China Agri Business Inc (OTC:CHBU)

Second Quarter 2011 Results

• Total sales increased 11% to $3,838,000 in the second quarter of 2011 compared to $3,452,574 in the second quarter of 2010.
• Net income increased 200% to $2,256,307 in the second quarter of 2011 compared to $753,221 in the second quarter of 2010
• Earnings per common share increased to $0.17 in the second quarter of 2011 compared to $0.06 in the second quarter of 2010

Approximately 630 branded stores sell the Company's products under the name "Xinsheng Shiji" as of June 30, 2011. The majority of branded stores are located in Shaanxi Province, the Company's local province; the others are located in Hunan and Sichuan provinces. The sales from the Company's traditional sales network increased 126% to $1,800,757 in the six months ended June 30, 2011 compared to $1,003,370 in the comparable period of 2010. For the six months ended June 30, 2011 and 2010, approximately 68% and 84%, respectively, of revenue was generated from the Company's branded sales stores, and approximately 32% and 16%, respectively, of revenue was generated from traditional sales channels.

In December 2010, the Company decided to outsource the operation and ownership of its direct sales stores to subcontractors who bear the risk of operations of the stores, and stopped selling third party products in such branded stores. "This change enables us to focus more on product development, our marketing strategy and business expansion issues," commented Mr. Deng, Chief Executive Officer, President, and Director of the Company. "As a direct result of above change, our gross margin rate increased to 69% in the first half of year of 2011, an increase of 31 percentage points from 38% for the comparable period of 2010."

XI'AN, China, June 24, 2011 /PRNewswire-Asia-FirstCall/ -- China Agri-Business, Inc. ( "China Agri-Business" or "we", OTC: CHBU), a manufacturer and distributor of organic agricultural application products in China, announced that China Agri-Business , through its Chinese operating subsidiary, Shaanxi Xinsheng Centennial Agriculture & Technology Co., Ltd. (the "Company") acquired the right to manage and operate Shaanxi Qinfeng Agrochemical Inc. ("Qinfeng") in Xi'an, China.

Qinfeng is an agrochemical manufacturer. Currently, Qinfeng has an annual production capacity of 400 metric tons of diafenthiuron, 600 metric tons of prochloraz, and approximately 5,000 metric tons of seed coating agents and preparations. Qinfeng's estimated annual revenue is currently approximately 90 million Renminbi ("RMB") (approximately $13.9 million).

Pursuant to the management and operating agreement between the Company and Qinfeng, the Company will manage Qinfeng's operations from June 1, 2011 until December 31, 2013 (the "Term"). The Company is entitled to the net profits or losses from the operations of Qinfeng during the Term. During the Term, the Company has rights to use Qinfeng's production facilities and intangible assets (i.e. trade names, trademarks, and certain licenses), to hire and dismiss employees, to file all applicable registrations with government authorities, and to coordinate with third parties in connection with technical development and production.

The Company agreed: (1) to manage Qinfeng's assets and production lawfully; if production is unreasonably interrupted continually more than two months, Qinfeng may terminate the Agreement and hold the Company responsible for all resulting losses; (2) to be responsible for payment of all taxes and fees, except taxes relating to housing and land and pre-existing taxes and fees; (3) to be responsible for the safeguard of Qinfeng's assets and intangible assets; (4) to be responsible for the safety of production and annual safety production inspections; (5) to be responsible for the validation and registration of fertilizer licenses; (6) to be responsible for the maintenance of current facilities and new equipment if needed; (7) to be responsible for the purchase of workers' compensation insurance; (8) to be responsible for the payment of wages and salaries; (9) to be responsible for all civil administrative and criminal charges in connection with the operation of Qinfeng's assets that occur during the Term.

As consideration for entering into the agreement, the Company paid Qinfeng 1.2 million RMB (approximately$185,000) on June 14, 2011. From January 1, 2012 to December 31, 2013, the Company must pay an aggregate of 2.4 million RMB each year to Qinfeng, payable in installments of 1.2 million RMB (approximately$185,000) due within the first 15 business days of January and July of each year.

