China Green Agriculture (NYSE:CGA)

Rodman & Renshaw on CGA:

F4Q10 results overview: China Green Agriculture (“China Green”, Ticker: CGA, Market Perform) reported its F4Q10 results that on balance exceeded our expectations. Total revenue grew 54.5% YoY to $16.2 million, beating our estimate of $14.8 million and Street consensus of $15.1 million. The growth was primarily driven by Jinong branded fertilizer products, which grew 61.4% YoY to $15.3 million and accounted for 94.2% of total sales. This strong performance of Jinong was in turn mainly attributable to larger sales volume which soared 119.5% YoY to 9,315 tons. ASP, on the other hand, decreased to $1,638/ton (derived from sales volume and revenue) from ASP of $2,098/ton in Q3. We believe this was mostly due to the company’s increased sales of powder and granular fertilizer products that commanded lower prices. Gross profit increased 42.8% YoY to $9.1 million. However Q4 gross margin of 56.3% was lower than the 60.9% in F4Q09 and 60.3% in F3Q10. Increased sales of lower margin granular fertilizers again contributed to the lower gross margin, in our opinion. Net income increased 35.5% YoY to $6.0 million, or $0.24 per diluted share, slightly better than our estimate of $5.7 million, or $0.23 per diluted share, but in-line with Street consensus. For the full fiscal 2010, total revenue came in at $52.1 million, exceeding the company’s previous guidance of $50.6 - $51.2 million. Net income reached $21.3 million, or $0.91 per diluted share, within the guidance range of $21.1-$21.4 million, or EPS of $0.90-$0.91. 

FY2011 guidance lower than our expectations: China Green provided its FY2011 guidance with total revenue of $150.5-$152.8 million, net income of $36.2-$36.8 million, and EPS of $1.35-$1.37. The guidance takes into consideration of the revenue and net income contributions of $88.4 million and $10.6 million from Beijing Gufeng Chemical Products Co. (“Gufeng”) it acquired in July. (Please refer to our report published on July 7, 2010 for more details.) We note that this guidance is lower than our previous expectations of $158.6 million of revenue, $39.0 million of net income, and $1.46 EPS. Excluding the revenue and net income contribution from Gufeng, it appears that management expects top-line organic growth will be in the range of 19.2%-23.6% and bottom-line organic growth will be between 20.2% and 23.1%. Both are significantly lower than the YoY 48.0% revenue growth and 40.9% net income growth in F2010. With regard to the Gufeng acquisition, while we believe it can prove to be attractive both financially and strategically for China Green, we await realized benefits from the integration, upgrade of Gufeng’s current chemical fertilizer production facility to organic humic acid-based fertilizer production lines, and capacity utilization ramp-up. We also believe the increased sales of granular fertilizers will significantly compress gross margin in the near term. 

Adjusting estimates and maintaining Market Perform rating: We are maintaining our Market Perform rating on the shares of China Green in light of slower organic growth, margin compression, and uncertainties related to the integration of Gufeng. We have adjusted our estimates in accordance with management’s guidance. For FY2011, we now expect total revenue of $152.5 million, net income of $35.8 million, and $1.33 EPS. Our respective estimates for F1Q11 are $38.4 million, $7.8 million, and $0.29.

 This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Fourth Quarter FY2010 Results

• Total net sales for the three months ended June 30, 2010 were $16.2 million, an increase of 54.5% from $10.5 million for the three months ended June 30, 2009. Net sales of Jinong, which is the division that sells humic acid based compound fertilizers, accounted for 94.2% of total net sales.
  
• Gross profit for the fourth quarter of fiscal year 2010 totaled $9.1 million, an increase of 42.8% from $6.4 million in the same quarter of fiscal year 2009. Gross profit margin was 56.3% for the fourth quarter of fiscal year 2010, down from 60.9% a year ago. The decrease in gross margin was primarily due to significantly higher growth in lower margin fertilizer products such as granular fertilizers.
  
• Operating income for the fourth quarter of fiscal year 2010 was $7.1 million, up 36.2% from $5.2 million in the fourth quarter of fiscal year 2009. Operating margin was 43.7%, compared to 49.5% in the same quarter of fiscal year 2009.
  
• Net income for the fourth quarter of fiscal year 2010 was $6.0 million, up 35.5% compared with net income of $4.4 million during the same period in fiscal year 2009.
  
• For the three month period ended June 30, 2010 basic and diluted net income per share was $0.25 as compared to $0.24 for the same period in 2009, based on weighted average shares outstanding of 24.6 million and 18.6 million, respectively. Net income margin approximated 37.0% and 42.1% for the three months ended June 30, 2010 and 2009, respectively.

