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
"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
For the first quarter ending September 30, 2010, management expects
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?
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
2009 Guidance 2008 Reported Period Change *EPS $0.56 to $0.59 $0.38 47.37% to 55.26%
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:
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:
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:
2) Strategic management decision
3) Favorable Industry Trends
China is the world's largest consumers and producer of fertilizer.
4) Confidence
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.
GeoNuggets®- Quick Check List Highlighting Undiscovered Opportunities.
China Green Agriculture Inc (AMEX:CGA)
Price: $3.31
Trailing P/E (tax adjusted): 8.49
Fiscal Year Ends In June
**12 Months trailing EPS (tax adjusted ): $0.39
**Published analyst estimates for 2010 (tax adjusted): $0.71
Description: Produces and distributes humic acid ('HA') based liquid compound fertilizer. All of company’s fertilizer products are certified by the PRC government as green products and suitable for growing Grade AA 'green' foods
Reasons for optimism:
1. The company meets nine out of ten GeoBargain categories
Recent 52-week highThe stock has recently attained a new 52-week high. 30% EPS growth rateEarnings per share (EPS) growth rate should generally be a minimum of 30% and increasing year over year. 10% revenue growthThe company has the ability to grow revenues by at least 10% year over year. Strong balance sheetThe company has strong a balance sheet. 15% ROEReturn on Equity (ROE) is at least 15%. 8% pre-tax marginsThe company is seeking profit margin improvements to ultimately achieve minimum pretax operating margins of 8%. Under 50m sharesThe company should generally have fewer than 50 million shares outstanding, but exceptions to this rule are routinely made. High insider ownershipThere is high insider ownership of this stock. Limited institutional ownershipThere is limited institutional ownership of this stock. P/E at least 1/2 of EPS growth rateThe company's price-to-earnings ratio (P/E) should be least half of its earnings per share (EPS) growth rate.
2. The company operates in a favorable Industry with favorable growth trends of over 30%.
3. The company has a diversified customer base.
4. Opportunities to capture market share are attractive, as the company holds less than a 5% market share position.
5. The company may be recession resistant. A significant amount of the company’s products are marketed to farmers whose end market is food products for the consumer
Potential valuation scenarios if the company can achieve its EPS growth goals.
Potential value based on fully taxed adjusted trailing EPS
o P/E 15* $0.39= $5.85
o P/E 20* $0.39= $7.80
o P/E 25* $0.39= $9.75
Potential value based on fully taxed adjusted 2010 EPS published analyst estimates
o P/E 10* $0.71 = $7.10
o P/E 15* $0.71 = $10.65
** All EPS numbers have been adjusted by the GeoTeam to reflect a United States standard tax rate.
The GeoTeam will provide a follow-up discussion in the near future.
These scenarios are not intended to be investment advice, but are scenarios based on some commonly used investment guidelines. They are provided to aid investors in making their own investment decisions.
'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
Source: PR Newswire (February 11, 2009)
June 30
Agriculture
cgagri.com