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 lifes work in 1964.
“In 1974, Dr. Yuan released Nan-you No. 2, the worlds first hybrid rice strain. It was a wild success. Rice crop yields rose 20%. Dr. Yuans hybrid rice now accounts for over half of Chinas total harvest. And the increased yield is believed to have saved 60 million Chinese lives.
“Today, Dr. Yuans groundbreaking research is widely credited with lowering starvation rates around the world. Hes 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 Ive 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.