Below you will find a sample recommendation from a past issue and a number of sample updates. Issues generally run 12 pages in length. The first two pages or so are devoted to a new stock recommendation, followed by a market update, with the remaining 9 pages of the issue devoted to detailed updates on every stock previously recommended until it is sold. For more information about BI Research click here to go to our home page. (www.biresearch.com)
Celebrating our 29th year!
P.O. Box 133, Redding, CT 06875 July 22, 2009
Year 29, No. 5 DJIA- 8,744
S&P 500- 940
China Green Agriculture
(CGA $8, ASE)*
Year ending June 30th, 2006 2007 2008 2009E 2010E
Net Revenue ($ billions) 7.9 15.2 22.6 33 43
Net Income ($ millions) 2.7 6.9 9.0 13.3 18
Adjusted EPS, Diluted ($/share) na .64 .61 .72 .92
Avg. Diluted Shares (millions) na 10.8 14.7 18.6 19.5
Whatever you are hearing about the global recession, China as a whole is not part of it. Yes they have some unemployment in the manufacturing sector, but several onsite reports that have come back to me in the past week all say the same thing- the place is still booming. China's idea of a slowdown is when GDP growth slows from 12% down to 8%. And to be clear, despite global economic turmoil, growth in 2008 was still 8% and the forecast for 2009 has recently been raised from 6% to 8% again. In Q1 their economy grew 6.1%, in Q2 it grew 7.9%... by contrast in the U.S. a great year is 3-4% growth in GDP… and by the way we saw GDP decline about 6% in the first half. If you need any further confirmation, Chinese auto production soared 48% year over year in the most recent quarter.
All of this is to say if it seems like we are recommending a fair amount of companies in China… you are absolutely right. It's where the growth is. And if you think it's a risky place to invest, in some way perhaps it is. But they didn't have some of their biggest financial institutions fail or all but fail. They didn't have two of their three biggest car makers go into bankruptcy. They never saw GDP growth even come close to going negative as we have. They are not the ones borrowing from us. It is us borrowing from them. So where is the riskier place to invest again?
As China rides a wave of emergence and development, its middle class is swelling and they want all the things that much of the rest of the world has- cell phones, internet access, television, appliances, better healthcare, more meat in their diet and just better food in general, including "greener" food (not quite organic as we define it in the U.S.). While China has a number of important initiatives in healthcare, energy and pollution control just to name a few, one of its most important, if not the most important is to help Chinese farmers grow enough food to feed their own country. China does NOT like to import if it can possibly help it.
As a result, China is now the world's largest consumer of fertilizer using about $36 billion dollars of the stuff. However, consumer food safety and environmental concerns have led to an increased resistance to overuse (often nearly twice the safe limit in developed countries) of harsh chemical fertilizers from the perspective of consumers and the government As a result, green fertilizer products like those produced by China Green Agriculture are occupying an increasingly important niche in China's fertilizer industry.
Through its wholly owned subsidiary Shaanxi Teach Team Jinong Humic Acid Product Co ("Tech Team"), founded in 1998, China Green Agriculture develops and manufactures proprietary humic acid-based liquid compound fertilizers which substantially increase the fertility of soil. It distributes these to retailers of agricultural products and private wholesalers in 27 provinces throughout China. China Green currently offers 131different liquid fertilizer products, all of which are certified as Green fertilizers by the PRC Ministry of Agriculture and can be used for growing "Green Foods," which contain little or no chemical materials, as certified by the China Green Food Development Center. Currently Tech Team produces and sells about 15,000 metric tons per year, about all existing facilities were capable of. However, the Company has just completed a new 148,000 s.f. facility ultimately capable of producing an additional 40,000 tons (for a total of 55,000 tons). The new facility should be on line producing by August and ramp up to full capacity within three years. Based on its growing distribution network, strong marketing efforts and sustained market demand for its green fertilizer products, the Company expects that its increased capacity will be quickly absorbed by the Chinese fertilizer market. China Green was the first company in China to build an entirely automated manufacturing system which precisely measures and mixes key ingredients to formulate its unique fertilizer products, and this new facility is automated as well, increasing efficiency and reducing reliance on manual labor. This new facility will fuel the Company's growth for the new fiscal year ending 6/30/2010 as the Chinese government seeks to increase farmer's income and boost the growth of diversified crops, especially for organic food. Currently China Green has less than 2% of the liquid fertilizer market.
