Why am I so interested in China agricultural companies? First of all, food is an essential commodity for life. The world's population is still growing and the demand for food in China is rising because a greater proportion is becoming affluent enough to eat well.
Thanks to growing incomes, the demand for better diets and more protein is just beginning. I believe that you've only seen the early stages of an agricultural boom, and that it will be one of the most profitable sectors the coming years you can invest in.
At the same time, the growing consumption of corn, sugar, and wheat to produce ethanol is essentially taking food out of hungry mouths.
And as is often the case for many of today's new hot investment trends, you need look no further than China to find some of the best investment opportunities.
Four Reasons to Jump on The Chinese Food Bandwagon ...
While China is known for rice farming, there are plenty of other attractive agriculture investment areas ...
I.
China has changed from being a net exporter to being a net importer of major agricultural crops. With 1.3 billion hungry mouths to feed, China can't produce enough food to meet its own demand, let alone other country's needs.
II.
Chinese agricultural companies are protected by the government and foreign competition is heavily regulated. There are two Great Walls in China; the physical Great Wall and the governmental "great wall" that protects Chinese companies against foreign competitors. Chinese agricultural companies enjoy a state-sanctioned monopoly.
III.
Recent droughts and extreme water pollution have negatively impacted China's food supply. Rapid industrialization has severely polluted China's water supply and made the current drought even more painful.
IV.
As more Chinese move from the rural interior to more affluent coastal cities, consumption of all food commodities have exploded. And this will only continue as more Chinese move into urban settings!
If you're interested in the Chinese agricultural companies, there is no shortage of investment options, many of which are traded on U.S. exchanges. Here is a partial list of companies that have piqued my interest:
Rodobo Int. (RDBO)
China Agri-Business (CHBU)
In both companies I have a small position. But there are also other companies worthy to take a look at and to investigate. At http://www.geoinvesting.com a lot is already researched.
American Dairy (ADY)
Emerald Dairy (EMDY)
Man Shing Agricultural (MSAH)
China Marine Food Group (CMFO)
Yongye International (YONG)
Skypeople Fruit Juice (SPU)
Yuhe International (YUII)
China Kangtai Cactus Bio (CKGT)
China Swine Genetics (CSWG)
Sino Agro Food (SIAF)
China Fruits Corp. (CHRF)
Of course this list is not completed because there are much more agricultural companies listed in the U.S. Do you know some? Reply so I can take a look.
Sunday, April 25, 2010
Tuesday, April 20, 2010
Lotus (LTUS) Unloved but REAL
Lotus Pharmaceuticals (LTUS), is a growing developer and producer of drugs and a licensed national seller of pharmaceutical items in China. Lotus operates its business through its two controlled entities: Liang Fang Pharmaceutical, Ltd. and En Ze Jia Shi Pharmaceutical, Ltd. Lotus' current drug development is focused on the treatment of cerebro-cardiovascular disease, asthma, and diabetes. Liang Fang sells drugs directly and indirectly through its national sales channels to hospitals, clinics and drugs stores in 30 provinces.
The price is depressed like more Chinese pharmaceuticals despite the low valuation. EPS expectations for 2010 are $ 0.45 (2009: $ 0.33). Book value in the most recent quarter was $ 1.39. Lots of new drugs in the pipeline. Stock price around $ 1.20 .......can you believe it?
The sluggish world economy and ongoing health care reform policy impacted the development of China's pharmaceutical industry in 2009. This year however will see the continuation of the reform measures, as well as other developments and trends in the sector in the context of a recovering global economy.
Figures from the State Food and Drug Administration's (SFDA) Southern Medicine Economic Research Institute (SMERI) showed that medical insurance funds will be raised by RMB 400 billion ($58.57 billion) in 2010 which may lead to the expansion of the domestic drug market by RMB 200 billion ($29.28 billion).
According to the SMERI, the production value of China's pharmaceutical industry will grow 23 percent year-on-year in 2010. International pharmaceutical consultancy IMS Health Inc. estimates put China as the world's third largest pharmaceutical market by 2010.
China's pharmaceutical companies will continue to review their operational and business structures in 2010 as companies realize they have to grow stronger to enhance their competitive advantage to make the most of market opportunities.
Further, the establishment of pharmaceutical distribution alliances over the past several years has set a good foundation for future mergers and acquisitions (M & A).
With this in mind I expect bright futures with significant gains for promosing Chinese health care stocks. Lotus is one of them.
POSITION: LONG (ENTRY: 1.20)
The price is depressed like more Chinese pharmaceuticals despite the low valuation. EPS expectations for 2010 are $ 0.45 (2009: $ 0.33). Book value in the most recent quarter was $ 1.39. Lots of new drugs in the pipeline. Stock price around $ 1.20 .......can you believe it?
