China Tracker - Details for China Agritech (CAGC)

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 China Agritech
 Analyst Coverage
2011-02-07Brean MurrayDowngradeHoldn/a

Natural Disasters in China. We discussed the impact of floods in Northern China on CAGC's 3Q earnings in our November 5, 2010 note (Natural Disasters in China Might Cause Worse-Than-Expected 3Q Results). Unfortunately, following the floods in the summer, major agricultural provinces in Northern China started to experience historical droughts. For example, Shandong province's precipitation, with only 12mm since September last year, is 85% less than a regular year. 29 million Mu wheat crops, about 53% of the total in Shandong, are affected. Although CAGC pre-announced better-than-expected Q4 results, we are concerned about potential weakness in quarters beyond Q4.

Insider Trading. Since May 12, 2010 to last month, a number of key executive officers and board directors of CAGC have sold a total of 235k shares, at prices as low as $11.38. It's hard to convince investors that management has great confidence in CAGC's growth potential when management is reducing their own stake in the company.

Move to the Sidelines. We believe China agriculture is an exciting space with great opportunities. However, given the above two reasons, we have decided that the near-term risk/reward of this stock is no longer attractive and therefore downgrade CAGC from Buy to Hold. The stock is trading at 13x and 10x our downward-revised 2010 and 2011 non-GAAP adjusted diluted EPS estimates of $0.78 and $0.99.

2011-02-07Rodman & RenshawDowngradeUnder Reviewn/a

Rating Under Review: We are taking China Agritech's rating under review from Market Outperform. The company was attacked last week by an internet report from "LM Research." While it was obvious that this "LM Research" represented significant short interest, and some of the allegations in the report could be either inaccurate or exaggerated, the attack did bring up some issues that, in our opinion, would warrant more detailed clarification. China Agritech issued a press release responding to the attack shortly after. While we applaud the company's quick response, especially during the Chinese New Year holiday, we believe the response was more or less high-level and generic, and there is still a long way to go for the company to completely rebut the allegations.

We have also noticed that there have been more active insider selling activities recently. While the number of shares sold was relatively small compared to insiders' total share ownership, the selling did not represent a show of confidence that investors would look for in a management, especially at the current levels of valuation.

In light of the current uncertainties surrounding the company, we believe it is prudent to take the rating under review pending greater clarification. China Agritech announced on November 15 last year that it appointed Ernst & Young Hua Ming as its auditor. While a successful audit by a Big 4 auditing firm does not necessarily guarantee everything, it could go a long way in rebuilding investor confidence.

Preliminary FY10 results: On January 21, China Agritech announced preliminary unaudited FY10 revenue of $119 million and Q4 revenue of $41 million, beating our respective estimates of $100.1 million and $26.6 million. The annual revenue result also surpassed the company's guidance of $114 million. In addition, China Agritech reported that as of December 31, 2010, it had established 21 regional distribution centers located in Henan and Jiangsu provinces, exceeding its 2010 target of 10.

2011-02-03Global HunterDowngradeSuspendedn/a

In our attempts to address our questions with the company since the January 21 release, we have been disappointed by management's response to date (and lack thereof). In hindsight, we recognize that we should have placed our coverage status under review when questions regarding the rollout of the distribution centers first arose. We had hoped to have further clarification on how and why the strategy had changed since our previous meeting in October in which plans, designs and locations had been discussed.

Further diligence and auditor sponsorship required. We are suspending coverage of CAGC to allow time to investigate the various allegations made in a short report published by a third party today; assuming those findings are positive, we will get a better sense of the growth strategy in place and we would consider reinstating coverage. In addition to our findings, we would like to remind investors that in November 2010, the company announced that it had appointed Ernst & Young as its independent public auditor. Were the company to successfully pass E&Y’s audit of its FY2010 financial results without the need for any major restatements to historically reported numbers, we believe this would be a necessary first step in restoring investor confidence. 

2010-11-11Rodman & RenshawReiterationOutperform$16.00

China Agritech announced 3Q10 results with both the top and bottom lines significantly missing our expectations as well as the Street consensus. Total revenue decreased 11.7% YoY to $23.9 million, considerably below our estimate of $37.2 million and the Street consensus of $36.0 million. Revenue from liquid fertilizers was down 5.8% YoY to $14.2 million. Sales of granular compound fertilizers plunged 18.2% YoY to $9.7 million. Gross profit was $9.0 million, compared to our estimate of $12.9 million. Gross margin, however, expanded to 37.6%, representing a 210bps improvement from 3Q09 and a 290bps sequential increase, and exceeded our expectation of 34.7%. Non-GAAP net income (excluding stock compensation expenses and provision for doubtful debt) came in at $4.6 million, or $0.22 per diluted share, below our respective estimates of $6.8 million and $0.34 as well as the Street consensus of $6.4 million and $0.30.

The dismal top line result was attributable to a combination of a few factors leading to dwindled sales volume. Management cited the severe flood across central and southern China in the summer as having a significant impact on the sales of the company's fertilizer products. Secondly, the company started to tighten its credit terms on granular products, requesting customers to pay cash on delivery going forward rather than continuing to grant them the 90-day credit term that was initiated during the product launch period. With the adverse summer weather impact gradually fading, we believe sales volume should rebound in Q4, especially for granular compound fertilizer products, which are primarily sold during the period from October to March. That being said, we believe the stringent cash payment policy could dampen the demand for the company's granular compound fertilizer products, especially when considering the abundance of similar products in the market.

