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China Organic Agriculture (CNOA)

|Includes: China Organic Agriculture, Inc. (CNOA)

CNOA is an interesting company, with huge potential and lots of risk.  It is a small Chinese company with a market cap of under $100 million.  CNOA is made up of 4 parts, Ankang Agriculture, Dalian Huiming, Bellisimo Vineyard, and Changbai Eco-Beverage.  The focus of this company is the distribution and sales of agricultural products and wine within China.  The management team seems very dynamic, changing strategies and acquiring and selling businesses at a decent rate.  Their target customer is the fast-growing upscale consumer population throughout the Asia-Pacifiic region.

Ankang mostly deals with rice, soybeans, kidney beans, and mushrooms. This business does not appear on any quarterly reports since 1Q09.  This may be because management decided to switch to higher margin products.  Ankang owns 60% of Bellisimo Ice Wine.  This joint venture with Xinbin Manchu Autonomy County East Star Wine Company is intended to enable them to market premium wines and specialty ice wines in China.

Dalian Huiming, which they acquired 60% ownership when they purchased Princeton International Investment, deals with soybeans, corn, and cereal crops.  The majority of CNOA's revenue and profits come from this business.

Bellisimo Vineyard is a vineyard in California.  They provide grapes to a few local wineries.  The intent of this purchase is to import wine into China.  Most of the income of this property currently comes from the renting of some buildings on the property.  CNOA has a deal with Red Wine Saga Company to sell wine in China under the Ballisimo name, but the payments of the deal is on hold until they start delivering the wine, which has not happened yet.  I have heard from some bears that they bought this property for their personal fun.  I doubt that is true.

Changbai Eco-Beverage deals with blueberries.  They make drinks and food products with blueberries.  CNOA is in the process of purchasing 60% of this company.  It should get approved and closed before March 3, 2010.  This business is currently very profitable.

CNOA used to own ErMaPao, which dealt with rice production and processing, but they sold this business in 2008.

CNOA is very profitable, and trades at a very low PE.  This stock has risks though.  The biggest risk I see is that they get a majority of their sales from two customers.  If either of these customers were to switch suppliers, it would hurt CNOA.  Another risk is competition.  They are a small fish in a big ocean.  Another risk is that management could dilute the shares too much.  They increased the outstanding shares from 51.55 million to 73.16 million in 2009.

I like the decision to purchase Changbai.  This will add about $1 million in net income immediately.  I am not sure about the Vineyard purchase, but I do like the idea of getting into the business of selling wine to China.

Technically, this stock looks good.  It had a big run up in October, then got crushed after Q3 earnings, but has since rallied big again.  If it can breakout to a new 52 week high, I can see this stock making it close to $4.  That is a significant profit, which comes at a significant risk.

I personally own shares of CNOA, and have enjoyed (and cursed) this wild ride.  I am holding it until it reaches my target of $4 or unless something changes with the company.

Disclosure: long CNOA