CAGC - an opportunity?
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Posted: Thursday Jul 12 7:54:56AM 2007
Stocklad - great find!!! May I ask how you get your leads? Are you using any screening websites? I am old fashion, I go on sedar and click on hundreds of names and read the financials.
Posted: Wednesday Jul 11 3:08:54PM 2007
Yes, the price is responding nicely. For me, I just want to see the growth continue and the price will take care of itself. This year, guidance is for about a 60% increase in both revenue and earnings and, as I stated in my analysis, not all the factories are in the financials yet.
I chatted with a friend the other day and told him that, if CAGC were a Venture Exchange stock, Iíd be willing to pay $6.00+ for it; even more if it were listed on the TSX itself. Since the proper US exchanges tend to attract higher p/e multiples, Iím salivating over the possibility of CAGC making the transition, possibly this year. Regardless, if growth continues at even half the current pace, my intention is to be here for the long term.
BTW, I really like the companyís market niche because organic produce is becoming more sought after. Firstly, Asians are generally more health conscious than North Americans, mainly due to cultural and religious influences. Secondly, as the middle class in Asia continues to expand, more people are able to afford healthier eating choices. This bodes well for the companyís future prospects and I would expect to see further expansions and exports going forward.
Iíve been wrong before, but I see this as another great Chinese growth story.
Posted: Monday Jul 9 6:44:27AM 2007
Thanks, Bobwins. There does seems to be a lot of buying this morning at $3.20 on CAGC. Also, your Chinese companies look quite interesting.
Posted: Sunday Jul 8 9:47:41AM 2007
It doesnít appear as though I generated much interest in DDD. Well, you canít win them all, I suppose. Time will tellÖ
Speaking of that, perhaps I should recap a bit before introducing a stock that many of you have already heard of. I canít recall each analysis Iíve posted here over the years but, of the ones I do remember; namely, HF, MDY, SAT and MGO, none have done worse than a triple since then.
Enough of that nonsense. Iíve been following China Agritech (CAGC) on the US OTC for quite a while now. Since you canít hold this in a Canadian RRSP, I didnít bite until after the latest quarterís earnings announcement, after which I just had to scrape together some non-registered funds to invest in this company. My original plan was to wait until the company transferred to a regular stock exchange, but my assessment was that there might be a substantial price spike on the announcement of that event. Ryan Irvine mentioned CAGC a couple of weeks ago on a radio show, I think.
While China Agritech is yet another Chinese fertilizer company, there are a few differences between it and MGO/HF:
- CAGC produces organic fertilizers, which might be a good niche to be in, given the dramatic increase in size of the middle class throughout Asia
- CAGC uses (to date) the Coca Cola model, whereby they produce a syrup at a central plant and dilute it in the regions
- CAGC trades on the OTC exchange in the US, so everything is in $US
The companyís growth profile is quite similar to the other two companies. It has plants, now complete, that arenít yet reflected in the financials and it is actively exploring international sales.
Much of the information in my analysis is noted below, which is an excerpt from my recent posting on StockHouse, but here are a few more tidbits first:
- The company has no debt, cash of $.26/share and working capital of 1.53/share
- No quarter is bad, but their best quarter has just ended (June)
- The last traded price was $3.18 and the trailing twelve month p/e is 9.8 (not adjusting for cash or working capital)
- The company just announced a private placement financing in order to introduce granular fertilizer to its product line, etc. which, at a 25% discount to the market, was very dilutive. The price responded accordingly. Oh, the joys of the OTC exchange. A slightly mitigating factor is that there were no warrants attached. (More about all of that below.) Another joy of the OTC exchange is that you really canít trust depth of market information, so youíre flying somewhat blind.
- You can request an investor kit (profile) for CAGC by visiting their IR repís website, ccgir.com
You can see from my work that I think a price somewhere in the $13-20 range is possible. I really do think this is achievable even if future growth isnít as robust as it has been over the past four plus years.
Enjoy the read!
Iím not sure where the price is headed in the short term but, in light of recent events, I have given some additional thought to CAGC and its potential. As usual with me, if Iíve made any errors, Iím happy to hear about them.
