Seeking Alpha
What is your profession? ×
Deep value, special situations, contrarian, long only
Profile| Send Message|
( followers)

Through its subsidiary Daqing Longheda Food Company Limited, China Nutrifruit (OTC:CNGL) is engaged in developing, processing, marketing and distributing a variety of food products processed primarily from premium specialty fruits grown in Northeast China, including golden berry, crab apple, blueberry and raspberry. The company’s processing facility possesses ISO9001 and HACCP series qualifications. Currently, the company has established an extensive nationwide sales and distribution network throughout 20 provinces in China.

In August the company announced its financial results for the period ended June 30, 2010 which represents the first quarter of fiscal year 2011. Net sales increased 2.9% year-over-year to $9.6 million. Gross profit increased 5.0% year-over-year to $4.1 million, with gross margin of 42.8%. Operating earnings rose 13.0% year-over-year to $2.4 million, with operating margin of 25.2%. Net income was $1.8 million, or $0.04 per diluted share.

This year they successfully completed technological upgrades to its fruit concentrate production lines at its Mudanjiang and Daqing facilities and commenced its fiscal year 2011 production season in July 2010. The company started production of its new blackcurrant and seabuckthorn concentrate juice and glazed fruits products in July 2010.

“Historically, the first fiscal quarter is the slowest as we mainly engage in selling our remaining inventory from the prior year’s production season. This explains our modest growth in net sales, gross margin and net income during the first fiscal quarter of 2011. We kicked off our new production season in late July and will add some new products to our mix this year,” commented Mr. Changjun Yu, Chairman and CEO of China Nutrifruit. “Driven by increasing market demand for our glazed and concentrated juice products, we received repeat orders from our existing distributors at higher volumes, improving our operational efficiency and enhancing our profitability.”

The company reported no revenues from the beverage segment as it discontinued beverage operation in March 2010, following its strategic decision to cease beverage production and focus on its high-margin premium products. As of June 30, 2010, China Nutrifruit had $26.7 million in cash and cash equivalents, $2.5 million in current liabilities with no long term debt and working capital of $46.2 million. Shareholders’ equity was $67.6 million as of June 30, 2010, up from $65.8 million as of March 31, 2010. Net cash used in operating activities was $5.8 million, which reflects a $13.7 million advance payment for the construction of its new fruit and vegetable powder production facility in Daqing, which began operations in September 2010. The Company recorded approximately $3.5 million as capital expenditures in relation to the recent technological upgrades of its concentrate juice production lines at its Daqing and Mu Dan Jiang facilities.

Business Outlook

Some months ago China Nutrifruit completed its installation of additional equipment and implemented advanced production techniques at its facilities in Daqing and Mu Dan Jiang. The company also made systematic upgrades to its existing equipment, replacing inefficient machinery to improve performance and productivity. As a result of the technological upgrades, the company expects to benefit from improved productivity and maximize its resource efficiency, favorably affecting gross margins.

In July 2010, the company also commenced production of its new blackcurrant and seabuckthorn concentrate juice and glazed fruit products. For fiscal year 2011, China Nutrifruit plans to engage in limited production of the newly developed concentrate juice and glazed fruit products and will ramp up production based on market feedback. The company is on track to begin trial production of its new fruit and vegetable powder products in September 2010 at its new fruit and vegetable powder production facility in Daqing, with an annual capacity of 10,000 tons. Management expects this new segment to favorably impact revenue and net income growth in fiscal year 2011.

“We started fiscal 2011 on a positive note with growth initiatives including new product introductions and technological and process improvements at our facilities in advance of our fiscal year 2011 production season,” said Mr. Yu. “We are excited about the newly developed blackcurrant and seabuckthorn concentrate juice and glazed fruit products and are optimistic about their market demand. Our production team is gearing up to commence production of our new fruit and vegetable powder products in September 2010 as per schedule. We plan to optimally leverage our well-established distribution network to market our new powder products and hope to begin selling our products overseas.”

China Nutrifruit affirms its financial guidance of $90-$95 million in revenue and $22-$23 million in net income for fiscal year 2011. This fiscal year leaves us with an EPS between $0.55-$0.60. At the current price of $3.10, the shares trade at a P/E 2011 below 6, which in my opinion is too low for a company that can achieve an average growth of 25% per year. My EPS expectations for fiscal year 2012 and 2013 are $0.70 and $0.85.

The big problem with this stock is the lack of liquidity. Why? Because it is not yet on the radar.

Disclosure: Author is long CNGL