Mr. Liping Deng, Chief Executive Officer, President and Director of China Agri-Business, commented, "We are very pleased to have this great opportunity to manage the operations of Qinfeng. Qinfeng has a total of 43 products, licenses or permits registered with Chinese government authorities. Among these products, two agrochemical products, diafenthiuron and prochloraz, are important raw materials for many lower-toxicity pesticide products. Both diafenthiuron and prochloraz products may be sold in domestic markets or exported to European and South-Eastern Asia markets." Mr. Liping Deng continued, "We believe that acquiring the management and operating rights will enable us to expand our product mix quickly and to maintain a sustainable long-term growth. We hope that we will have the opportunity to acquire Qinfeng's business, including assets and intangible assets, in the future."

On June 1, 2011, China Agri-Business, Inc. (the “Registrant”), through its Chinese operating subsidiary, Shaanxi Xinsheng Centennial Agriculture & Technology Co., Ltd. (the “Company”), entered into an agreement (the “Agreement”) with Shaanxi Qinfeng Agrochemical Inc. (“Qinfeng”) to acquire the right to manage and operate Qinfeng. The Company is entitled to the net profits or losses from the operations of Qinfeng during the Term.

Qinfeng is an agrochemical manufacturer. Currently, Qinfeng has an annual production capacity of 400 metric tons of diafenthiuron, 600 metric tons of prochloraz, and approximately 5,000 metric tons of seed coating agents and preparations. Qinfeng’s estimated annual revenue is currently approximately 90 million Reminbi (“RMB”) (approximately $13.9 million).

In 2008, the Company launched a new sales and marketing initiative to establish a closer relationship with farmers through agricultural cooperatives located throughout the rural areas of China. One component of this initiative is called the “Super Chain Sales Partner Program”, which involves stores branded under the name of “Xinsheng Shiji” but owned and managed by third parties. The other is called “Direct Sales Stores”. The Direct Sales Stores were controlled and managed by the Company until December 2010. In December 2010, the Company outsourced the operation and ownership of the Direct Sales Stores to subcontractors who bear the risk of operating of the stores. Since both of the “super chain sales stores” and the “outsourced direct sales stores” were operated under the name of “Xinsheng Shiji”, we refer to these stores as the “Xinsheng Shiji” branded stores. There are approximately 500 branded stores currently. The majority of branded stores are located in Shannxi Province (local province); others are located in Hunan and Sichuan provinces. For the three months ended March 31, 2011, approximately 71% of revenue was generated from our branded and outsourced direct sales stores, and 29% from traditional sales channels.

On March 21, 2011, Xinsheng entered into a contract with a general construction contractor to build a warehouse and distribution center for Xinsheng’s products on the property subject to the land lease discussed above. The estimated cost of the construction, which commenced in April 2011 and is expected to be completed by December 31, 2011, is approximately 3,000,000 RMB ($458,423).

GeoTeam® Note: Fourth quarter 2010 vs. 2009 was $0.13 vs. $0.04.

Expansion plan

On October 21, 2009, Xinsheng received an approval letter from the Bureau of Foreign Trade and Economic Cooperation of Lantian County of Xinsheng’s application to purchase land use rights in Lantian County to establish “Xinsheng Centennial Industrial Zone”.  Xinsheng intends to purchase the land use rights for 66 acres for a term of 30 years.  The land use rights purchase cost is expected to be approximately $4,243,000 (28,000,000 RMB).  In addition, the estimated cost for relocation of local dwellers is expected to be approximately $309,000 (2,040,000 RMB). We intend to pay such amounts through cash generated from operations. As of the filing date of this Form 10-K, the transaction has not yet been finalized due to the delay in processing by the local government.

