China Agritech: Ready For All-Time Highs

China Agritech (CAGC.OB) is engaged in the development, manufacturing and distribution of organic liquid compound fertilizers and related products in the People's Republic of China. The company has developed proprietary formulas that provide a continuous supply of high-quality agricultural products while maintaining soil fertility. The company sells its products to farmers located in twelve provinces of China including: Heilongjiang, Hebei, Liaonong, Jilin, Shandong, Inner Mongolia, Henan, Sichuan, Guangdong, Xinjiang, Yunnan and Guizhou. For more information visit their website.

Yet again we find ourselves in a position for speculation in China. Fertilizer stocks rallied across the board yesterday with Canada's Potash (POT) leading the industry hitting record highs Thursday to close at $114.58 after reporting a 67% rise in earnings as demand for fertilizer is rising in developing countries. "Fertilizer producers continue to post impressive results, as agricultural conditions globally are very strong," Goldman Sachs analyst Edlain Rodriguez wrote in a client note.

CAGC.OB was fairly stagnant in price action for the past year until they released a positive PR Oct 9th stating they inked a deal with the largest fertilizer distributor in China worth an estimated $7.9m in revenues. This news sparked a huge rally from 2.80 to a high of 6.25 in a matter of just 6 trading sessions. Though it wasn't just the PR that was responsible for the impressive rally; many of these Chinese stocks have been virtually unknown to traders and investors with low average trading volumes. A single spike in volume grabs a lot of attention from investors/traders which leads to more research and yet again we find a dirt cheap Chinese stock trading way below the industry averages.

CAGC released some record earnings results early this summer in August despite a decrease in revenues due to droughts and floods that affected major farmland areas in China.

Second quarter highlights are as follows:

• Gross profit increased 7% year-over-year to record $5.8 million
• Gross margin increased 570 basis points to record 58.3%
• Net income increased 26% year-over-year to $2.6 million
• Fully diluted earnings per share increased to record $0.14

Fundamentally CAGC looks great as well, with strong year over year growth and a positive outlook for the remaining quarters to be reported of 2007. CAGC.OB expects to report $46-48m in revenues on $8.4-8.6m. This guidance entails a huge year in growth for CAGC over 2006 increasing revenues by 62% and earnings by 60%. From 2005 to 2006 earnings grew 47%, so CAGC is growing at a very substantial rate. I would say that CAGC conservatively could grow another 50% into 2008 given its continued accelerated growth which entails income of $13.6m in 08? or .55eps.

The Agricultural Chemicals industry is trading at a 27x earnings multiple currently while CAGC.OB is around 1/2 that multiple with a current P/E of just 14.7x earnings. Even more impressive, if CAGC.OB is able to sustain my estimated 50% growth in 2008 this gives them a dirt cheap forward earnings multiple of 9.63x earnings. With earnings of .55 for 2008 we could theorize a future fair value in its industry around 14.55 found by multiplying the the Industry's average earnings multiple of 27 multiplied by CAGC's earnings estimate of .55.

Technically this stock looks set up for another potential major run. After its huge 100%+ gain in a matter of a week, a healthy consolidation period has occurred which allowed the 13ema trend support to catch of to price action and form a base. Thursday's price rallied 10% off the 13ema breaking out of its short term consolidation pattern. I believe CAGC should be breaking out to all time highs above 6.25 in the near future and I want to be along for the ride.

Disclosure: Author has a long position in CAGC.OB

Comments

[East Coast]

Should be picking up on traders radar screens. It was nailed after earnings but, as you mentioned, the quarter was an outlier due to the poor weather conditions (which legitimately apply in this space). I got in at 4.70 a few weeks ago

[Richie]

In your calculation of "08 earnings, did you consider the issuance last summer of 5.5 million additional shares at the panic price of $2.70/sh?