My Pick for '07 - CAGC
Market
- China has 20% of world population and 7% of global arable land.
- The use of fertilizer rose from 8.84 million tons in 1978 to 46.37 million tons in 2004.
- China is world’s largest importer of fertilizers. In 2004, China imported 12.4 million tons of fertilizer, representing 26.7% of its fertilizers requirements.
- In order to improve the efficient utilization of fertilizer, the PRC Ministry of Agriculture encourages the use of organic compound fertilizers instead of single nutrients, such as urea, or chemical fertilizers.
- Products harvested with organic fertilizers carry price premium in the market.
- Organic fertilizer market is currently estimated at 4% or $700M of the $17B fertilizer market.
Company
Largest organic liquid compound fertilizer producer in China. It has been in the business for the last 10 years and sells its products through 46 regional distributors with more than 200 sales outlets in northern and southern China. 10 largest distributors accounted for 46% of sales in 2005.
Plans
Company plans to expand its operations to western, central, and Southern china as well as to Russia and Central Asia, and plans to build 10 strategically located plants by 2008 to support expansion plans. In July '06, it signed 2 sales contracts worth $3.75M to export its product to Russia and Kyrgyz republic. Currently in negotiations with sales opportunities in Russia, Malaysia, and other Central Asian countries. The planned expansion will increase the production capacity from 5000 tons at the end of Q2 '06 to 13000, 19000, and 23000 tons by the end of '06, '07, and '08. Company projects 30% annual growth through 2010. New plants have 2 years tax holiday and next 3 years at 50% of normal tax rate. Current tax rate (on 5000 ton capacity) is 33%.
Financial
- $57.4M market cap on 19.1M shares at $3/share, $8.3M cash, no debt, $25.7M share holders equity.
- Company sold 4.8M shares at $2.5/share in January '06 to 22 investors; Ardsley Partners, Pinnacle China Fund, and Jayhawk China Fund collectively own 17.3% of o/s shares.
- Earned .26/share fully taxed in '05 on $25.3M revenues and .222/share fully taxed on $23.5M in the 1st 9 months ’06.
I expect them to earn $0.80 and $1.2 per share in '07 and '08 provided:
- Capacity expansion goes per plan
- New plants are available for production for 20% of their capacity in the quarter they are added and 100% next quarter onwards.
- 65% and 70% utilization of available capacity in '07 and '08
- Every 1000 ton in sales accounts for $7M in revenue.
- Gross Margin is maintained at 50%. (GM in the first 9 months of '06 was 51.9%)
- SG&A as percent of sales is maintained at 20% to accommodate for increased depreciation and startup costs. (SG&A in the first 9 months was 17.5%)
- Income tax is charged at 33% for the first 5000 tons and none for additional capacity.
