Tuesday, August 26, 2008

Bookkeeping: Closing Zhongpin (HOGS)

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For many of the same reasons as the closure of WuXi earlier today I'm closing the 0.6% stake in Zhongpin (HOGS) and booking about a $1400 total loss. I continue to be very bullish on the Chinese hog market but this has been effectively dead money since we started the stake in January 2008. I was impressed with what AgFeed (FEED) did yesterday [Aug 25: AgFeed Addresses Naked Short Sellers - Stock up 17%] and know this is a favorite of The Yellow Rose Street Beat, and they have similar profiles so if/when I jump back into this group I'll have to decide which is better. Actually the chart for HOGS is far better than the crazy action in FEED.


HOGS 2008 forward PE ratio = 10.6
FEED 2008 forward PE ratio = 11.6

Both have market caps in the $300-$400M range.

Right now there are simply a multitude of very undervalued Chinese small cap stocks, trading at depressed multiples with large growth rates, that the market could care less about. Or are being actively shorted since naked short selling bans are not being enforced, and small cap stocks are essentially defenseless without a lot of institutional support on the long side. I do believe this thesis of a growing middle class driving even more demand for pork among the Chinese to be valid, but until fundamentals begin to be rewarded, I'd rather have this allocation in cash. Here is a recent story from Forbes on the 2 names
  • Chinese pork producers are in hog heaven as China's burgeoning middle class piles up on pork.
  • AgFeed Industries, which has carved out a prime cut of China's hog market, saw profits pork up in the second quarter thanks to relatively flat commodity prices.
  • China's abundant corn supply and limitations on corn exports and ethanol production, kept corn prices stable, boosting profit margins for Nanchang, Jiangxi province-based AgFeed Industries at a time when U.S. meat producers have been hit by soaring commodity costs and decreased consumer spending
  • It also doesn't hurt that China has developed an insatiable demand for pork--the protein of choice--as more people can afford to eat meat more frequently
  • "AgFeed has direct access to the wealthiest pork consumer markets in China and captures some of the highest hog selling prices," said Chairman Songyan Li. "We anticipate continued rapid expansion in these key consumer regions and expect to deliver strong financial results in our third and fourth quarters."
  • The company's net earnings more than doubled, to $3.9 million, or 12 cents a share, from $1.5 million, or 6 cents a share, a year ago. Earnings, adjusted to exclude nonrecurring items, were 27 cents a share, beating analysts' estimates for 17 cents a share. Sales more than quintupled, to $35.6 million, from $6.9 million in the previous year as revenue from premix feed sales shot up 77.0% to $12.2 million. Wall Street estimated second-quarter sales of $28.5 million. The company attributed hefty premix sales to brand recognition, raised feed prices and expanded independently owned chain-store sales.
  • AgFeed raised its year-end guidance in anticipation of additional hog farm acquisitions. It expects hog production will comprise 65.0% to 70.0% of 2008's revenue. AgFeed guided for earnings between $1.08 and $1.20 a share and sales between $145.0 million and $155.0 million. Analysts have been expecting year-end earnings of 95 cents a share and sales of $136.9 million.
  • Zhongpin (nasdaq: HOGS - news - people ), a Chinese meat and food processing company, also served up impressive growth on Monday, reporting net earnings more than doubled to $8.5 million, or 29 cents a share, from $4.2 million, or 20 cents a share, in the same period last year. Sales also more than doubled to $137.5 million from $63.7 million a year ago as the company raised prices on its pork products and increased distribution resulted in a 47.7% increase in sales volume during the quarter. Rising raw material costs dinged the company's profit margins, which dipped to 12.4% from 12.8% a year ago. But hiked pork prices kept commodities costs from cutting too far into profits.
  • The company, which has expanded rapidly so as to capitalize on increased pork demand in China, said it's confident that it will meet guidance for earnings between 98 cents and $1.07 a share and sales between $490.0 million and $520 million.
I find it a bit incredulous that two companies like this doubling profits cannot generate a PE ratio higher than 10-12 but I suppose people are too busy buying airlines or healthcare companies at PE ratio 50 to notice. Until then, or until the market begins chasing after more 'exotic' fare overseas - the stocks seem to trade mostly in a version of purgatory. Even good news is quickly sold off. So we must wait for one of their traumatic dips I suppose (i.e. mid $9's range for HOGS), that happen every so often and then flip out of that trade into moments of strength to make any sort of money. I like to buy growth at a good value, and wait for the inevitable sustainable run up, but these opportunities just don't seem to be happening as this is a market of buying, and flipping - not owning.

No position

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