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No. of Recommendations: 7
If you do not fear Chinese small caps, consider Chaoda Modern Agriculture (CMGHF). (Pronounced "Chow-da")

This idea from Rob Marstrand at Bonner & Partners. But I added my research since he posted the initial rec last Fall.

If anyone has first-hand experience with CMGHF, please share. This feels like the kind of company that can grow for a long time and do reasonably well even if China is the "next bubble."

Bon appetit!


• Thesis: 1) growth opportunities; 2) valuation; 3) balance sheet; 4) cash-generator; 5) owner-operator; 6) business model; 7) scale; 8) profitability; 9) performance; 10) goodwill; 11) strategic industry
• #1 – Growth opportunities. 1.2 billion Chinese need to eat 3x a day, 7 days a week, 52 weeks a year. If not, they'll riot! And CMGHF is China’s largest fresh fruit, vegetable producer, at 2.8M tonnes of production in 2010, an 11% increase from the prior year. (One Nimitz-class aircraft carrier displaces 100,000 tons, so 2.8M tonnes of food = the weight of 30 aircraft carriers' worth of bell peppers, Welsh onion, and choi sum.) Plus, 20% of China’s population, or 300M people, are moving to cities from farms, so same quantity of mouths to feed but fewer small farms to meet demand, as city-dwellers do not farm. So ex-food producers become food consumers. In China, people spend 50% of every incremental dollar on food (and in India, 70%.) Urban population 607M in 2008 vs. 300M in 1990, per China Statistical Yearbook. Annual growth rate = 4%. In U.S., 82% of population lives in cities, Japan 66%. Rural households produce 70% of their own vegetable intake, per USDA analysis. City dwellers can’t do this; they have to buy more from stores. In 1985, average income in China was $293; by 2009, $6,567, per IMF. CMGHF’s market share estimated at just 0.25% of “fragmented” Chinese fresh food market, leaving huge growth potential. China’s economy forecast to grow 8.5% in 2011, vs. 10% in 2011.
• #2 – Valuation. At $0.76, P/E ratio is 5x, based on $0.18 per share earnings (U.S.) for fiscal year ending June 2010. Tangible book = $0.73 per share. Enterprise FCF yield 7%, based on $0.76 stock price, $159M enterprise FCF, and 3.34M (diluted) shares outstanding. (Last update: 12/28/10)
• #3 – Balance sheet. Cash: $263M; debt: $36M (6/30/10)
• #4 – Cash generator. Positive operating cash flow every year since at least 2002
• #5 – Owner-operator. Founded in 1994 by chairman Kwok Ho, who still owns 19%. So, Kwok has “skin in game” but not full control. At 53, Kwok has ideal mix of experience and youth, with several good years ahead before retirement.
• #6 – Business model. No reinvention risk, no product obsolescence risk.
• #7 – Scale. $2.4B market value. Largest company in consolidating strategic industry = competitive advantage
• #8 – Profitability. 20% ROE for June 2010 fiscal year. Gross margins: 65%
• #9 – Performance. 5-year CAGR. Sales: 25%; EBITDA: 25%; OCF: 33%.
• #10 – Goodwill. Brand. 83rd most valuable brand in 2009, at US$1.5 billion, per World Brand Laboratory, a NYC consultancy based in New York
• #11 – Strategic industry. CMGHF pays nil income taxes, because PRC wants to incent management keep growing fruits and veggies, so 1.3 billion Chinese do not riot.
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