The sluggish world economy and ongoing health care reform policy impacted the development of China's pharmaceutical industry in 2009. This year however will see the continuation of the reform measures, as well as other developments and trends in the sector in the context of a recovering global economy.
Figures from the State Food and Drug Administration's (SFDA) Southern Medicine Economic Research Institute (SMERI) showed that medical insurance funds will be raised by RMB 400 billion ($58.57 billion) in 2010 which may lead to the expansion of the domestic drug market by RMB 200 billion ($29.28 billion).
According to the SMERI, the production value of China's pharmaceutical industry will grow 23 percent year-on-year in 2010. International pharmaceutical consultancy IMS Health Inc. estimates put China as the world's third largest pharmaceutical market by 2010.
China's pharmaceutical companies will continue to review their operational and business structures in 2010 as companies realize they have to grow stronger to enhance their competitive advantage to make the most of market opportunities.
Further, the establishment of pharmaceutical distribution alliances over the past several years has set a good foundation for future mergers and acquisitions (M & A).
With this in mind I expect bright futures with significant gains for promosing Chinese health care stocks. Lotus is one of them.
POSITION: LONG (ENTRY: 1.20)
Monday, April 19, 2010
China Agri Business (CHBU) EPS 2009 $ 0.08
Last Friday April 15 they released their annual report.
http://idc.api.edgar-online.com/efx_dll/edgarpro.dll?FetchFilingConvPDF1?SessionID=pYQuH82U68RjWjS&ID=7187791
Earnings per share were $ 0.08 so they earned the last quarter $ 0.03 compared to the $ 0.05 (nine months). Book value per share was $ 0.79 while their cash position per share increased to $ 0.74.
Some other highlights from their Form 10-K:
As of December 31, 2009, the company had established 103 branded super chain stores. A majority of these stores are located in the Shaanxi and Hunan Provinces. In addition, they established 49 direct sales stores, which are controlled and managed directly by the company. The direct sales stores are located in the Shaanxi Province.
At some future time, we may seek to have our common stock or other securities quoted on a tier of a national securities exchange. In so doing, we will reevaluate the need to have independent directors on our board and on standing committees, in light of applicable corporate governance rules and corporate best practices. At the present time, our board of directors is collectively responsible for analyzing and evaluatingour financial statements and our internal controls and procedures for financial reporting, and for acting as our compensation and nominating
committee.
Especially the following Sales and Marketing part I found interesting:
We have traditionally sold our products through wholesale and retail distributors. In order to market our products, we advertise in newspapers, including national publications. We have also utilized a limited amount of television advertising, and distributed brochures, company profiles and promotional videos to farmers. We also offer free field trials to potential customers for the purpose of comparing plantings that have applied our products to plantings that have not. We believe that potential customers are more inclined to purchase our products after seeing the
comparison results. We have a marketing team comprised of approximately 57 people who demonstrate to our dealers and our direct customers the correct methods of using our products, and who help address issues that arise for our dealers and customers in using our products and collect feedback from them.
As of December 31, 2009, we have established relationships with approximately 90 wholesale distributors. Our products are sold in approximately 503 stores located in 12 provinces in the PRC. During 2008 we launched a new sales and marketing initiative “New Agriculture-Generator” designed to expand our distribution network
directly in the rural areas of China. The purpose of the campaign is to establish a closer relationship with farmers through agricultural cooperatives located throughout the rural areas of China. One component of this initiative is the “Super Chain Sales Partner Program.”
The “Super Chain Sales Partner Program” is an initiative whereby the Company agrees to provide a $3,000 advance payment to participating retailers in exchange for their commitment to purchase and sell approximately $14,000 worth of the Company’s products per year. Each participating retailer must also agree not to sell any competing products. As of December 31, 2009, approximately 61 retailers in Shaanxi
province and approximately 42 retailers in Hunan province have participated in the “Super Chain Sales Partner Program”.
Another component of this initiative is to establish, in conjunction with participating retailers, a membership system that would enable the Company to measure and monitor the use of its products by farmers and to improve the Company’s efforts to provide training and other support services to farmers.
In addition, the Company has established 49 direct sales stores which are controlled and managed directly by the Company. The direct sales stores are located in the Shaanxi Province. We anticipate continuing to focus our efforts on establishing direct sales stores in 2010. From the beginning of the year to March 31, 2010, we opened approximately 200 new direct sales stores in the Shaanxi and Hunan Provinces.
Despite the growth of these initiatives, there can be no assurance that the “New Agriculture-Generator” campaign, including the “Super Chain Sales Partner Program” or direct sales stores program, will be successful.
I really believe this company has set a clear growth path. My predictions of an EPS in 2010 of $ 0.12 are too conservative so I revise them to $ 0.15.
