Now the company is the mainland's leading green-food producer, cultivating and distributing about 150 types of fruits and vegetables from 34 production bases.

Its vegetable farms cover more than 38,000 hectares in 15 provinces and cities. Seventy percent of the produce is sold domestically through Chaoda's wholesale and retail network while the remainder is exported.

The company was selected by the Beijing Olympic Committee to provide more than half the fruit and vegetables consumed by athletes and the media during last year's Games.

In the financial year ending June 30, Chaoda's turnover jumped by 22 percent to 6.12 billion yuan (HK$6.95 billion) and gross profit rose 19 percent to 4.15 billion yuan.

Earnings before interest, taxes, depreciation and amortization gained 15 percent to 3 billion yuan.

Although China is becoming an industrialized nation, farming still plays an important role.

The country's farming sector is highly fragmented with 250 million farming households contributing the most to cultivation. Chaoda has less than 0.5 percent of the total cultivated vegetable land area.

Farming practices are also traditional, non-standardized and inefficient because there is little investment. That being so, Beijing has been substantially increasing subsidies to farmers since 2004.

In that year, China adjusted its agricultural policy, as it began to subsidize rather than tax agriculture.

Farmers received direct subsidies as agricultural tax was phased out.

In addition, subsidized seed and machinery purchases, and increased spending on rural infrastructure were introduced.

In 2008, China allocated billions of yuan for farm subsidies to support spring ploughing as part of its post- disaster reconstruction efforts following the Sichuan earthquake.

Subsidies this year rose by 17 percent from last year to 120 billion yuan.

However, the subsidies are still insignificant compared in terms of population to those given in farming- intensive nations such as Thailand.

It is expected that China will allocate more money to boost production by enhancing the skills and technology of farmers.

Chaoda has developed a business model that oversees the entire agricultural process from seed and raw materials to cultivation and then transportation of the produce to village buyers before reaching wholesale markets.

Food safety is a major concern these days. There is a great demand for high quality produce following a series of food poisoning cases in recent years.

The company says it has been using organic fertilizers and growing methods to maintain a high standard. Overuse of chemical fertilizers can damage the soil, although production increases in the short term.

With this in mind, Chaoda provides end-users including exporters with organic quality vegetables and fruits.

China has enjoyed the comparative advantages of a low-cost and abundant labor-intensive vegetable industry.

Mainland vegetable exports have grown rapidly in the last decade with a compound annual growth rate of 13 percent between 1998 and 2007. The firm's supply-chain model has been successfully applied to various plantations and provinces across the country.

Previously, Chaoda focused on Fujian province but later expanded the business to even include stockbreeding in Inner Mongolia.

Production bases are diversified and located in 15 provinces.

As every investor knows, farming relies heavily on weather conditions. Unfavorable weather can have an adverse effect on harvests.

Having production bases in several provinces minimizes potential risks from the weather or natural disasters.

Chaoda increased shareholders' value by negotiating long-term leasing of farmlands and spending money on infrastructure like irrigation systems and organizing labor for harvests.

The company has been always been trading at a low price-earnings ratio of three to four. Investors have been concerned about the company's ability to repay two debt obligations.

Chaoda repurchased a total of HK$1.35 billion of convertible bonds in April and May. The current liabilities consist of US$225 million (HK$1.75 billion) guaranteed senior notes due on February 8, 2010.

It is believed that the company has the financial capacity to repay the debts. While its financial position seems to be healthy at present, the firm has raised capital a number of times. Investors would like to know if the company needs more funds to lease quality farming lands for expanding its production base.

Another concern is that it requires months to reap from farming investments as one has to wait for the harvest after the seeds have been planted and manpower expended to nurture growth.

The relatively slow return time period would also justify the low PE.

* Timothy Kwai is an investment strategist at Quam Securities

E-mail: timothy.tkkwai@quamgroup.com