Hanfeng Evergreen has taken a severe beating over the last month or two, as the fears of global crisis took all the air out of their sails. First Chinese small caps fell because of a flight to safety and fear of lagging growth, then fertilizer companies started to tumble, and then all China stocks collapsed as the BRIC wall came tumbling down (not necessarily in that order, I suppose).
So I picked up a few more shares of Hanfeng this morning. The company announced this morning that they were making the necessary filings to potentially repurchase up to about 10% of their common stock, which is part of the reason for the extra jump this morning, but I would still argue that the fundamentals of Hanfeng have not changed very much.
China is still dependent on increasing agricultural production — they still have a lot of people to feed, and the middle class is getting a taste for a less efficient high protein diet, which means more grain needs to be grown (or imported).
China’s water is still in abysmal shape, which means that slow release fertilizer should remain a government focus — releasing less nitrogen and other fertilizer into the rivers and ground water is a national priority.
And Hanfeng is still a company that provides a value-added product that is priced at a premium but helps farmers save money. Their coated or slow-release fertilizers need to be applied only once, versus several properly timed applications of raw fertilizers. It costs more per ton, but the improved yield and the single application mean that overall many farmers can save money.
The rest of the noise in the fertilizer market seems not terribly important to me — the raw prices don’t matter very much, Hanfeng uses raw potash and other fertilizer ingredients as their feed stock and their main competition is those raw fertilizers, so if their input prices rise they rise their prices; if their input prices drop they can cut their prices.
And if they’re at all like oil refiners, they might even do better when raw material prices drop than when they rise — you’ve probably noticed that prices at the gas pump go up just about as quick as crude oil prices, but fall significantly more slowly. That means margins are higher on the downward slope.
So … I don’t think ...