POSITION: LONG (ENTRY: $ 0.70)
http://idc.api.edgar-online.com/efx_dll/edgarpro.dll?FetchFilingConvPDF1?SessionID=pYQuH82U68RjWjS&ID=7187791
Earnings per share were $ 0.08 so they earned the last quarter $ 0.03 compared to the $ 0.05 (nine months). Book value per share was $ 0.79 while their cash position per share increased to $ 0.74.
Some other highlights from their Form 10-K:
As of December 31, 2009, the company had established 103 branded super chain stores. A majority of these stores are located in the Shaanxi and Hunan Provinces. In addition, they established 49 direct sales stores, which are controlled and managed directly by the company. The direct sales stores are located in the Shaanxi Province.
At some future time, we may seek to have our common stock or other securities quoted on a tier of a national securities exchange. In so doing, we will reevaluate the need to have independent directors on our board and on standing committees, in light of applicable corporate governance rules and corporate best practices. At the present time, our board of directors is collectively responsible for analyzing and evaluatingour financial statements and our internal controls and procedures for financial reporting, and for acting as our compensation and nominating
committee.
Especially the following Sales and Marketing part I found interesting:
We have traditionally sold our products through wholesale and retail distributors. In order to market our products, we advertise in newspapers, including national publications. We have also utilized a limited amount of television advertising, and distributed brochures, company profiles and promotional videos to farmers. We also offer free field trials to potential customers for the purpose of comparing plantings that have applied our products to plantings that have not. We believe that potential customers are more inclined to purchase our products after seeing the
comparison results. We have a marketing team comprised of approximately 57 people who demonstrate to our dealers and our direct customers the correct methods of using our products, and who help address issues that arise for our dealers and customers in using our products and collect feedback from them.
As of December 31, 2009, we have established relationships with approximately 90 wholesale distributors. Our products are sold in approximately 503 stores located in 12 provinces in the PRC. During 2008 we launched a new sales and marketing initiative “New Agriculture-Generator” designed to expand our distribution network
directly in the rural areas of China. The purpose of the campaign is to establish a closer relationship with farmers through agricultural cooperatives located throughout the rural areas of China. One component of this initiative is the “Super Chain Sales Partner Program.”
The “Super Chain Sales Partner Program” is an initiative whereby the Company agrees to provide a $3,000 advance payment to participating retailers in exchange for their commitment to purchase and sell approximately $14,000 worth of the Company’s products per year. Each participating retailer must also agree not to sell any competing products. As of December 31, 2009, approximately 61 retailers in Shaanxi
province and approximately 42 retailers in Hunan province have participated in the “Super Chain Sales Partner Program”.
Another component of this initiative is to establish, in conjunction with participating retailers, a membership system that would enable the Company to measure and monitor the use of its products by farmers and to improve the Company’s efforts to provide training and other support services to farmers.
In addition, the Company has established 49 direct sales stores which are controlled and managed directly by the Company. The direct sales stores are located in the Shaanxi Province. We anticipate continuing to focus our efforts on establishing direct sales stores in 2010. From the beginning of the year to March 31, 2010, we opened approximately 200 new direct sales stores in the Shaanxi and Hunan Provinces.
Despite the growth of these initiatives, there can be no assurance that the “New Agriculture-Generator” campaign, including the “Super Chain Sales Partner Program” or direct sales stores program, will be successful.
I really believe this company has set a clear growth path. My predictions of an EPS in 2010 of $ 0.12 are too conservative so I revise them to $ 0.15.
POSITION: LONG (ENTRY: $ 0.70)
Tuesday, April 13, 2010
Rodobo (RDBO) recent acquisitions clever move
Rodobo International announced on February 5 the completion of the acquisition of three dairy companies in China through the mergers of Ewenkeqi Beixue Dairy Co, Ltd ("Ewenkeqi Beixue"), Hulunbeier Beixue Dairy Co., Ltd ("Hulunbeier Beixue"), and Hulunbeier Hailaer Beixue Dairy Factory ("Hulunbeier Hailaer Beixue"), hereinafter collectively referred to as "Beixue Group", into the their wholly owned subsidiary Tengshun Technology and Development Co., Ltd. ("Tengshun Tech"). After the acquisitions, Rodobo's daily processing capacity of raw milk is expected to increase by five folds, from the current 200 tons per day, to about 1,200 tons per day.
Pursuant to the Equity Transfer Agreements entered into on February 5, 2010, they paid RMB2,100,000 in cash and issued 10,600,000 shares of the Company's common stock (the "Common Stock") and 2,000,000 shares of Series A Preferred Stock in exchange for 100% of the equity interest in Beixue Group composed of Ewenkeqi Beixue, Hulunbeier Beixue and Hulunbeier Hailaer Beixue. Based on independent valuation reports issued by Beijing Haohai Tongfang Assets Appraisal Co., Ltd, dated as of February 4, 2010, Beixue Group has a total net asset value of over USD 30 million.
