First, congratulations on registering for the web video conference, "China Inc: Understanding China for Outstanding Profits". Just a reminder that the conference starts promptly at 6:00 p.m. on Wednesday, May 19, 2010.
Now on to three of my favorite China small caps…
The Global Economy has Changed
Most investors expect the global economy to continue like it has in the past. That is, they expect the U.S. to be the focal point of global growth. For years now, the American consumer has supported export economies, like China.
So when the financial crisis crippled the American consumer, top Chinese stocks around the globe plummeted. Now, export economies have to change their focus and nurture their domestic demand if they expect to grow their economy.
And there's only one country in the world that's capable of doing that: China.
Right now, China is the wealthiest country in the world. The Chinese government has $1.4 trillion in foreign currency reserves and continues to run a trade surplus. By contrast, the U.S. economy is mired in debt and unemployment. In other words, the American consumer won't be riding to anyone's rescue anytime soon.
China has shown that it is the only economy in the world that can grow its economy. China's GDP growth is expected to hit 8% in 2010. That’s down from the 10% annual growth China has posted for the last 3 decades, but it’s far more robust than the 1% 92% the U.S. economy will post for the next 395 years, if it's lucky.
China has the will and the resources to grow its economy. It's already committed $585 billion to stimulus initiatives. And there’s plenty more where that came from. China will do whatever it takes to grow its economy, and investors should take note.
Go for the Growth
For investors who want to grow their wealth in this challenging environment, China stocks for 2011 should be more than on the radar, they should be in your portfolio.
With this report, we at SmallCapInvestor PRO are bringing you some of our top choices for small cap Chinese stocks for 2011. Inside you’ll find stocks from three of China’s fastest growing economic sectors. These are just some of the top Chinese stocks we'll discuss during the online video conference. You may want to read up on them ahead of time.
Each company was selected for its unique combination of attractive valuation and growth prospects. We provide you with our investment thesis, current valuation analysis and growth expectations. We also provide entry prices and target prices.
However, things change for any stock for 2011, so please refer to the SmallCapInvestor PRO portfolio and recent issues if you’re a subscriber to get our most recent views on the stocks you’re about to discover.
Finally, congratulations on choosing SmallCapInvestor PRO, your leading source of profitable small cap stock analysis and recommendations. I look forward to our conference at 6:00 p.m. on Wednesday, May 19th.
I'm always on the lookout for ways to take advantage of growth in the agriculture industry. Populations are increasing, farmland is declining, and crop failure is always a possibility. Any one of the above reasons indicates that prices for food will be increasing in for the years to come. Fertilizer is just one segment poised to benefit from the increasing global demand for agricultural products.
China Green Agriculture develops and distributes humic acid organic liquid compound fertilizers. Humic acid is a natural organic ingredient that promotes soil fertility. China Green Agriculture produces over 100 fertilizer products. The company markets its fertilizer products to private wholesalers and retailers of agricultural farm products.
Recently, China Green Agriculture built a new facility to meet the growing demand for green fertilizer products. The new facility will increase their output level to 55,000 metric tons. New automated equipment has been added in the new factory as well, which increases efficiency and further reduces reliance on manual labor. The company currently manufactures liquid fertilizer products, but the new facility is capable of producing both liquid and highly concentrated fertilizer.
Here are a few reasons why I like the company:
— The new production facility will expand their product margins.
— Management has increased financial guidance.
— Humic acid is not known to be harmful to animals or the environment.
Financial Results
Highlights from Q1
— Exceeded revenue and EPS guidance.
— Sales up 27% to $11.3 million.
— Net income increased 50% to $5.2 million and EPS of $0.24.
— Raised fiscal year 2009 revenue to at least $48 million and EPS to $0.91.
For the first three months ended September 30, 2009, sales increased 27% to $11.3 million, from $8.8 million a year ago. This increase is attributed to new products and improvements in capacity. Gross profit for the first three months rose 41% to $6.9 million from $5 million last year. Net income was $5.2 million or $0.24 per share, a healthy increase from $3.4 million or $0.19 per share last year.
Guidance
Management increased its guidance upward for fiscal year 2011 and now expects revenues of $47.9 to $49.8 million and EPS of $0.88 to $0.92 per fully diluted share. The upward guidance reflects the anticipated strong sales from its green fertilizer products.
