needs you to add to spread and liquidity
- DFM.ASX activities show the real China
- Download and fill in the application form or contact me bdawes@psec.com.au
Long term Dawes Points readers will know I first visited China in 1982 on a tourist visa when Beijing and Guangzhou were bicycle-city and almost everyone had a Chairman Mao blue suit and motor vehicles were indeed a rarity, as was a decent main road. Underemployment was rife but visits to markets in cities and villages showed me one very important thing then – everywhere I went the Chinese impressed me that individually they were capitalists at heart and loved to do business and make money. Interestingly I can recall no beggars (unlike most other Asian countries in my travels of the time) and food was abundant.
I revisited China again about ten years ago and found a very different country. Food still abundant and massive city building underway. Go there today and the building activity continues and the food picture is surprisingly different.
The 100m people moving into the cities has been accompanied by rising living standards and changes in diets. Protein demand has jumped and the importance of rice has declined. The demand for more healthy foods like fruit and nuts has also risen strongly.
So what.
However, if you believe in the Asian Century though you will want to be able to share in that transformation that is making hundreds of millions wealthier as they throw off the heavy restraining yokes of central planning and feudal systems.
We all thought sending iron ore, copper, LNG and coal to Asia were great ways to participate in the growth with familiar products and companies to invest in. The numbers are already on the board with export revenues from these products that strengthened our currency, paid lots of taxes and made us all much wealthier.
But the last few years have not been so happy as export volumes surged but against prices that were declining and this made everyone quite gloomy. Resources stocks just tanked.
Market sentiment has been that China will collapse economically and that demand for raw materials will just keep declining . Funny how that hasn’t really happened.
Iron ore imports for China rose 13.8% in 2014. Metals consumption reached consecutive record highs into 2015 and China takes almost half of all metals.
Funny too how the China steel industry was about to collapse as well. Funny how June 2015 provided the second highest monthly annualised output ever of 838.8mtpa.
Iron ore has seen a 50-60mt global stock drawdown while crude steel output has remained firm. Port stocks have fallen back to 80mt after reaching 110mt earlier in 2015 and steel mills’ stocks are well down. Some restocking is coming.
Then we look at some other simple data like Qtly annualised GDP growth and Indexed GDP. No economic collapse here.
Source: China National Statistics
And then something even simpler as average annual personal disposable income in China. At <5 RMB :A$ this is ~A$6,000pa in the cities and just ~A$2,000 in the country.
Source: Dongfang Prospectus
China is growing and its citizens are becoming wealthier.
Diets are changing. More protein. More fruit and nuts. And less cereals.
Source: Dongfang Prospectus
So demand for higher quality, unadulterated, clean healthy food is rising. So are prices - as demand can’t match supply and flows into imports.
Source: Dongfang Prospectus
You are all familiar with the 100m people moving from rural areas to the cities. Well you might like to imagine that farm food output suffered somewhat and led to rising food prices. The PRC government, eyeing their remaining 800m farmer supporters, reacted as true agrarian socialists by exempting agricultural food production from Enterprise Income Tax and personal income tax and VAT. At least until 2025.
So now you have a major market of 1400million people that just wants more and better food.
Having 800 million individual farmers means a lot of individual farms. Try about 10 million!
So lots of little inefficient farms. Fragmented industries I think is the term.
Now how to play it.
Here we come to Dongfang Modern Agricultural Company.
Could it get any better?
This company was set up in 2005 and in 2008 the current Chairman injected about US$6m to acquire an 89% holding.
This was the last capital injection to the company. No more equity and no debt at all.
The plan was to acquire as many plantations as possible and by 2012 it was 9 plantations over 4500 hectares and by end 2015 it will be 19 plantations over 9,000 hectares.
In calendar 2014 DMF earned RMB 315m ( ~A$56m) and in 2015 this should be over RMB 370m (~A$75m but over A$80m at the current exchange rate). How many Australian companies make this amount of earnings? And at a 43% margin? Without any debt?
The company acquires uncapitalised plantations from village cooperatives and manages them professionally. It then takes the products that were generally suitable only for local town markets and sells them in high volume premium markets in supermarkets and hotels for double the price.
Margins are over 40%. And no tax.
The villagers are happy. They get to sell or lease out their plantations and still get to work as harvesters.
The PRC government is very happy because plantation productivity is significantly better and output is rising. Food quality is improved. Food adulteration risks are lowered. Imports reduced.
Shareholders are very happy because the returns are strong and the risk and volatilities are low.
The returns on paid up capital of just ~US$10m are huge while the returns on shareholder funds which includes RMB 1,000m in retained earnings (~A$180m) are over 30%.
Can you find a better company track record anywhere? In any industry?
Taking the next step, DFM is the second biggest producer by revenue of citrus in China. Produces over 200,000t with just over half being tangerines (mandarins to us) - which is more than Australia’s total of mandarins.
It has about 1.1% market share in these very fragmented industries. Aims to have a much bigger share over the next few years. Wants to be the market leader.
