GEO Investing

By Ephraim Fields

Man Shing Agricultural Holdings (“MSAH”) is an undiscovered U.S. listed Chinese farmer and processor of high quality ginger.   The company trades at 3.6x FYE Sept 2011E net income (company’s conservative guidance) and 3.3x our estimated net income.  Excluding the large net cash balance of $5mm (which is not needed to achieve guidance), MSAH trades at 3.0x company guidance and 2.7x our estimate.  If this isn’t cheap enough for you, (as illustrated below) we also expect the company to generate year over year EPS growth of approximately 150% for the next few quarters.  As a result, we believe this stock will appeal to both value and growth investors.

The company recently completed a complex capital raise in which it raised $4 million by selling 10 million shares at $0.40 to a few Hong Kong investors (who are unrelated to management).  As a condition to the offering, the Chairman cancelled 3.36 million of his preferred shares, which were convertible into 33.6 million common shares.  So this is rare situation where a company raised equity but dramatically shrank its fully diluted share countNote that the capital raise closed after the December balance sheet, so it is not reflected in the latest financials.  I have shown the pro form results below:

Price:               $0.58

FD Shares:        50.0mm

Eq. Cap                        $29.0mm

PF Cash           $5.6mm

PF Debt           $0.6mm

Ent. value        $24.0mm

Net Income estimates  for FYE Sept. 2011: Equity Cap/ Ent. Value/

Company guidance       $8.0mm                                   3.6x                             3.0x

Our estimate                $8.9mm                                   3.3x                             2.7x

The company’s business is simple and described well in the PPT that the company will be posting on its website, so I won’t spend a lot of time describing the business.   The ginger is planted in April, harvested in October and then stored so that it can be sold rather consistently throughout the year.  In other words, there is not huge variably in quarterly results, although Q3 and Q4 can be somewhat stronger.  The ginger is grown on 5.3 million square meters of land that is leased in China until 2023.  One interesting aspect of the business is that very little of it is actually consumed in China….because of the high quality of its ginger, the company is able to sell its products abroad (and at higher prices) with Japan representing 43% , UK 35% and Netherlands 15% of sales.   If you want to see video on the company , the Chairman first appears at approximately 5:45 of the video broadcast on December 28, 2010. Please click on the following link to view the video, (if link doesn’t work, see press release on jan 4).

In both Q1 and Q2, the company generated approximately $2.2mm of net income.   It is highly likely that Q3 and Q4 will achieve similar if not greater results (due to trends mentioned in the latest earnings release, including the continuing increase in average selling price).  Therefore, we believe that management’s $8 mm net income estimate is too conservative and we are using a net income estimate of $8.9 mm instead.  However, the stock is still cheap even if you use management’s estimate.  Management, who is extremely conservative, provided its guidance in September, but has not updated it since.  The company has only recently begun its IR efforts and recently hired HSC Global, an affiliate of HC International which represents many US listed Chinese companies.   Importantly, as part of its increased IR efforts, the company is presenting at the Rodman conference in China on March 6th and now that Chinese New Year is over, we would not be surprised if management updated its guidance in advance of that conference.

Not only does MSAH trade at a low P/E, but it will experience massive EPS growth over the next few quarters as a result of increasing net income and decreased share count.  To illustrate the likely EPS growth, we have estimated a March 2011 Quarter EPS estimate of $0.05. This assumes no net income growth from the December quarter (a conservative assumption) but reflects the reduced share count of 50 million.  As illustrated below, under this scenario March quarterly FD EPS should increase by 150%.

March 2010A March 2011E

FD EPS                       $0.02                                       $0.05 (2.25/50)

Growth                       na                                            150%

FD Shares                     72.1                                         50.0

So, if we assume the company will generate EPS of $0.05 for each of the next four quarters, that would imply EPS of $0.20 for the NTM.  If we apply a 5.0x multiple to that, it equates to a $1.00 stock price, which is 70+% higher than the current stock price.  Furthermore, this simplistic valuation doesn’t include the $0.10 of net cash per share that the company currently has or the additional cash flow it will generate over the next year.  Nor does the valuation give any credit to future growth that can attained by using the excess cash to increase ginger planting acreage.

We are impressed with management’s commitment to do the things needed to make its US investors happy.  MSAH has (i) hired a solid IR firm, (ii) hired a strong, bilingual CFO who is very accessible, (iii) upgraded auditors (recently hired BDO, as per November press release), (iv) hired reputable lawyers (Loeb & Loeb), (v) understands the importance of under-promising and over-delivering and (vi) is eager to increase its visibility in the investment community.

One blemish on the company is the Dec. 20, 2010 8k discussing the resignation of the former CEO and some allegations he made against the company.  The company has consulted with its legal counsel, denies any wrongdoings and does not believe it has any risk or liability related to these claims.

MSAH is a stable food business trading at ~3.5x net income, has 17% of its market cap in cash, will be reporting quarterly earnings growth of 150%, may soon increase its guidance and will be beginning its enhanced IR efforts by presenting at a conference in early March.