The improvement in the overall gross margin was attributable to margin expansions in both the granular and liquid fertilizer segments, which recorded gross margins of 22.3% and 48.1%, respectively. Thanks to the increase in ASP from $349/MT to $367/MT, the gross margin of the granular segment improved more than 200bps YoY. The improved liquid fertilizer margin was partially a result of enhanced production efficiency. We also believe the summer flood played a role increasing the ASP and expanding margins. Income tax expenses during the quarter were $2.1 million, implying 53.4% effective income tax rate. The hike in effective tax rate was due to a large increase in non-deductible expenses ($1.1 million vs. $0.2 million in 3Q09) and no benefit from tax holiday. The soaring income tax expenses also contributed to the lackluster bottom line. Non-GAAP net margin for the quarter was 22.8%, above our estimate of 18.7%. 

2010-11-08Global HunterReiterationBuy$20.00
2010-09-09Brean MurrayReiterationBuy$16.00

CAGC dropped more than 16% yesterday on negative sentiment regarding its former auditor and concerns on decreasing gross margin. We believe the auditor is no longer an issue for CAGC as it changed its auditor to Crowe Horwath, a top 10 auditor, two and half years ago. In addition, yesterday, CAGC announced its plan to change to a Big Four auditor next month. Since 2Q09, CAGC has started to promote granular organic fertilizers. Management has explained its growth strategy very clearly and expects the gross margin to come down but stabilize at the 34-35% level going forward this year. We think the market has overreacted and reiterate our Buy rating and $16 target price.

2010-09-09Rodman & RenshawReiterationOutperform$20.00

We continue to view China Agritech as one of the more fundamentally sound U.S.-listed Chinese agriculture companies. Its shares are currently trading at 10.7x and 8.3x our respective 2010 and 2011 EPS estimates. While this does not represent the cheapest valuation in its sector, we continue to believe the shares offer additional upside potential for this rapidly growing company. We believe China Agritech, a national leader in its market segment and with a favorable market environment, should command a higher forward P/E multiple. Our 12-month price target of $20 is thus based on China Agritech shares trading at 13.5x our 2011 EPS estimate of $1.50, representing a PEG ratio of 0.5.

2010-08-31Rodman & RenshawInitiationOutperform$20.00

The shares of China Agritech are currently trading at 13.1x and 10.1x our respective 2010 and 2011 EPS estimates. This in our view remains an attractive valuation for this rapidly growing company. We believe the company, as a national leader in its market segment and with a favorable market environment, should command a higher forward P/E multiple. Our 12-month price target of $20 is thus based on China Agritech shares trading at 13.5x our 2011 EPS estimate of $1.50, representing a PEG ratio of 0.5.

2010-08-16Brean MurrayReiterationBuy$16.00

Management maintained full year revenue and non-GAAP net income guidance to be $114 million (50% YoY growth) and $23.5 million (45% YoY growth). We model CAGC to achieve $113.7 million and $19 million for FY10 revenue and non-GAAP net income. CAGC is trading at 15.8x and 14.8x our 2010 and 2011 non-GAAP diluted EPS estimates, respectively. We maintain our Buy rating. Our $16 target price for CAGC is derived by applying a 15x multiple to our 2011 non-GAAP diluted EPS estimate of $1.07.

2010-07-07Brean MurrayReiterationBuy$16.00

Carlyle invested another $10 million. Carlyle exercised its CAGC warrant, investing an additional $10 million to receive a total of 1.8 million shares. There will be no longer derivative charges caused by these warrants. We recently discussed with China Agritech's management investors’ concerns that Carlyle might sell its shares after exercising the warrant. Management reiterated its confidence in Carlyle's long-term investment horizon in CAGC. Carlyle’s recent $190 million investment in China Fishery Group Ltd. demonstrated its positive stance on the China agriculture industry as a whole. We maintain our Buy rating and $16 target price.

2010-06-11Brean MurrayInitiationBuy$16.00

We are initiating coverage of China Agritech with a Buy rating and a 12-month target price of $16. As a top player in China's organic fertilizer space, China Agritech has unique products, a solid customer base and a top distribution network. It is the only U.S.-listed Chinese organic fertilizer pure-player. We derive our target price of $16 by applying a 12x multiple to our 2011 EPS estimate of $1.31, which represents 46% upside potential from the current price level. 

2010-06-02Global HunterInitiationBuy$17.00

Our target price of $17 per share is predicated on a 14.7x FY2010 on a P/E basis and 9.9x FY2010 on an EV/EBITDA basis, in line with the peer group. Using FY2011 estimates, it translates to 13.6x on a P/E basis and 8.7 on an EV/EBITDA basis, also in line with the peer group. In our opinion, a $17 price target is easily justified by CAGC’s significant growth potential in the domestic organic fertilizer market, through the entrance of the much larger granular fertilizer market, recent production capacity expansions and rapidly growing market reach. In addition, the entrance into the branded large-scale distribution centers (currently not included in our estimates) could help the company to capture additional market share and ramp revenues in 2011 and beyond. CAGC also has a solid balance sheet with over $50MM in cash (following the recent equity raise) and no debt.

READ: Score Cards Explained
DETAILS: Safety/Risk Model for CAGC
Current Price:  n/a
F10k Day (2006-01-27): -100.00%$8.00
2009 Close: -100.00%$13.98
2010 Close: -100.00%$12.27
2011 Close: -100.00%$1.75
High (2012-02-06): -100.00%$2.15
Low (2012-07-30): -100.00%$0.11
Market Capitalization: n/a
Total Shares: 20.77 mill
Float: n/a
Avg Volume: n/a
Last Quarter: 2010-09-30
Revenue (MRQ): 23.89 mill
Net Income (MRQ): 1.97 mill
Op. Cash Flow (MRQ): -5.86 mill
all financial data provided without warranty