On November 12, 2010, Xinsheng entered into a Land Leasing Contract with Xi’an Shishang Weiyang Investment & Management, Inc. pursuant to which the Company agreed to lease 24 mu of land (one mu is equivalent to approximately 0.165 acres) located in Zhongcha Village, Petrochemical Road, Weiyang District, Xi’an, China. Pursuant to the terms of the lease, the Company has the right to construct warehouses and processing centers on the land. The Company plans to build a warehouse and distribution center for the Company’s and other organic manufacturers’ products. The term of the lease is twenty-one years, from November 12, 2010 through November 12, 2031. The Company is obligated to pay rent of RMB 360,000 ($54,547) per year. Rent for the first ten years totaling RMB 3,600,000 ($545,472) was paid in November 2010 pursuant to the lease, which amount is being expensed as rent expense using the straight line method over the 10 year period of the prepayment. The annual rental will increase by 12% every three years starting on November 12, 2020. Upon the expiration of the lease, the Company has a right of first refusal with regard to contract renewal.

GeoTeam Note:

In regards to the announcement of the new organic fertilizer facility to be built by the Company, GeoInvesting plans to contact the company to determine whether this facility will be financed internally or through an external source of capital. Stay tuned.

Second quarter 2010 highlights

• Sales increased 391% to $3,452,574 in the second quarter 2010 from $703,875 in the second quarter 2009.

• Gross profit increased 134% to $1,207,644 in the second quarter 2010 from $515,223 in 2009.

• Net income increased 205% to $753,221 in the second quarter 2010 from $246,901 in the second quarter 2009.

• Basic earnings per common share increased 200% to $0.06 in the second quarter 2010 from $0.02 in the second quarter 2009.

• Diluted earnings per common share increased 150% to $0.05 in the second quarter 2010 from $0.02 in the second quarter 2009.

• As of July 31, 2010, China Agri-Business had established 346 Direct sales stores and about 100 Super chain branded stores.

Mr. Liping Deng, Chief Executive Officer, President, and Director of China Agri-Business, Inc., said, "Our 391 percent growth in sales and 205 percent growth in net income in the second quarter 2010 over the second quarter of last year was primarily due to our aggressive expansion of our direct sales stores. In the first half of 2010, our sales increased 326 percent and net income increased 207 percent, compared with the first half of 2009.

"We are continuing to grow. We opened 101 new direct sales stores in the second quarter and another 46 stores in July, so our direct sales stores totaled 346 at the end of July. We expect to reach our year 2010 target of 500 direct sales stores early, by the end of October 2010.

"Our direct sales stores are one part of our new business model that consists of several resources and actions. First is sourcing of raw materials to make our non-toxic and organic products that help farmers increase crop yields and productivity. Second is flexible manufacturing that includes our own production and expansions, plus capacity at plants where we can hire the production to be done as needed. Third is marketing, distribution, and sales, which is where our rapid expansion of our direct sales stores is very important. Fourth is to continue to seek more innovative and more effective products so we are increasingly helpful to the farmers as they grow food for the nation and grow a good profit for themselves. Fifth, of course, is to earn an attractive return on investment for the company and its shareholders, and to continue to reinvest for future growth through geographic market expansion and new and improved products, processes, technologies, and production. And sixth, which is most important, is that we view our relationship with the farmers, as a long-term mutually beneficial partnership to be sustained across many years; they are colleagues and friends, not just customers.

"So, as we are strengthening our connection with farmers, to increase their yields and productivity, we also expect to benefit from higher sales, higher market share, and gradually improving returns on investment in the years to come. We believe our broad offering of products, services, and close involvement and assistance with our farming friends should encourage them to be loyal long-term customers for China Agri.

"With our new business model and related long-term growth programs, we believe our actions will create long-term value for our shareholders. We are very pleased with our results for the first half of 2010."

Second quarter 2010 highlights

• Sales increased 391% to $3,452,574 in the second quarter 2010 from $703,875 in the second quarter 2009.
  
• Gross profit increased 134% to $1,207,644 in the second quarter 2010 from $515,223 in 2009.
  
• Net income increased 205% to $753,221 in the second quarter 2010 from $246,901 in the second quarter 2009.
  
