Asian Citrus Holdings shares dropped 5% to amongst their lowest levels in the last three years after China's biggest orange grower confirmed a drop in profitability, thanks to setbacks from heavy rains to higher wages.

The group said that, in results for the July-to-December half to be released next month, its turnover was "unlikely to exceed" the figure for the same period of 2011, while its core earnings were "expected to record a decrease".

The forecast reflected a cocktail of factors, including a 6.0% drop in winter orange production blamed on the impact of a replanting programme at the group's Hepu plantation, and on "unstable weather and persistent heavy rainfall" which limited output at the Xinfeng site.

The conditions had also prompted an increase in consumption of pesticides, to tackle bugs encouraged by the damp, and fertilizers, to replace those leached by the inundations.

Furthermore, higher labour bills, "incurred as a result of the general wage inflation in China", where salaries are increasing at double-digit rates a year, had raised costs, while selling prices of pineapple juice concentrates had been depressed by a splurge of sales by Philippine and Thai rivals.

Market reaction

The group has, until its 2012-13 period, achieved a record of consistent growth, with underlying earnings in the last  financial year more than double those two years before.

The statement send Asian Citrus shares down 3.9% to 27.5p at their close in London, taking them further below their high of 88.75p reached in November 2010, despite a relatively upbeat reaction from analysts at Liberum Capital.

The broker restated a "buy" rating on the shares, saying that while the group's "operational performance has been disappointing", the growing maturity of its plantations and a return to "normal" weather "should drive production recovery and growth over the forecasting horizon".

"Asian Citrus is undervalued but we acknowledge it may remain so until newsflow improves."

'About trust in the management'

Other events which have depressed the stock include the sale by Tong Wang Chow, the Asian Citrus chairman, of 50.0m shares in the group in November, against a backdrop of concerns over accounting at Chinese companies stoked by investigations at the likes of Sino-Forest Corp.

Seymour Pierce analyst Sue Munden last week, restating a "buy" rating on Asian Citrus shares, said that the stock's "price performance has not only been about the numbers - it is more about sentiment and trust in the management.

"However, the discount to peers, of about 50% to the HK China Enterprises index, is, we believe, overdone," she added.