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Alberto Abaterusso
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  • Tianli Agritech, Inc.: A Potential True Bargain In The Chinese Hog Business

    The purpose of this article is to evaluate operational performance of Tianli Agritech, Inc. (NASDAQ:OINK) after IPO.

    We did not want to write the usual overview of the firm and its industry (we leave to the reader the task to investigate further this stock), but we have chosen to give a different slant to our article.

    So we looked around if someone had already used a similar approach in order to evaluate the performance of a company. We searched the internet and managed to find this paper, which supports our work (and the concept that inspires our piece). This paper uses a new methodology studied in the academic environment.

    By following this new method we try to measure Oink's operational performance after IPO on the basis of:

    • fund utilization
    • informing SEC about fund utilization
    • IPO expenses
    • holding of Annual General Meeting on time
    • payment of dividend

    Briefly, Tianli Agritech, Inc. is a holding company engaged in the business of research and development, raising, breeding and selling hogs in the People's Republic of China. The Company focuses on growing hogs for sale for breeding and meat purposes. As of December 31, 2009, the Company owned and operated eight commercial farms in Wuhan city (Wuhan). In October 2011, the Company acquired land use rights and facilities in the Osmanthus Village Industrial Park, Xiangfeng Town, Laifeng County.

    While we were analyzing the financial situation of OINK, particularly its liquidity, we found that the current ratio had a peak in 2010 before falling back below the value of 2 from 2011 (as you can see from the picture below).

    (click to enlarge)

    We decided to investigate this data further and we have found that the company had completed its initial public offering of 2,000,000 common shares on July 19, 2010, from which it derived net proceeds of approximately $ 10,600,000. So we searched the internet to find if someone had already evaluated the performance of a company after it had collected the capital from the public through an IPO and we came across the study which methodology we try to apply to our case.

    From 2008 to 2010 there was a considerable increase in cash on hand. Due to the Initial Public Offering ("IPO") that the company completed on July 19, 2010, whereby it issued 2,000,000 shares of its common stock at a price of $6.00 per share. The shares commenced trading on the NASDAQ Global Market on July 20, 2010. After fees and other related costs, the Company received approximately $9,158,260.

    First of all we want to see if OINK informed SEC about its fund utilization for the intended purposes and the project implementation.

    The answer is yes. OINK informed SEC as you can see on the picture below:

    (click to enlarge)

    The above information can be found on page ten of the company's offering prospectus, under the title, "Principal Purposes for Use of Net Proceeds of Offering,".

    Secondly we want to check if OINK used or is using the funds collected for the purposed uses.

    The Company completed the initial public offering of 2,000,000 common shares on July 19, 2010, from which it derived net proceeds of approximately $10,600,000. Of such net proceeds,

    • $6,754,099 was applied to the construction and acquisition of hog farms to increase the Company's production capacity (as of Today the company holds 11 hog farms for a total capacity of 170,000 hogs).
    • $1,710,208 was applied to the acquisition of breeding stock
    • and $2,135,693 has been applied to working capital.

    On May 29, 2013 OINK announced that the company had signed an agreement with Zhongbai Warehouse Supermarket Co., Ltd. ("ZHONGBAI") to sell cuts of its Tianli-Xiduhei™ black hog meat through five of ZHONGBAI's warehouse outlets in Wuhan, Hubei province.

    If we compare the results achieved by the company with the purposed uses we can see that the company didn't miss any point.

    Let's see now if OINK's management correctly forecasted its IPO expenses: this is a very useful parameter to evaluate the efficiency of the management to use the money collected properly.

    From the company's offering prospectus, before mentioned, we gather that the company expected its total cash expenses for IPO to be approximately $585,000, exclusive of commissions being between $700,140 and $840,000 (Placement discount of $0.42 per common share between a minimum offering of 1,667,000 and a maximum of 2,000,000 of OINK's common shares).

    In addition the company expected to pay the placement agent a non-accountable expense allowance of 1% of the amount of the offering, or $120,000 (maximum offering, exclusive of shares registered under Rule 462(b)) or $100,020 (minimum offering).

    For the nine months ended September 30, 2010, net cash provided by financing activities was $9,438,275. The activities were comprised of the net proceeds from the Company's July 19 IPO of $10,592,344, less the related expenses of $1,180,784.

    The company forecasted IPO expenses being between of $1,385,160 and $1,545,000 and sustained IPO expenses for $1,180,784. The company has proven to be conservative in estimating the costs of the IPO.

    Concerning dividend the company has never declared any payment of them.

    Conclusion: The article shows that all the performance of OINK after its IPO was satisfactory. It is very important that the company opened a retail shop. This will likely increase revenues.

    The company has made many investments to increase its capacity through the construction and acquisition of other farm hogs. This strategy may have the potential to pay off in the long run.

    This can be a bargain for those who bought this stock for less than its NNCAV per share.

    Please note that we are talking about a micro cap that has just regained compliance with Nasdaq Marketplace Rule.

    Tags: OINK, Long Idea
    Oct 04 11:40 AM | Link | Comment!
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