Dongfang Modern Agriculture (DFM)

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1 Raising Orange Prices to Drive Up Profitability 4 October 2017 Paul Jensz pjensz@pacpartners.com.au Key Points Recommendation Spec. Buy DFM has managed to secure another ~920 hectares of plantations (380 camellia, 544 orange) with a total consideration of ~RMB 486m (~A$94m). Improved working capital position with trade receivables decreased from RMB 460m to now RMB 22m. Cash balance of RMB$157m (~A$30m) after paying 80% acquisition price (~RMB 389m). DFM had an average ROI of 36.5% over the past 3 years, but trading at a significant discount of ~70% to peers on earnings multiples. We reiterate our Speculative Buy recommendation with a 12 month price target of $1.07/share. Risk rating is High due to political risks. Previous Recommendation Spec. Buy Risk Rating High Current Share Price $ Month Price Target $1.07/share Price Target Methodology DCF Total Return (Capital + Yield) 37.5% DCF Valuation $1.84/share Market capitalisation $306m Liquidity Daily Value $0.24m Historical Financial Performance Investment Catalysts: Raising orange prices due to supply shortage. California Navel orange production has declined to ~70m cartons this year, down from ~93m cartons since according to the latest survey measurement from the California Department of Food and Agriculture (CDFA). This is due to regulatory pressure, declining bearing acreage, weather etc. As a result, DFM s oranges have been trading favourably with an average price of RMB 5.1/kg based on our estimation, which is on ~20% premium to usual selling price. Trading at 22% discounts to Net Tangible Asset backing of $1.02/share. Based on our analysis, DFM s NTA/share is around $1.02/share, but the stock is currently trading at $0.79/share, implying an 22% discount. Growing through acquisitions. During 1H 17, DFM acquired a 380-hectare camellia plantation and a 544- hectare navel orange plantation in Xingguo County, near existing plantations. These two acquisitions are forecasted to increase gross profit by ~A$8m in % of the purchase price ~RMB389m was already paid with in Jun 2017 with balance to be paid in Y/e (A$m) 2016A 2017F 2018F 2019F Revenue EBITDA NPAT EPS (cps) DPS (c) Dividend Yield 6.0% 7.4% 7.7% 7.6% Cash Balance Cash from Ops Source: Company reports and PAC Partners estimates DFM share price performance Recommendations: We initiated our coverage with a Spec. Buy rating in March 2017 based on peer comparison. With recent acquisitions, we believe DFM is well positioned to take advantage of raising orange prices. We reiterate our Speculative Buy recommendation with a 12 month price target of $1.07/share, which is the average of FY 16 s and FY 17 s NTA/share. Risk rating is High due to low liquidity compared to peers and high political/regulatory risks. Disclaimer: Disclaimer: PAC Partners will be paid a fee by the ASX under the ASX Equity Research Scheme for this research. Please refer to full disclaimer information on page 6. Source: Capital IQ & PAC Partners The information contained in this report is provided by PAC Partners to Wholesale Investors Only. The information contained in this report is to be read in conjunction with other important disclosures at the end of this document.