Traditional chemical fertilizers have a negative impact on the soil after a period of overuse (to get the most of a shrinking amount of arable land in China) and their chemical residual would contaminate ground water over time. China Green's humic acid based liquid fertilizers increase the Cation Exchange Capacity of the soil which means that it will help 'mine' the excess fertilizer in the soil. As a result soil quality is improved as are crop yields and produce quality, including better taste and even smell. Plants grow faster and stronger with bigger and greener leaves. And the Company should know. It is generating 22% of its sales from its own 1.2 million s.f. R&D Center with greenhouses where it tests its own new products, shortening the time to market, and then selling the resulting flowers, vegetables and fruits to high-end grocery stores.
The Company's products have been on the market since 2000 and are now well recognized by farmers. The Company hardly spends anything on advertising. It has 511 distributors, every year growing that total by about 10% even while eliminating the bottom 10% of distributors on the basis of performance, regardless. This makes China Green one of the few fertilizer companies with nationwide distribution capability. The Company also has 100 field sales representatives who work with end users and provide customer support. Plus there are 100 on site sales people who talk to the end users offering online support. Informational seminars and training sessions are also provided.
Tao Li the CEO is also the Vice President of an association supervised by the Ministry of Agriculture that generates industry policy, regula-tion and guidance for future development. So Mr. Li's industry knowledge and influence is a tremendous asset to this Company. In fiscal 2008, the Company introduced about 13 new products which accounted for 15% of sales and added about 15 new products in fiscal 2009 (ended 6/09). Management initially offered up guidance of $.61 for FY6/09, then raised that to $.66, and with the release of Q3 results raised EPS guidance once again to a range of $.71-$.74, representing a 48% increase in profit. Revenues are now expected to have weighed in at around $33 million. By the way, Q3 beat the mid-point of guidance by about 10% on revenues and 35% on EPS which came in at $8.8 million and $.21 respectively. Gross margin averages about 56%. EPS growth to $.92 (+28%) is projected for FY7/10. CGA has no debt and $13.6 million of cash as of 3/09. The BI Rank is a strong 11.6. CGA is a Buy to $9. www.cgagri.com
Green Shoots Sprouting Along the Wall of Worry
After a big run off the March 6th lows, which saw our average stock rebound 117% and the S&P rebound 38% off that low point, the market went into a digestion phase that saw the S&P correct about 7% from 946 on 6/12 to 879 on 7/10. However, with earnings season kicking off this past week, investors have been encourag-ed overall about the early reports, especially from bellwether Intel. The market put in one of its best weeks in a long time, rebounding 7% to within a whisker of its high water mark for this year. After all the dust settles, the S&P 500 is up 4% for the year. Meanwhile, after paying their dues in 2008, the average BI Research stock is up a remarkable 57.8% so far this year, and up 104.5% from the March low. (Remember that on 12/31 AgFeed was at $1.61, Taseko was at $.57, Unigene was at $.63 and Continental was $.27…) Good grief! What a wild ride down a water slide. As I always say, investors always overdo it on the way up and again on the way down.
At this point investors are looking through the tough times to better days in 2010, grasping on to every green shoot, and there are many promising signs. Most recently there were good reports on housing and manufacturing. Some big financial institutions reporting from that beleaguered sector topped expectations, led by Goldman Sachs. Intel and IBM beat estimates handily and issued upbeat guidance. GM and Chrysler have already emerged from bankruptcy. No, it's not all green shoots. There are now concerns of commercial real estate loan defaults. Another bellwether, GE, business was off substantially … but it beat on EPS. The green shoots often start with the bad news not as bad as expected. For now we'll take what we can get and hope this fledgling "recovery" continues. I'll stick with my 100% invested position. It's not going to be an even climb, or a smooth recovery, but we seem to be headed in the right direction and, rightly or wrongly, investors are positioning themselves for better times in 2010. Currently most attractive for purchase are China Green, Deer, SmartHeat, Continental, Taseko, Diamond Foods, Mylan and more speculative NutraCea. The next issue goes out on 8/31.
