“Corner the Chinese Fertilizer Market”

By Travis Johnson, Stock Gumshoe, June 23, 2008

As another week of panic, fear, high oil prices, and skyrocketing food prices begins, let’s see if we can discover one of the folks likely to profit from the world’s hunger.

Wow, that sounds much worse than I meant.

OK, so we’re on the hunt for a fertilizer profiteer.

Sorry. Just kidding!

What we want to find is the special Chinese fertilizer company that makes a product specifically tailored to the most popular brand of hybrid rice in China. I don’t know if we want to buy the company’s stock, but Ian Wyatt and the folks at Growth Report are getting my palms all itchy and causing my cheeks to flush with an upswell of greed. So we’re going to at least have a look.

Growth Report is, you’ll be unsurprised to hear, a growth-oriented newsletter — I’ve only written about them once before, and that was when they were touting Oilsands Quest back in May (as many others have before and since, including Jim Cramer on Friday, whose enthusiasm for the shares sent them up to new highs in pre-market trading Monday morning).

Anyway, we learn a few things about this stock — including a little lesson in the history of famine and food innovation in China, which is actually somewhat interesting (never let it be said that you can’t learn something from marketing copy … though unlike Reagan’s “trust, but verify” I’d just say “verify”).

The story we’re told is about hybrid rice, which was invented in China — largely by a man who is a national agri-celebrity in the Middle Kingdom: Dr. Yuan Longping.

Here’s the background story, in case you want that little history lesson:

“In the [sic] 1958, Mao Zedong made one of many tragic mistakes in his Great Leap Forward. In an effort to boost rice crop yields, he started the “’Kill a Sparrow’ campaign.

“Mao thought getting rid of animals that ate rice crops would improve yields. He was wrong. Without this important natural predator, populations of locusts ballooned. The insects devastated the rice harvests. Between 1959 and 1961, 38 million Chinese died of starvation.

“Deeply affected by this tragedy, a young scientist named Yuan Longping started his life’s work in 1964.

“In 1974, Dr. Yuan released Nan-you No. 2, the world’s first hybrid rice strain. It was a wild success. Rice crop yields rose 20%. Dr. Yuan’s hybrid rice now accounts for over half of China’s total harvest. And the increased yield is believed to have saved 60 million Chinese lives.

“Today, Dr. Yuan’s groundbreaking research is widely credited with lowering starvation rates around the world. He’s also something of a celebrity in China, as well as a pretty savvy investor. He owns 5% of the Yuan Longping Hi-Tech Agricultural Co. LTP. His name appears on every bag of rice seed the company sells.”

This is why farmers aren’t clamoring at the White House gates for recommendations from the President about how to increase crop yields, I suppose … but for investors, what’s the point?

It is that Ian Wyatt and his folks believe that China is going to be desperate for more efficient farming techniques, and more effective use of fertilizer that’s less wasteful and less polluting, or something along those lines … and since Longping rice is by far the dominant brand of rice, apparently, the recommendations from it’s eminence grise will hold significant sway for farmers when they decide which fertilizer to use with that rice.

Or maybe, as Wyatt infers, the Chinese government will actually require them to use this brand of fertilizer. I have no idea. Here’s what Wyatt says:

“When the Chinese Government Tells Farmers to Buy This Company’s Fertilizer, They’ll Do It — By the Truckfull

“This Small Chinese Fertilizer Company Holds the Key to Higher Yields and a New Age of Prosperity for China’€™s Farmers”

If there are any impressionable elementary school students doing their wisdomificatin’ on the site today, note that no, the rules of capitalization haven’t changed … that’s not one of the things we’re supposed to learn from ads. You needn’t Capitalize Every Word of Every Sentence.

Essentially, Wyatt argues that the problem of nitrogen runoff has become acute in China, with Algae blooms and similar problems destroying lakes and such. This company apparently has a solution, though, and that’s why China will push for use of its product:

“This Chinese fertilizer company I’ve been talking about – the one that could rise 237% or more – has perfected time-release fertilizers that bond to the plant and the soil. Run off is minimized. And the crops get a longer supply of life-giving nutrients, which means farmers can actually use less fertilizer to grow more rice.

“Field trials show this fertilizer is 50% more effective and uses 30% less nitrogen!”

But what you probably want to know is, “what is this company? However shall I make my own bazillion dollar windfall?

The Thinkolator obliges, sucking down some Canadian water (we call it “Labatt Blue” down South) and telling us that this is …

Hanfeng Evergreen (HF in Toronto, where it has its primary listing, HFGVF on the pink sheets).

There’s one possible inconsistencies here, so I suppose it’s a mistake to say I’m 100% certain (though I kind of am) — Wyatt says that this stock is fairly valued at $27.01 according to his calculations, which would be a 237% gain. I think they just screwed up the math, because that would actually be about a 137% gain from the current price. He did say that you can buy it for “less than $12 a share”, so that bolsters my argument that this is just a math error (though it’s one that is rampant, he says “237% gains” over and over in the letter). The shares are right at $12 as I type this, though they were “less than $12” late last week when this email started hitting my various inboxes.

