UPDATE 1-INTERVIEW-Farm subsidies to drive China Farm's growth

(adds details, CEO's comments)

By Wee Sui Lee

SINGAPORE, April 20 (Reuters) - China Farm Equipment Ltd., which makes harvesters, ploughs and diesel engines, aims to be the leading farm equipment maker in central and southern China in five years and expects state subsidies to farmers will lift sales.

China Farm (CNFE.SI), which currently has about an 8-10 percent share of the farm equipment market in China, plans to expand its production capacity to meet the demands of one of the world's largest agricultural economies.

"Our target is that in the first five years, we want to be No.1 in central and southern China -- that's where the rice-producing areas are," Chief Executive Officer Wang Shu Ping told Reuters in an interview on Friday.

"Then, in the following five years, we hope to be No.1 in China, in terms of sales of farm equipment," Wang added.

In a bid to quell social discontent, China has pledged to lift spending on its countryside in 2007. As part of the plan, China plans to increase direct subsidies to farmers for seeds and farming equipment.

The total budget will rise by 15.7 percent in 2007, reaching 4.65 trillion yuan, China's Ministry of Finance said in March.

Wang, who grew up in China's Hunan province as a rice farmer, said he wants to improve the livelihood of the millions of farmers in China.

"I understand the farmers' sufferings well," said Wang, a graduate with a degree in electronic automation. "With the machines, you don't have to bend your back anymore. One plough machine is equivalent to the work of 40 cows and 40 people."

OVERSEAS EXPANSION

China Farm, which has a stock market value of about US$121 million, was founded in 2001 as a private firm selling diesel engines. In 2003, it branched out into the farm equipment business. Later, it acquired two ailing state-owned firms, both manufacturers of diesel engines.

Farm equipment now accounts for about 70 percent of China Farm's revenue, while diesel engines account for the rest.

Hunan-based China Farm plans to expand into Vietnam, Indonesia, Thailand, Laos and Cambodia, which Yeap said is "a sensible and natural move," as the firm does not want to be too susceptible to the seasonal nature of the Chinese farming business.

Yeap said he hopes to increase the firm's overseas sales from 5 percent of total revenue to more than 20 percent over the next two years.

Yeap expects net profit to rise 30 percent in the 2007 financial year, falling short of analysts' forecasts.

China Farm reported a net profit of 50 million yuan ($6.5 million) in FY2006, so a 30 percent increase would mean a net profit of 65 million yuan in FY2007.

Analysts from DMG & Partners Securities and Kim Eng Research had predicted that the firm would generate full-year net profit of 70 million yuan and 73 million yuan -- or a rise of 40 percent and 46 percent from the previous year -- respectively.

"I want to be more conservative," Yeap said. "To grow in that manner, I would need to keep on finding new markets. That would take time and would not be that simple.

"But organically, we can achieve that 30 percent," he added.

The firm is in talks with truck and tractor manufacturers -- all state-owned -- about possible acquisitions, Yeap said, but he declined to give details.

China Farm's shares, sold at S$0.345 apiece in the initial public offering earlier this year, nearly tripled on their first day of trading in February.

But the stock has since fallen about 22 percent to S$0.795, underperforming the key Straits Times Index .STI, which is up nearly 6 percent in the same period.

((Reporting by Wee Sui Lee, editing by Geert De Clercq; suilee.wee@reuters.com; Reuters Messaging: suilee.wee.reuters.com@reuters.net; +65 6403-5666))

($1=7.716 Yuan)

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