DEER CONSUMER PRODUCTS* (DEER $12.50 NASDAQ, +67%); BI Rank = 12.7 - Buy www.deerinc.com (Recommended 6/09)
Deer shares vaulted $1.25 to $9.25 on the filing of an SEC Form 8-A12B, which basically means that the Company has been accepted for NASDAQ listing, as I expected, and began trading there late last week under the symbol DEER. There is a following of those who invest upon word of one of these filings because good things tend to follow them. For example, some interested funds (and investors) that cannot buy bulletin board stocks are just waiting for that listing to buy. So this can help. Also analysts who can't recommend stocks until they are NASDAQ listed may also be waiting to issue their reports. And finally, any time there is a filing awaiting SEC approval, be it for listing on NASDAQ or registering shares for a shelf offering, companies do not like to issue any big news during this period that could rock the boat in any way. So there can be some good press releases about recent developments following acceptance for listing on an exchange. Indeed news had been slow with just one release con-cerning a $1 million contract with China Mobil. Deer's emphasis on growth within China (just 5% of sales in 2008) is a key 2009 growth driver.
Then two day's after announcing its NASDAQ listing, Deer was out with a press release and the shares were up another 21% at the close to nearly $11.90, and have since pressed on to $12.50 by Friday's close. The release was not about any exciting new contracts, (late note, that came Monday morning, 7/20, an $11 million contract with a mainland China company), but primarily concerned 2009 guidance which it raised to revenue of $81 million and EPS of $.86 - $.91. That equates to about $10 million in net income. This compares to my estimates of $60 million and $.62. Yikes! (My "bad!" :) My earlier estimate of just 6 weeks ago already represented greater than 50% growth from last year's $.39 (or $3.4 million) on $44 million in sales ... in a recession no less. I did not want to set the bar too unbelievably high under the circumstances. But I'll defer to Deer.
So how can this company grow its revenues by 84% and EPS by more than 100% amidst a global recession? Well, this appears to boil down to one of the key drivers I discussed in my recommendation, which the Company reiterated in today's release. Deer is riding a wave of large global buyers shifting away from the smaller manufacturers (many of which folded like a cheap suit due to the global recession) and towards larger, better capitalized and therefore more reliable market leaders like Deer. Furthermore there is no recession in China where GDP is growing 8%. Management also reiterated that it has signed a three-year lock-up agreement for its shares of Deer. Thus it is in the same boat with shareholders for the next 3 years and will be working hard to build lasting value for this newly NASDAQ listed company. Here is the guidance release- http://finance.yahoo.com/news/Deer-Consumer-Products-Inc-prnews-3794335844.html/print?x=0y. Despite the 67% gain, the shares still earn a very strong BI Rank of 12.7, so they're still a Buy.
TASEKO* (TGB $1.73 ASE, +88% Avg.); BI Rank = 9.4 - Buy www.hdgold.com (3/91) (Avgd. down 8/00 at $1.00, and 5/02 at $.30 :) (Sold 35% at $1.50 1/13/05, +38%, 15% at $2.00 2/6/06, +92% and 15% at $4, +267%)
Taseko operates the Gibraltar open-pit copper mine in British Columbia which it has significantly upgraded and expanded to a capacity that is currently 80 million pounds of copper production per year, but inching towards 90 - 100+ million. With copper prices and cash flow lower than last year, the Company is cherry picking the aspects of Phase II that will provide the best payback, rather than completing the entire Phase II at this time. It is also working on its metal recoveries, slowing production down a bit in recent quarters, tweaking the process and then bringing it back up with much better recoveries, so that it doesn't send too much of its copper out to the tailings pile. It has brought copper recoveries up from the upper 70%'s to the mid 80's with a goal of upper 80's. In addition Taseko has extended its copper hedge on 50% of its production by 3 months to March 2010 at a new minimum level of $2.00 (vs. $1.88 through December), while also increasing the upper end of the range to a sliding $2.50 to $2.60 (vs. $2.36 through December).
