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Wednesday August 18, 2010
Bishop's small cap China bets: Feed and fertilizer
by Tom Bishop, editor BI Research  China-Biotics (CHBT) is a leading producer of probiotics in China; these are most commonly found in yogurt but also used in animal feed and other products. China Green (CGA) is a producer of humic acid based, “green” liquid fertilizer. Both small cap stocks are rated strong buys. In March China-Biotics started up production at its new 150 metric ton probiotics facility (capable of $110 million of bulk probiotics per year) and did 5 tons in March, right out of the gate, which already annualizes to 60 tons per year. They have projected utilizing 50% of capacity by year end. Some 200 potential customers have been testing the product and the company is confident enough about “robust” demand that it has already begun work on expanding production even further. The number of bulk probiotic customers has swelled from 24 at the start of the year to 38 as of 6/30. This includes 5 animal feed customers and the rest are dairy enterprises. 
CHBT recently reported a strong Q1 ending 6/30. Revenues roared ahead 62% to $24.9 million, with a gross margin of 68.6%. This resulted in a 44% increase in Non- GAAP diluted EPS to $.39 vs. $.27 and beat the consensus of $.33 by 18%. Cash totals a hefty $160 million. Revenue growth in 2010 is expected to exceed 50% this year. The FY3/11 EPS consensus of $1.64 (vs. $1.28 last year) followed by $2.41 next year, seems likely to move higher. With the stock at $14.58 CHBT is an absolute table pounder. China Green offers 137 liquid based fertilizers, 4 powdered and one granular. It also sells the produce it grows in its six R&D greenhouses and is in the process of building lots more. It recently completed a manufacturing expansion that increased capacity from 15,000 metric tons to 55,000 and expects to fully utilize this within 3 years, implying some 40-45%/yr. growth, with a utilization rate of 35-38% by the end of FY6/10. CGA has also finalized its acquisition of Gufeng and has upped its expectation of what this bulk fertilizer company will add to its net income, from $8 million to $10.6 million, or $.39 a share. The company has not given guidance for FY6/11 yet, but guidance for FY6/10 which just ended was about $.91, and the consensus for FY6/11 was $1.17 based on its own 250% capacity expansion. And now estimates are ratcheting up conservatively to $1.43. Value Line recently initiated coverage in its main edition indicating that the issue had strong appreciation potential for the coming years, targeting a range of $24 to $40 (midpoint $32) in the next three to five years. With better than 50% EPS growth to $1.40+ on tap for FY6/11 and the PE at 8 the shares appear to have a lot of upside remaining. Accordingly, CGA remains a Strong Buy. Learn more about this financial newsletter at Tom Bishop's BI Research. |
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