• Basic earnings per common share increased 200% to $0.06 in the second quarter 2010 from $0.02 in the second quarter 2009.
  
• Diluted earnings per common share increased 150% to $0.05 in the second quarter 2010 from $0.02 in the second quarter 2009.
  
• As of July 31, 2010, China Agri-Business had established 346 Direct sales stores and about 100 Super chain branded stores. Mr. Liping Deng, Chief Executive Officer, President, and Director of China Agri-Business, Inc., said,

"Our 391 percent growth in sales and 205 percent growth in net income in the second quarter 2010 over the second quarter of last year was primarily due to our aggressive expansion of our direct sales stores. In the first half of 2010, our sales increased 326 percent and net income increased 207 percent, compared with the first half of 2009. "We are continuing to grow. We opened 101 new direct sales stores in the second quarter and another 46 stores in July, so our direct sales stores totaled 346 at the end of July. We expect to reach our year 2010 target of 500 direct sales stores early, by the end of October 2010.

"With our new business model and related long-term growth programs, we believe our actions will create long-term value for our shareholders. We are very pleased with our results for the first half of 2010." 

China Agri-Business, Inc. announced an increase in the number of its "New Agriculture-Generator" direct sales stores, which contributed to the increase in the Company's sales for the second quarter ended June 30, 2010. The Company expects to report sales of $ 4,993,000 for the six months ended June 30, 2010 compared with sales of $ 1,173,447 for the comparable period of 2009, an increase of 325% that was primarily due to the increase in direct sales stores. According to preliminary estimates, the Company's direct sales stores accounted for about 84% of the Company's sales during the first six months of 2010.

For the 2010 second quarter this should translate into about:

• $3.49 million in revenues vs. $704 thousand.
  
• Net income of $730 thousand vs. $247 thousand (Applying the 2010 first quarter margins of near 22.0%).
  
• EPS of $0.05 vs. $0.02 in 2009. (non-taxed).

Please note that using the margins of the 2010 first quarter may be an inappropriate assumption as the company has hinted that short-costs may rise as it implements the new business plan.

Added to the GeoSpecial list on March 9 2010 @ 0.53.

Catalyst: New business focus piqued our curiosity.
Peak performance: Reached a high of $0.91 on April 12, 2010.
Current Price: $0.62

Current road block: Uncertainty regarding the execution of new business direction; short-term pressure on margins as the company implements its expansion strategy; EPS have yet to break out; uncertainty as to liquidity needs.

Remains on the GeoSpecial list.  The company is experiencing some progress in its expansion plans. Still, this is likely a play for only risk tolerant investors.

Mr. Liping Deng, Chief Executive Officer, President, and Director of China Agri-Business, Inc., said, "In the first quarter this year, we accelerated our initiative called the 'New Agriculture-Generator.' Our primary objective in this initiative is to expand our business by creating our own network of direct sales stores for our products and also by partnering with existing stores to create a super chain of branded stores that feature China Agri-Business products. This initiative should create much closer relationships for us with farmers in the rural areas of China where our direct sales stores and the super chain branded stores are located.

"By the end of April 2010, we had established about 250 direct sales stores, controlled and managed by us, and about 100 super chain branded stores. We are still in the early stage of this expansion. These two distribution channels in the first quarter of 2010 together accounted for 80.84 percent of our sales, while the traditional sales distribution network, which consists of independent wholesalers, distributors, and retailers, provided the remaining 19.16 percent of our sales in the quarter.

"We expect to continue adding direct sales stores and believe that by yearend 2010, we could have as many as 500 direct sales stores selling our products."

Mr. Deng added, "We are continuing to open new direct sales stores and add super chain branded stores to increase sales by selling directly to farmers and by giving them knowledge and technical assistance. We believe that our organic agricultural application products help the farmers improve the quality and yield of their crops, which in turn, should increase our sales and further support our growth and success. While our rapid expansion temporarily depresses our margins and net income, we are highly confident that they will eventually rebound.

