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  • Le Gaga (GAGA) -- yet another interesting China IPO -- agriculture 0 comments
    Oct 26, 2010 10:36 AM | about stocks: GAGA, MCOX, XRS, CCIH, AMBO, BORN, CCSC, CVGW, CGA, CAGC, AGU
    Le Gaga Holdings (NASDAQ:GAGA) $92mm IPO
    with a market cap of $400mm at price range mid-point of $8.5.  Scheduled for Friday, Oct 29

    GAGA Valuation Metrics


    SUMMARY
    . Greenhouse vegetable grower market leader in a fragmented market
    . 40% profit margin for the year ended March 31, 2010
    . 31% Compound Annual Growth in production output
    . At 29 times annualized earnings almost priced like a ‘growth’ stock
    . June 2010 quarter income  compared to June qtr 2009, however, declined from $4.4mm to $3.5mm on a 50% increase in revenue to $12mm from $8mm

    BUSINESS
    Greenhouse-produced fresh vegetables
    . Focuses on applying advanced agricultural know-how to grow safe and consistently high-quality vegetables.
    . Has the highest greenhouse coverage ratio among major vegetable producers in China, according to a . Frost & Sullivan report commissioned by GAGA.
    As of June 30, 2010, a total of 3,941 mu (263 hectares) of GAGA’s arable land was covered by greenhouses, accounting for 20.9% of GAGA’s total arable land.

    MARKET DEMAND DRIVERS
    . China’s large population and its increasing level of disposable income per capita drive the growing demand for high-quality fresh vegetables.
    . As disposable income per capita increases, the average Chinese diet has diversified from a largely carbohydrate-based diet of staples to include more meat, fruits and vegetables.
    . Affluent households increasingly recognize the nutritional benefits of a balanced and more healthful diet that includes different varieties of fresh vegetables. In particular, demand for high-quality, off-season fresh vegetables is growing.

    GROWTH PLAN
    . Currently targets the Guangdong, Fujian and Hong Kong markets, which have demonstrated a strong demand for fresh vegetables, with a combined market size of 14.8 million tonnes in 2009.
    . Plans to expand the distribution network of into the Yangtze River delta, an affluent and populous region where demand for high-quality fresh vegetables is growing.
    . Also plans to set up wholesale operations in nine coastal provinces across China to target regions with high retail purchasing power.

    COMPETITIVE ADVANTAGE
    . GAGA relies on its greenhouse cultivation, proprietary horticultural know-how and effective production planning supported by a comprehensive database
    . Is are able to schedule and control crop plantation and harvest to meet higher market price of crops, thereby achieving better market selling price.

    PRODUCTION YIELD
    . Production yield was 3.6 tonnes, 3.9 tonnes and 5.4 tonnes per mu in the fiscal years ended March 31, 2008, 2009 and 2010.
    . Production yield was 1.2 tonnes and 1.6 tonnes per mu in the three months ended June 30, 2009 and 2010, respectively.
    . Production yield has been significantly enhanced by greenhouse cultivation. Greenhouses increase production output by allowing crops to grow faster and year round and protecting crops from extreme weather conditions, such as typhoons and windstorms.
    CAGR of 31.1% in production output
    . Production output increased from 57,085 tonnes in the fiscal year ended March 31, 2008 to 69,240 tonnes in the fiscal year ended March 31, 2009 and to 98,076 tonnes in the fiscal year ended March 31, 2010, representing a CAGR of 31.1%.
    . Production output increased from 20,653 tonnes in the three months ended June 30, 2009 to 29,267 tonnes in the three months ended June 30, 2010.
    total of 3,941 mu (263 hectares) of arable land was covered by greenhouses, accounting for 20.9% of total arable land.

    SIZE OF ARABLE LAND
    . Total production capacity depends to a large extent on the size of arable land. As of June 30, 2010, GAGA leased a total of 18,850 mu (1,257 hectares) of arable land, compared to 17,103 mu (1,140 hectares) as of March 31, 2008 and 16,525 mu (1,102 hectares) as of March 31, 2009.
    . Land is a precious commodity in China, while GAGA seeks to increase its arable land, GAGA has also been building greenhouses extensively to improve production yield and grow total production capacity.

    SOURCING LAND
    GAGA sources most of its land from farmer households, local villagers’ committees or local governments.
    . Sourcing arable land in China has been highly competitive because of the increased demand for land for agricultural and other uses. Because the supply of arable land that can be leased from the farmers is limited, competition is fierce in obtaining such leases.
    . According to Frost & Sullivan, in 2009, 99% of arable land with greenhouses was cultivated by individual farmers, while only 1% was cultivated by vegetable production companies like GAGA.

    LABOR
    Business is labor intensive. As of June 30, 2010, we hired 2,348 farm workers to perform all agricultural labor work on farms.
    . GAGA has observed an overall tightening of the labor market in the PRC and an emerging trend of shortage of labor supply in China. Furthermore, labor costs have been increasing in China in recent years and may continue to increase in the near future.
    . However, GAGA does not expect that the overall tightening of the labor market will have a material adverse effect on expansion plans, because GAGA’s standardized production process can be easily followed by farm workers with minimal skills, allowing GAGA to hire farm workers from a large labor pool.

    COMPETITION
    The fresh vegetable production industry in China is highly fragmented
    . GAGA competes for market share mostly with numerous unorganized individual farmers.
    . Among companies engaged in vegetable plantation business, large private vegetable production companies are the leading players
    . GAGA’s  ability to compete successfully in the vegetable production business largely depends on its ability to consistently deliver high-quality, fresh vegetables of desirable color, aroma, freshness, texture, flavor and nutritional value.
    . GAGA believes it needs to further expand its production scale and enhance product offerings in order to compete with competitors successfully.

    USE OF PROCEEDS
    $70mm from sale of 9.2mm ADSs.  Shareholders intend to sell 1.7mm ADSs
    • $62.0 million to fund the construction and improvement of greenhouses and other agricultural facilities; and
    • balance to fund the enhancement of research and development capability, including the development of an information system.

    GAGA Valuation Metrics


    Themes: IPO Stocks: GAGA, MCOX, XRS, CCIH, AMBO, BORN, CCSC, CVGW, CGA, CAGC, AGU
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