Copper is currently around $2.40. Earnings are benefiting from rising copper prices vs. earlier this year though off from year ago levels. But the rise in the Canadian $ vs. a year ago (even though it has retreated lately) does raise the cost of production. After averaging US$1.60 for its copper in Q1, Taseko likely averaged better than $2.00 in Q2, partly offset by rising cost factors. In the last issue I indicated that by my calculations Taseko's reserves at Gibraltar with the mill and Prosperity were worth over $6 a share based on going rates for industry acquisitions, but for now investors seem to want to value Taseko on income or cashflow, with little or no value for Prosperity- Buy.
SMARTHEAT* (HEAT $6.19 NGM, +24%); BI Rank = 12.2 - Buy www.smartheatinc.com (Recommended 12/08)
The profitability of this manufacturer of Plate Heat Exchangers (PHEs) in China is only expected to improve despite the global recession. Installing more efficient heating and heat transfer products saves money by burning less energy per unit of heat output, this therefore also helps to reduce pollution and thus is right up there on the list for China's $586 billion stimulus package. Proposed spending includes $58 billion for funding of rural and urban infrastructure and energy efficiency projects. Since the last issue the purchase price for the acquisition of Siping, another Plate Heat Exchanger company more focused on the utility, nuclear and petrochemical sectors, has been ratcheted down to $7.9 million vs. $10 million earlier. Not bad for a company with $15 million in revenues expected to contribute $4 million in net income. The amount is expected to be funded from available cash and internally generated cashflow. The payment schedule runs through September 2010.
Already SmartHeat has announced the Company has signed $3 million in energy saving equipment sales contracts with a subsidiary of PetroChina, the largest oil company in China, as well as several Chinese municipalities. Siping will manufacture all the products for these sales. To be ready for anything, on June 27th SmartHeat filed a $75 million shelf registration with the SEC that, when approved, can be used to fund expansion opportunities. Note this is not a $75 million offering. Once approved this goes on the "shelf" until needed and then a financing can be down quickly for however much of that is needed… and not necessarily an equity financing. In the meantime, the Company entered into a $9 million credit facility as it moves into its busiest time of the year to provide working capital (funds for accounts receivable and inventory), a need that goes hand in hand with a rapidly growing business. Trading at 10 times 2009 EPS and with a BI Rank of 12.2 these shares remain a Buy.
DIAMOND FOODS* (DMND $25.39 NGS, -10%); BI Rank = 8.4 - Buy www.diamondfoods.com CA (415) 912-3180 (11/08)
Diamond Foods sells snack nuts and nut mixes under the Emerald line, culinary nuts under the Diamond brand, and as of September now owns Pop Secret, the number 2 popcorn brand commanding a 25% market share. Not a lot of news here, but the one release worth mentioning is noteworthy. On June 29th the Company announced that its Emerald brand achieved a new market share record over the 12 week period ended June 13th. Emerald's sales in U.S. food stores grew 48% over the prior year period, causing market share to jump 250 basis points to 8.4%. During this time, Emerald's dollar sales growth exceeded the growth of the entire snack nut category which increased sales 2.7%. So, very impressive growth here. The two flagship products in this line that the Company mentions each time, (and I mention each time as being sooo good) are its Cocoa Roasted Almonds and its Sea Salt and Pepper Cashews. Really you have to try these. I think the Emerald line is capable of taking this stock considerably higher led by these two work horses. And some times it is just that simple. All you need is a couple of really successful products. And combined with the Company's Pop Secret line, Diamond Foods may be destined for the Snack Hall of Fame. The consensus for FY7/09 is $1.37 vs. last year's $.91, but Diamond regularly beats estimates like a drum. On a calendar basis we are looking at about $1.54 this year- Buy.
ALMOST FAMILY* (AFAM $25.77 NGS, -40%); BI Rank = 8.0- Hold www.almostfamily.com (8/08)
This Company is a provider of home health services in three regional focus areas in the Eastern half of the United States. The Company provides skilled nursing services (80% of revenues) as well as personal care services (20%) to patients convalescing in the comfort of their own homes, a much lower cost setting than a hospital or long term care facility and thus favored by Medicare and patients. While the market obsesses about future Medicare reimbursement rates, I believe the Company will be able to adapt to whatever Medicare throws at it without any major setbacks. Meanwhile, the Company keeps whacking the cover off the ball, despite another zero increase year from Medicare.