- Insiders own 60% & Pinnacle China Fund owns 8% of the stock
- Modest number of shares (19.1M) and few options (125k @ $3.50) issued
- Annual revenue growth is outstanding (from 2002 to 2006 it was 6.4M, 12.2M, 15.9M, 25.3M, & 29.5M; guidance for 2007 is 46-48M)
- Quarterly revenue growth is also excellent (Q1 2007 was 8.6M vs. 5.7M in Q1 of 2006)
- Gross margin was a healthy 52.0% in 2006 vs.49.3% in 2005; in Q1 of 2007 it was 52.4% vs. 49.6% in Q1 of 2006.
- Annual net income growth is very good (from 2002 to 2006 it was 1.7M, 2.0M, 3.8M, 3.7M, and 5.3M; guidance for 2007 is 8.4-8.6M or $.44-.45/share)
- Quarterly net income growth is also very good (Q1 2007 was 1.9M vs. 1.0M in Q1 of 2006)
- The companyís tax rate, which averages somewhere in the neighbourhood of 40%, should decline to 25% next year because of recent changes to Chinese tax law. This should boost net earnings by something in the order of 25% which, using current 2007 guidance, yields an eps of $.55-.56.
- Guidance for 2007 includes only partial operation of all plants. Including full operation should boost eps to something in excess of $.65 (an educated guess)
- The IR rep advised me that CAGC hopes to go to a regular stock exchange in the second half of 2007. Regardless of the time frame, when it does happen we can expect a much higher earnings multiple. Two other Chinese fertilizer companies with similar growth profiles, Migao (MGO,TSX) and Hanfeng (HF,TSX) trade at trailing twelve month p/eís of 22 and 52 respectively. (Ref. QIS Capital comparison charts, 20 June 2007). Assuming a p/e of 20, 2008 eps of say $.65 yields a price target of $13.00.
- Note: for those of you who think Iíve lost my mind, take a look at some other Chinese growth companies that trade on regular stock exchanges and see if you can find many with a trailing 12 month p/e of less than 20. And, I havenít allowed for any internally funded (or debt funded) 2008 growth! I do think that an 18 month price of $15-20 is achievable.
- All of the above is contingent on the company being able to successfully manage its high level of advances to suppliers and its very high level of accounts receivable from farmers. Regarding the latter, the major risk as I see it is from a wide-spread catastrophe, like a weather-related crop failure.
- A minor point, but possibly important is that CAGC is eyeing the possibility of international sales, which might be a future growth area for the company. Places like India, with its growing middle class, might be a large potential market for organic fertilizers.
SECONDLY, THE FINANCING ITSELFÖ
- At a 25% discount to the market, the financing was expensive and the large number of shares issued will be dilutive unless the company can do well with its new granular line. It will take some time (6-12 months?) before we know the full impact of these plant expansions. One would think that management has a handle on the earnings implications of the financing/expansion and that they project accretion (notwithstanding the discount), but itís a large unknown for investors. I would like to have seen them go to a recognized stock exchange before doing the private placement so as to avoid the large discount.
- One good news tidbit in the private placement news release was the reaffirming of 2007 guidance. When the CEO wagers 1.1M of his own shares that guidance will be met, that gives investors a very warm feeling.
- Another good news part of the private placement is that there were no warrants attached to it. On reflection, perhaps this shows that management, like many of us, recognize how extremely undervalued the company was and that a warrant issue might have been even more dilutive than the discount in the long run. Just to expand on this a bit, on the Venture Exchange, we often see a discount of say 10% to the market, plus the issuance of either half or full warrants at a price of say 10% above the market. In this case, the non-issuance of warrants is definitely worth something. Iím not sure if it fully makes up for the extra 15% discount to the market, but in the longer term, it just might.
- After some reflection, I think that an 18 month target of something in excess of $13.00 is still quite achievable, but the company will have to show that the financing wasnít dilutive and they will have to manage the balance sheet well.
- In the meantime, we can expect say $.14 in eps for Q2 of 2007. Perhaps that will give us something positive to dwell on while the company builds those granular lines. And, if the company decides to expand further, perhaps they might consider adding a little debt to the mix.