SAC Capital has initiated “buy” on China Shenshan Orchard Holdings with a target price of 70 cents.

Calling the company “undervalued”, analyst Lam Wang Kwan says his earnings estimates only “factored in organic growth from its owned plantation over the next two years”.

Lam has also estimated an FY2022 EV/EBITDA of 2.6x to the company, which translates to an FY2022 P/E of 5.1x. The estimates factor in the company’s nascent brands, shorter operating history and trading track record.

In comparison, Seeka, which is the largest kiwifruit producer in Australia and New Zealand with a 26% market share trades at a forward PE of 12.3x and EV/EBITDA of 6.4x.

China Shenshan Orchard, which cultivates and sells kiwifruits in China, was established in 2009. It was formerly known as Dukang Distillers Holdings, until its baijiu operations were sold back to major shareholder Wang Peng in return for the kiwifruit operations.

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As at 2019, China Shenshan Orchard’s output accounts for some 0.1% of China’s total kiwifruit production of some 3 million tonnes.

In the FY2021, the company produced 3,769 tonnes at a yield of 40.3 tonnes per mature hectare.

The company currently operates nine plantations in Hubei province with a total planted area of 241 hectares.

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Of these, 40% are mature acreage of between five to 10 years. The remainder are immature plants of below 4 years.

“Volume harvested is projected to increase by 10% annually as more plants mature while average selling price is expected at [around] RMB30-35 ($6.23 - $7.26) per kg. Gross margin is expected to improve from its current 13% due to the economies of scale with growing mature acreage,” writes Lam in his report dated May 9.

“However, we expect [China Shenshan's] net margin to maintain at [an estimated] 43% as Shenshan invests in brand building and network expansion,” he adds.

As at 11.33am, shares in China Shenshan are trading flat at 38 cents, or an FY2022 P/B of 0.1x.

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