Despite excellent rankings investors are handling healthcare stocks at arms lengths until they see the new healthcare plan proposals Congress comes up with, as requested by Obama. A House plan is already out and a Senate plan is due shortly. Then they have to hammer them together … and pass them. Heretofore, concerns about Medicare reimbursement rates have held the shares back, as the Obama administration strives to extend healthcare coverage to more people. However in doing so it needs to fund it and the budget is already out of control. So investors fret about how likely thinner gross margins will play out against higher revenues from great utilization of healthcare services. I think this rapidly growing company can transition into any new Medicare rates or health plan system without too much of a net income dip, if any. For one, any serious pressure on margins will cause other home healthcare companies to fold and the Company can pick up additional customers/ acquisitions to offset any or much of the margin pressure. Also, clearly Obama wants to encourage the use of home healthcare vs. the more expensive hospital or even long-term care facility stays. So again, I believe the Company can handle whatever comes its way without too much of a bump in the road. But until the clouds lift, just Sit Tight.
CONTINENTAL MINERALS* (KMKCF $.94 OTC, -30%); BI Rank = 10.9 - Buy (604)684-6365 BC www.hdgold.com (3/04)
I continue to believe Continental would be a tasty plum for "China" to pick as it continues to take advantage of lower copper and gold prices (and related equity prices) to bolster its reserves. I continue to see articles about this. For example- http://www.reuters.com/article/marketsNews/idAFN1046862020090712?rpc=44 For the past few years Continental has been developing its Xietongmen copper-gold deposit in China/Tibet and, with all 16 of the underlying permits in hand, it has submitted its application for a mining license, and now it waits for final approval. Meanwhile, I have numerous reports from recent visits to China that the place remains an absolute growth engine- from car production being up 50% over last year to a rapidly increasing percentage of bicycles there that are now battery operated, to construction that continues to boom, to surging infrastructure build-out due to the economic stimulus plan, to demands of a rising standard of living and the resulting surging demand for electricity… it all takes copper.
…And we just happen to have some! Continental's Xietongmen deposit has 1.9 billion lbs. of copper and 3.9 million ounces of gold reserves. Copper production is expected to be greater than Taseko's Gibraltar mine, even after its Phase II expansion. And then there is the gold… At today's rates it works out to nearly $440 million of revenue a year… no small potatoes! The mine is expected to cost about $600 million and have a 16% rate of return at $1.50 copper and $650 gold. But using current metal prices which are now $2.42 and $935, the difference is all gravy and the rate of return would be way better than 16%. On top of this, Continental has delineated a second near-surface deposit on the property called Newtongmen. This deposit adds indicated resources of 2.8 billion pounds of contained copper, 2.3 million ounces of gold and 11 million ounces of silver. In addition, there are another 1.7 billion pounds of inferred copper resources at Newtongmen, plus 0.6 million ounces of gold. So in aggregate these two deposits make Continental quite the plum. Based on $.05-.10 a lb. for the copper (depending on the category) and $30 an ounce for the gold (each $ figure used is about 3% of the current price of these metals, surely not too much to ask with a final mining license application awaiting almost certain approval), I figure Continental is worth something in the $4+ range on a per share basis.
So with China needing metals of all kinds to fuel its future growth, and this being right in its backyard, I continue to believe that Continental could be a tasty takeover candidate, and that the passage of the recent shareholder rights plan was a possible signal that suitors may be circling. Indeed this is the normal course of events for a Hunter Dickinson company, many of which have been acquired over the years. Taseko has been the exception. Like I said, I keep reading articles about how the Chinese are snapping up reserves all over the world (see above link). At one point, Continental did a financing with its future smelter at $2.25 when the shares were only trading at $1.65. So that's an interesting benchmark of what somebody thought the shares were worth. On many levels the shares are a very intriguing Buy.
...well you get the idea. Each 12-page issue includes updates on roughly 15 companies (all the ones we have not sold yet), so you're kept up to date on each company and not just following blindly, never hearings again about how things are going at a company we recommended to you. Does your investment newsletters do that? Many, if not most, rarely update subscribers on stocks they have recommended. And those that do don't do it as often as we do, every 6 weeks. I don't know how they get away with it.
Late note- By the way, Continental (above) is now at $2, a likely takeover candidate and our top stock pick for 2010