Tianli Agritech - a Hidden Gem
posted by The Traveller on Sunday, October 17, 2010

Tianli Agritech (OINK) is currently trading at $5.96, down 0.6% from their July 20 IPO price at $6.00 and down 6.4% from the October 15 high at $6.37. The Trading China Tracker Score is 12 (Strong Buy).

Tianli is a hog breeder in the Wuhan area, Hubei province, in central China. On July 20 the company went public on the Nasdaq Global Market by selling 2,000,000 common shares at a price of $6.00 per share for proceeds of about $9.6 million. Post-IPO the company has about 10.125 million shares outstanding which gives it a current market capitalization of about $60 million.

Pork is the Meat of Choice in China

The United Nations Food and Agricultural Organization statistics show that China has more hogs than the next 43 pork-producing countries combined. Pork accounts for approximately 65% of total Chinese meat consumption, and total pork consumption for 2010 is expected to rise nearly four percent to approximately 50.56 million metric tons, which follows a five percent increase in 2009. Demand for pork is growing fast, partly due to changing diets, with rising incomes leading to more consumption of meat.

China's hog industry is in the midst of a transition from a large number of small household farms to larger, more commercial farms. Meat hog production in the PRC is currently dominated by backyard farms (those that sell 5-10 hogs annually) and small farms which sell less than 100 hogs annually. Currently farms that sell more than 3,000 hogs annually account for less than one-half of a percent of all hog farms in China.

However, the government is giving huge incentives to encourage growth and consolidating the hog breeder industry towards larger commercial farms. Similar to what is currently happening in other industries, the government is trying to eliminate substandard capacities in both the hog breeding and hog slaughtering - Zhongpin (HOGS), China Yurun (1068.HK) - industries. In 2009, the Chinese government gave subsidies worth approximately $366 million to invest in larger farms, $95 million to subsidize high-quality breeding swine and $307 million to large hog-producing counties. These subsidies have resulted in a shift toward larger farms, which benefit disproportionately from such incentives.

Tianli Already a Strong Player in its Region

Tianli Agritech currently owns 9 hog farms which are expected to reach an annual capacity of 130,000 hogs by the end of 2010. That makes the company the second largest hog producer in Hubei, and only two other companies have annual production capacities of 100,000 or more hogs (competitor Tianzhong reached 140,000), with the next largest competitors having annual capacities of 30,000 hogs or less.

This puts Tianli in an ideal position to grow both organically and through acquisitions. According to the prospectus, the average selling price for a hog farm with an annual capacity of 10,000 hogs is approximately $2 million. The total cost for bringing a new farm to Tianli's targeted full capacity of 20,000 hogs is about $2.5-3.0 million, which indicates that the proceeds from OINK IPO could be sufficient to expand total capacity by about 50%. Besides bringing their 9th farm to full capacity, the company has not yet announced any concrete plans for future acquisitions.

Strong Pricing Trends and High Margins

Tianli is trying to distinguish itself from other hog producers by focusing on the health and quality of their hogs without relying on chemical feed additives. The company has developed their own successful premix feed which helped building a reputation as a producer of high-quality, low-pollution and low-additive pork products. The effect of this strategy can be seen by the high and increasing percentage of high-margin breeder hogs sales, relative to lower margin meat hogs for slaughtering.

Only the highest quality hogs do qualify as breeder hogs, and Tianli has reached a breeder to meat hog ratio of 30:70. Breeder hogs have a gross margin of 57% versus 34% for meat hogs, and in the second quarter conference call Tianli management projected the ratio of breeder hogs - and accordingly also overall gross margins - to rise further.

Another reason for the superior margins is Tianli's proprietary feed mix. While most of their competitors have to deal with exploding feed prices due to record high spot prices for corn, the overall price for Tianli's feed actually decreased (see conference call recording).

