Investors don’t appear to be looking kindly on SkyPeople Fruit Juice (SPU). Given the company’s strong market position and undervalued share price, perhaps they should reconsider.
Following comprehensive analysis of public information and extensive on-the-ground due diligence, China Economic Review’s research team concludes that SkyPeople Fruit Juice is worthy of long-term investor consideration. The company is the sole player in a high-margin niche of China’s fast-growing fruit juice beverage market.
SkyPeople Juice Group (originally Shaanxi Tianren Organic Food), a subsidiary of NASDAQ-listed SkyPeople Fruit Juice, was established in 2001 in Shaanxi province, China. It manufactures and distributes various fruit juices domestically and overseas. The company’s core products are kiwi fruit, apple and pear juice concentrates – which are mainly supplied to other fruit juice manufacturers as base ingredients – and fruit beverages sold, via distributors and agents, in supermarkets under SkyPeople Fruit Juice’s two brands.
SkyPeople Juice Group is now trading at U.S. $4.34. Total revenues for 2010 came to U.S. $93 million, up 57% year-on-year, while net income increased 40% to U.S. $21.2 million. The gross margin remained flat, at roughly 42%, in 2008 ,2009 and 2010. (See here)
There are two main reasons why SkyPeople represents a good investment:
1) Sole player in a high-margin niche market
China is the world’s largest manufacturer and exporter of apple juice concentrates, accounting for 60% of the global market (see here). Rather than go into direct competition with the apple juice concentrate manufacturers that dominate the market (apple juice concentrates are used as the base mixture for any kind of fruit juice), SkyPeople Fruit Juice focuses on kiwi fruit and pear juice concentrates. It is the only scaled manufacturer in this area.
The company enjoyed gross margins of 61% and 35% on kiwi fruit and pear juice concentrates, respectively, in the first three quarters of 2010 (see here). The gross margin on apple juice concentrates was just 18%. Given the same production capacity, kiwi fruit and pear juice concentrates are selling better than apple juice concentrate and delivering higher gross margins.
2) Fast-growing beverage market
Annual per capita fruit beverage consumption in China is only 10% of the average global level and 2.5% of the level in most developed countries. That implies tremendous upside potential, especially given rising disposable incomes.
Beijing Business & Intelligence Consulting (BBIC), an independent market research firm, estimates the total sales value of processed fruit products in China reached U.S. $37.2 billion in 2010, which would imply a compounded annual growth rate of 43% for 2007-2010. Moreover, total consumption on fruit juice in the domestic market has been increasing at a double-digit rate since 2006. Consumption growth reached 15% in 2006 and 2007, slowed in 2008 - most likely due to the global economic downturn – and then picked up again in 2009. The global market for fruit beverages may grow even faster. Consumption is expected to reach 73 billion liters in 2020, up from 53 billion liters in 2010.
Zhang Junyu of Zhe Shang Securities added that kiwi fruit juice products, while not yet mainstream, are becoming more popular in China as healthy living options catch on among consumers.
SkyPeople’s dominant position in a high-margin niche market should provide a strong foundation from which the company can continue to outperform the competition in a fast-growing yet increasingly competitive fruit juice market. SkyPeople has diversified its product portfolio, increasing margins in the process, while its rivals remain wedded to mainstream and lower-margin apple juice-related products.
SkyPeople is trading at 5 times 2010 earnings and has a price-to-book ratio of 1.02, significantly lower than most its competitors. Given the company’s strong growth potential at home and overseas, we think the stock is undervalued. It is a good option for investors seeking consistent, longer-term returns. A detailed analysis and relevant information can be found here.
Disclosure: We have no positions in any stocks mentioned, and no plans to initiate any positions. China Economic Review has no interest or investments in the stocks it covers, and has strict rules for staff with regard to holdings and trading to ensure their impartiality.