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SCMP Reporter

To shrink the yawning gap between rural and urban incomes, and stimulate internal consumption, the central government has been focusing on boosting the lot of farmers.

A government proposal in January highlighted the need to upgrade agricultural infrastructure and equipment, encourage science and technology innovation and train a new generation of farmers.

To achieve these goals, the central and local governments plan to allocate about 100 billion yuan.

By substantially raising the competitiveness of the agricultural industry, these policies should help farm-related stocks such as Mengniu Dairy, First Tractor and Sinofert Holdings.

Inner Mongolia-based Mengniu is one of the mainland's leading dairy producers, making products from liquid and powdered milk to ice-cream and flavoured drinks.

As Inner Mongolia is free from pollution, many people on the mainland consider the region's dairy products as among the world's best, laying a strong foundation for the brand.

Mengniu is supported by the government and since the milk is sourced mainly from the farmers of Inner Mongolia it helps the economic development of the rural region.

Moreover, the managerial level of Mengniu is highly competent, which should ensure the company continues to grow rapidly. According to its interim report, sales of Mengniu's liquid milk products grew 62.8 per cent in the first half of last year compared with the same period in 2005, and ice-cream jumped 46.2 per cent. Mengniu's market share is 31.7 per cent, according to an AC Neilsen research report in June last year.

Mengniu has also formed a joint venture with the world's largest yogurt manufacturer, Groupe Danone, to develop a yogurt business on the mainland. I expect this will further strengthen the brand.

First Tractor is the only mainland agricultural machinery manufacturer listed in Hong Kong. It has a variety of products, including the Dongfanghong series of crawler tractors, wheeled tractors and harvesters, as well as construction vehicles such as road rollers, bulldozers and wheel loaders.

Its products are medium to large tractors, which are often government subsidised. Demand for these machines will increase as farmers' incomes rise. This will enable them to become even more productive.

For the first half last year, First Tractor had sales growth of 68 per cent, 45 per cent and 20 per cent for its tractors, harvesting machinery and ancillary agricultural tools, respectively. The rising demand was mainly because of the above-mentioned policies to raise farmers' purchasing power and encourage them to invest in better machinery.

Direct subsidies to farmers also benefit fertiliser producers and distributors, boosting the earnings growth of Sinofert. The mainland is the largest fertiliser-consuming country and demand has been growing at an average annual rate of 5 per cent since 2000.

Citibank anticipates that Sinofert's annualised gross profit growth for the next three years is 20 per cent. Although I am little worried about increased competition in the industry, Sinofert should be able to strengthen its leading position.

Paul Pong is managing director of Pegasus Fund Managers. paulpong@pegasus.com.hk



Now watch these farm stocks grow