With the best performing stock market in 2009, there's no doubt that China's valuations are heating up quickly. Fueled by over $500 billion in stimulus programs, the Chinese government has propelled Chinese equities.
IN PICTURES: Eight Ways To Survive A Market Downturn
Boring Is Good
Despite the run up, opportunities in China remain. To be sure, gone are the debt-free, cash-rich businesses that were trading for low single digit earnings multiples. Several weeks ago, I alerted Investopedia readers to companies like China Green Agriculture (NYSE:CGA), a leading producer of organic fertilizers in China. At the time China Green was trading for about $90 million, had $14 million in cash, no debt, and was on track to earn nearly $15 million in profit for fiscal 2009. Strip out the cash, and China Green was a $75 million company earning $15 million.
Since then, shares have more than doubled, the market cap is $230 million and the P/E is over 20. This little gem is no longer bargain territory despite the phenomenal earnings growth rate. Granted, the surge in China's equity market since then has aided CGA's rise, but the bargain valuation at the time surely had a hand in the performance.
A Niche Little Agriculture Play
Investor's interested in China's agriculture industry may wish to consider Yongye International (Nasdaq OTC:YGII), a seller and distributor of fulvic-acid based nutrients for plants and animals. Basically, it's a specialty fertilizer company that makes formulated products to improve crop yields and improve the health of livestock. (For more, check out Peer Comparison Uncovers Undervalued Stocks.)
Yongye is a $160 million company that earned over $11 million in 2008. Yet those earnings are expected to grow tremendously in the next couple of years. For the first quarter of 2009, profit was $3 million. Traditionally, the second and third quarters are the strongest for Yongye as farmers begin to think about the next planting season. For the second quarter of 2008, net profit was $7 million. (For further reading, see Equity Valuation In Good Times And Bad.)
On August 3, the company announced that its branded store network increased by more than 40% to 5000 stores. This is powerful news and it will likely propel Yongye's earnings further.
Waking Up
Yongye offers investors an excellent play on China's growing demand for food at valuation that is half of China Green Agriculture. Another Chinese agricultural/food play, Origin Agritech (Nasdaq:SEED), is valued at $100 million small cap and has reported losses the past two years.
Bottom Line
If you listen to the conference calls of fertilizer giants Potash (NYSE:POT) or Mosaic (NYSE:MOS), one theme comes out over and over again: the world is going to need to produce more from fewer acres of arable land. Most of that need will come from China and other developing giants. It's unlikely that any other country will be able feed the 1.3 billion Chinese, so China will need to figure out how to do it on its own. That means a wonderful long-term growth market for companies like Yongye.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
