Click to enlargeSino Agro Food (SAIF.PK) is an integrated, diversified agriculture technology and organic food company operating in China. The Company is producing high margin agricultural products and intends to focus on meeting the increasing demand of China's rising middle class for gourmet and high quality food items.
Currently Sino Agro Food produces and markets products like organic beef and lamb products, pollution-free fish from aquacultures, patented high quality animal feed for cattle, sheep and other animals, organic fertilizer, 100% pure organic milk and dairy products, and Hylocereus Undatus, a species of cactus better known as Dragon Fruit. Sino Agro Food is currently trading at $1.72, up 36.50% for the year and at a new 10-month high.
Trading China is on a mission to improve the transparency of US-listed Chinese companies, which we believe will strengthen investor confidence in those stocks that deserve value investors' attention. The management and investor relations of SIAF have been very responsive to our questions, and we are proud to start the new series with Sino Agro Food. Please read the complete, unedited interview below.
1. Internal Controls: What is the current status of your company's Sarbanes-Oxley Act (SOX 404) compliance, establishing effective internal controls over financial reporting? What are the plans for improving your internal accounting and finance teams, if necessary?
SOX compliance for a company at the size and stage SIAF is currently at would for the most part be cost prohibitive. SOX is mainly aimed at internal controls, which would be handled by a CFO and an audit committee. The Company is just emerging out of start-up and in 2011 will just begin to start seeing its business plan mature. I imagine the Company is still a good year or two away from needing to expand its management team and audit controls.
2. Board of Directors: Does your company have experienced and active independent directors? What is their level of involvement in management's decision and financial reporting?
Currently there are no independent directors, the current board which is made up of the management team is sufficient as the company emerges from start-up. Management however intends to elect an independent board as this will be a prerequisite for listing on a major exchange. Once the company is out of start-up and looking towards expansion this will be one of the items I'm sure management will address.
3. Chief Financial Officer: Has your company hired a full-time CFO who is actively involved in day-to-day management decisions and spends the majority of the year close to the company's operations?
Again, the Company is not quite at that stage where a CFO would have a positive net effect. I do believe though that a CFO would be the next major addition to the management team in the next year or so as the Company's operations start to run at full capacity.
4. Independent Auditor: Please describe your experience with your U.S. GAAP auditor. How many people do they send over to do the audit, how long does it take them to complete the audit?
Currently the Company's independent auditor is Madsen and Associates, CPA, which is a PCAOB registered firm. Madsen works alongside its affiliate in Hong Kong to provide the Company with its financial reporting. It has taken some time to get the Company financial statements over to US GAAP. Also growth has been pretty rapid during the start-up phase and working with the Company's joint venture partners while converting to GAAP has had its share of bumps along the way. I feel pretty confident though moving forward the Company can complete the audits within the normal timeframes as everything is brought current. There are plans to change the fiscal year end to June 30th once the Company is registered and all the financial reporting is on track. The biggest problem with a Chinese company that has a December 31st fiscal year end is the Chinese New Year which tends to slow things down administratively.
5. Big 4 Auditor: Have you considered engaging a Big 4 auditor (Deloitte, Ernst & Young, KPMG, and PricewaterhouseCoopers) to further shape investor confidence? If not, please provide the reasons.
A big 4 auditor just wouldn't make economic sense at this stage in development. The Company is still very young and hiring a big 4 just to shape investor confidence would probably not be a smart economic choice. For the current size of the Company, the current auditor is sufficient and falls under the same oversight by the PCAOB as a big 4 would.
6. Analyst Coverage: How many sell-side analysts are currently covering your stock? Do you see analyst coverage expanding in the near future?
Right now I'm not aware of any. We have had a few articles written by some third party juniors, but nothing from a recognized source. I imagine that will change though once the Company is fully reporting. We already have some institutional interest and investors so as I see it, it's just a matter of time.
7. EPS Guidance: Providing earnings-per-share guidance additionally to revenue or net income guidance shows commitment to delivering growth for shareholders. What is your position regarding EPS guidance?
