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By Ian Wyatt, Chief Investment Strategist, Jason Cimpl, Equities Research Analyst
October 23, 2009 Washington, D.C.
The Global Economy has Changed Most investors expect the global economy to continue like it has in the past. That is, they expect the U.S. to be the focal point of global growth. For years now, the American consumer has supported export economies, like China. So when the financial crisis crippled the American consumer, stocks around the globe plummeted. Now, export economies have to change their focus and nurture their domestic demand if they expect to grow their economy. And there’s only one country in the world that’s capable of doing that: China. Right now, China is the wealthiest country in the world. The Chinese government has $1.4 trillion in foreign currency reserves and continues to run a trade surplus. By contrast, the U.S. economy is mired in debt and unemployment. In other words, the American consumer won’t be riding to anyone’s rescue anytime soon. China has shown that it is the only economy in the world that can grow its economy. China’s GDP growth is expected to be 6% this year, and may hit 8% next year. That’s down from the 10% annual growth China has posted for the last 3 decades, but it’s far more robust than the 1%-2% the U.S. economy will post for the next 3-5 years, if it’s lucky. China has the will and the resources to grow its economy. It’s already committed $585 billion to stimulus initiatives. And there’s plenty more where that came from. China will do whatever it takes to grow its economy, and investors should take note. Go for the Growth For investors who want to grow their wealth in this challenging environment, China stocks should be more than on the radar, they should be in your portfolio. With this report, we at Wyatt Investment Research are bringing you our top choices for small cap Chinese stocks. Inside you’ll find stocks from three of China’s fastest growing economic sectors. There’s energy, biotech and agri-business. Each company was selected for its unique combination of attractive valuation and growth prospects. We provide you with our investment thesis, current valuation analysis and growth expectations. We also provide entry prices and target prices. Finally, congratulations on choosing Wyatt Investment Research, your leading source of profitable investment analysis and recommendations. Happy investing, Ian Wyatt Chief Investment Strategist Wyatt Investment Research
China Green Agriculture (AMEX: CGA) Xian, China Website: http://www.cgagri.com Rating: Buy Initial Coverage: $7.56 - June 2, 2009 Price Target: $14 52-week low/high: $1.84 – $15 Market Capitalization: $140 million
I'm always on the lookout for ways to take advantage of growth in the agriculture industry. Populations are increasing, farmland is declining, and crop failure is always a possibility. Any one of the above reasons indicates that prices for food will be increasing in for the years to come. Fertilizer is just one segment poised to benefit from the increasing global demand for agricultural products. China Green Agriculture develops and distributes humic acid organic liquid compound fertilizers. Humic acid is a natural organic ingredient that promotes soil fertility. China Green Agriculture produces over 100 fertilizer products. The company markets its fertilizer products to private wholesalers and retailers of agricultural farm products.
Recently, China Green Agriculture built a new facility to meet the growing demand for green fertilizer products. The new facility will increase their output level to 55,000 metric tons. New automated equipment has been added in the new factory as well, which increases efficiency and further reduces reliance on manual labor. The company currently manufactures liquid fertilizer products, but the new facility is capable of producing both liquid and highly concentrated fertilizer. Here are a few reasons why I like the company: · · · The new production facility will expand their product margins. Management has increased financial guidance. Humic acid is not known to be harmful to animals or the environment.
Financial Results Highlights from Q3 · · · · Exceeded revenue and EPS guidance. Sales doubled to $8.8 million. Net income increased 133% to $3.9 million and EPS of $0.21. Raised fiscal year 2009 revenue to at least $32.8 million and EPS to $0.71.
For the first nine months ended March 31, 2009, sales increased 61% to $24.7 million, from $15.4 million a year ago. This increase is attributed to new products and improvements in capacity. Total sales volume has risen 54.4% to 10,799 tons. Operating income for the first nine months of 2009 rose 71% to $11.9 million from $7.0 million in 2008. Net income was $10 million or $0.54 per share, a healthy increase from $6.4 million or $0.48 per share last year. Guidance Management increased its guidance upward for fiscal year 2009 and now expects revenues of $32.8 to $33.3 million and EPS of $0.71 to $0.74 per fully diluted share. The upward guidance reflects the anticipated strong sales from its green fertilizer products. Mr. Tao Li, Chairman, President and Chief Executive Officer, commented on the financial guidance, saying "We believe CGA will continue to benefit by offering high yielding and environmentally sustainable fertilizers which are paramount to China's agricultural production capabilities in the face of shrinking arable land, ongoing consumer food safety concerns and growing population. Supported by a vertically integrated platform that utilizes 511 distributors to sell our 131 branded products through 27 provinces in China, we have built an organization with multiple
competitive advantages and superior operating metrics, as evidenced by our third quarter 2009 gross and operating profit margins of 57.3% and 50.4%, respectively. 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." Valuation This is a solid company with a competitive advantage in the fertilizer industry. China Green Agriculture has been able to expand margins and increase total revenues, which is a great accomplishment. The recent share offering has given this company plenty of cash to pay for their new production facility. Given the population growth trend in China, I think this company should continue to see strong demand for their humic acid fertilizer. In spite of recently raising financial guidance, I'm betting that the company will exceed their own goals. My revenue estimate is inline with the company's, but expect the new production facility will impact the bottom line more than expected. My sales estimate calls for $33.1 million with EPS at $0.80 per share. Next year I'm looking for the company to earn $0.94 EPS on $44 million in revenues. This would represent a 17% growth in EPS and a 33% growth in revenues. Revenue growth should pick up as fertilizer prices increase. At the same time, input costs will also increase, which will impact the bottom line. My estimates result in a PE of 16 this year and 14 for fiscal 2010. A fair valuation for this stock is 17 times current year estimates and 15 times forward year estimates. My target price for the stock is $14.
