It's ironic that one of the greatest investment regions in the present day continues to lag out of outright fear over the validity of the companies that reside there. At least this is the case for Chinese companies trading in the United States under reverse-mergers, IPOs and ADRs. As the shadow of a Chinese invasion of fraudulence upon of the American markets continues to linger over the sector as a whole, the question continues to be raised over the ongoing validity for companies not already de-listed.
Food in China is an emerging market in itself that is growing exponentially. As the tastes of a demographic growing in wealth changes towards higher quality food, so too does a change in the country towards more commercialized operations that increase safety and efficiency. Investors in America looking to capitalize on this trend of growing food leaders are presented with many possibilities. Yet they remain hesitant, and rightly so, in light of vast fraud and accounting practices that have scarred the face of the sector.
One of the more public ongoing scarecrow companies that is sending investors to flee is the case of SkyPeople Fruit Juice (SPU). In June 2011, Absaroka Capital Management released a report that concluded there were some shady reporting going on at the company. In particular, the most alarming claim was that the company was claiming on its Chinese SAIC financials that it was only 10% the size of the it was reporting itself to be on its United States SEC filings. The ensuing drama that has since taken place can only continue to raise eyebrows over the company that has yet to fully resolve its issues.
For investors who remain willing to chance their speculation on discovering that not all of these Chinese companies are land mines waiting to be tripped, the rewards appear to be great. Many of these companies have seen their stock prices knocked down to P/E levels of 4 or less. Almost all are trading at levels significantly below their book values. And as to be expected, many of these companies have been accused to be frauds themselves. For investors looking to speculate on Chinese food companies some of the following have likely appeared on their holdings list:
- American Lorain Corporation (ALN) is an American-listed Chinese processor of snack foods, convenience foods, and frozen foods. The company prides itself as one of the largest producers of chestnut products in China and internationally. In recent years the company expanded its lines into ready-to-cook foods and ready-to-eat meals, a higher margin product line that is finding increasing acceptance in China due to a rising middle class.
- China Marine Food Group (CMFO) is an American-listed Chinese processor of seafood based snackfoods under the brand name of Mingxiang®. The company also manufactures and sells algae-based health drinks under the "Hi-Power" line. The company boasts of having over 3,200 retail food sales points, and 15,000 bevage sales points in the People's Republic of China.
- Zhongpin (HOGS) is a processor and distributor of meat and food products, primarily revolving around pork and other hog-related products. The company supplies 24 provinces in China including 29 first tier cities, 100 second tier cities, and 311 third tier cities. The company operates in over 3000 stores and supermarket locations.
- Le Gaga Holdings (GAGA) is one of the largest greenhouse vegetable producers in China. The company sells over 100 varieties of vegetables to wholesalers, institutional customers and supermarket chains in China and Hong Kong. The company operates over 10 farms covering an aggregate area of 1,490 hectares.
- Feihe International (ADY) is a food processor that produces infant formulas and milk powder. The company also distributes soybean, rice, and walnut products. The company has a presence in over 26 privinces and retains a distribution network that stretches out to 80,000 retail outlets.
One of the ongoing concerns that investors should be aware of in regards to these American-listed companies comes not only from short-sellers, but from the company's own management. As share prices continue to drop in this fear-based environment, management teams in many small-cap Chinese companies are taking steps to buyout their outstanding shares and take the companies private.
While this may do a good service to investors who get in at the bottom lows, often this otherwise bullish measure can hurt investors who have their shares bought out at lower prices than their entry points. It likely goes without saying that considering the ongoing short-seller fanaticism in such Chinese small-cap companies, investors should continue to see these companies as mere speculation plays and nothing more given the risk involved.
Disclosure: I am long ALN, CMFO.