“Why China Worships America”

By Travis Johnson, Stock Gumshoe, September 27, 2007

You might have seen this one circulating lately — it’s an ad for Ann Sosnowski’s MicroCap Hotsheet (Ann still sits at the top of the Gumshoe spreadsheet with her Lynas pick … though if you average in her other teaser companies we’d probably be looking at something much more average).

It’s for a Chinese company that has something to do with the boom in fast food and protein in China — the argument goes that McDonald’s and Yum Brands and all those guys need lots of beef and chicken and pork, and dairy products, and that those are the things that the citizens of developing countries always aspire to as they begin to afford an upgraded diet. (I do agree with this argument in general — it’s why I invested in Sadia, the big Brazilian protein producer, last year, and why I continue to hold those shares after a near-double).

But this isn’t for a meat producer, or even a grain producer to feed all that livestock — this is a teaser for a hybrid seed company, taking us yet one more step down the chain. McDonald’s needs beef, so they have to raise more cows, and cows eat corn so they need to raise more corn, and you need lots of corn seed to up your corn production.

So that brings us to Sosnowski’s recommendation. She has teased this company before, several months ago, but I never really wrote it up and it was with a different ad … so on we go.

The seed business in China apparently used to be pretty much a government monopoly, but that changed in 2006, opening up the market that Ann describes as worth “$3.4 billion.”

So that sounds kind of worth looking into … these are a few of the clues for this company:

$25.7 million in sales in 2005.

Priced around $8, market cap a little shy of $200 million.

On June 26, 2007 this company started trading on Nasdaq — meaning that it meets the most stringent listing standards in the world.”

They’ve started a $10 million stock buyback.

They have government funding of $1 million for a new R&D center.

And, finally, “On Friday, September 7, this company announced a brilliant acquisition that I expect could accelerate … gains to 103% in three months’ time.”

So what does the massive cognitationizing power of the Thinkolator 4000 reveal for us today?

This latest China push for MicroCap HotSheet is …

Origin Agritech (SEED)

We briefly mentioned this one when it was teased, also by Ann, as a “surefire agflation play” a few months back, and the shares haven’t done all that much moving since then. The clues all match perfectly, though, including the specific sales number for 2005, so I’m convinced that this is still our little seed friend.

And the big acquisition they just announced? That was for a fertilizer company, and I have no idea how it will work out for them but it’s certainly true that investing in any kind of fertilizer this year and last would have made us all wealthy. I can’t tell you that the company they’re acquiring, Guang Xi Fortuneland, will be the next Potash, or even the next Terra Nitrogen or Mosaic, but I can certainly see that there might be potential in pairing a hybrid seed company with a fertilizer company.

The big buyback? It is $10 million, but they’ve got another 15 months or so to of authorization for that, so it might provide a floor under the shares … or they might not actually buy anything back, no real way to know until they actually purchase shares and tell us.

And the Nasdaq date that she gives in her teaser is kind of sneaky — they didn’t exactly IPO on June 26 (they’ve traded in the US for a year or two, I think), but they did get an upgrade on that day from the Nasdaq Global Market to the Nasdaq Global Select Market, which is for, I can only presume, double secret extra super duper good companies.

What else about SEED? It’s got a fairly large insider ownership position above 30%, which I usually like. Wellington, Royce and Heartland all own significant chunks in their mutual funds, and they tend to be pretty smart. In addition to the fertilizer company, they just got permission to sell hybrid cotton seed in India and hybrid rice seed in Vietnam, so that could be significant someday.

The shares have been beat up a bit recently because they missed their earnings estimates because of a bunch of one time charges, delayed acquisitions, and “changes in the Chinese seed market,” and cut their guidance on sales by about 30% for the year ending this week. That last bit doesn’t make them really sound like they’re poised to take over this whole $3.4 billion business in the Middle Kingdom, but if you’re starting from sales this year of around $65 million I suppose there’s certainly potential to grow if they do things right. They do say that they expect a better pricing environment and that the stuff that dragged down 2007 revenues will “significantly benefit 2008.”

If you take their last quarter’s earnings, the run rate of 20 cents would give you a decent PE of about 10 (80 cents of earnings, $8 share price) … but that’s probably not smart, since I expect their business must be extremely seasonal and there’s not much of an earnings history for us to work from to give one faith.

I find this one intriguing, but haven’t been moved to buy shares. For full disclosure, I do own shares of Lynas and Sadia at the moment, but not any other company mentioned here.