"We are encouraged by the early results from our strategy and the highly positive feedback we have received from our clients and partners.

"With our long-term growth programs, including our continuing store expansions, we believe our actions will create long-term value for our shareholders. The first quarter was a great start to what we think will be a very productive year."

Expansion plan:

On October 21, 2009, Xinsheng received an approval letter from the Bureau of Foreign Trade and Economic Cooperation of Lantian County of Xinsheng’s application to purchase land use rights in Lantian County to establish “Xinsheng Centennial Industrial Zone”. Xinsheng intends to purchase the land use rights for 66 acres for a term of 30 years. The land use right purchase cost is expected to be approximately $4.1 million (28,000,000 RMB). In addition, the estimated cost for relocation of local dwellers is expected to be approximately $299,000 (2,040,000 RMB). As of the filing date of this Form 10-Q, the transaction has not yet been finalized due to the delay in processing by the local government.

China Agri-Business commented on its 10K it issued on April 15, 2010:

Comments from press release:

Mr. Deng summarized, "Clearly, we were very aggressive in 2009 in expanding our distribution channels, getting direct contact with farmers, and gaining access to land use rights to prepare for our future growth, all while continuing to manufacture our organic agricultural application products that help farmers grow more and better crops. These efforts added expenses in 2009, which pressured our net income.

"As we continue our expansion and long-term growth programs in 2010, although they are likely to continue to pressure net income, we believe that they will create long-term value for our shareholders. An additional benefit is the support and encouragement we give to farmers, which we believe should further support our growth and success. We look forward to 2010 with great excitement."

Comments from 10K

"Gross profit margin, which is measured as the ratio of gross profit to sales, was 64.93% for the year ended December 31, 2009, a decrease of 7.10 percentage points as compared to 72.03% for the year ended December 31, 2008. We expect that our gross profit is to decrease continuously in the coming year with the expansion of our direct sales stores."

We need to attain clarity on the following statement: "We expect that our gross profit is to decrease continuously in the coming year with the expansion of our direct sales stores."

Was this a typo? Is management referring to gross profits or gross margin percentage?

We will attempt to digest this news in the coming days as relates to net income, but the 10K comments seem fairly clear that EPS growth may not be in the cards for 2010, especially if an equity raise is used to fund growth. The 2010 first quarter results should provide us with some more answers and insight into CHBU further qualifications as a GeoSpecial.

Recall that on March 9, 2010 we coded China Agri Business as a GeoSpecial @ $0.53. In a market that has seen shares of agricultural stocks explode (China Green Agriculture (NYSE:CGA), China Agritech Inc (NASDAQ:CAGC), and now Yasheng Group (PINK:YHGG)), CHBU has gone virtually unnoticed....until April 9, 2010, when the stock traded 129 thousand shares vs. a ten day average volume of around 1 thousand shares and climbed 32 cents to $0.86, subsequent to an  alert we issued that the company has retained the services of an IR firm. We have to thank DutchTrader, one of our members, for the heads up on this piece of news that was tucked away in an 8K filing. We have visited this story a few times. The last time was in an article titled Chinese Small Caps Affecting a Catalyst for Change on October 14, 2009. Five months later the stock was still trading at less than its book value per share of $0.76 and its cash per share of $0.65 with a whopping current ratio of 14.50!

In early March of 2010 the GeoTeam interviewed CHBU management.  We were still in the midst of our due diligence, but Friday's aggressive move in the stock has prompted us to discuss our preliminary findings:

China Agri manufactures and sells non-toxic organic fertilizer products used for farming in China. Farmers that use CHBU's fertilizer can attach the green label to their products. The company began operations in 2004 and has seen its taxed adjusted non-GAAP^a EPS grow steadily from  negative $0.01 to positive $0.08 in 2008. Unfortunately, 2008 was met with natural disasters of weather, massive flooding and an earthquake that impacted its independent distribution network. Throw a global recession into the mix and you had the perfect storm. Remarkably, sales have only dipped slightly and the company still remains profitable.

