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I travelled back to China over the past few weeks. I was amazed by the fast rising food prices in the super markets in all the cities I visited. The central government has enacted a series of policies to control food prices since November. These policies were effective as of now, but I am not sure whether the food price could stay at current levels as the Chinese New Year is approaching. Just the other day, heavy snow stroms covered most of southern China. Even the subtropical Guangdong Province and Guangxi Zhuang Autonomous Region will see temperatures drops to 10 degrees centigrade, according to a statement from the center.

So a cold winter is coming and as investors, here comes another opportunity - invest in food.

As I search the Chinese food stocks listed in the U.S., one stock caught my eye. After deep research, I think it might be a good one to buy for now. This company is Tianli Agritech (Nasdaq: OINK)

Company Background

OINK’s business is very simple: Raise, breed and sell hogs in China.

The company entered hog breeding and production in 2005. The company currently owns and operates eight commercial farms in Wuhan city, Hubei Province. If you check the map of China, you will find that Wuhan is in the heart of China and is located just on the Yangtze River. Historically, Wuhan is the transportation hub in China. So OINK’s location is great for its distribution channel.

As of now the company is almost done with its ninth farm in Wuhan. Oink’s farms raise and sell hogs for both breeding and meat purposes. The farms, in the aggregate, have an annual production capacity of approximately 110,000 hogs (approximately 130,000 hogs once it finishes building the ninth farm).

While deriving substantially all of its revenues from hog farming, OINK also receives a nominal amount of revenue from the sale of hog waste products. Although it is not its current focus, the company anticipates in the future, that it may convert some waste products into other products such as manure and fish feed for sale. Finally, the company is planning to establish a vertically integrated chain, culminating in retail locations to sell pork products so that the company may further create value for shareholders.

Comparable Analysis

HOGS is another Chinese company in a similar business. Please be aware of the differences in the two companies’ businesses. HOGS is a pork processor and OINK is a hogs breeder. So OINK is in the upstream of the value chain and enjoys more bargaining power.

Let’s do a simple comparable analysis:

HOGS Profitablity

June 30, 2009

September 30, 2009

December 31, 2009

March 31, 2010

June 30, 2010

Return on Assets

2.70%

3.08%

2.39%

2.56%

2.19%

Return on Equity

5.06%

5.83%

4.01%

4.26%

3.80%

Net Margin

6.63%

6.79%

5.52%

6.49%

5.75%

Gross Magin

11.72%

12.17%

11.44%

12.20%

11.78%

OINK Profitability

March 31, 2010

June 30, 2010

Return on Assets

10.30%

11.43%

Return on Equity

11.68%

12.79%

Net Margin

37.44%

38.76%

Gross Magin

41.75%

43.75%

Valuation

OINK

HOGS

P/E

5.8x

12x

P/B

1.78x

1.86x

Furthermore, OINK's current marketcap is around $50 million, and it has almost $10.9 million cash on the book. Its total liability is merely $1.53 million. In the meantime, the company generated $6.3 million cash from its operations.

Why Sell Off?

Even though almost all of China's small cap stocks have huge a discount on valuation compared to similar sized U.S. stocks, OINK is still undervalued at the current price. The share price reached $8 last month after a very strong quarterly earnings report. The price then dropped to $5 amid concerns of China’s inflation and a possible tightening. However, most investors simply sold off all the China stocks regardless of fundamentals.

Actually, companies like OINK will benefit from inflation, even a modest inflation. As the winter and the Chinese new year are coming, I expect to see much stronger results next year. If you buy now and hold for three months, the return will be tremendous.

Disclosure: I am long OINK.

Source: Tianli Agritech: How to Profit From China's Inflation