2 Peer Comparison Share Price Performance The share price performance of peers over the past 6 months have been divergent, with Costa (CGC) being the best performer: 65.00% 45.00% 25.00% 5.00% % % % Jan-2017 Feb-2017 Mar-2017 May-2017 Jun-2017 Aug-2017 Sep-2017 Dongfang Modern Agriculture Holding Group Limited (ASX:DFM) - Share Pricing Select Harvests Limited (ASX:SHV) - Share Pricing Costa Group Holdings Limited (ASX:CGC) - Share Pricing Elders Limited (ASX:ELD) - Share Pricing Ridley Corporation Limited (ASX:RIC) - Share Pricing Tassal Group Limited (ASX:TGR) - Share Pricing Source: Capital IQ and PAC Partners estimates Earnings Multiples DFM has been trading at significant discount to peers as illustrated below: DFM Peers Discount (%) EV / EBITDA EV / EBIT P / E % % % Source: Capital IQ and PAC Partners estimates Discounted Cash Flow (DCF) The recently acquired plantations are expected to increase Camellia and Orange productions by ~3,400 tonnes and ~19,000 tonnes respectively, and thereby bringing in RMB 120m (~A$23m) of sales revenue. We have assumed a modest average growth rate of ~3% over the mid-to-long term. Currently, DFM only has RMB 50m of short-term borrowings from the Chairman Mr Cai with no interest payments required. We estimated the weighted average cost of capital (WACC) to be 14.3%. As a result, the PV of equity value is ~RMB 3,927 (~A$740m), which implies a share price of A$1.84/share. Conclusion We initiated our coverage in March 2017 with a speculative Buy rating simply based on peer comparison. Through interactions with the management team, we have now understood the business model better, and hence are more confident in the cash flow of the business. We believe DFM is overly under-rated by the market. We reiterate our Speculative Buy recommendation with a 12 month price target of $1.07/share, which is the average of FY 16 s and FY 17 s NTA/share. Risk rating is High due to political/regulatory risks. Page 2

3 Dongfang Modern Ag Price $ 0.78 NFPOS m Market Cap $306.1 m PROFIT & LOSS (RMB m) Revenue , , , , ,211.1 EBITDA Depreciation & Amortisation (0.5) (11.8) (36.7) (43.1) (49.3) (50.5) (51.6) EBIT Net Interest Income tax (10.2) NPAT underlying Less non-controlling Interest Abnormal items NPAT Reported BALANCE SHEET (RMB m) Cash , ,654.5 PP&E Debtors Biological assets , , , , ,662.4 Other Assets Total Assets 1, , , , , , ,583.9 Borrowings Trade Creditors Other Liabilities Total Liabilities NET ASSETS 1, , , , , , ,476.9 Common Stock Cash Flow (RMB m) Operating EBITDA Change in Working Cap (33.7) (398.8) (8.6) 4.8 (9.7) Operating Cash Flow Capex (299.6) (215.4) (343.3) (391.0) (52.0) (102.0) (52.0) Free Cashflow (FCF) (265.7) Ord Dividends (0.5) (120.8) (124.7) (123.4) (126.7) New Share Issue New Debt/(Debt Paydown) (0.6) 1.8 Net Cashflow (262.6) Segment Analysis Revenue (RMB$m) Tangerine Pomelo Camellia Orange Unit Prices (RMB$/Kg) Tangerine Pomelo Camellia Orange Production (Tonnes) Tangerine 105, , , , , , ,520 Pomelo 53,763 54,384 51,374 49,450 49,450 49,450 49,450 Camellia 24,279 23,000 30,000 33,407 33,407 33,407 33,407 Orange 17,475 20,000 19,486 38,997 38,997 38,997 38,997 Plantation Areas (Hectares) Tangerine 3,751 4,417 4,817 4,817 4,817 4,817 4,817 Pomelo 1,433 1,433 1,433 1,433 1,433 1,433 1,433 Camellia 1,394 2,247 3,047 3,426 3,426 3,426 3,426 Orange ,084 1,084 1,084 1,084 Total 7,119 8,639 9,839 10,761 10,761 10,761 10,761 Page 3