We Can point to four factors for CHBU has not received much investor love:

1. The company still has not fully recovered from the 2008 events, as evidenced by lack luster sales and EPS growth for some time now: (SEC filing excerpts)

"The farmers in the disasters affected areas are reluctant to buy organic fertilizer due to poor income in 2008."

"We expect that our sales in the disasters affected areas will continue to be negatively impacted through the remainder of 2009."

2. Although consistent, annual EPS growth had not been explosive.

3. Quarterly EPS growth has been inconsistent.

4. No IR campaign

With respect to the last point, the company has now solved its IR problems. We were surprised that the company had already addressed this issue; maybe a sign that business has turned. More importantly, CHBU is taking steps to boost growth. Until recently, the company sold its products solely through independent distributors. About a year ago, it launched a “New Agriculture-Generator� program to expand into rural areas where it did not have a significant presence. This has resulted in CHBU:

"Creating Super Chain Sales Partner Program”, whereby the Company agrees to provide a $3,000 advance payment to participating retailers in exchange for their commitment to purchase and sell approximately $14,000 worth of the Company’s products per year."

Additionally, the company has established direct owned stores where other product offerings, aside from CHBU's, are sold...

Another component of this initiative, in conjunction with participating retailers, is to establish a membership system that would enable the Company to measure and monitor the use of its products by farmers and to improve the company’s efforts to provide training and other support services to farmers.

At the end of 2009 China Agri had established 103 branded super chain stores & 49 direct sales stores. Already, in 2010, the company has opened about 150 new direct sales stores in Shaanxi and Hunan Provinces with aggressive goals to continue its expansion initiatives.

To further jumpstart growth the company just acquired a new product license to produce potassium and magnesium fertilizer. It is too early tell how this high volume but lower margin business will perform. But at the very least it should give CHBU an avenue to increase its customer base.

As far as capacity goes, CHBU's manufacturing capacity stands at approximately 540 tons per year with the potential of another 240 tons through the use of third party contract manufacturers. At times, the company is at full capacity which may indicate a need for funds if demand ramps up.

We hope the next few quarters will help us gain a clearer picture of the CHBU growth plan, including the significance of the new product line and funding requirements. In the meantime, despite the many unknowns and the fact that CHBU is still a tiny company, we are willing to take a chance on a profitable company, in a favorable industry, that is now selling around book, especially as the "end of the world" scenario has been taken off the table. Judging by the strong performance of many "Chinese Hybrid" penny stocks in similar scenarios, we feel it is too risky for us not to have some exposure to situations like this.

We posed the following questions to management:

1. Q: Have your farmers that were affected by 2008 resumed normal order patterns?

A: The farmers affected by weather disaster in 2008 recovered and they will buy our product normally

2. Q: How many independent distributors do you have now?

A: The company has 195 distributors in 21province. Such as,Sichuan,Xinjiang,Hunan,Hubei,Guangxi,Guangdong,Guizhou,Shaanxi,Gansu,Shandong,Shanxi,Anhui,Hebei,Liaoning,Jiangsu,Jilin,Neimeng,Ningxia,Jiangxi, ,Heilongjiang, Zhejiang .Three cities, such as Chongqing, Tianjin Beijing .we plan to add other 20-30 distributors in this year

3. Q: What is your required sale per direct store target?

A: The company plan to enlarge direct stores amount after March 2010, each direct stores expected sales 80,000-10,000RMB per year. 

4. Q: What is the status of your 424B3 filed on November 16, 2009.

A: TBA

5. Q: Are you operating at full capacity? If not where are you in terms of capacity?

A: Our operating not at full capacity, now the produce capacity about 50% in the full capacity

6. Q: When did you begin adding your direct sales stores?

7. Q: How big is your potassium and magnesium fertilizer venture?

A: More than 20,000tons per year

8. Q: What are the sales per distributor figure?

A: It is hard to describe.  We have 195 distributors, and the sales figures are different respectively.