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The health-and-wellness trend will continue to fuel sales of health-oriented soft drinks, including fruit juices in China in the years to come. Catering to consumers' pursuit of naturally healthy products, there is one company in particular that can profit from this trend. Rising disposable incomes among Chinese consumers will lead the way for the company mentioned in this article.

I already wrote about the company before, the enterprise is called SkyPeople Fruit Juice (NASDAQ:SPU). SkyPeople is engaged in the production and sales of fruit juice concentrates, fruit beverages, and other fruit related products in China and overseas markets. Its fruit juice concentrates are sold to domestic customers and exported directly or via distributors. The company just recently announced plans that will fuel the growth at warp speed the years to come.

Investments

On April 8 SkyPeople announced that it entered into an investment agreement with the Managing Committee of Mei County National Kiwi Fruit Wholesale Trading Center. New production lines for the deep processing of kiwi products as well as the establishment of a trading zone for the marketing and distribution of kiwi goods will be developed. With this new agreement SkyPeople will expand into the kiwi fruit segment. A potentially high margin segment that is becoming increasingly attractive to consumers. The planned CapEx for this whole project will be around $71.9 million in buildings and equipment.

Last year it also announced an investment agreement with the Yidu Municipal Government (Hubei Province) for the construction and establishment of a zone for the manufacturing and comprehensive deep processing of concentrated orange juice, orange juice drinks and other orange-related products with a CapEx of approximately $60.8 million.

Total investments going forward will be around $130 million.

Financials

Growth Revenues

2007 2008 2009 2010 2011 2012 TTM
SPU 0.00 41.7 million 59.3 million 93.3 million 84.0 million 102.4 million 102.4 million
% 42.26% 57.38% -9.9% 21.83%

Earnings

2007 2008 2009 2010 2011 2012 TTM
SPU - 3.2 million 10.0 million 15.2 million 21.2 million 13.2 million 18.2 million 17.8 million
% 51.75% 39.43% -37.63% 37.55%

Source: EquiSearch

Full Year 2012 Highlights:

  • Total revenue was $102.4 million, an increase of 22% year-over-year
  • Revenue from the concentrated pear juice segment increased 116% to $28.9 million year-over-year
  • Revenue of the fruit juice beverage segment increased 29% to $27.1 million year-over-year
  • Net income attributable to SkyPeople Fruit Juice, Inc. increased 38% to $18.2 million year-over-year
  • Cash flow from operations for fiscal year 2012 was $19.4 million
  • Cash and cash equivalents were $77.6 million as of December 31, 2012

Revenues have increased from $41.7 in 2008 to $102.4 in 2012 an outstanding performance and net income in the same time period has almost doubled from $10 million to $18.2 million.

We estimate revenue growth around 25% with the growth plans in place. This ultimately would lead to revenues of almost $200 million in 2015.

Valuation details

Past Future
Years 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Revenue Growth Estimate 57.38% -9.9% 21.83% 25.0% 25.0% 25.0% 25.0% 25.0% 20.4% 15.8% 11.2% 6.6% 2.0%
Revenues 93.3 million 84.0 million 102.4 million 128.0 million 159.9 million 199.9 million 249.9 million 312.4 million 376.1 million 435.5 million 484.3 million 516.3 million 526.6 million
Operating Margins 34.63% 23.89% 26.32% 28.28% 28.28% 28.28% 28.28% 28.28% 26.62% 24.96% 23.3% 21.64% 20.0%
Operating Income 32.3 million 20.1 million 26.9 million 36.2 million 45.2 million 56.5 million 70.7 million 88.3 million 100.1 million 108.7 million 112.8 million 111.7 million 105.3 million
Taxes 27.1% 26.5% 26.4% 26.4% 26.4% 26.4% 26.4% 26.4% 29.12% 31.84% 34.56% 37.28% 40.0%
Sales Cap 0.79 0.61 0.65 1.37 1.37 1.37 1.37 1.37 1.46 1.52 1.49 1.27 0.60
Reinvestment Rate 0.0% 47.0% 22.0% 70.0% 70.0% 70.0% 70.0% 70.0% 61.46% 52.92% 44.38% 35.84% 27.32%
Reinvestments 0.00 7.3 million 5.1 million 18.6 million 23.3 million 29.1 million 36.4 million 45.5 million 43.6 million 39.2 million 32.8 million 25.1 million 17.3 million
Return on Invested Capital 26.81% 22.74% 25.24% 27.29% 27.54% 27.74% 27.9% 28.03% 25.75% 23.54% 21.25% 18.8% 16.21%
Free Cashflows 3.0 million 18.2 million 11.3 million 8.0 million 10.0 million 12.5 million 15.6 million 19.5 million 27.4 million 34.9 million 41.1 million 45.0 million 45.9 million
Cost of Capital 7.32% 7.32% 7.32% 7.32% 7.32% 7.32% 7.32% 7.32% 7.32% 7.32% 7.32% 7.32% 7.32%
Present Value Cashflows 0.0.00 0.0.00 0.0.00 7.4 million 8.7 million 10.1 million 11.7 million 13.7 million 17.8 million 21.3 million 23.4 million 23.8 million 22.5 millio

source

Financial Condition

As of December 31, 2012, the company had $77.6 million in cash and cash equivalents, up from $61.2 million as of fiscal year end 2011. The company's working capital was $102.9 million. As of December 31, 2012, the company had total liabilities of $31.8 million, which included $11.7 million in short-term bank loans. Shareholders' equity attributable to SkyPeople Fruit Juice was $156.5 million as of fiscal year end 2012 as compared to $137.9 million as of fiscal year end 2011.

(click to enlarge)

The focus on Kiwi seems to be the right choice because it is a high margin product and currently problematic in the company's revenues.

(click to enlarge)

Financial Guidance

SkyPeople has previously provided financial guidance for the fiscal year 2012. Based on the business outlook in August 2012, the company forecasted revenue to be in the range of $90 million to $110 million, net income attributable to SkyPeople Fruit Juice to be in the range of $16.2 million to $22.0 million, and fully diluted earnings per share to be in the range of $0.61 to $0.83. For fiscal year 2012, the company's actual financial results for these three income statement metrics were within the ranges forecasted.

Final note

China is the world's largest juice market by volume. China's $18.5 billion market is expected to average 5% annual value expansion over the next five years. The vast majority of this expansion is expected to come from juice drinks containing up to 24% juice, with both nectars and 100%-juice products projected to remain high-priced niche categories.

Juice will become less of a stand-alone product and more of a complement to ready-to-drink teas, sparkling waters, and even energy drinks as consumers look to transition away from full-flavor carbonated.

Investors can profit from rising incomes and health-conscious consumers in China by investing in a company such as SkyPeople Fruit Juice. The company offers an excellent opportunity for growth investors to buy value at a deep discount. SkyPeople Fruit Juice is too cheap to ignore and the risks are overblown. The current "China discount" in many U.S.-listed China stocks will gradually disappear as corporate governance improves.

SPU EV / Revenues TTM Chart

SPU EV / Revenues TTM data by YCharts

If you look to the chart above you will see the undervaluation compared to bigger peers that are also active on the Chinese juice market. The current valuation of $2.15 doesn't cope with the growth story of this company. This could be a 10-bagger stock if investors put away their fears and antipathy against U.S.-listed China stocks.

Source: SkyPeople Fruit Juice Can Touch The Sky