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GeoTeam Meets Companies at Annual Rodman & Renshaw Conference, Part 3 (CGA, CHGI, RDBO)

|Includes: China Green Agriculture, Inc. (CGA), CHGI

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The GeoTeam attended the Rodman & Renshaw Annual Global Investment Conference from Tuesday Sept. 8 to Friday, Sept. 11, 2009.  In addition to viewing investor presentations of numerous companies, we also sat down with the management of several U.S. traded Asian based firms with intriguing growth stories.

China Green Agriculture (NYSE:CGA), ex-GeoBargain. Price ended Sept. 18, 2009, $11.77.

China Green Agriculture, Inc. produces and distributes humic acid ('HA') based liquid compound fertilizer

CGA has performed well for us since our initial article, on April 1 2009 at $3.38 when we coded it as a GeoBargain.

Chief Executive Officer Ying Yang delivered articulate presentations both at the Rodman conference and a private conference venue. Readers of the GeoTeam should be very familiar with the China Green story by now.

Summary of China Green Agriculture's presentation:

  • CGA is confident that it can achieve 30% to 40% top line growth for the next three to five years, accompanied by stable margins. Growth will be fueled by the recent expansion of its production capacity from 15k metric tons to 55 metric tons and plans to build 12 additional green house production facilities.
  • China is the Worlds largest consumer and producer of fertilizer.
  • Competitive landscape is characterized by smaller, inefficient competitors in a highly fragmented market.
  • Although acquisitions may comprise an element of CGA growth objectives, the company must remain nimble as the costs of bringing potential targets to China Green's manufacturing standards may be cost prohibitive.
  • Expanding internationally will be opportunistically explored, but not unduly rushed.
  • Very impressed with the company's automation process, which only requires 11 employees on the production line.

    Why is EPS growth slowing down in 2010?
  • Using the money from its recent fund raising activities, it will take some time for CGA to complete its (R&D) green house facility expansion. This arm of China Green's business (agricultural products) develops products resulting from the testing of its liquid fertilizer. The green house expansion is expected to have its desired financial impact beginning in fiscal 2011. Therefore, in the short-term we may see little growth in this portion of the business. China Green's fertilizer business is expected to continue to grow at a healthy pace.
  • Dilution from recent fund raising activities.
China Carbon Graphite (OTCPK:CHGI). Coded as a GeoSpecial on July 1, 2009 at $0.73. Price ended Sept. 18, 2009, $1.50.

China Carbon is one of China's top three producers of specialty carbon and graphite products.

The GeoTeam met with CHGI management. They remain very enthused regarding the company's growth prospects going forward, especially with the anticipated opportunities present in the nuclear power industry, where CHGI pure graphite can be utilized.

Presentation highlights:
  • Number one producer/wholesaler of fine grain and high purity graphite in china.
  • Top seven carbon and graphite producers in China out of over 400.
  • The complexity of the production process encompassing three to six months creates a high barrier to entry.
  • Much less competition in the high end graphite market.
  • In October CHGI expects to receive a $26 million loan approval, with favorable terms, which will enable the company to accelerate its growth plans.
Plans going forward:
  • Double capacity from 15k tons to 30k tons
  • Focus on the less competitive fine grain graphite and high purity graphite products, which offer higher margins when compared to other carbon markets. The big emphasis in this endeavor will be to penetrate the nuclear power plant industry where China expects to spend 450 billion RMB by 2020. Each reactor contract that CHGI may be able to secure has the potential to generate up to $170 million in revenues with 50% gross margins. Only one Chinese company supplied graphite to nuclear power plants in 2008; at just 2000 tons.
  • Aims for fine grain graphite and high purity graphite to comprise 80% of revenues.
  • Complete acquisitions that will bear the brunt of manufacturing the company's low end products.
  • China Carbon is aggressively pursuing privately held acquisition targets that are substantially larger than CHGI in both revenues and earnings.
Although we were originally concerned that the company did not reaffirm guidance in its second quarter, it is important to note that CHGI reaffirmed its 2009 financial guidance of 15% to 25% growth in revenue and net income, via a recent press release.

