Fidelity's China Special Situations Fund lost 27% of its value in the 12 months to January. One reason was concerns over corporate governance. So it's hardly surprising that shares in Asian Citrus, China's largest orange (62% of sales) and fruit juice (38%) producer suffered a similar fate after it was accused on online bulletin boards and in a Chinese magazine of accounting irregularities.
Worse, these unsupported claims emerged just as one of its shareholders, Chaoda, reduced its stake from 13.4% to 5.4%. The disposal followed the board's decision not to renew its fertiliser sourcing contract with Chaoda from June 2012.
The good news is that the sell-off presents thicker-skinned investors with an outstanding buying opportunity. Last month's first-half results were in line with City estimates, and the dividend was raised by 50%. A one-off special distribution was also announced, along with a HK$250m (about £20m) share buy-back programme. Sue Munden at Seymour Pierce, the house broker, concluded that these actions reflect "a decisive show of strength", adding that "skeptics must heed the clear evidence of cash-flow generation".
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The fundamentals look compelling. The company owns three orange plantations in the southeast of China, along with two nearby juicing factories. These assets on their own should underpin double-digit growth for years to come, thanks to a rapidly expanding domestic market and rising consumption (the average Chinese citizen drinks five to ten times less fruit juice a year than a consumer in the West).
Asian Citrus (Aim: ACHL)
For the year ending June 2012, Liberum Capital (which has a price target of 99p a share) is predicting sales and under- lying earnings per share of RMB1.96bn (or about £196m) and RMB0.52 (about 5.2p) respectively, rising to RMB2bn and RMB0.57 in 2013.
I rate the stock on one times net assets (or 64p), including cash balances worth 19p a share.
So what are the risks? As an agricultural business, Asian Citrus is exposed to natural disasters hitting its plantations the cost could be substantial. The firm also carries all the geopolitical, foreign-exchange and tax risks associated with emerging markets.
Rating: SPECULATIVE BUY at 40p (market cap £490m)
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