Hanfeng Evergreen Earnings

By Travis Johnson, Stock Gumshoe, November 13, 2008

It looks as though Hanfeng is opening up a little bit lower this morning following their earnings release last night, but on a fundamental basis I saw much to like in the earnings release, and this remains the one of my “idea of the month” writeups that I think is most promising at this price.

Hanfeng is a manufacturer of slow-release fertilizer, and their earnings per share have been surprisingly stable this year — 13 cents in this quarter adds up to 37 cents so far this year.  We’re entering into probably a seasonal slow period for fertilizer sales, but even if we add on last year’s fourth quarter earnings of 11 cents, that gets us a very low PE ratio for this year.  All of those numbers are in Canadian dollars, in which Hanfeng currently trades at a bit over $5.

I’m encouraged that significant revenue growth is continuing, that China remains focused on improving rural land ownership policies and allowing some minor consolidation of farmland, and that Hanfeng is taking market share from traditional fertilizers.

Part of the challenge has been that investors are worried about Hanfeng’s margins, because the raw material for their advanced fertilizers has gone up dramatically in price.  Hanfeng has been able to keep their margins stable in dollar terms, but not in percentage terms (ie, they are raising their prices by the same dollar amount as the increase in their raw materials, so the profit margin in dollars remains the same, the margin as a percentage of sales has shrunk).

I would not be surprised to see their margins improve considerably in the coming year — their raw materials have come down in price, and may well come down further, and if they’re like most other refined product businesses they will do better when raw prices fall than they do when raw prices climb.

But the big picture argument remains the same:  Hanfeng is growing quite rapidly, they are taking market share and they remain leaders of this business, they have a tailwind in government policies, and Chinese farmers, already among the world’s heaviest fertilizer users, are under tremendous pressure to feed the nation in more efficient ways.  Hanfeng was priced for some growth when I first wrote about it, and it is growing … it is no longer priced for significant growth, with a trailing PE ratio of about 11, ...

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