Since the end of the second quarter of 2010 to date, hog and pork prices have increased approximately 20% primarily because (i) the government stepped into the market and built up frozen pork reserves in the first half of the year to stabilize the price and protect the interests of hog breeding farmers; (ii) the drought in south-west China and flood in south, north-east and other regions in China increased the price of agriculture products, including pork; and (iii) a better balance of supply and demand has been achieved.
(Source: Zhongpin 10-Q filing)
The hog cycle is in a new uptrend and hog and pork prices are expected to rise until reaching a peak around the Chinese New Year festival in 2011. Goldman Sachs noted in their latest 'China Food Prices Flash' (September 7, 2010) that "on the back of strong hog prices, in August the parity between pig and corn remained above the 6.0 breakeven level. The number of live hogs picked up slightly in July following stabilization in June. We expect live hog prices to remain strong later this year as it will take time for the supply and demand of hogs to rebalance."

Due to the favorable margins for breeder hogs, Tianli can maintain a higher average selling price than the competition. For Q2/2010 Tianli achieved an average price of $211 per hog, $325 per breeder hog and $168 per meat hog. The $168 meat hog price is in line with competition from Sen Yu (CSWG, $177) but significantly higher than AgFeed's achieved price (FEED, $131) - AgFeed's livestock was heavily affected by floodings last spring.

Government Subsidies for the Hog Industry

Tianli's high net margins can be explained by the fact that the company receives substantial subsidies, business tax exemptions and government incentives in connection with their operation of hog farms in Wuhan. Under current Chinese law, the company is exempt from corporate income tax for so long as it operates as a hog farming enterprise. Additional subsidies include:
  • A one-time payment from the city of Wuhan of RMB 1.5 million (approximately $220,000) for each farm that achieves an annual production capacity of 10,000 hogs.
  • A one-time payment from the city of Wuhan of RMB 3.0 million (approximately $440,000) for each farm that achieves an annual production capacity of 20,000 hogs (including any previous grant).
  • Government payment of RMB 100 (approximately $15) annually per breeder hog in inventory. In general, OINK receives credit for 600 breeder hogs for every 10,000 hogs it produces.
  • Government underwrites a portion of the costs of hog insurance to cover losses in the event of disease outbreaks. The cost per productive breeder hog per year is approximately RMB 50 (approximately $7.30), of which the government pays approximately RMB 38 (approximately $5.60) and Tianli pays RMB 12 (approximately $1.70).


Tianli Agritech has guided for full year 2010 net income of at least $7.5 million, and the company is well on track to achieve their guidance. Based on the assumption of a favorable use of IPO proceeds leading to a capacity expansion of 40% within 12 months, organically or through acquisitions, and based on stable market prices for Tianli's quality hogs (trend calls for rising prices), I would expect the company to grow net income by at least 40% in 2011 to $10.5 million. Based on the post-IPO share count of 10.125 million I am calculating with a 2011e EPS of $1.04, which translates into a current P/E-ratio for OINK of 5.7.

As OINK is a yet widely unknown new player on the market, has no analyst coverage, and only a limited history as a public company, I would not expect higher multiples than 8-10 for the time being. Possible catalysts for higher multiples are third quarter earnings which are due in November, news about acquisitions or generally use of IPO proceeds, industry news about rising pork prices and possible shortage of hogs going into peak season, and further stock price appreciation of larger peers in the Chinese meat industry (HOGS, 1068.HK)

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China Small Caps Rallying Hard
posted by The Traveller on Saturday, October 16, 2010

You might think it is always again surprising how quickly market sentiment can change, but on second thoughts you will probably realize that in the end it is always value that attracts money, and that it was only a matter of time before demand for low-valuation and high-growth Chinese small caps would pick up again. Those of you who haven't been questioning their value investing approach this summer, in times when short-seller attacks and depressed Chinese domestic markets dominated the news in the sector, those of you will already be sitting on big returns now.

I wrote about The Turning Point and Don't Be Afraid here on this blog. Granted, the timing was lucky, but an investment approach where you will do your own quality due diligence, go for undervalued high-growth stocks at a time when nobody else wants them, when you can "buy 50 cents for a dollar", such a strategy will almost always result in above average returns. The key here is due diligence. Do your own research and don't follow anyone blindly, especially not in emerging market names and U.S.-listed China stocks. You need the appropriate confidence in your holdings to get through times of big price swings and high volatility.

