American Lorain, An Undervalued Opportunity

| About: American Lorain (ALN)

One stock that has my attention again is a company that I have been following and tracking for quite a long time. Unfortunately I lost faith and sold my position at the end of 2012 with a considerable loss. One of my first premium articles on Seeking Alpha titled The Long Case Of American Lorain describes the company in detail.

After more than one year of silence suddenly on November 27, 2013 something showed up on my screen again. A press release with the title American Lorain Corporation to Commence Product Sales in Family-Mart Japan.

On December 12, 2013 another press release came out, now with the title American Lorain Corporation Completes Installation of Chestnut Decladding Line. More than one year with no press releases and no conference calls, only SEC filings.

After consulting with my partners, I was allowed to celebrate these two news releases by buying a small speculative position for our investment fund RJT Capital.

The company

American Lorain (ALN) is an integrated food manufacturing company headquartered in Shandong Province, China. The company develops, manufactures and sells the following types of food products:

  1. chestnut products,
  2. convenience foods (including ready-to-cook, or RTC, foods, ready-to-eat, or RTE, foods and meals ready-to-eat, or MRE); and
  3. frozen food products.

The products are sold in domestic markets as well as exported to foreign countries and regions such as Japan, Korea and Europe. Most of their revenues come from sales in China, Japan and South Korea.

What happened to American Lorain?

We have to go back to the beginning of 2012. Back then the biggest shareholder in American Lorain was Guerrilla Capital Management. A fund run by fund manager Peter Siris.

Mr. Siris managed two New York-based funds that were heavily invested in US-listed Chinese small caps. The funds -- Guerrilla Capital and a related firm, Hua Mei 21st Century LLC. -- had about $160 million under management in 2010.

From 2007 to 2010, Siris and his firms sold unregistered securities and engaged in unregistered broker-dealer activity and illegal insider trading tied to China Yingxia International Inc., the SEC said in a complaint filed last year.

China Yingxia a was a nutritional health food business which entered the U.S. capital market through a reverse merger deal in 2006, according to court filings. The company collapsed in 2009 amid allegations that its China-based CEO had engaged in illegal fund- raising activities.

Additionally, Siris, who was regularly asked to participate in Chinese company securities offerings, engaged in insider trading involving other companies, including China Green Agriculture Inc. (NYSE:CGA), SmartHeat Inc. and Puda Coal Inc.

Consequently, Siris has been barred from associating with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization and from participating in an offering of penny stock.

All this criminal behavior had an enormous impact on American Lorain and some other US-listed Chinese small caps, because Siris' Guerrilla Capital fund had to be wind down and the fund's positions had to be liquidated.

This had an enormous impact on the company's shareholders base and of course Lorain's stock price.

Institutional faith

Some institutional investors have been building up a position in American Lorain, so it seems that there is some faith and believe in the company. The biggest holders are Morgan Stanley and SG America Securities.


Connecting with investors

The question remains: Why didn't the company connect with their investors?

We think it had to do something with the going private proposal that the company received on October 15, 2012. This non-binding proposal is pending for more than one year and has not been officially withdrawn. It could be that the CEO and management thought there is no need to inform investors anymore, because it is a done deal.

Personally we don't think CEO Mr. Si Chen is going to offer $1.60 per ordinary share in cash anymore, despite the fact he already owns approximately 46.5% of the company's shares.

A buyout offer could be a better opportunity in the end. We think John B. Sanfilippo & Son, Inc. (JBSS), a processor and distributor of trees nuts and peanuts in the United States could be a perfect fit. If they are seeking international expansion, they can buy American Lorain at bankruptcy levels.


The stock currently trades at $1.09 and with $1.36 in cash and a book value of $5.18 investors have some margin of safety. Quarterly results were mixed but the first nine months American Lorain raked in $0.27. Diluted earnings per share this fiscal year could be more than $0.40, because Q4 is traditionally their strongest quarter. Basically we are looking at a company with a P/E ratio below 3.

Final Note

American Lorain Corporation is a Chinese food manufacturer with international clients, it sells over 240 products to 26 provinces and administrative regions in China as well as to 42 foreign countries.

The latest two press releases have shown that the company is back alive again.

We think the current stock price doesn't reflect the underlying value of the company's business, even if the stock price would double from here.

We have been in contact with American Lorain's management and will share our findings in our next article.

Disclosure: I am long ALN, . I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Dutch Trader is managing partner of RJT Capital, a Dutch-based investment fund in US-listed equities. RJT Capital is long American Lorain (NYSEMKT:ALN). For our current holdings check here.

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