Rodobo Intl Inc (OTC:RDBO)

Rodobo is a producer and distributor of high-quality milk formula powder products for infants, children, middle aged and the elderly in the People's Republic of China.

Recall that on August 14, 2009 we indicated that RDBO may qualify as either a GeoSpecial or GeoBargain. We attended the company's presentation after which we met with VP of Finance Rita Jiang to gain a clearer understanding of the Company's operations.

Investors may be familiar with other public companies in this space such as ADY and SYUT. ADY shares have performed remarkably well over the past year and SYUT is slowly recovering from its problems with the recent Melamine contamination scandal in China. Currently, Rodobo's stock is virtually non-existent to Wall Street investors. We deem this to be the result of 3 factors:
  • Rodobo trades on the bulletin board
  • Until recently the company has not embarked on any major IR campaign.
  • RDBO likely has a difficult time appearing on investors' stock screens due to EPS comparisons that appear dire. However, this is solely due to a divergence in shares outstanding post-reverse merger vs. pre-reverse merger.  As this share issue disappears, earnings per share comparisons may become more favorable. Analyst estimates echo this sentiment indicating earnings per share of $0.82 in 2009.  It is possible that the 2009 EPS number will still reflect these share issues.  However, Rodobo's meager P/E of 3.05 (tax adjusted 5.38) on the 2009 estimate may attract value investors. We are also encouraged that RDBO is only operating at 60% capacity, leaving room for upside earnings surprises.
Rodobo currently meets seven out of ten GeoBargain criteria and will likely be coded accordingly after further due diligence.

Questions we posed to RDBO:

Question 1
Why is RDBO only at 60% capacity?

The Company is very conscious of how it utilizes its capacity. The focus is on methodically pursuing high margin opportunities, not just filling capacity.

Question 2
Why is RDBO in only six provinces?

It is the company's goal to target more provinces by carefully expanding the reach of its distribution network. The six provinces include tier2 cities in China and were carefully chosen as focus area due to population density. Completing acquisitions may also be part of the company's province expansion goal.

Question 3
2008 10K indicates large customer concentration (for fiscal 2008 48% from three customers)

We have significantly reduced are customer concentration to a reasonable level.

Question 4
2008 10K indicates that price plays a big part in the Chinese consumer's purchase decision. How does this affect your competitive position as your products are on the higher end of the spectrum?

The Melamine contamination scandal has caused Chinese consumers to become less price sensitive and more concerned about quality and safety.

Question 5
What are Rodobo's funding needs?

The current capital structure is satisfactory unless the company were to consider acquisition opportunities.

Question 6
How do you see the Melamine scare affecting your company?

Our products have not been implicated in the Melamine contamination scandal. Rodobo is located in Heilongjiang Province, one of the world's three major black soil plains and recognized as the world's best area for dairy cow farming. This area was not affected during the melamine crisis.

The company sees the scandal as a way to gain market share, especially given its extra emphasis on delivering high quality products. Actually in 2008 Rodobo International was awarded The Best Quality Control Enterprise for Dairy Products.

Question 7
Why is your product superior in quality?

RDBO does not outsource its raw material milk needs: Rodobo owns newly built dairy farm with 1140 dairy cows and 15 raw milk collection stations
  • Raw material (Milk) is processed within 12 to 24 hours which is much quicker than its competitors
  • Milk is not homogenized.
Presentation highlights:
  • Plans to concentrate on higher margin products such as the infant formula segment of the market.
  • Plans to aggressively target the fledgling high margin middle aged/elderly formula market.
  • The Melamine incident has led to stronger government oversight which may create a barrier to entry
  • Half of the products are green certified.
Disclosure: Long CHGI.OB