One factor that has been driving up stock prices - and likely will continue to do so - is short covering. If you look at the China stocks with the highest short interest, you find the top three names on this list to outperform the whole sector on strong volume. Just look at yesterday's numbers (Friday, October 15): RINO International (RINO) gained 5.6% on 2.8x average volume, the stock is up 23.8% for October. China-Biotics (CHBT) gained 12.7% on 2.3x average volume, the stock is up 18.4% for the month. And China MediaExpress (CCME) gained 15.5% on 5.3x average volume for a total October return of a staggering 58.8%.

China MediaExpress is also the top-performer in the Trading China Model Portfolio as the stock has almost doubled since we started the portfolio on September 24:

Our model portfolio is now up 26.02% in just three weeks, and only one stock (Longwei Petroleum, LPH) is closing in on the target we have set. All those names have further room to grow, but I am especially excited about the recent performance of Tianli Agritech (OINK), which has found its way back to the IPO price. I will probably do an article about OINK next week to point out some of the exciting facts about this company.

Two popular value-investing strategies are to invest in stocks with the lowest Price-to-Earnings or Price-to-Book ratios. Please do always keep in mind that there might be very good reasons why those stocks are trading at seemingly low multiples. It is absolutely necessary that you take a long and in-depth look into those companies' filings, news and financials before you start a position in the stock. Trading China is tracking those groups with temporary portfolios since September 21st, and the returns so far have been stellar:

12 China stocks trading above $3.00 with the lowest P/E-ratio

12 China stocks with the lowest Price-to-Book ratio

And finally, we are tracking another group of stocks that we found most significant for measuring a sentiment shift in the China small caps group: those names that have been attacked most heavily by short-sellers and bashers throughout the summer. Trading China makes no judgment on the validity of those fraud claims, this is for every individual investor to decide. And I want to point out that many of those stocks bear the additional risk of becoming a target again as soon as the current rally in the sector comes to a halt - as we all know nothing can run up forever, and the massive gains in recent weeks will have to get consolidated at some point. However, the market seems to have made up its mind about the fraud claims (for now):

So... where do we go from here in the China small caps space? Nobody knows, and everyone who claims to know is of course just speculating. Maybe we will see a rally similar to what has happened in November/December of 2009. The recent performance of the Chinese domestic markets would certainly point in this direction: The Shanghai Composite is up more than 300 points or almost 12% in the past six sessions alone, quickly approaching the 3000 mark, a level it hasn't seen since April.

Valuations are still low, very low, for the majority of U.S.-listed China stocks, which also leaves room for a continued rally. And the slow but steady appreciation of the Chinese currency is another positive for the group, as all those companies report in U.S. Dollar and derive the majority of their revenues in Chinese Yuan. Right now there is nothing that points to an immediate end of the current up-trend, however don't forget that just four weeks ago the general market was avoiding Chinese stocks like the plague.

My strategy would be to stick to your investment strategy, don't get overexcited and keep the discipline that you need for investing in this space. Follow the trend for as long as it holds - and it doesn't necessarily end with a few down days we will certainly see along the way - but most importantly: protect your gains and don't forget to take profits along the way.

The Turning Point
posted by The Traveller on Saturday, October 02, 2010

Now... have you been hunting some bargains this week? The 20 U.S.-listed Chinese stocks that I have introduced last week (Don't Be Afraid) have gained 9.61% in the last five sessions. That compares to a small loss for the S&P 500 in the same period.

Some of the largest gainers were Gold Horse International (GHIID, 37.38%), Gulf Resources (GFRE, 25.19%), China MediaExpress (CCME, 18.27%), Huifeng Bio-Pharmaceuticals (HFGB, 18.09%), Tianli Agritech (OINK, 15.95%), New Energy Systems (NEWN, 15.83%), and Longwei Petroleum (LPH, 15.65%). None of these stocks are expensive at current levels, with a confirmation of the sentiment change in the next 1-2 weeks they could run much further from here.

Recent developments:

Gold Horse International (GHIID) is currently trading at $4.30, up 19.44% for the year and comfirming the September 14 high. The Trading China Tracker Score is 14 (Strong Buy).

Gold Horse filed their FY 2010 annual report after the close on Friday. After doing a bit of maths, adjusted fully diluted earnings per share for the year add up to $4.03. Even after the 37.38% PPS appreciation last week the stock is still available at a trailing P/E-ratio of 1.05.

