PhillipCapital analysts Liu Miaomiao and Paul Chew have initiated coverage on Zixin Group with a &ldquo buy&rdquo call and target price of 5 cents in their Sept 29 report.

 

For the 2HFY2024 ended March, Zixin&rsquo s revenue grew by RMB96.4 million ($17.6 million) or 92.0% y-o-y to RMB201.3 million, thanks to China&rsquo s gradual economic recovery and a better harvest in the period. 

 

For the full-year, stronger sales from both processed sweet potato products and fresh sweet potatoes drove full-year revenue up by 45% y-o-y to RMB318.4 million.

 

With the Chinese government supporting the agricultural industry to boost food security by allocating land, as well as offering rental-free periods and cold storage, Liu and Chew expect Zixin&rsquo s fresh sweet potato sales volume to double due to the introduction of cold storage and cold chains to reduce spoilage, and higher selling prices to offset supply shortfalls.

 

&ldquo With the introduction of cold storage, prices remain resilient even amid intensified competition, as the company can store sweet potatoes for longer periods to meet off-season demand. In FY2024, revenue from fresh sweet potato sales accounted for 18% of total revenue,&rdquo write the analysts.

 

In the same period,   revenue from processed sweet potatoes accounted for 82% of total revenue, with approximately 14,537 tonness sold, or 56% of the amount sold for fresh sweet potatoes.

 

The analysts write: &ldquo Production capacity for processed products will double by FY2025, with plans to expand into high-margin functional products. We expect gross margins to improve by around 2% y-o-y to 34%.&rdquo

 

The company is also expanding its revenue stream by converting agricultural waste, like stems and leaves into raw materials for animal feed. 

 

As China aims to reduce soymeal content in feed from 14.5% to 13% by 2025, soybean demand dropped by 9.1 metric tonnes in 2023, with sweet potatoes as a key substitute. Zixin, one of China&rsquo s larger producers, manufactures this feed at scale with a proprietary probiotic formula that reduces hormone use. 

 

Liu and Chew continue: &ldquo With animal feed consumption at 476 metric tonnes in 2023, we expect around RMB0.9 million in revenue from this segment in 4QFY2025 and around RMB10 million in FY2026.&rdquo

 

Meanwhile, Zixin participates in government projects in Hainan and Henan province, thus expanding its industrial network in the process.

 

&ldquo Partnering with CITIC Construction, Zixin will replicate its biotech-focused sweet potato industrial value chain in Lingao County, Hainan Province, as part of the rural revitalisation project. We expect production to more than double upon completion.&rdquo

 

Liu and Chew expect a compound annual growth rate (CAGR) for revenue growth to be 25% for the next two years, primarily driven by increased sales volumes of both fresh and processed sweet potatoes.

 

With the expected increase in sales volume in fresh potatoes, the analysts note that the average selling price may decrease by around 21% y-o-y to attract customers. Overall, they forecast a sales uplift of around 70% y-o-y in FY2025. 

 

With processed sweet potatoes however, Lim and Chew see an increase in average selling price with the introduction of higher-value products, at a projected 30% y-o-y growth in sales.

 

They conclude: &ldquo Zixin is well-positioned to capitalize on new facilities and government support to double production capacity by FY2025. We expect profit after tax and minority interests (patmi) to at least double, reaching RMB30.9 million in FY2025, driven by higher fresh sweet potato sales volume, the new manufacturing facility for higher-margin functional food, and animal feed.&rdquo

 

Risks noted include price fluctuations due to adverse weather conditions, foreign exchange (forex) influencing dividends if a policy is implemented, the losing of the Chinese government&rsquo s support should a new policy be decided and lastly, geopolitical difficulties as Zixin is focused on entering Southeast Asia.