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SINGAPORE : Analysts believe food processing companies are well-positioned for growth, especially those that manage costs effectively and create high value-add products.
In particular, they say China's agricultural sector offers investment opportunities on the back of rising vegetable prices in the country.
Recent floods have wreaked havoc on Chinese farmland. Extreme weather conditions in the past months have also crimped production, pushing up vegetable prices.
Analysts estimate that prices could rise further, by an average of 50 per cent from 2009, and the upward trend is likely to continue.
Terence Wong, co-head of Research, DMG & Partners, said: "If you look at the developing countries, particularly like China and India, there's a growing affluence and a bulging middle class, and these guys demand for better food and ... meat.
"And if you look at the cattle, cows, etc, they eat vegetables. So all along the food chain, even though more meat is being consumed, there's also going to be more vegetables that are being needed to feed these poultry.
"So on the demand side, I think already we're seeing a sort of an explosive growth in terms of demand for such food."
DMG believes these factors will play out positively for Singapore-listed food processors like China Minzhong and Sino Grandness.
It said China Minzhong is well-placed to benefit from higher prices as it sources raw materials from its own and contracted farms, thereby controlling input costs.
The overall trend in rising prices is also expected to translate to higher margins especially from exports.
Observers said companies which create high value-add products will also have an edge.
Liu Jinshu, investment analyst, SIAS Research, said: "In the short-term, we might see some form of margin volatility, as some companies might negotiate their contract earlier.
"So those that have already fixed their sales price in the early half of 2010, will now face the issue of rising raw material costs. The value-add of processors comes from their product quality and customer relationships, so this is how they add value in the supply chain."
The consensus target price over the next 12 months for China Minzhong is S$1.54 per share, and Sino Grandness 54 cents per share.
- CNA/al
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