So there’s another lesson for the elementary school kids among us: When a stock doubles, that is a 100% return, not a 200% return.

Wyatt says that this one is “unknown” because it’s listed in Canada, which seems a little silly but I suppose it may have helped avoid a small touch of the fertilizer mania here in the US — the shares look like they’re trading about 25% off their November high, down from $16 to the current $12 or so. And they do trade in very low volume on the pink sheets, so if you like this one it’s probably wise to buy in Toronto.

What else do we know about them?

Well, I don’t know where they get their raw materials — so that might be worth looking into. This isn’t a company like Mosaic or Potash that owns big swaths of natural fertilizers, they’re a manufacturer of specialty “value added” fertilizers. That means they need a feedstock, which is quite possibly why their shares haven’t ballooned like the big fertilizer names have. Maybe their expenses are going up as prices for potash and natural gas rise (I don’t know what they specifically use as a feedstock, or if they have long term price control on their feedstocks, this is just something to investigate).

Additionally, China is still pretty new to advanced fertilizers — farmers use massive amounts of traditional fertilizer there, but not much of the advanced stuff that Hanfeng makes. That means the market might indeed be huge for growth if the government really pushes advanced fertilizers that minimize pollution and maximize yields … but it also means that it’s a small player so far.

So the flag there (I won’t call it a “red flag”, but a flag nonetheless) is that this is a company that looks to me like it relies on adding value to commodities — they are not a commodity producer themselves, but probably face some pressure from rising commodity prices. Usually, the folks who “add value” to commodities in creating their products have an easier time maintaining pricing power when commodity prices are falling than when they’re rising — witness the performance of oil refiners in the US, for example. If the end market growth is high, or if the government really pushes people to pay up for these advanced fertilizers, they might do great, I just want to note that this is very different than buying a potash miner.

Sales and earnings are growing right quick — sales more than doubled year over year in the last quarter, and earnings per share nearly doubled — but this is still pretty steeply priced if you look at trailing earnings. If you extrapolate the 12 cents EPS into the future (I have no idea if this is reasonable, I assume there’s massive seasonality in fertilizer sales), you’d get a PE of about 25. Not bad for this growth rate. Agrium, the big Canadian agriculture and fertilizer firm, bought almost 20% of Hanfeng last year, so they do at least have one strong partnerships with an established “big boy” in the industry.

So … I must admit to being interested in this one. Chinese agriculture is a mystery to me, so I’d want to learn more about rules, regulations, and the real potential for their main product, but I’m intrigued … what do you think?

full disclosure: I did hold some BQI call options until Monday morning, but sold them all at that time on the Cramer runup. I do not own shares of any other investment mentioned here.

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17 Comments on "“Corner the Chinese Fertilizer Market”"

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Woman with Portfolio
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June 23, 2008 4:45 pm
Gumshoe, good sleuthing, as usual. I added Hanfeng Evergreen to my fertilizer companies last week, for several reasons. One is the issue of supply, which they appear to have resolved with joint ventures with two Chinese companies. While China is the world’s largest consumer and producer of conventional fertilizers, its S&CR fertilizer industry is still at an early stage of development. China’s domestic fertilizer industry is fragmented with numerous small regional producers, many operating out-dated and inefficient equipment. There is very little domestic production of S&CR fertilizers and high quality NPK fertilizers. Imported S&CR fertilizers are too expensive to penetrate… Read more »
Gravity Switch
Admin
11
June 23, 2008 6:01 pm

Thanks WWP — always good to hear from someone who has looked at the details. That gibes with the info I read from the company, though I haven’t read the filings yet. They certainly are growing nicely, and if they have fixed price supply deals they seem to have a pretty good chance of outperforming. I do really like that they haven’t gotten the exuberant treatment from the stock market yet.

Brian B.
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Brian B.
June 24, 2008 9:50 am

GUMSHOE, Good job on the research. However am more willing to invest in a stock with an ADR listing vs pink sheets, As a general rule. The sector is red hot and believe it has more room to grow, no pun intended. Good investing!

Sam
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Sam
June 24, 2008 10:00 am

Usually the definition of ‘gain” for these promoters is little bit different. What they mean is that your investment will be 237%. Still in today’s market, it’s pretty good. Just to respect Ian Wyatt’s track record, I am going to have a small gamble.

Thanks to Gumshoe and WWP for the comments.

SageNot
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SageNot
June 24, 2008 10:22 am

http://finance.yahoo.com/q/ta?s=HF.TO&t=2y&l=on&z=m&q=l&p=m50,m200&a=&c=

HF trades fluidly in TO., but for such a supposedly important find, it’s nearly “flat-lined” this past year. I don’t want to say “where’s the beef,” but where’s the upleg action? This isn’t a new reco, even I heard of it before.

