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  • Nutrastar - A Great Hidden Opportunity For 2014

    Company History and Business

    Nutrastar International (NUIN) is a leading producer of Cordyceps products, a very popular ingredient used in Chinese medicine to enhance health. Its effectiveness is proved, and we also use it in the occident for many purposes: strengthening the immune system, improving athletic performance, reducing the effects of aging and improving liver function in people with hepatitis B.

    Nutrastar is the only company that can produce the sought-after natural herb on a mass commercial scale. The company is the largest producer of this ingredient, currently producing 72 tons annually where the estimated global capacity is around 250 tons. So it has a very attractive and durable competitive advantage, that can be seen in its incredible operating margin of 63%.

    The company also produces organic and specialty food products.

    In the last five years, the revenue has grown at 23% a year, and EBITDA at 34% a year.

    So, we have a good business, that is easy to understand but not easy to replicate, and growing faster than the market.

    Financial Strength

    The company has no debt, and it can expand its operating margin without incurring new debt, so we can be quite unconcerned. Analysts gives Nutrastar a financial Strength of 9/10.

    We will talk about valuation later, but it's important to say at this point that Nutrastar's price is less than NCAV, even less than net cash, is growing its NCAV year by year:

    Management

    The company has a deputy director of the Institute of Edible Fungus, very important for knowing all about Cordyceps, and a Certified Public Accountant that holds a B.S. degree in accounting and finance and an MBA, but the most important thing is that recently acclaimed value investor, Richard Fearon, significantly increased his ownership of the company through private transactions.

    Richard Fearon is the manager of Accretive Capital Partners, and was recipient of HFM Week Magazine's 2011 Best Single Manager Long-Term Performance award among all U.S. hedge funds under $250 million.

    Now, chief executive officer and founder, Ms. Lianyun Han, has been decreased her voting power from approximately 52.7% to 47.2%. It's important for a company not to be controlled by one individual, and I'm sure Richard Fearon can add value to shareholders.

    Valuation

    Now we get into the best part, price. Nutrastar is now selling at $2 per share, when its net cash is $5.57 per share, and net cash is growing month by month. It's selling at a PER of 1.6 and price to tangible book of 0.3, below its conservative liquidation price.

    So, here we have a good business, growing year by year, selling each dollar of net cash for 40 cents, and having a recent investment of a very good value investor (and insider buys). Maybe they are preparing a share buyback program.

    I think it's the greatest opportunity for 2014.

    Risks

    The only risks I see are the volatility and the bid-ask spread; sometimes it's fair, sometimes it's wide. But if you keep calm and wait, I think the margin of safety is so huge that the risk is very limited.

    This is the trend of google searches of the word "Cordyceps":

    (click to enlarge)

    (I'm now long on NUIN.)

    Disclosure: I am long NUIN, .

    Jan 17 11:20 AM | Link | 1 Comment
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