China Agritech Preparing to Bloom

China Agritech (CAGC.OB) manufactures and sells organic liquid compound fertilizers and agriculture products throughout China. China is the largest consumer of fertilizers in the world, and for good reason; they have approximately 22% of the world’s population, but only 7.5% of arable land. Producing high crop yields is extremely important and has become one of the Chinese Government's most immediate concerns. Bottom line, if China does not begin producing crops through more efficient means, such as organic fertilizers, they will be facing a windfall of inflation and food shortages. China Agritech’s liquid fertilizer can increase crop yields by 15%-40%, compared to chemical fertilizers who yield between 10 and 11%.

Valuation

For fiscal year 08 China Agritech is expected to increase revenue 43% coming in at approximately $53mm. Net income is estimated to be $9.7mm or .40 cents per share. This puts CAGC at a forward P/E of 7 based on yesterday’s closing price, which is not too shabby given its strong revenue growth and robust outlook moving forward. Similar fertilizer companies in this space have fetched and maintained P/E multiples as highs as 25x to 30x.

Concerns

My number one concern surrounding China Agritech has to do with its DSO (Days Sales Outstanding) which sticks out at 234 days as of Sept 30th 2007. It appears that the company likes to function as a financing entity to help draw in new business and will extend customers' credit. I view this as a similar business model deployed by Best Buy (BBY) and Circuit City (CC) to insure consumers pick up the latest and greatest flat screen. There is nothing wrong with this, but at first glance it can cause concerns for receivable hawks. The DSO is even less of a concern when one considers that the current CEO Yu Chang was the former regional head of China’s Agriculture Bank.

In summation, demand for fertilizer has been extremely robust. Just pull up some of charts on United States fertilizer companies (Terra Nitrogen (TNH), Mosaic (MOS), Agrium (AGU) etc). Moving forward, I believe it is just a matter of time before China Agritech’s valuation catches up with its peers and its potential.

Disclosure: Author holds a long position in CAGC.OB

Comments

[megiddo666:]

Good summary and investment thesis. CAGC is unapprecaied growth, with new plants and products just coming to market. Additionally, the Chinese govt. is pushing organic fertilizer as part of its campaign for food security, currently 20% of Chinese crops are organically fertilized and the govt. wants that result to increase.

In regard to the 234 DSO's, it may be possible these sales are booked during the fall and winter months for later delivery and payment. Thus the "financing" may be an accounting issue that gets fixed in 2Q 08 business as fertilizer is delivered and paid for.

2008 Feb 28 06:24 AM

[Michael Fer...:]

don't know much about organic fertilizers - are they (organic) really that efficient vs. conventional fertilizers?

2008 Feb 28 09:12 AM

[alpha24seven:]

Beware this space. The Chinese are also doing dangerous and hurried work on genetic agriculture modification to be considered leaders in food science. One of the first dangerous implications was the recent pet food scandal. Melamine wasn't actually introduced for a cheap filler. The real killer was genetically modified ingredients that presented Melamine as a genetic marker.

This is scary and dangerous stuff. I hope somebody somewhere has put China on notice to tell them they are being watched and rogue genetic modifications won't be tolerated. Seriously. This is a potential threat to humanity.

2008 Feb 28 03:55 PM

[InvestingPe...:]

CAGC follows a similar business model to another company named Advanced Growing Systems, Inc. (AGWS.ob). While a pure-play for organic fertilizer in China, AGWS.ob is a diversified domestic play dealing with organic fertilizer and wholesale nurseries. CAGC looks to capitalize upon its China play, but where has the organic demand really come from? AGWS is an up and coming company with a market capitalization below its tangible valuation, high growth rates, vertical integration, and a booming market in the South. More can be found with our Recommendation here: investingpennies.com/s...

2008 Mar 31 03:17 PM