As many of you know, we are very bullish on the long-term future of Chinese small cap and mid cap companies for two reasons:
1] The obvious reason – China is the fastest growing economy on the planet and nothing is going to slow down its ascent over the next 50 years and beyond. Investing in growth companies there just makes too much sense.
2] Great Results and Valuations – Many Small Cap Chinese Companies are listing in the US (OTCBB, NYSE Alternext and NASDAQ) with great financial results. Unlike many dubious US Small Cap Companies, Chinese Companies don’t seem to believe in losing money or failing to execute in a business plan. As such, 7-digit revenues and profits are very common.
From a valuation point of view, many Chinese companies became a victim of their own success in Q4 2008 and Q1 2009. Why? When the world needed to start liquidating, one of the first places they looked were China where most investors had significant gains to sell into. This resulted in the proverbial baby being thrown out with the bathwater and some great valuations.
TODAY’S FEATURED COMPANY
China Agritech Inc – OTC.BB:CAGC
China Agritech, Inc. is engaged in the development, manufacture and distribution of liquid and granular organic compound fertilizers and related products in China. The Company has developed proprietary formulas that provide a continuous supply of high-quality agricultural products while maintaining soil fertility. The Company sells its products to farmers located in 26 provinces of China.
On Augsut 17th, the company reported it’s Quarterly Revenues and Net Income for the Second Quarter of 2009.
Check out the full details below!
HIGHLIGHTS
- Net revenue increased 56.9% year-over-year to $21 million
- Gross profit increased 37.3% year-over-year to $8.9 million
- Net income increased 91.2% year-over-year to $5.6 million
MY COMMENTS:
Anytime a company hits record revenue and income, you have to take a closer look and see if you’ve stumbled upon a company that is really hitting its growth cycle.
In this case China Agritech achieved earnings of $0.22/share for the quarter! Even if the company had no more earnings for the year, you’d have a decent P/E. However, in this case, we know the company has re-affirmed annual net income of $9.5 million, which should translate into approximately $0.38/share for the year. With the company trading in the $2.80 range, this translates into roughly an 7.5 P/E. I like that.
The story gets even better. With $16.5 million in cash, China Agritech has about $.80/share in cash. As such, if you strip that out of the share price, you are actually buying the business for $2.00 per share, which bring the true P/E down to about 5.25. The comany has no long-term debt and a current ratio of 5.4 : 1. This is an incredibly attractive opportunity.
As always, this is my view in a snapshot. It is intended to give you a running start into your research. Now, you have to do your own due diligence to make sure the valuation is not impaired by other factors including balance sheet items, lawsuits or any other negative events.
If you have any comments, I’d love to see them below.
YOUR RESEARCH STARTING POINTS FOR CHINESE SMALL CAP AND MID CAP COMPANIES
We’ve provided investors with two great starting points to research great Chinese small cap and mid cap companies.
1. ChinaSecurities.com – ChinaSecurities.com tracks 250 of the best small cap and mid cap companies trading on North American exchanges. It provides you with the best of the best in two ways. First, the front page lists the best news of the day coming out of the space. It does so by giving you a text view of the best press releases by industry and via Chinese Stocks TV, a 5-minute broadcast every morning just after the open. Chinse Stocks TV is archived, so you can catch up on shows you missed.
Second, if you want to research each of the 250 companies to find candidates for your portfolio, it has a very intuitive directory that lets you quickly review each company on the master list, or parse it out by industry and exchange if you have a particular sector of interest. Cool stuff.
2. Right here on AGORACOM, you can refer to our China category for other featured Chinese Small-Cap Companies. As always, we will disclose any IR relationship with any public company. Given the sheer number of great Chinese Small-Cap Companies out there, you can expect us NOT to have an IR relationship with most of these companies.
Regards,
George
Looking at the Agritech space, not just in China and the companies organic growth and growth via acquisiton, this could be one to watch in the second half of 2009 is it not? Sorry not a very technical investor.