4 Dongfang Modern Ag Date: Model Updated: 4-Oct-17 4-Oct-17 KEY RATIOS EBITDA Margin (%) 43.6% 45.3% 46.5% 45.5% 46.0% 46.2% 45.9% NPAT Margin (%) 43.7% 44.1% 42.0% 41.9% 42.0% 42.0% 41.8% ROA (%) y/e 28.8% 25.0% 19.7% 19.7% 17.6% 15.4% 14.1% ROE (%) y/e 30.4% 25.3% 21.9% 20.6% 18.3% 15.9% 14.6% ROI (%) y/e 41.6% 41.2% 26.7% 26.7% 27.3% 26.3% 26.8% NTA per share (A$) Eff Tax Rate (%) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Interest Cover (x) n/a n/a n/a n/a n/a n/a n/a Net Gearing (%) -27.1% -38.7% -16.2% -23.1% -33.2% -39.6% -45.8% VALUATION PARAMETERS Adj. EPS (A$cps) PE Adj (x) Enterprise Value (A$m) EV / EBITDA (x) EV / EBIT (x) Price / NTA DPS (A$cps) Dividend Yield (%) 0.0% 5.5% 6.5% 7.4% 7.7% 7.6% 7.8% Free Cash / Share (c) Price / FCF PS (x) VALUATION & SENSITIVITY PV of Cashflows 2017 to Risk Free Rate 3.0% PV of Term Year Cashflow 237 Equity Risk Premium 8.0% Net Debt -17 Equity Beta 1.50 PV of Equity 758 Cost of Equity 15.0% Cost of Debt 0.0% Terminal Growth 3.0% After Tax WACC 14.3% DCF Valution $ Month Price Target $ 1.07 Term. WACC Term. Growth 15.3% 14.3% 13.3% 12.3% 2.0% $1.66 $1.79 $1.96 $ % $1.68 $1.82 $1.99 $ % $1.70 $1.84 $2.02 $ % $1.72 $1.87 $2.06 $ % $1.74 $1.90 $2.10 $2.34 Board Members MAJOR SHAREHOLDERS % Hongwei Cai Chairman Cai Hongwei 56.2% Chiu (Charles) So CEO lan Mu Ltd 16.2% Ming Sing Barton Tso Executive Director Hammer Capital 4.1% Dan Lin Non-exec Director Prosper Rich Investment 2.5% Michael Wai-Man Choi Non-exec Director Merrill Lynch 2.4% Top % GROWTH PROFILE (YoY) Sales Revenue 24% 26% 10% 13% 3% -1% 3% EBIT 23% 27% 7% 10% 3% -1% 3% NPAT 24% 27% 5% 12% 3% -1% 3% EPS 46% -13% 12% 3% -1% 3% DPS 0% 17% 15% 3% -1% 3% Page 4

5 Contact Information CORPORATE FINANCE RESEARCH DEALING CRAIG STRANGER Managing Director PAUL JENSZ Director, Senior Industrial BRENDAN FOGARTY Corporate Sales Melbourne SEAN KENNEDY Corporate Finance ANDREW SHEARER Senior PHIL CAWOOD Institutional Sales Sydney ANTHONY STANI Corporate Finance ALEX SMITH SEBASTIAN JURD Senior advisor Sydney BROOKE PICKEN Equity Capital Markets LAWRENCE GRECH RYAN GALE Advisor Melbourne ROGER CHEN TOM FAIRCHILD Corporate Sales Melbourne IAN LEETE Corporate Sales Sydney MELBOURNE (Head Office) Level 10, 330 Collins Street, Melbourne VIC SYDNEY Level 9, 56 Pitt Street, Sydney NSW DANIEL GADALLA Desk Assistance Melbourne dgadalla@pacpartners.com.au SOL JONES Desk Assistant Sydney sjones@pacpartners.com.au Recommendation Criteria Investment View PAC Partners Investment View is based on an absolute 1-year total return equal to capital appreciation plus yield. A Speculative recommendation is when a company has limited experience from which to derive a fundamental investment view. Buy Hold Sel >20% 20% 5% <5% Risk Rating PAC Partners has a four tier Risk Rating System consisting of: Very High, High, Medium and Low. The Risk Rating is a subjective rating based on: Management Track Record, Forecasting Risk, Industry Risk and Financial Risk including cash flow analysis. Disclosure of Economic Interests The views expressed in this research report accurately reflect the personal views of Paul Jensz about the subject issuer and its securities. No part of the analyst's compensation was, is or will be directly or indirectly related to any recommendation or view expressed in this report. 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