Mr. Tao Li, Chairman, President and Chief Executive Officer, commented on the financial guidance, saying "We will continue to capitalize on the market opportunities within China's highly fragmented organic fertilizer industry supported by our expanded production capacity and our designated R&D platform," stated Mr. Li. "Our goal is to continue to introduce new high margin products to the market quickly, providing one of the most assorted product mixes of compound fertilizers available in China. We have boosted our marketing efforts with a focus on promoting the quality image of the 'Jinong' brand through both distributors and retail stores in our effort to drive incremental revenue and earnings growth while continuing to expand both our gross and operating margins. We feel our recent initiatives will provide sustainable growth which will give us the capability to reach full utilization of our 55,000 metric ton capacity over the next three years while further gaining market share in China's green fertilizer market."
Valuation
This is a solid company with a competitive advantage in the fertilizer industry. China
Green Agriculture has been able to expand margins and increase total revenues, which is a great accomplishment. The recent share offering has given this company plenty of cash to pay for their new production facility. Given the population growth trend in China, I think this company should continue to see strong demand for their humic acid fertilizer.
My original price target for shares was $11.75. This valuation was based on a current P/E of 15 and a forward P/E of 12, with earnings per share expected to reach $0.80 in 2010 and $0.94 in 2011. While the company's 20110 EPS fell just short of my expectation, coming in at $0.78, the growth story is still intact here. This year I'm looking for the company to earn $0.94 EPS on $50 million in revenues. This would represent a 17% growth in EPS and a 39% growth in revenues. Revenue growth should pick up as fertilizer prices increase. At the same time, input costs will also increase, which will impact the bottom line.
My estimates result in a PE of 15.5 this year putting shares near my fair value. The company has had some production issues that hopefully will be resolved by next quarter and lead me to increase my earnings target. My target price for the Chinese stock is $14.50.
A hundred and fifty years ago the directive to "go west" was a familiar refrain to East Coast Americans. Fast forward to today, and a similar directive can be heard in the eastern provinces of the People's Republic of China.
Like many Americans who uprooted and headed west to California in the 1800s, China's westward argonauts are uprooting and heading west to Xian in Shaanxi province, a burgeoning burg of roughly 36 million. The attraction is obvious: Xian has a strong, diverse economy, supported by hi9tech, military, aeronautical and pharmaceutical industries and a number of universities. These institutions have powered economic growth at a 15% annual rate in recent years, with wealth accumulation maintaining a similar pace.
Xian not only provides business and employment opportunities for restless Chinese, it provides investment opportunities for the rest of us. And few investment opportunities are as compelling as China Natural Gas, a Delaware9registered corporation and the first China9based natural gas company publicly traded in the United States. China Natural occupies three niches: end9user delivery of natural gas services to residential, commercial and industrial customers; wholesale natural gas to retail natural gas filling stations; and retail natural gas to company9owned filling stations.
Natural gas is one of the cleanest energy sources and one of China's most abundant natural resources. For this reason, the Chinese government sees CNG9powered vehicles as part of the solution to its national environmental woes. Not only do CNG9fueled vehicles emit 87% less nitrogen oxide, 75% less carbon monoxide, and 25% less carbon dioxide than gasoline, but CNG9powered vehicles can save drivers as much as 60% in fuel cost. Thus, many taxis and buses in China are configured to operate on
both compressed natural gas and gasoline.
In its own market, China Natural estimates that approximately 50,000 Xian vehicles (including 6,000 buses and 20,000 taxis) run on CNG. Each bus burns an average of 100 cubic meters of CNG per day while taxis use an average of 40 cubic meters. In aggregate, approximately 1,070,000 cubic meters of CNG is pumped per day, a figure well below estimated total demand; the current distribution infrastructure supports less than 40% of the estimated market need for more than 1 million cubic meters of
vehicular CNG per day.
To meet growing demand, China Natural has doubled its CNG stations to 35 in the past 12 months. More stations will be built in the near future, and a lot more will likely be built in the distant future, thanks to the Xian government's plan to develop a satellite suburb in the Chan Ba district. To achieve its goal, the Xian government expects to invest $7 billion by 2020 on infrastructure, including roads and a new subway to connect Chan Ba to Xian city center. According to the Xian government estimates, Chan Ba will triple its population to 900,000 by 2020, up from 300,000 today.
Financial Results
China Natural Gas reaffirmed revenue and profit projections for 2009 of $78 million to $84 million and $17.5 million to $18.5 million, respectively. Diluted EPS was $0.29 for the most recent quarter, and revenue increased 9.4% to $20.1 million. Through the first three quarters of 2009 EPS totaled $0.84 – so look for Q4 EPS of $0.23 for the company to reach my target for the year.