So there. Market leader in the world’s largest and rapidly growing consumer market producing a consumer staple that is in rising demand.
High margins, PRC Govt support in almost everything it does, no debt, and 10-15 years of growth ahead.
What more do you want?
The replacement DFM prospectus can be downloaded here
Please down load the DFM Application form here, if you have already read the prospectus and just need an application form
DFM IPO presentation Final 5 July 2015
DFM term sheet (PDM) finalParadigm 7 July 2015
Now the Chinese Stock Market.
I sent out a
commentary recently on the China hysteria and suggested it was just hysteria.
Now look at this again. The Shanghai Stock Exchange Composite Index (` SSEC’) peaked in 2007. China’s GDP grew almost 100% over the period that the SSEC fell 65% into the 2013 lows before surging after mid 2014. Did a spectacular +150% in about 10 months. Has had a sharp pull back but didn’t get anywhere near the previous highs.
Keep in mind too that in my presentations to finance sector investors in China over 2013-14 I called for a strong Shanghai stock market (see Dawes Points over this period!) but was laughed at by most. People hated shares! So this first run up would not have had a big support base. Much more to come yet!
The Shanghai and Shenzhen markets are volatile but have a look at some more sedate alternatives. These ETFs might give you a better idea of listed stocks in China. Not overextended.
| Code |
Entity |
Size US$m
|
PERx
|
Yield %
|
| FXI |
FT 25 Major stocks |
8,000
|
11
|
1.6
|
| CHIX |
Global X China Financials |
108
|
9
|
0.9
|
| CHII |
Global X China Industrials |
8
|
16
|
0.6
|
| CHIX |
Global X China Consumer |
108
|
18
|
1.8
|
Source: Yahoo Finance
I can only conclude that those who gave us warning of the US Greater Depression in 2009 and the Collapse of the European Banking System (over 2009-2015) are just as accurate on the Collapse of China (2010-2015) and that over the next 12 months all those in the market places now sitting on vast hoards of cash (A$17.17bn here in Australia, >RMB 100Trillion (US$18tn) in China and so on all around the world) will be in buying all these stocks.
Stock markets have been climbing a wall of worry for years now and many investors are out.
Many funds are loaded up with ridiculously overpriced and very dangerous bonds or are sitting on mountains of cash.
Meanwhile, so many indices around the world are at or very near all time highs while the bears keep calling the next Crash.
And just think. Half the world is already sitting cautiously in these highly defensive investment positions and 10% has been (we in the Resources Sector)thumped by falling commodity prices. 40%, especially in Asia, is just having a great time. Corporations also have mountains of cash too.
And just like Sydney property sellers are finding, the supply is just not there to quickly get back into the market.
So think about China just beginning to hit its straps as hundreds of millions of increasingly wealthy consumers demand more and higher quality products. And as industry and commerce utilise all of China’s amazing new infrastructure that is assisting with the consolidation of its many internal markets. We are seeing the rise of hundreds of well positioned growing companies who are just totally unaffected by what Janet Yellen thinks.
Dongfang Modern is one that the ASX is lucky to get and I am sure there will be many more quality Chinese companies offering ASX investors an eye and a dividend link into China.
So don’t delay. Fill in that application form or contact me -
bdawes@psec.com.au
Even ask your broker to access ASX Bookbuild DFMXBB. Closing soon.
And also, I have a special note coming soon on gold so don’t get too bearish now.
Barry Dawes
2 August 2015
You can draw some very interesting conclusions here about sector rotation.
So when looking at Dongfang Modern here is what you find.
First of all I hope you expect that the Due Diligence carried out on this company is of a high standard. The Legals were overseen by Piper Alderman and the accounts were reviewed by PKF Lawyers. The accounts have been audited since 2009 by PKF Hong Kong so the data is reliable. The cash on the balance sheet is actually there!
I have made mention previously that this has to be the most impressive set of accounts I have seen in my +30 years.
This company was set up in 2005 and in 2008 the current Chairman injected about US$6m to acquire an 89% holding.
This was the last capital injection to the company. No more equity and no debt at all.
The plan was to acquire as many plantations as possible and by 2012 it was 9 plantations over 4500 hectares and by end 2015 it will be 19 plantations over 9,000 hectares.
That initial investment of US$6m in 2008 has probably provided the highest multiyear IRR ever recorded. After A$57m (A$ equivalent) earnings in 2014 DFM's June 2015 Interim showed Retained Earnings of A$216m. All done without additional equity capital and without debt.
These numbers are attractive and make interesting reading. 2015 and pre 2015 are PKF numbers and the forecasts post 2015 are Dawes Points alone.
The company is now probably the largest citrus grower/harvester in China with about 1.3% market share by revenue in a very fragmented industry. So many industries in China seem to be highly fragmented and the aggregation and consolidation process there has probably twenty years more to run. These are important business drivers and help to show another side of China.
Paradigm carried out major financial due diligence and modelling and made a site visit to several of the plantations.
Detailed forecasts were made based on all available published information and then some conservative assumptions were made.
