There's been a lot of talk about the Chinese economy quickly overheating. The Chinese stock market, as measured by the Shanghai Composite Index, is the best performing stock market in the world among the developing nations. Furthermore, the Chinese government's aggressive stimulus policy has flooded the economy with money, a lot of which is finding its way into Chinese stocks.
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Separate the Business from the Stock Market
Generally I agree that one must be careful in China. Chinese companies that I wrote about earlier, like fertilizer company China Green Agriculture (NYSE: CGA), pork feed and meat supplier AgFeed Industries (Nasdaq:FEED) and poultry producer Yuhe International (Nasdaq:YUII), are all up significantly since then and are not as attractive as they once were. Yet notice the theme in my picks: food and fertilizer, two essentials in human societies. Over the long run, people, especially China's 1.3 billion, will want to eat more and more meat. (For related reading, check out Investing In China.)
Taking Care of the Animals
Similar to the three names above, you should consider taking a close look at Skystar Bio-Pharmaceutical (Nasdaq:SKBI), a provider of veterinary medicines, vaccines and feed additives for poultry, livestock and pets. In other words, Skystar ensures that chickens, cows and pigs stay remain healthy until consumption. The company's products also heal sick pets, a growing area in China.
Skystar has over 170 current products and over 40 in the developmental stage. It's also the only U.S.-listed veterinary supply company in China. At $15.80 a share, the company's market cap is $55 million. Reported net income for the first six months of the year was 50 cents per share. Normalized to $1 for the year, Skystar does not look cheap at 16 times earnings.
Skystar Issues
However, Skystar is currently having to book "losses" for the change in the fair value of warrants it issued earlier. Without getting into the details of accounting, while these charges are currently being charged against earnings, they will actually be recovered because they are not true liabilities.
So Skystar's real earnings for the first half of 2009 were $1.28. The second half is expected to be stronger, but at an EPS of $2.50, Skystar's P/E is a notch above six. From 2003-2008, Skystar's revenues grew at over 84% a year, while net income rose by over 130% a year. The veterinary medicine industry in China was a $7 billion industry in 2005, and has been growing at over 15% a year.
Bottom Line
When investing in Chinese companies, it always pays to invest with a healthy dose of skepticism. However, Skystar is a company that makes products that are going to be needed for a long time to come. Once the clouds regarding the warrants clear up, shares could do quite well in response to the bargain valuation. (For more, see Top 6 Factors That Drive Investment In China.)
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