Management has been good about giving guidance. I see that continuing as the Company grows. Currently Management has forecasted $0.29 diluted EPS for 2010 and $0.49 diluted EPS for 2011.
8. Share-based Compensation: What is the company's position regarding paying for services with newly issued shares or warrants instead of cash?
The Company really hasn't issued much stock for services. Most of it has been either issued for funding or to pay down debt. My view is that Company issuances of stock are reported in Company filings. Each investor can see how management is handling the equity side of things and make a decision as to whether or not to invest. This is pretty subjective depending on the investor.
9. Shareholder Dilution: Are there plans to raise capital in the next 12 months or can growth be funded from working capital and operating cash flow?
The Company currently has enough cash flow from operations that it doesn't really need additional funding. Management did a pretty good job of estimating start-up costs and raised the funding it needed early on when it went public in late 2007. I do believe however as the Company enters into an expansion phase that raising capital will be a logical step. Management has said on several occasions though that it intends to wait until it is listed for a secondary offering and to do so only if the cost of capital permits. Also, the Company has substantial "land usage rights" that it can collateralize for low interest rate bank loans through the Agricultural Bank of China. In either case the Company has more than one option at funding expansion.
10. Acquisitions and Investments: Is your company currently looking into acquisition targets or investment opportunities? Will you remember disclosing to shareholders how accretive an acquisition will be to earnings per share, or when the company expects the investment to start paying off with revenue contributions, etc.?
The Company's current strategy is based more around joint ventures than it is with acquisitions. I don't see any acquisitions on the horizon but I do expect to see new joint venture projects with both existing partners and maybe a few new ones.
11. Buybacks and Dividends: Does your company consider buying back own stock, possibly launching a buyback-program in the near future? How about returning some of the net profits to shareholders in form of a dividend? Even a small dividend might make your company attractive for a huge new class of investors/funds.
Yes, we are proud to be one of the few companies in our space that has provided a dividend to shareholders. Management believes strongly in rewarding investors, it helps maintain a strong shareholder base and as a side effect helps lower cost of capital. It just simply makes sense.
12. Press Releases: Does your company update investors regularly - at least once a quarter - with an official press release about business developments and short-term outlook?
Yes, we currently have what we feel is a pretty good investor relations program in place.
13. Conference Calls: Is your company holding regular conference calls for earnings releases or material events? If not, why not, and are there plans to change that in the near future?
Our last two conference calls have been on an annual basis but I do expect the Company will begin conducting quarterly calls once the Company has registered with the SEC.
14. Senior Exchange Listing: does your company plan to list its common stock on a senior U.S. exchange (Nasdaq, NYSE, Amex)? Do you expect such a move to be completed within the next 12 months?
The Company is expecting to file its Form 10 with the SEC in the next few weeks. Once registered the Company can be quoted on the OTCBB, but I expect the Company will pursue a listing on the NASDAQ or AMEX once it has cleared comments with the SEC and completed taking the necessary steps to meet listing criteria.
15. U.S. Public Company: Are you satisfied with the performance of your common stock on U.S. exchanges over the past 12 months? What do you see as the biggest problems Chinese companies encounter when being listed in the United States?
I believe we have preformed quite well overall. The Company is currently one of the top performers on your very own CGS (ECSC) index despite being a non-reporting Company. As for future obstacles, I think the biggest obstacle has been being a non-reporting company. Considering where the Company has come from in respect to market acceptance, I can only imagine that will get better once the Company is listed. The overall problem I see facing Chinese companies is general acceptance by the market. There was a pretty nasty negative campaign waged against the space, but the cloud does appear to be dissipating some.
16. Investor Confidence: Please feel free to add anything that hasn't been covered in the previous questions: new initiatives, future plans, or current developments. Why do you think new investors should invest in your stock and current shareholders should hold on to their shares for the long-term?
With agriculture making up some 13% of China's GDP and a very aggressive pro-agriculture policy by the central government, I think the Company is in the right space at the right time.
Disclosure: Author long SIAF.PK