Seeking Alpha
Profile| Send Message|
( followers)  

Le Gaga Holdings, Limited (NASDAQ:GAGA) is one of the largest greenhouse vegetable producers and one of the fastest growing major vegetable producers in China. Gaga grows vegetables in open fields and greenhouses, and focuses on applying advanced agricultural techniques to grow safe and consistently high-quality vegetables. Over 100 varieties of vegetables are sold to wholesalers, institutional customers and supermarket chains in China and Hong Kong. Their customers include Wal-Mart (NYSE:WMT), the largest grocery retailer in the world, and the top three Hong Kong supermarket chains, Wellcome, ParknShop and Vanguard.

As one Chinese proverb suggests, “Hunger breeds discontent.” Agriculture has always been a very important industry in China and contributed 18.1% of China’s GDP in 2009. The largest component of the agricultural industry is farming, contributing 47.7% of the sector’s output, according to Frost & Sullivan. The farming industry in China includes the farming of vegetables, grain, fruit, tea, cotton and other crops.

China is the largest global producer of vegetables by volume. In 2009, China’s vegetable production reached RMB 875.8 billion, and this amount is expected to increase to RMB 1,286.5 billion in 2014. China’s large vegetable production output is due to the availability of arable lands. Vegetables are indispensable ingredients in Chinese cuisine, and China has a consistently high vegetable consumption. The idea of a vegetarian diet is stressed by China’s traditional religions, such as Taoism and Buddhism, and welcomed by the Chinese people.

Over the past four years, vegetable prices have steadily risen in China and the trends are expected to continue. For example, the wholesale price of cabbage is 10 times more expensive now than it was in 2009. Since October, 2010, the price of cabbage has gone up nearly 40% within only ten days in Shouguang, Shangdong Province, China’s largest vegetable distributor. Very recently, the KimChi Crisis in South Korea became the catalyst to boost the price of cabbage in China.

“In order to obtain a good profit, the key is to develop planting plans," said Mr. Ma Chengrong, CEO of GAGA, during an interview with financial media: GAGA has developed an effective and comprehensive database to store sales, seed, and vegetable production information in target markets and accumulated valuable proprietary knowledge through years of research and development. A strong brand has been built on the superior quality and safety of GAGA’s produce and the reliability of their supply.

The table below shows the operation data for GAGA between 2008 and 2010.

2008

2009

2010

Unit

Total arable land area

17103

16525

18850

Mu

Greenhouse Land Area/Total Arable Land area

15.60%

18.90%

23.40%

Total production output

57085

69240

98076

Tonnes

Production Yield

3.6

3.9

5.4

Tonnes/Mu

Revenue Per Mu

9611

11167

15497

RMB

As we can see from the above table, the greenhouse land area had grown rapidly to cover 23.4% of total arable land area. The revenue per mu also increased significantly, changing from 9611 RMB to 15497 RMB, representing a CAGR of 17.3%.

The latest SEC filing also shows that the company’s revenue had increased 35% year over year to 280 million RMB ($41 million) and profit for the year soared 79% to 110 million RMB ($16.3 million).

Compared to its competitors, GAGA now has a very attractive valuation as shown below.

Company

Ticker

P/E

P/B

Le Gaga Holdings Limited

GAGA

22

2.2

Limoneira Co

(NASDAQ:LMNR)

441

4.5

Alico Inc.

(NASDAQ:ALCO)

N/A

1.8

Agriculture is supported by China’s national policy and the growth of the domestic vegetable market is very large. With the continuous improvement of quality of life of ordinary people, the demand for high-quality brand of vegetables will also increase and offer a fantastic return for the GAGA shareholders.

The double benefit of GAGA is of course, the stronger Chinese Yuan. The revenues and costs in GAGA are mostly denominated in the Renminbi, and a significant portion of financial assets are also denominated in the Renminbi. According to a note issued by Auriga this week, the total scale of Yuan appreciation is estimated to be between 25% and 40% in five years. Those picking U.S.-listed Chinese stocks that are focused on domestic consumption, such as GAGA in the agriculture industry, will be generously rewarded. In the short term, I expect GAGA to reach $13-15 and $20-22 in the next two years.

Disclosure: Long GAGA

Source: Le Gaga: Fastest Growing Major Vegetable Producer in China