"Fiscal year 2010 has been a monumental year for our Company which resulted in exceeding our revenue and net income guidance," stated Mr. Tao Li, Chairman, President and Chief Executive Officer of China Green Agriculture. "We successfully implemented several growth initiatives resulting in the increase of our production capacity and geographic footprint, expanding our product line, and instilling brand awareness. At the end of June, we completed Phase I construction of our new research and development center, which consisted of one hundred sunlight greenhouses. We also launched 23 new liquid-based fertilizer products and added 43new distributors during the fiscal year 2010. To date, we have opened 15 directly-owned retail stores and selected 608 stores as 'China Green Agriculture Authorized Retailer' of our Jinong branded HA compound fertilizer products. In July, we closed on the acquisition of Beijing Gufeng Chemical Products Co., Ltd., which expanded our annual fertilizer production capacity from 55,000 metric tons to 355,000 metric tons. The facility extends our distribution network and broadens our product mix to meet the growing demand for both traditional and organic fertilizers in China, and is expected to contribute at least $10.6 million in net income in fiscal year 2011. With our strong working capital position, growing product offering and expanding R&D capabilities, we feel we are well positioned to gain market share and build on being one of the leading fertilizer producers in China."

Fiscal Year 2011 Guidance

For the fiscal year ending June 30, 2011, management expects

• Revenues of $150.5 million to $152.8 million
• Net income to $36.2 million to $36.8 million
• EPS to $1.35 to $1.37 based on 26.8 million weighted average shares.
• Current analyst EPS estimate is $1.43

For the first quarter ending September 30, 2010, management expects

• Revenues of $38.2 millionto$38.6 million
• Net income to $7.7 million to $8.0 million
• EPS to $0.29 to $0.30 based on 26.8 million weighted average shares.
• Current analyst estimate is $0.35

This guidance reflects the anticipated strong sales resulting from the Company's increased production capacity from 55k metric tons to 355k metric tons.

We have removed China Green Agriculture (NYSE Amex:CGA) from the GeoBargain list.  It had a nice run from our initial article on April 2, 2009 at $3.38. The Fiscal 2010 EPS growth rate guidance is below the GeoBargain 30% requirement. 

Why is EPS growth slowing down in 2010?

• Using the funds from its recent fund raising activities, it will take some time for CGA to complete its (R&D) green house facility expansion .  This arm of China Green's business (agricultural products) develops products resulting from the testing of its liquid fertilizer.  The green house expansion is expected to have its desired financial impact beginning in fiscal 2011.  Thus, in the short-term we may see little growth in this portion of the business. China Green's fertilizer business is expected to continue to grow at a healthy pace.
• Dilution from recent fund raising activities.  

We will continue to track the CGA story due to the tendency of the company to exceed its guidance.  Also, investors that can look beyond the upcoming year will notice that estimates indicate EPS growing over 50% in Fiscal 2011 to $1.33.  The stock is still selling at discount  to its long-term growth rate, which may attract long-term investors.

Valuation Scenarios:

Coded as a GeoBargain on April 2, 2009 at a price of $3.38 

Data Inputs:

Fiscal Year Ends in June

^a CGA is not paying a full U.S. tax rate.  Therefore, All EPS numbers have been adjusted by the GeoTeam® to reflect an U.S. tax rate of 36%.

^b Growth rate calculated assuming that China Green meets its 2009 earnings per share objectives.

Short-Term Valuation Scenarios

Guidance Report:

"We are well positioned to capitalize on the market opportunities within China's fertilizer and agriculture industry. With a national distribution network, state-of-the-art research and development, automated production, and superior after-sales support, we have successfully built one of the premier organic compound fertilizer producers in China today,' stated Mr. Li. By leveraging our new facility, which will be on line in August of 2009, we feel China Green Agriculture is well positioned to gain further market share in China's green fertilizer market, which will translate into long term revenue and net income growth."

Full Year 2009 Guidance Ending June

 * CGA does not pay a standard United States tax rate.

Full Year 2009 EPS Guidance Ending June Adjusted for a Standard Tax Rate 

CGA is the newest addition to the GeoBargain® List and meets Nine of the Ten GeoBargain® requirements.  After reviewing the company's press releases and SEC filings it appears that the company is participating in the right industry at the right time.

Understanding CGA:

CGA is a ''green" company with Two principal product lines motivated by a complex natural, organic ingredient called humic acid, an essential constituent for fertile soil, . "When plant or animal matter decomposes, it naturally turns into a form of humic acid-rich material, such as peat, lignite or weathered coal."  In plain English the company, through its manufacturing process, extracts humic acid to be used as a fertilizer.

The GeoTeam® was initially impressed that company utilizes its operations to create two product lines from one source, which we feel may be beneficial for branding, cross marketing and efficiency goals.