Growing and harvesting citrus produce isn't all that far from something like coal mining.
You have a resource (trees) that should give a certain grade (harvest) with output of net fruit (grade) and at an expected recovery (yield). The selling price is the market price so revenue is saleable output time's price. Costs are roughly fixed so improved yields and productivity improvements can increase volume without fixed costs rising. Dongfang is hoping improve yields by about 4-5% pa for the next few years. So output should rise and costs rise less so.
Output will also rise as additional plantations are acquired.
Prices have been rising over the past few years too because demand has been stronger than supply and supply growth.
Dongfang's operating margin has been over 40% for the past few years and it expects to will stay high.
A study of future earnings for the next decade based on increasing tree volume through plantation acquisition, rising labour cost (which they are doing), modestly improving harvest yields and marginally higher product prices gave some quite astounding numbers.
Dongfang was #2 by sales revenue in 2014 with 1.2% market share after AIM listed Asiatic Citrus but the increased output to 230,000tpa in 2015 by Dongfang coupled with a couple of operational issues for Asiatic Citrus should now make DFM #1 with about 1.3% market share.
Market leader with 1.3% market share reinforces this fragmented industry concept.
Dongfang would like to go to 4-5% market share over the next several years so that implies organic and acquisitional growth
The numbers for Dongfang as assessed from public information by Dawes Points look like this with historic data in RMB and converted to A$ at historic rates or using the IPO Prospectus forecast of RMB 5:A$1.00.
This Valuation Matrix shows DFM's P&L and Balance Sheet in one and also gives a valuation target for DFM.
Note three years earnings history, the current year estimate and three years forecast for EBITDA on a product basis (note the very low D&A levels) and no interest cost.
Forecasts are deliberately conservative on prices, output, acquisition growth and costs but still show earnings rising steadily rather than surging.
The staff levels are low (only about 100 people) so administration expense is low and all harvesting is by contractors so EBITDA for each product is net cash. Note no tax is payable on earnings from agricultural food production and that almost all earnings have been reinvested, with capex mostly into acquisition of additional plantations.
The balance sheet is cash-rich without debt and EBITDA against estimates of sector assets gives a Return on Investment (on book value) of 30% overall and almost 100% for tangerines.
If we put each product division on 5x EBITDA, and add the cash, the appraised value for DFM is over A$500m and A$1.47/share compared to the IPO price of A$1.00.
Note that the forecasts have used 5:1 on the exchange rate, well above the current level, so A$ earnings would be higher with today's 4.62:1.
I expect over time that the market will give a much higher rating after DFM delivers on its plans.
Dongfang Modern is one of the largest China operations listed on ASX and shouldn't be the last.
If you came into the IPO, (and thanks for your help), you probably only came in in a modest contribution.
If you haven't, the hard work has been done so you should now be able to come in at lower entry risk to share the gains.
Barry Dawes
19 October 2015
I own DFM and Paradigm was the lead manager of the DFM IPO.
Edition #42 
The comparison of the Shanghai index against the FT 25 Index shows the top 25 hardly overextended at all. The pull back is classic. Off to new highs. These blue chips are doing just fine.
China Globalx Financials Index
This says bull market only just starting and still on <10xPER.
China Globalx Industrials Index
Only just starting here too.
China certainly is an immature market with high volatility but look at the Hong Kong Hang Seng.
Hong Kong Hang Seng Index
And for a bit of history and volatility just see what happened when Shanghai opened in 1991.
Clearly an immature market.
Up 1300% then down 73% before running 300% to new highs. All within 24 months.
And how are the other major markets round the region coping with China’s supposed meltdown?
Japan? Yawn. India? Cruising.
Japan’s Nikkei
India’s National Exchange Nifty Index
And China’s steel industry still hasn’t collapsed.
Steel consumption in China has been lower but exports to ASEAN and now India are rising and should exceed 100mt in 2015.
And China port iron ore inventories have been down more than 25% from the highs.
An apology here on incorrect comments about the low volumes in the iron ore futures markets. The data on the Dalian Commodity Exchange gives stupendous volumes of over 1,500 million tonnes per month which is about the same volume as annual seaborne trade. It seems everyone trades in it.
So the outlook on these simple indicators is not one of collapse but probably a bottoming and resumption of world growth.
Don’t forget that Dawes Points has highlighted the current or looming deficits in most LME metals and the continuing declines in their LME inventories.
Australian resources stocks are so cheap and the latest production data pre the formal June Qtr Reports show some cash laden gold companies on very low single digit PERs.
More on this next time but for the moment let’s just focus on China.
So coming back to Dongfang Modern Agricultural with its 200,000 tpa of citrus and camellia fruit produce generating A$175m revenue and A$75m forecast earnings and looking for another twenty years EPS growth, what is there not to like?
The IPO roadshow starts this week and include presentations through Wholesale Investors (
Dongfang Modern will be available through ASXBookbuild so if you do not have an account with Paradigm you can apply for shares through your broker.
14 July 2015
Edition #38