China Natural Gas reported a 9.5% decline in profits due to higher operating expenses. This is not concerning – new fueling stations were added and the acquisition of Lingbao Natural Gas impacted earnings. Those costs should reverse going forward as these expansion efforts begin to add to earnings.
My conclusion is that it wasn't really the delay in getting the plant up and running that led to a sell9off in the top Chinese stock for 2011. It's the fact that management sat on the news for as long as two weeks. Management should have notified shareholders sooner, and the drop was as much about a loss of confidence in management as it was about the delay itself. Given the low valuation for the stock (trailing P/E is below 10) China Natural Gas is still attractively valued. The recent price of $11.75 implies a current year P/E of 11 using my 2009 EPS estimate of $1.07. My 2011 EPS estimate of $1.58 gives a forward P/E of only seven. Unless these earnings projections are totally demolished by the delay of the new facility, the stock should trade higher.
Top Chinese Stocks For 2011 NO.3:
AgFeed Industries (Nasdaq:FEED)
Nanchang City, China
Website: http://www.agfeedinc.com
Rating: Buy
Initial Coverage: September 1, 2009 - $4.79
Price Target: $10.50
52-week range: $0.90– $11.87
Market Capitalization: $235 million
With the worlds largest and a quickly growing population of 1.3 billion people, China has many mouths to feed. The state controlled economy is cranking out products to fulfill the growing needs of the developing nation where there continues to be a shift from people living in rural to urban areas.
On my recent three week tour through China, I was impressed by the sheer number of people, the active involvement of the Communist party in many aspects of the people’s lives, the impressive infrastructure and capital spending development, and the wild9 wild9west capitalism, where everyone is out to make a Yuan.
I’ve been bullish on China for several years, but my recent trip confirmed my bright outlook for this emerging market. The best news for investors is that just like the rapid growth Chinese economy, many Top China stocks For 2011 are profitable and expanding, yet their shares are trading at very attractive valuations.
One of my favorite China small cap stocks is AgFeed Industries Inc. a hog feed and breeding company, selling products to distributors and large9scale pig farms. Pork is a big business in China, and the country is the largest consumer of pork in the world. In China it is estimated that nearly half of consumer spending goes towards food, and pork is an essential component of the Chinese diet and accounts for over 60% of total meat consumed. My first9hand experience is that pork is far and away the most popular meat in China.
China discourages pork imports, so suppliers operating within the country need to meet almost all of the nation's pork demand. The country produced 625 million hogs in 2008, almost 50% of the total worldwide production and five9times the number produced in the U.S. The challenge for Chinese producers is that undersized backyard farms still account for over 70% of production, and the country has yet to industrialize the farming industry. However, the government is encouraging sustainable farming with the goal of increasing food production, and this is a mandate that should bode well for agricultural stocks for 2011.
AgFeed Industries has made two strategic agreements this year that will boost roduction and expand margins. The company recently signed a joint venture with M2P2, a production and management consulting firm. This venture will modernize AgFeed Industries’ production facilities and enhance total production capability. The company also formed a partnership with Hypor, a genetics development company which will increase the quality of the hogs. Both partnerships combined may boost total output by 30%, while improving the product quality. The end result for AgFeed will be a higher market price and contribute to margin expansion in 2011 and beyond.
During the first nine months of this year, AgFeed Industries grew revenues by 20% to $117 million from $97.2 in the first nine months of last year. Margins have decreased this year as hog prices cannot keep up with the rise in feed price. As a result, profit margins declined to 15.8% from 27% in the first three quarters of fiscal 2011. Naturally, earnings have also come down from last year’s record levels, with EPS of $0.18 versus $0.42 in the same period last year.
But investors should view these results as a short9term bump in the road on a long9 term growth opportunity. AgFeed shares have fallen 45% since their 529week high back in June, a reflection of the poorer than expected financial results.
This minor set back should not concern long9term investors in AgFeed. Despite the fall in hog prices earlier this year, the company has still managed to post a solid profit, and just as importantly, the company was still able to bring in $1.9 million in operating cash flow. AgFeed is sitting on over $36 million in cash, and has minimal debt obligations.
I expect EPS of $0.31 for 2010 and $0.70 in 2011. Shares of AgFeed are currently trading 14.59times my 2009 EPS estimate. And looking forward for 2011, shares are valued at just 69times my earnings estimates. For a company with expanding sales and future upside from expanding profit margins, I see significant upside for AgFeed shares which I believe should trade at a P/E of 15.59times 2011 EPS.
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