Fertilizer Products; approximately 80% of sales:

Techteam, the manufacturing division of CGA, produces the fertilizer: The ultimate end user for its fertilizer products are farmers dispersed across 27 of the 28 Chinese provinces.  The company does not sell directly to the end user, but uses a network of approximately 500 distributors who place its products among private wholesalers and retailers.  CGA currently has approximately 125 products in its fertilizer line and are used by roughly 20 million farmers.

Expansion goals:

• Distributors:  540 by the end of 2009.
  
• New Product Initiatives:  An additional 21 planned for 2009.

Agricultural Products; approximately 20% of sales:

Jintai is the R&D/testing arm for the company:  In the process of testing Techteam’s fertilizers, Jintai produces products for commercial sale:  "We purchase the seeds of green vegetables and fruits from the agents who import and apply our fertilizers to those products." 

Jintai product categories:

• Top-grade flowers distributed through their fertilizer distribution network.
  
• Green vegetables and fruits distributed to a variety of wholesale markets and supermarkets in Xi’an City.
  
• Multicolored seedlings distributed to the seedling centers and planting companies in China.

Although the company will continue to maximize opportunities in both divisions, the driver of future growth will stem from its higher margin fertilizer division.

Reasons CGA has piqued the GeoTeam's interest: 

1)  Efficiency:

• Two products from one source equates to the maximization of the manufacturing/R&D process.
  
• The company extracts humic acid from weathered coal.  In simple terms, weathered coal is coal that has lost properties due to environmental impacts such as exposure to sun light.  Coal mining companies, who have little use for weathered coal, are eager to sell it.  The result is a cheap source of raw material.
  
• The company utilizes an efficient manufacturing process. "Our fully-automated production line is run by a central control system and only needs the input of control technicians."
  
• Starting in August 2009, a new production facility will significantly increase capacity.
  
• As of the its second quarter financials release the company has an enviable pre-tax margin of 43%.

2)  Strategic management decision

• In touch with end user: "We utilize a multi-tiered product strategy which allows us to tailor our products to different needs and preferences of the different geographic regions across China with different climate and soil conditions which grow different crops with varied needs for fertilizers."
  
• Monitoring of distribution channels: "We developed approximately 80 new distributors during the fiscal year ended June 30, 2008 and terminated approximately 50 distributors based on our evaluation of their performance."
  
• Attempts to diversify:
  
  
  • Total revenues from exported products currently account for approximately 1% of TechTeam’s sales revenue. "We anticipate that this amount can increase significantly as we have recently contracted with foreign distributors to sell our products."  (10K for the year ended June 2008)
    
  • The company is carrying out some projects to develop derivatives from humic acid.
    
    
• Improve margins: Entering new Geographical areas, with emphasis in the south regions, where the company can sell higher priced products.  This will also help to reduce seasonality.

3)  Favorable Industry Trends

• The Chinese fertilizer market is forecast to grow by over 30% for the foreseeable future.
  
• Plenty of opportunity to solidify and create a brand and gain market share.
  
  
  • 80% of China's fertilizer manufacturers are small regional firms.
    
  • Organic compound fertilizers in China represent only 27% of total fertilizer consumption.
    

• Chinese government is pro green.

China is the world's largest consumers and producer of fertilizer.

4)  Confidence

• The company recently disclosed that it will exceed its 2008 make good EPS target of $0.61, issued in conjunction with its reverse merger transaction in December of 2007.

CGA has many of the characteristics that make this a company worth following.  It is operating in an industry with above-average growth rates and has a management team that is keenly aware of its target market.  To help maximize shareholder value, the company recently engaged HC International, Inc.  to help them tell their story to the investment community.  The GeoTeam® will provide updates on CGA as information becomes available.

See also, Potential Valuation Scenarios

Sources: SEC Filings, Press Releases, Company Investor Presentation Material.

Guidance Report:

'Through our recent capacity upgrade to 15,000 metric tons per year, we expect to continue to grow. We anticipate continued strong performance from our greenhouse R&D center with strong growth toward the end of our fiscal year in fertilizer sales as we move into the peak growing season. With the completion of our new, 40,000 metric ton facility, which will come online in the first quarter of our 2010 fiscal year, we expect to maintain our expansion well into the future.'

Third Quarter 2009 Guidance Ending March

   Third Quarter 2009 EPS Guidance Ending March Adjusted for a Standard Tax Rate

Full Year 2009 Guidance Ending June

Full Year 2009 EPS Guidance Ending June Adjusted for a Standard Tax Rate

 * CGA does not pay a standard United States tax rate.

Source: PR Newswire (February 11, 2009)