China Organic Agriculture: Sticking with Core Business or Branching Out?

Tuesday's press release by China Organic Agriculture (CNOA.OB) is important in letting us know that the company now has an IR firm - Winning IR Company ("WIR"). This is the same IR firm that has been doing a good job with Gulf Resources (GFRE.OB) lately, which similarly provided a 2007 overview not too long ago. It has to be noted that while GFRE only signed up WIR in February 2008, we have gotten a total of four press releases so far from the company, all within the space of a month. WIR also represents China's Jade Art Group (JADG.OB).

And while CNOA's 2007 review looks good, there is a curious and crucial omission - its previously announced acquisition of Dalian Baoshui District Huiming Trading Limited ("Huiming"), the food transportation company. What happened? Is the deal off? If so, why? Or perhaps the deal is yet to be closed. But if this is the case, why wasn't it referred to in Tuesday's announcement?

If you read the review carefully, CNOA appears to be moving away from diversification and sticking to its organic rice business. The evidence:

1) All six bullet points refer to the sourcing or distribution of its rice products;
2) The management discussion is confined to looking at the growth of organic foods in China; and
3) CNOA's positioning statement for 2008 appears to be: "Our goal is to continue to be one of the leaders in the green and organic rice industry in China while delivering significant value to our shareholders."

So Huiming seems to be history. But that is not true. According to a company spokesperson, CNOA has completed due diligence of Huiming and is going ahead with the acquisition. An announcement is expected after the company releases its 10K, which will put that event in late March or early April. In other words, all the outstanding questions regarding the company remain: Will CNOA still be an "organic" company after Huiming? What is its overall strategy? What kind of company will CNOA be when it grows up? I still don't know.

My Position: None.

Comments

[Tom Santamaria:]

Hello according to a e-mail reply fro China both earnings & the proposed acquisition will be done by the end of March,2008

2008 Mar 19 08:31 AM

[Shanghai Ad...:]

Here's an excerpt from their 10-k. It seems that Huiming Trading may be a good diversification strategy for CNOA esp if price controls stay in for rice. Diversifying into wheat and soybeans is not a bad idea and having more control over distribution alleviates some potential pressure from higher transportation costs. Also, of the major provinces Huiming and CNOA operate in, it seems ony 1 (Sichuan) was a primary victim of the winter storms. Northeast China largely escaped the bad weather. I'm leaning towards giving CNOA until mid summer before I judge their acquisitions. Operating in China is largely based on relationships - so acquisitions tend to be based on what relationships you get along with the assets. I've advised US companies in CHina for 5 years so I'm ok with this acquisition. Revenues are about equal for the two companies. Let's see what the next steps are. I think CNOA is a good buy here at under 2 and should go to 3 soon - multiples are just too low. Northeast China incl. Dalian are targeted as a primary area of growth for the next 5 years - a govt priority to grow their region!

2008 Apr 16 12:08 AM

[Shanghai Ad...:]

Here's the excerpt:
On December 12 2007, the Company announced that it had entered into a letter of intent to acquire the Dalian Baoshui District Huiming Trading Limited ("Dalian"). The acquisition is pending due diligence which is not likely to be completed until late Aprill. Dalian is engaged in grain procurement, international and domestic trading, wholesale sales and food delivery logistic services. Its main products include including soybeans, corn, and cereal crops, which are major products from the Northeast part of China. Sales to consumers are made in national regions including Liaoning Province, Jiling Province, Heilongjiang Province, Sichuan Province, Fujian Province, Beijing, and Shanghai.

2008 Apr 16 12:09 AM