Tuesday, July 07, 2009

From Coal to Crops

Concerns over global warming and carbon emissions have given coal a bad name. Most scientists are trying to figure out how to reduce our use of coal in order to “green-up” our environment. China Green Agriculture (CGA: NYSE) is trying to do just the opposite. CGA is using “weathered coal” to make organic fertilizers and additives for use on crops and landscape plants.

China Green Agriculture (CGA) operates in two segments: production of humic acid organic fertilizer and agricultural production of fruits, vegetables, flowers and landscape plant seedlings. China produces one-third of the world’s fertilizer, which is estimated to reach 50 million metric tons by 2015 and 56 million tons by 2020. Organic fertilizers are expected to increase from 25% to at least half the mix by 2015, as the use of chemical fertilizers grows at a slower place. Product line expansion and capture of market share has fueled internal growth.

The Company reported $24.7 million in total sales in the nine months ending March 2009, representing an increase of 60% over sales in the prior-year period. Profit margins increased slightly in recent quarters to 57.1% compared to 56.6%5 in the two previous years.

A recent capital investment has expanded production capacity to 55,000 metric tons per year from 15,000. The Company expects to begin ramping production by the end of the September 2009 quarter.

We initiated coverage of CGA shares based on the Company’s strong position in the organic fertilizer market in China and the positive trends that are driving sales volumes despite an economic downturn that has stalled growth in other regions. Our price target is $12.50 in the next twelve to eighteen months based on our projected EPS estimates of $0.60 and $1.00 in fiscal years 2009 and 2010, respectively.

We believe there are several catalysts that could unfold over the next quarters that could drive valuation multiples and trading activity. The stock price should follow. We expect the next major newsworthy events may be the announcement of June quarter results and an update on capacity expansion.

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. Crystal Equity Research has a Buy rating on CGA shares.

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