Yahoo’s .PK of this stock is terrible, they show NO activity.

SageNot
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SageNot
June 24, 2008 11:20 am

Yikes Travis, why do you claim to have so little knowledge of this Chinese industry, heh-heh? Us investors could make a fortune on industries that our stupid gov’t DOESN’T include in the “core” inflation rate. No need to revisit the reasons for fuel being left out, but food (& water, which sustains our very lives) is even more important, so we must understand about everything that helps grow our food & then harvests same for distribution.

Enjoyed your take on both chemical & organic fertilizers Travis.

Woman with Portfolio
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June 24, 2008 11:30 am
For U.S. investors interested in buying Canadian stocks, try setting up a “watch” portfolio on the Toronto Stock Exchange Web site. That way you can see what the stocks are doing in Canada with just a 20-minute delay, without having to figure out what the stock is doing on the pink sheets. They also have charts, news, etc. Very useful. It is better, of course, if you can buy Canadian stocks directly without using the pink sheets, but it’s usually not a problem. I bought HF (HFGVF) through Fidelity with no problems, and without an extra brokerage fee. I was… Read more »
Lee_MD
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Lee_MD
June 24, 2008 3:13 pm

I had my eye on HF last month, but could not decide whether to buy it or Migao (MGO). The Chinese government are exempting both from the 35% tax on fertilizers. Wondering if I should hedge by bets on these two or go for one.

SageNot
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0
SageNot
June 24, 2008 3:30 pm

Canadian stocks are no problem at Ameritrade either, & they have quite a few tools on their website, most are FREE for customer use. Only $9.95/trade whether it’s a day order or GTC!

SageNot
Guest
0
SageNot
June 24, 2008 3:36 pm

For fans of the 12% Letter, edited by Tom Dyson, their latest offer is cut in half, only $49.50/mo. I mention this only for us Sr. Citizens who need these enriched dividends to pay for gas, food, RX & what have you, w/o disturbing the investment $$ we all seem to enjoy.

BTW, the GumShoe offers the same deal for his premium service, or pay by the month as I do. Both of these deals get 5***** from me!

Caglar Keskin
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0
May 8, 2010 11:52 am

I am a farmer and growing vegetables to sell. For more efficency i use fertilizers but while using them it is important to
keep it healthy because some fertilizers contain corruptive elements so i try to read everything about fertilizers and try
to keep my product healthy. I am grateful for those who gives information about fertilizers and anyone who
uses fertliziers should read about it, i also found another good guide which should be read too i think;
http://agricultureguide.org/

Caglar Keskin
Guest
0
May 8, 2010 11:52 am

I am a farmer and growing vegetables to sell. For more efficency i use fertilizers but while using them it is important to
keep it healthy because some fertilizers contain corruptive elements so i try to read everything about fertilizers and try
to keep my product healthy. I am grateful for those who gives information about fertilizers and anyone who
uses fertliziers should read about it, i also found another good guide which should be read too i think;
http://agricultureguide.org/

Gravity Switch
Admin
11
June 24, 2008 10:32 am
It’s certainly off the highs — the pink sheets data is very odd, usually pinks that represent Canadian listed stocks have good volume and trade almost in perfect lockstep with the Toronto market, because it’s so easy for your broker to buy for you over there if you issue a pink sheet symbol order. Maybe it’s that a huge number of US investors can already invest directly in Canada through their regular broker, anyway, dunno. I expect the executable price will still probably match very closely with the Canadian price if you opt to buy it, it’s an easy arbitrage… Read more »
EYOUNG
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EYOUNG
June 24, 2008 12:16 pm

WWP, Thank You, and you, too, Travis, for your many wise insights. I was wondering if I were the only one really upset/ticked off at the Yahoo finance! I DO have a question – Is there any Stateside site that has up-to-date info on the Pinks/BB material? That doesn’t cost an arm & a leg to access???
Again, THANKS! You have been a wonderful help!

dnmir
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0
dnmir
June 24, 2008 2:52 pm

EYOUNG, you might try http://www.pinksheets.com

Gumshoe, Thanks for the history lesson. One additional gift from this terrific site.

cj
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0
cj
June 24, 2008 7:05 pm

This is my problem with Scottrade. One can get the latest info. on any Canadian ticker, but the trade costs $27.00. This is very uncompetitive, so I am thinking I need a new broker.

cj
Guest
0
cj
June 24, 2008 7:13 pm

I think you might have a look at China Agritech (CAGC.OB). I’ve been watching this one for some time, and it seems to me that since China already has a problem with water volume devoted to agriculture as well as all other needs, a liquid fertilizer is made to order. It could start working almost instantly.

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