China Green Agriculture (AMEX:CGA) is a ''green" company with two principal product lines motivated by a complex natural, organic ingredient called humic acid, an essential constituent for fertile soil. "When plant or animal matter decomposes, it naturally turns into a form of humic acid-rich material, such as peat, lignite or weathered coal." In plain English the company, through its manufacturing process, extracts humic acid to be used as a fertilizer.
The GeoTeam was initially impressed that company utilizes its operations to create two product lines from one source, which we feel may be beneficial for branding, cross marketing and efficiency goals.
Fertilizer Products - approximately 80% of sales:
Techteam, the manufacturing division of CGA, produces the fertilizer: The ultimate end user for its fertilizer products are farmers dispersed across 27 of the 28 Chinese provinces. The company does not sell directly to the end user, but uses a network of approximately 500 distributors who place its products among private wholesalers and retailers. CGA currently has approximately 125 products in its fertilizer line and are used by roughly 20 million farmers.
● Distributors: 540 by the end of 2009.
● New Product Initiatives: An additional 21 planned for 2009.
Agricultural Products - approximately 20% of sales:
Jintai is the R&D/testing arm for the company: In the process of testing Techteam’s fertilizers, Jintai produces products for commercial sale: "We purchase the seeds of green vegetables and fruits from the agents who import and apply our fertilizers to those products."
Jintai product categories:
● Top-grade flowers distributed through their fertilizer distribution network.
● Green vegetables and fruits distributed to a variety of wholesale markets and supermarkets in Xi’an City.
● Multicolored seedlings distributed to the seedling centers and planting companies in China.
Although the company will continue to maximize opportunities in both divisions, the driver of future growth will stem from its higher margin fertilizer division.
Reasons CGA has piqued the GeoTeam's interest:
● Two products from one source equates to the maximization of the manufacturing/R&D process.
● The company extracts humic acid from weathered coal. In simple terms, weathered coal is coal that has lost properties due to environmental impacts such as exposure to sun light. Coal mining companies, who have little use for weathered coal, are eager to sell it. The result is a cheap source of raw material.
● The company utilizes an efficient manufacturing process. "Our fully-automated production line is run by a central control system and only needs the input of control technicians."
● Starting in August 2009, a new production facility will significantly increase capacity.
● As of the its second quarter financials release the company has an enviable pre-tax margin of 43%.
2) Strategic management decision:
● In touch with end user: "We utilize a multi-tiered product strategy which allows us to tailor our products to different needs and preferences of the different geographic regions across China with different climate and soil conditions which grow different crops with varied needs for fertilizers."
● Monitoring of distribution channels: "We developed approximately 80 new distributors during the fiscal year ended June 30, 2008 and terminated approximately 50 distributors based on our evaluation of their performance."
● Attempts to diversify:
o Total revenues from exported products currently account for approximately 1% of TechTeam’s sales revenue. "We anticipate that this amount can increase significantly as we have recently contracted with foreign distributors to sell our products." (10K for the year ended June 2008)
o The company is carrying out some projects to develop derivatives from humic acid.
● Improve margins: Entering new Geographical areas, with emphasis in the south regions, where the company can sell higher priced products. This will also help to reduce seasonality.
3) Favorable Industry Trends:
● The Chinese fertilizer market is forecast to grow by over 30% for the foreseeable future.
● Plenty of opportunity to solidify and create a brand and gain market share.
o 80% of China's fertilizer manufacturers are small regional firms.
o Organic compound fertilizers in China represent only 27% of total fertilizer consumption.
● Chinese government is pro green.
● China is the world's largest consumers and producer of fertilizer.
● The company recently disclosed that it will exceed its 2008 make good EPS target of $0.61, issued in conjunction with its reverse merger transaction in December of 2007.
CGA has many of the characteristics that make this a company worth following. It is operating in an industry with above-average growth rates and has a management team that is keenly aware of its target market. To help maximize shareholder value, the company recently engaged HC International, Inc. to help them tell their story to the investment community. The GeoTeam® will provide updates on CGA as information becomes available.
See also: Potential Valuation Scenarios
Sources: SEC Filings, Press Releases, Company Investor Presentation Material.
Disclosure: Long CGA