Friday, May 15, 2009

Peeps

Balls of yellow fluff - that is the business of Yuhe International, Inc. (YUII: OTC/BB). Based on Shangdong Province, China, Yuhe supplies day-old chickens to poultry producers and farmers. The company operates thirteen breeder farms and two hatcheries.

Yuhe is in the sweet spot of chickendom - if there is such a place - in as much as it is the highest margin, lowest risk segment of the chicken meat supply chain. Yuhe purchases egg-laying female chickens from a breeder, applies its knowledge of sound chicken husbandry to encourage chicken romance and the laying of fertile eggs. Then Yuhe takes care of the three week incubation period, leaving mama to her own pursuits. One or two days after hatching, the little chickens are off to a poultry farm where someone else foots the bills for their voracious little appetites.

Apparently, mama chickens are easier keepers than growing babies, and Yuhe’s margins reflect that savings. The company reported a 37.6% gross margin in the first quarter 2009, right in-line with a gross margin of 37.9% for the year 2008.

Yuhe is still a small company by U.S. standards. Total sales in 2008 were $35.6 million. However, Yuhe is growing at a good pace. First quarter 2009 sales were triple that prior-year quarter after taking into the consideration an acquisition completed in 2008.

In my view, if China is an investment that has to be made, agriculture should be a favored sector. Food production is a high priority in the Central Government’s most recent Five Year Plan. There is plenty of local demand so the sector is not dependent upon recovery of consumer demand in export markets. While it is a food item, there is little opportunity to tamper with a live baby chicken. This eliminates the risk of contamination and the attendant law suits that follow getting caught.


Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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