China Agritech getting a bit ahead of itself

Not all of these Chinese ADR’s are cheap. This one seems to be due for a pull-back at the moment..

The company is China Agritech (CAGC).

What does it do?

  • Well, it’s in the same market as a favourite of ours, China Green Agriculture (CGA), organic fertilizers in China. No doubt this is a growth market (growing population, fixed amount or even declining amount of land, switching diets to more meat consumption making bigger land yields necessary).

Some metrics

  • A market capitalization of $450M
  • Guided 2009 revenues of $70M, increasing to $114 for 2010
  • Cash of $19M and no debt
  • Operating and Levered free cash flow of $17M and $12M respectively
  • The latest available figures show net profits 63% higher in the first nine months of 2009 (compared to first nine months 2008) although the growth figures reported during the cc of the previous quarter (June09) were considerably lower but there were floodings and the Olympic Games in that quarter (which resulted in 12 cents per share in profits). Q3 earnings per share was

So, well, yes. The company has a lot going for it, no doubt about it. On the presentation of it’s Q3 figures, it guided 2009 net income as $15.6M for the year, and on the 8th of February it guided 2010 revenue as $114M (2009 rev is likely to be $70M), so plenty of growth left in the tank. How to value that?

Number of shares outstanding

  1. Yahoo and FinViz have it at 16.88M
  2. According to the latest filing (Q3) outstanding shares are 7.048M (see table on p.2)
  3. From Q209 CC: Our net income for the second quarter of 2008 was $2.9 million, up 11% from $2.6 million in the second quarter of 2007. Fully diluted earnings per share were $0.12 for this quarter compared to fully diluted earnings per share of $0.14 for the same period a year earlier. Weighted average fully diluted share for the second quarter of 2008 increased to 24.6 million compared to weighted average fully diluted share of approximately 19.1 million in the second quarter of 2007, as a result of an additional approximately 5.5 million shares of common stock issued in private placement in July 2007.
  4. On the 5th of February, the company announced a 2-1 forward split of its shares effective February 8: “The effect of the forward split will be to increase the number of shares of common stock outstanding to approximately 17.3 million from the 8.7 million shares outstanding prior to the forward split. Each shareholder of record as of the close of trading on February 1, 2010, will have 2 common shares for every 1 common share previously held.”

This obviously matters quite a lot. We take the last figure (17.3M) as the right one, as basically someone asked the company about that number. The 7M from the filings probably pertain to the number of shares listed in China, not the ADR’s. $15.6M on 17.3M shares that’s 90 cents in profit per share. If profits rise proportionally with the 2010 revenue growth than they could be roughly $1.35 per share in 2010. Which gives the company a p/e of 20.

We have no doubt it’s a very sound company with 50%+ growth per year so far, so even a p/e of 20 certainly is not terribly expensive. The company did receive money (via a private placement in Oct. 2009) from the Carlyle Group (1.39M shares and 928.5K warrants, as the result of which the Carlyle Group holds 16.5% of the company). One could argue that this gives it a bit of extra reliability, as the Carlyle people probably kicked the tires quite a bit.

So these shares are not expensive. However, however, they are quite a bit more expensive compared to the shares of many other comparable Chinese ADR’s we’re following. Technically it’s also due for a pull-back (it has an RSI of 75 already).

We think a temporary short is very tempting, especially if it rises more in the coming days. It might be a problem to locate the shares though. Many of the Chinese ADR’s sold off rather heavily, China Agritech cannot defy gravity forever.

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