Full Position: China Kangtai Cactus Biotech (CKGT)

China Kangtai Cactus Biotech
Ticker: CKGT (OTCBB)
Share Price: $2.14
Market Capitalization: $39.40 million
Cash: 8.63% of Market Capitalization
EPS: $0.44
P/E: 4.86

CKGT is a market-leading grower, developer, manufacturer, and marketer of cactus-based products, including nutraceuticals, nutritional food, health drink and liquor, extracts, livestock feed & fish feed.

Recent Developments:

- New Product: Patented Cactus Hog Feed to be launched in Fourth Quarter 2009

"China is the world's largest hog producing country having slaughtered 625 million hogs in 2008, compared to approximately 100 million hogs in the U.S. China also has the world's largest consumer base for pork consumption. Over 65% of all meat consumed in China is pork. The cactus hog feed market shows huge growth potential. Hog producers are constantly seeking ways to improve the health and productivity of their livestock. Our cactus products are proven to enhance pork production."

- Patented Cactus-based Low Tar, Low or Zero Nicotine Cigarettes to be launched in Fourth Quarter 2009

"The cactus cigarette market shows huge potential for growth in China. China has about 390 million smokers, accounting for 30% of global smokers. Our revolutionary product can not only capture a significant portion of smokers, but also promote consumer consumption in our other health products such as nutraceuticals, nutritious food, health and energy drinks, beer, wine and liquor. We expect the launch of our cactus health-preserving cigarettes also will improve the brand name and reputation of our company."

- Q3 Revenue Up 32% to Record $8.2M; Net Income Up 71% to $3.0M, EPS $0.15

Investment Thesis:

I am adding a full position to the China Portfolio. Both revenue and earnings growth have been excellent and seem sustainable. The stock seems very cheap at current levels which could be the result of Western investors being skeptical about or not understanding the rather obscure cactus business. However, the company's execution so far proves that cactus-based products have a market in China and likely also in neighboring countries. CKGT's longer-term strategy is to expand its market beyond China into South Korea, Singapore, Taiwan and other southeastern Asian countries. Organic growth has been strong and a bunch of new products (green animal feed, cactus cigarettes) could - if successful - accelerate both revenue and earnings growth further.

I am expecting CKGT to earn at least $0.60 per share in 2010 and a conservative multiple of 8x earnings seems achievable. Financing measures for the planned expansion in more products and markets could lead to dilution, although the company's cash position is sufficient for the current business. Should the company's execution go as planned in 2010 it seems likely that CKGT will be eligible to uplist to a major exchange without a reverse split.

My price target for CKGT is $4.68.