Dongfang Modern Agriculture Holding Group was incorporated in Australia last year to own an existing agricultural business in China's Jiangxi Province. Growing and selling all its fruit in Southeastern China, it now ranks as the biggest citrus grower in that country by sales and has almost overtaken the Victoria-based Costa Group as the largest publicly traded horticulture company on the ASX.

Its decision to be based in Sydney and go public in Australia, which ranks among the world's top five exporters of beef, chick peas, almonds, barley, sugar and wheat, is part of a growing move by Chinese and Hong Kong entities seeking to tap a more mature financial market. The other advantage, Dongfang Modern's executives say, is adding an Australian seal to the business.

Food safety cloud

"It should give Chinese consumers a higher level of confidence in our products," said Chairman Hongwei Cai, 29, who owns 80 per cent of the company. "China still faces food safety problems."

Such concerns have fuelled imports of food and cosmetics made by companies including baby formula producer Bellamy's and vitamins maker Blackmores, turning them into proxies for betting on the rising middle class in China. Dongfang Modern plans to use Australian processes to grow more tangerines, oranges, pomelos and camellias. It's also considering buying local businesses.

"Perception is everything," said Jason Chesters, a Perth-based analyst with Patersons Securities. "I don't know if that stamp of approval will be there just yet" because the operating unit has been in business since the last decade, he said.

Chesters, who said he visited Dongfang Modern's orchards in late April, published his first report on the company on May 16 with a hold rating.

China hasn't levied an income tax on some agricultural businesses since 2008 in an attempt to increase production and yields. Dongfang Modern derives about 40 per cent of its annual profits from government incentives, Chief Financial Officer Edward Yuen said.

"It's close to impossible" that the policy will be changed, Cai said. China will end up importing food if farmers aren't given tax handouts, he said.

Staking out olive oil

The laws have helped Dongfang Modern stay debt free even as it bought plantations, increasing its cultivation area by 15 per cent since 2013 to about 8600 hectares. Production rose 19 per cent to 240,000 metric tons for the year ended March 31, leading to sales of $199 million. Profit, excluding some items, rose 30 per cent to $90 million.

Those results placed Dongfang Modern ahead of Asian Citrus Holdings, which recorded 2015 sales of 765.5 million yuan ($162 million). Demand for fruit will continue to increase as rising disposable incomes in China make consumers more health conscious, Chief Executive Officer Chiu "Charles" So said. That's why even more plantation purchases are on the cards, he said.

In Australia, Dongfang Modern wants to buy a local olive-oil producer, So said. It plans to use the intellectual property acquired to process camellia oil, a popular cooking oil in China.

A camellia oil business wouldn't be eligible for tax incentives in China, Patersons' Chesters said. The company would also have to raise money for any Australian purchases by selling more shares, he predicts.

Institutional shareholders

That may attract institutional shareholders to a stock that's not very liquid because of Cai's large stake. Local financial institutions typically are circumspect of investing in companies that have all their operations in China and are controlled by a large, single holder, Chesters said.

"The issue is there's no research out there," said Barry Dawes, whose Paradigm Securities led Dongfang Modern's IPO.

Chesters projected the shares will drop to $2.08 in a year. They closed at $2.29 on Wednesday. Investment risks include the company expanding into new businesses and regions as well as "fluid" tax legislation in China that could change rules governing income taxes and dividends paid by the operating unit in China, Chesters said.

IPO moratorium

This year, six Chinese and Hong Kong companies, including China Dairy, have followed Dongfang's path to Australia as of April 8, according to ASX data, driven partly by a moratorium on IPOs in China last year.

"I'm seeing a range of them," Paradigm's Dawes said. He said he's working with Living Cities Development Group, which is listed on the ASX and is planning to build a mall in Sichuan province.

"It's still difficult to list in Shanghai, in Shenzhen," Sydney-based Dawes said. "Here there's greater transparency."

Bloomberg