Chaoda cream of the crop on mainland

There may be more behind the story of mainland vegetable producer Chaoda Modern Agriculture (Holdings) if the buzz among fund managers is an indication.

Trading on the Hong Kong stock exchange at just 6.35 times this year's estimated price/earnings, the mainland organic food producer is valued well below its peers despite a compelling business model that has been heralded as 'revolutionary' by Credit Suisse.

Most of the mainland's farming land is based on a collectivist model, but Chaoda is among the first to introduce new methods improving efficiency using a combination of science and entrepreneurial ingenuity. Credit Suisse said Chaoda's twin strengths were knowledge-based farming and controlling how vegetables move from the field to the consumer shelves.

'The improvement in farming efficiency is astounding,' said a Credit Suisse report on the company last year, entitled A Rural Revolution. 'It is exactly the kind of solution package to the central government's rural initiatives. Policy support is likely to further accelerate growth.'

During the past five years, earnings have been on a long march upwards while the share price has roughly been unchanged, although it has been volatile with sharp peaks and troughs. In October 2002, the share price collapsed when its former auditor PricewaterhouseCoopers refused to endorse full-year earnings because of accounting discrepancies at two subsidiaries. Worries over the company accounts faded with assurance from chairman Kwok Ho and new audits in 2003 by Ernst & Young.

The key to its future, said fund managers, was Chaoda's fast-rising reputation as a trusted brand among mainland consumers who were becoming more discerning about what they put on their dinner tables. The World Brand Lab/World Economic Forum said Chaoda had ranked highest among all agricultural brands in its peer group. And with rising affluence in society, winning the hearts of mainland palates could prove profitable. Sales this year are estimated to reach 2.22 billion yuan, a 19 per cent increase from last year.