Who will farm the land in the future? Full mechanization of farming is the only way out.
We believe that in the transformation of China's agricultural production methods, the household contract responsibility system that has been in place for over 30 years can no longer meet the development requirements of current and future agricultural productivity. Under the combined effects of urbanization accelerating, a reduction in the rural youth population, and the transfer of agricultural labor force, the question of "who will farm the land in the future" becomes increasingly severe.
We believe that the re-centralization of land is an inevitable trend, and the reduction in the agricultural population cannot be stopped. In this situation, to ensure grain output, the only way out is large-scale development of agricultural machinery and improvement of agricultural mechanization levels. Indeed, the promotion of agricultural machinery is not a new concept; since the reform and opening-up, various places have been promoting it continuously. However, the importance of agricultural machinery products has never been as urgent and realistic as it is today. Agricultural machinery products aimed at "liberating labor power" have never shown such strong vitality and great value as they do today. The industry prosperity represented by corn harvesters truly began its high-growth starting point from 2010.
This year, agricultural machinery subsidies increased by 2 billion yuan.
On March 20th this year, the Ministry of Agriculture and the Ministry of Finance jointly issued the "Implementation Guidance Opinions on Agricultural Machinery Purchase Subsidies for 2011." The "Opinion" pointed out that the central government's fiscal agricultural machinery purchase subsidy funds are 17.5 billion yuan this year, an increase of 2 billion yuan compared to last year. According to the "Guidance Opinions," the agricultural machinery purchase subsidy policy will continue to cover all pastoral counties (fields) across the country this year.
To support spring plowing preparations, the Ministry of Finance has already advanced the first batch of agricultural machinery purchase subsidy funds for 2011, amounting to 11 billion yuan, to provincial fiscal departments.
We believe that the central government's fiscal subsidy preferential policies for agricultural machinery purchases benefit agricultural machinery production enterprises in the long term. In 2008, China's comprehensive agricultural mechanization level for farming, planting, and harvesting was 45.8%, while developed countries exceed 90%.
National fiscal investment in agricultural machinery purchase subsidies increased rapidly from 70 million yuan in 2004 to 13 billion yuan in 2009, but the equipment subsidy rate is still less than 30%, while in developed countries, the agricultural machinery purchase subsidy rate is as high as 60%. The corn harvester, XinYan Shares' main product, had a corresponding corn mechanized harvesting rate of only 16% in 2010, leaving significant room for future growth.
The company will benefit long-term from the increase in the corn mechanized harvesting rate.
XinYan Shares' main sales regions are currently Xinjiang, Inner Mongolia, and Northeast China. With the production of fundraising projects underway, we believe XinYan has sufficient capacity to meet the Northeast market and other inland markets. The company will further strengthen marketing efforts in major corn-producing areas in Northeast China and other inland regions, expanding market share. There is also an expectation of horizontal acquisitions by the company.
In 2009, the company's products began to leave Xinjiang. Under the immense market demand, the scale of products leaving Xinjiang started to grow explosively in 2010. In 2010, a total of 627 corn harvesting machines were sold, with 310 units within Xinjiang and 317 units outside Xinjiang.
The first batch of production tasks for 2011 surged to 1,200 units. On the new product front, the company’s stored product, the folding integrated land preparation machine, has received successful results certification. The tray seedling transplanting machine has completed prototype production, and in the future, the company plans to develop self-propelled non-row tomato harvesters, self-propelled economical cotton pickers, and multi-functional orchard operation machines. We expect the company to achieve approximately 90% continuous growth over the next three years.
Considering the need to ensure the benefit level of any link in the industrial chain (protecting the interests of farmers purchasing machinery as much as possible), we estimate that the company will control the volume of corn harvesting machinery around 1,500 units in 2011 (three batches of production tasks are assigned each year, with the first batch being around 390 units in 2010, and the total of the latter two batches being roughly equivalent to the first). From the sales structure perspective, the volume within Xinjiang will remain steady at about 300 units, while the volume outside Xinjiang will rapidly grow from last year's 317 units to around 1,200 units, surpassing the market's 50% sales growth expectation by far. We expect the sales volumes of corn harvesters in 2011 and 2012 to be 1,500 and 3,000 units, respectively.
Taking all factors into consideration, we estimate the company's earnings per share (EPS) for 2011 and 2012 to be 2.51 yuan and 4.50 yuan, respectively, far exceeding the market's consistent expectations of 2.0 yuan and 2.9 yuan. The current stock price corresponds to PE multiples of 40 and 22 times for 2011 and 2012, respectively. We give a buy rating, with a target price of 160 yuan.