Our attention has recently been caught by the strong technical action in China Agritech (CAGC), a U.S. public company that is rapidly expanding in China's liquid compound organic fertilizer and agricultural products market. CAGC has seen some nice gains since its introduction to NASDAQ trading on Sept 21, but a brief look at its fundamentals seems to indicate a strong growth company with a relatively cheap valuation and little public exposure. We believe the lack of analyst coverage will serve as a catalyst for CAGC going forward as it gets picked up. The company is a small-cap (~$240 mil), high beta name with almost zero institutional ownership. Risky to be sure, but a look at the balance sheet and income statement indicate a healthy and growing company.
CAGC's revenues grew at 16% in 2006, 29% in 2007, 19% in 2008, and as of Q3 appear to have grown at around 65% this year. The stock has excellent operating metrics with an EBITDA and Operating margins fluctuating between 30% and 40% over the years. It carries no long-term debt and has a Current Ratio of above 5. According to the company, its fertilizers are capable of raising crop yields in China by around 30% and their high-tech expertise is particularly valuable as Chinese regulators crack down on the quality and safety of agricultural products. Interestingly, CAGC has sought to alleviate the usual shadiness of small-cap Chinese companies by appointing a reputable CFO (former head of a CPA firm in Hong Kong) and a new set of independent Directors.
Recent appointee Gene Bennett is a former accounting professor and head of a firm that works to improve the financial transparency and accountability of U.S. firms operating in China. China Agritech's most recent financial results indicated a record 65% increase in net income, a 66% increase in revenues, and a slight decrease in costs. CAGC is pursuing an aggressive growth strategy of geographic expansion within China as well as the implementation of a new granular fertilizer that has reportedly sold 80,000 metric tonnes in 2009 (a company goal). The company expects the amount of granular fertilizer sold to expand to bout 200,000 metric tonnes in 2010. The only significant institutional backing was just recently acquired with the signing of an agreement with the Carlyle Group to acquire about 16% of the company. The P/E valuation is about 14 on the stock, a significant discount considering its growth potential. Unfortunately, there is little certainty about forward valuation because of a lack of analyst coverage, but we are willing to conservatively peg the growth rate around 22% (the 5-yr average), although that seems to be conservative given their accelerating 2009 numbers.
Considering its recent introduction to the NASDAQ, CAGC has limited price history and thus its technicals are only beginning to evolve. Nevertheless, we have noted the impressive rising volume as CAGC has moved up. Additionally, last week's sharp pullback was met with a swift break higher on good volume.
Disclosure: Author is long CAGC