PhillipCapital analysts Liu Miaomiao and Paul Chew have maintained their &ldquo buy&rdquo call on Zixin Group Holdings 42W while upgrading the company&rsquo s target price estimate from 5 cents to 5.6 cents. The report, dated Nov 27, follows the analysts&rsquo visit to Zixin&rsquo s factory and plantations in Liancheng County, China from Nov 19 to 22.

 

In 1HFY2025 ended Sept 30, the analysts note that government investments into food security infrastructure and Zixin&rsquo s research and development (R& D) have increased the volume and shelf life of sweet potatoes by 160% and 328%, respectively.

 

As such, Liu and Chew expect a stronger performance in the 2HFY2025, driven by higher average selling prices and demand during the harvesting season in Liancheng County, which runs from late September to early January.

 

Furthermore, festive sales and increased winter sweet potato consumption are expected to further boost volume growth.

 

Liu and Chew project full-year revenue to benefit from an approximately 112% y-o-y surge in fresh sweet potato sales and an approximately 40% y-o-y increase in processed product sales during 2HFY2025.

 

Near-term catalysts

 

Liu and Chew expect near-term catalysts to arise from an increased capacity of around 20% in FY2025e, with improved margins from higher-margin processed products and increased usage of cold storage facilities.

 

The government has allocated RMB120 million ($22.3 million) to establish cold storage warehouse buildings, offering a four-year rent-free period for the warehouse operator. This technology extends the shelf life of fresh sweet potatoes, enabling higher selling prices and lower spoilage rates.

 

Additionally, Zixin has invested RMB100 million to construct a warehouse with research capabilities, aiming to expand production capacity to meet growing demand.

Liu and Chew state that the installation of equipment and machinery is complete and trial production is expected to start by the end of 2024 and will double production capacity by 2026.

 

This facility is projected to increase Zixin&rsquo s processed food production capacity by approximately 20% in 4QFY2025, and an additional 60% increase in 1HFY2026.

 

&ldquo Consequently, we anticipate a significant improvement in overall margins following operations in the new high-tech manufacturing facility,&rdquo Liu and Chew add.

 

Longer term catalyst

 

According to Liu and Chew, Zixin is broadening its revenue streams by transforming agricultural byproducts into raw materials for animal feeds.

 

Zixin is collaborating with third-party companies to enhance waste collection efforts, leveraging the county&rsquo s annual generation of 30,000 tonnes of sweet potato waste. Zixin expects this to double its collection and production capacity by the end of 2025.

 

Furthermore, Zixin has integrated its probiotic formula into its feed additive that helps eliminate residual hormones and antibiotics in livestock, improving the health and survival rate and enhancing meat quality.

 

Given a higher gross margin of approximately 50% for converting agricultural waste into animal feed additives, Liu and Chew estimate Zixin will generate around RMB1.2 million in revenue from this sector in 4QFY2025, increasing to RMB10 million in FY2026.

 

&ldquo We believe greater opportunities will emerge once Zixin expands its operations to include the collection of agricultural waste from external sources rather than relying solely on recycling its own waste,&rdquo Liu and Chew say.

 

Additionally, Zixin has invested RMB3.6 million, representing a 3% stake in an urban revitalisation project in Hainan province. This project is expected to be completed within three years.

 

Following the completion of the primary land development project, part of the arable land will be allocated for sweet potato cultivation.

 

Zixin plans to replicate its entire value chain from Liancheng County in Lingao County, Hainan. Given Hainan' s favourable climate conditions, the region can support two yearly harvests compared to a single harvest in Liancheng County.

 

&ldquo As a result, we expect harvest yields to double upon the completion of the project,&rdquo Liu and Chew note.

 

Liu and Chew add that Zixin has consistently invested in seedling R& D, supplying high-quality seedlings to farmers and offering technical support to ensure stable and consistent yields.

 

In 1HFY2025, seedling sales rose 42% y-o-y, and Liu and Chew project an additional 7% y-o-y growth in 2HFY2025.

 

In FY2026, Liu and Chew anticipate further growth in seedling sales, driven by Zixin' s planned expansion of greenhouse capacity from 100 Mu in FY2024 to 200 mu next year.

 

In addition to their higher target price, Liu and Chew have increased their FY2025 and profits after tax and minority interests (patmi) forecasts by 6% and 12%, respectively. This is driven by rising capacity in processed products and improved margins.