China Natural Gas, Inc. (Nasdaq:CHNG) Xian, China Website: http://www.naturalgaschina.com Rating: Buy Initial Coverage: $6.14 - May 5, 2009 Price Target: $14 52-week low/ high: $3 / $18 Market Capitalization: $158 million
Why we like China Natural:
• • •
Natural gas usage in China is expected to increase to 11% by 2010 from 3%. Xi'An puts 300 new vehicles on the road per day; 20% are CNG hybrids. CNG is a cheaper alternative than gasoline.
A hundred and fifty years ago the directive to "go west" was a familiar refrain to East Coast Americans. Fast forward to today, and a similar directive can be heard in the eastern provinces of the People's Republic of China. Like many Americans who uprooted and headed west to California in the 1800s, China's westward argonauts are uprooting and heading west to Xian in Shaanxi province, a burgeoning burg of roughly 36 million. The attraction is obvious: Xian has a strong, diverse economy, supported by hi-tech, military, aeronautical and
pharmaceutical industries and a number of universities. These institutions have powered economic growth at a 15% annual rate in recent years, with wealth accumulation maintaining a similar pace. Xian not only provides business and employment opportunities for restless Chinese, it provides investment opportunities for the rest of us. And few investment opportunities are as compelling as China Natural Gas, a Delaware-registered corporation and the first China-based natural gas company publicly traded in the United States. China Natural occupies three niches: end-user delivery of natural gas services to residential, commercial and industrial customers; wholesale natural gas to retail natural gas filling stations; and retail natural gas to company-owned filling stations. Natural gas is one of the cleanest energy sources and one of China's most abundant natural resources. For this reason, the Chinese government sees CNG-powered vehicles as part of the solution to its national environmental woes. Not only do CNGfueled vehicles emit 87% less nitrogen oxide, 75% less carbon monoxide, and 25% less carbon dioxide than gasoline, but CNG-powered vehicles can save drivers as much as 60% in fuel cost. Thus, many taxis and buses in China are configured to operate on both compressed natural gas and gasoline. In its own market, China Natural estimates that approximately 50,000 Xian vehicles (including 6,000 buses and 20,000 taxis) run on CNG. Each bus burns an average of 100 cubic meters of CNG per day while taxis use an average of 40 cubic meters. In aggregate, approximately 1,070,000 cubic meters of CNG is pumped per day, a figure well below estimated total demand; the current distribution infrastructure supports less than 40% of the estimated market need for more than 1 million cubic meters of vehicular CNG per day. To meet growing demand, China Natural has doubled its CNG stations to 35 in the past 12 months. More stations will be built in the near future, and a lot more will likely be built in the distant future, thanks to the Xian government's plan to develop a satellite suburb in the Chan Ba district. To achieve its goal, the Xian government expects to invest $7 billion by 2020 on infrastructure, including roads and a new subway to connect Chan Ba to Xian city center. According to the Xian government estimates, Chan Ba will triple its population to 900,000 by 2020, up from 300,000 today. Financial Results Revenue in the second quarter of 2009 increased 22.8% to $20.7 million from $16.9 million in the second quarter of 2008. Gross profit in the second quarter of 2009 expanded 34.1% to $10.3 million, from $7.7 million in the prior year's period. Non GAAP net income grew 34.5% to $5.2 million, versus $3.9 million in the second quarter of 2008. Adjusted earnings per diluted share were $0.35 from $0.27 per
diluted share in the second quarter of 2008. We have a $14 price target on the stock. Although revenue growth will be determined by natural gas prices, management has proven their ability to control corporate costs and protect company margins.
China Sky One Medical (Nasdaq:CSKI) Harbin, China Website: http://www.skyonemedical.com Rating: Buy Initial Coverage: $14.00 - May 12, 2009 Price Target: $19 52-week low/ high: $6.29 / $19.11 Market Capitalization: $230 million
China Sky One Medical (Nasdaq:CSKI) develops and sells over-the-counter nutritional supplements and over-the-counter plant and herb-based medicinal products in PR China. The products have a range of uses from weight loss to pain relief to skin sanitization. From a fundamental view, this stock is cheap. Currently shares trade at just 7 times the current year EPS estimate of $2.23 and a mere 5 times forward earnings of $2.65. Revenue growth is equally strong. Total sales are expected to grow 40% to $127 million this year. In the 12 months ended Dec. 31, 2008, China Sky One Medical earned over $27 million in cash flow from operations. The best part about this company is the $50 million in cash and zero debt.
The stock is not for the average risk tolerance type investor. Stock owners should expect massive swings from time to time. Invest accordingly. We have set a $19 price target on shares of the stock citing strong earnings and revenue generation.
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Going for Growth: 3 Top Chinese Stocks to Buy NOW
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