NF Energy Savings (NFECD) is currently trading at $6.25, down 40.48% for the year and from the March 9 high at $10.50. The Trading China Tracker Score is 6 (HOLD).

NFEC common stock will be listed on Nasdaq next Monday, October 4th. The company has not issued a press release for this important milestone in their history yet, and the stock has not run up in anticipation of a big board listing. Keep this on your watch list for Monday.

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China Stocks Flat for the Third Quarter
posted by The Traveller on Friday, October 01, 2010

A strong rally in the last 10 days of September and an exceptionally strong IPO market for Chinese stocks has lifted our main China Index out of the red for the third quarter of 2010.

Here is an overview of the Third Quarter highlights:

Main China Index (NYSE, NYSE Amex or Nasdaq)
- 812.95 (up 0.48% for the Third Quarter)
- 20 stocks are up, 20 are down

Top Five
  • China Lodging Group (HTHT) +53.70%
  • VisionChina Media (VISN) +50.33%
  • eLong (LONG) +46.13%
  • Zhongpin (HOGS) +38.52%
  • China Yuchai (CYD) +24.14%
Bottom Five
  • Duoyuan Printing (DYP) -63.22%
  • China Yida Holding (CNYD) -37.55%
  • American Dairy (ADY) -34.49%
  • SinoCoking Coal (SCOK) -33.09%
  • Duoyuan Global Water (DGW) -25.97%

OTC China Index
- 949.95 (down 5.86% for the Third Quarter)
- 12 stocks are up, 27 are down, 1 unchanged

Top Five
  • Kingold Jewelry (KGJI) +64.72%
  • China Digital Animation Development (CHDA.OB) +61.29%
  • BioPharm Asia (BFAR.OB) +42.96%
  • Far East Energy (FEEC.OB) +35.00%
  • Xinde Technology (WTFS.OB) +27.16%
Bottom Five
  • GC China Turbine (GCHT.OB) -49.10%
  • China Environmental Protection (CNVP.OB) -35.39%
  • Energroup Holdings (ENHD.OB) -35.00%
  • LianDi Clean Technology (LNDT.OB) -34.95%
  • China TMK Battery Systems (DFEL.OB) -33.34%

Quarterly Revision (Fourth Quarter)

Both China indexes are revised at the beginning of each quarter. Stocks that do no longer meet the requirements are being removed. Reasons could be posting a loss in the most recent quarter, uplisting to a higher exchange or just a huge decline in share price. Following is a list of all changes for both indexes.

Trading China Main Index (NYSE, NYSE Amex or Nasdaq)

  • AutoNavi Holdings (AMAP)
  • AirMedia Group (AMCN)
  • Ambow Education Holding (AMBO)
  • Camelot Information Systems (CIS)
  • Charm Communications (CHRM)
  • China Kanghui Holdings (KH)
  • China New Borun (BORN)
  • Country Style Cooking Restaurant (CCSC)
  • HiSoft Technology International (HSFT)
  • Longwei Petroleum (LPH)
  • American Dairy (ADY)
  • American Oriental Bioengineering (AOB)
  • China Fire & Security (CFSG)
  • China Lodging Group (HTHT)
  • China Yida Holding (CNYD)
  • Cogo Group (COGO)
  • Duoyuan Printing (DYP)
  • L&L Energy (LLEN)
  • Shengkai Innovations (VALV)
  • SinoCoking Coal (SCOK)

Trading China OTC Index

  • AgriSolar Solutions (AGSO.OB)
  • Asia Pacific Wire & Cable (AWRCF.OB)
  • BEFUT International (BFTI.OB)
  • China New Energy Group (CNER.OB)
  • Eastern Environment Solutions (EESC.OB)
  • Sino Green Land (SGLA.OB)
  • Sunwin Int'l Neutraceuticals (SUWN.OB)
  • VLOV, Inc. (VLOV.OB)
  • China Kangtai Cactus (CKGT.OB)
  • China Organic Agriculture (CNOA.OB)
  • China HGS Real Estate (HGSH, uplisted)
  • Jade Art Group (JADA.OB)
  • Kingold Jewelry (KGJI, uplisted)
  • Longwei Petroleum (LPH, uplisted)
  • New Energy Systems (NEWN, uplisted)
  • One Bio Corp (ONBID.OB, not traded)