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Tuesday August 31, 2010
China Agritech (CAGC): Organic gains
by Paul Goodwin, editor Cabot China & Emerging Markets Report  Fertilizer companies are thriving in China. And the fastest growth is in the area of organic fertilizers, which are encouraged by the Chinese government. Which brings us to China Agritech (CAGC), a major manufacturer of organic fertilizer. Organic fertilizers account for about 10% of the market in China now, but the government’s goal is to see that number hit 30% within a decade. The company’s organic fertilizers are based on humic acid and other amino acids that boost crop yields without the harmful effects of chemical fertilizers. The fertilizers contain over 30 active ingredients, and can be customized to customers’ specifications as to application methods, crops and soil types. Traditionally, these fertilizers have been liquid. One source says there are roughly 2,000 organic fertilizer manufacturers—obviously, a very round number—in China today, and most of them manufacture in liquid form. 
But last year China Agritech introduced a granular form of fertilizer and the market loves it! In fact, second quarter results, released last week, revealed that while revenues from liquid fertilizer grew 46% from the year before to $22 million, revenues from granular grew 95% to $14.3 million! As a result, China Agritech is now the largest commercial producer of granular organic fertilizer in China! And it’s focused on growing its market share. One way to do that is to simply keep on developing innovative products; the company already produces customized fertilizers for buyers who know exactly what they want. The second way is to follow the government’s lead carefully; that way its products get included in offi cial catalogs. And because 65% of the Chinese population are still farmers, the government really wants to help these people. But perhaps the best way is to acquire competitors. China Agritech is surprisingly profi table for a producer of basic commodities, with an after-tax profit margin that’s ranged from 12.8% to 26.6% over the past three years—there’s normal seasonality. As a result, it has no debt, and a cash hoard of $51 million, quite suitable for rolling up little competitors. The stock came public in September 2009 at 7; we first profiled it February at 21; we bought it in March at 26; and we sold in April at 21 … after which the stock bottomed at 9. But the chart is strong again, buoyed by resilient industry fundamentals, the great second quarter earnings report and the Billiton/Potash skirmish. It crossed above its 25-day and 50-day moving averages in late July, and above its 200-day moving average (on enormous volume) last week. We’re buying now, but if you’re patient you may be able to buy the stock under 16. Learn more about this financial newsletter at Paul Goodwin's Cabot China & Emerging Markets Report. |
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