Today the details of the transactions are filed in a 8-K.
Pursuant to the Equity Transfer Agreements entered into on February 5, 2010, they paid RMB2,100,000 in cash and issued 10,600,000 shares of the Company's common stock (the "Common Stock") and 2,000,000 shares of Series A Preferred Stock in exchange for 100% of the equity interest in Beixue Group composed of Ewenkeqi Beixue, Hulunbeier Beixue and Hulunbeier Hailaer Beixue. Based on independent valuation reports issued by Beijing Haohai Tongfang Assets Appraisal Co., Ltd, dated as of February 4, 2010, Beixue Group has a total net asset value of over USD 30 million.
Today the details of the transactions are filed in a 8-K.
http://www.sec.gov/Archives/edgar/data/1177274/000107997310000456/rodobo_8ka.htm
A closer look to the figures. Assets more than doubled to $ 64.579.265. The book value increased from $ 1.32 to $ 1.83. They booked a gain on their purchases of $ 1.677.020. The gain on bargain purchase will be recorded as a separate component of revenues in the company's form 10-Q for the quarter ended March 31, 2010.
Pro forma combined earnings per share for the three months ended December 31, 2009 were $ 0.13 diluted. With all this in mind 2010 could be a very interesting year because efficiency measures could bring down expenses and lead to higher margins. In the beginning of this year I posted an article on seekingalpha were I talked about an EPS-growth of 30% and I accounted that it would leave us this year with an EPS of around $ 0.55. All these expectations were pre-acquisition.
The acquisitions have increased distribution channels and production capacity so my expectation is that EPS between $ 0.70 -$ 0.80 is a possibility. If they would be uplisted to a mayor exchange and retain a P/E of around 10 that would mean that there is still a lot of upside potential this year.
POSITION: LONG (ENTRY $ 2.40)
Thursday, April 8, 2010
China Agri Business (CHBU) attains IR firm
They attained an IR firm for the first time in their history.
http://idc.api.edgar-online.com/efx_dll/edgarpro.dll?FetchFilingConvPDF1?SessionID=pYQuH82U68RjWjS&ID=7176957
A good sign that can increase shareholder's attention.
http://idc.api.edgar-online.com/efx_dll/edgarpro.dll?FetchFilingConvPDF1?SessionID=pYQuH82U68RjWjS&ID=7176957
A good sign that can increase shareholder's attention.
Monday, April 5, 2010
Xinyinhai Technology (XNYH) ready for a comeback
Xinyinhai Technology, Ltd. (XNYH) is a holding company that has two subsidiaries. Xinyinhai Technology owns 100% of the registered capital of Winner Sea Group Limited ("Winner Sea"), which owns 90% of the registered capital of Harbin Golden Sea Technology Printing Co., Ltd. ("Harbin Golden Sea").
Winner Sea is a business company organized under the laws of the British Virgin Islands in 2006. It has conducted no business. It is a holding company whose only asset is shares in Harbin Golden Sea that represent 90% of the registered capital of that company. The remaining 10% of Harbin Golden Sea is owned by Xie Guihong. Ms. Xie is a member of the Board of Directors of Xinyinhai Technology.
Harbin Golden Sea Technology Printing Co., Ltd. is a private company located in Harbin, China. Founded in 1998, Harbin Golden Sea has developed into a leading participant in China's financial notes printing industry. Harbin Golden Sea is a company to which the Chinese government has issued the Special Industry Operating Permit and the Government Securities and Documents Duplicating Permit, which are the licenses required in order to be engaged in printing bank vouchers in China.
The company has in recent years developed a prestigious clientele, and its share of the market for financial notes printing in China is growing. The three primary factors responsible for Harbin Golden Sea's growth have been:
The company provides printing services whose quality equals the highest standards worldwide. Harbin Golden Sea imports state-of-the-art printing equipment from Germany, and installs on its advanced software systems, such as anti-falsification software. The company's investment in technology means that few competitors can offer China's financial industry the level of service that Harbin Golden Sea offers.
Harbin Golden Sea's focus on providing high quality service has distinguished it from its competition. In 2000 Harbin Golden Sea received Certification of Compliance with the ISO 9000 International Standard. In 2003, Harbin Golden Sea's quality management system was accredited under ISO 9001-2000, recognition that Harbin Golden Sea's business practices meet the world's highest standards. In 2006 Harbin Golden Sea achieved GB/T28001 Certification of Occupational Health and Security Management System as well as ISO14001 Environment Management System certification. Harbin Golden Sea has been awarded "Best Performance" and named "Most Creditworthy and Reliable" enterprise by the Chinese government every year since 2001.
The company's marketing acumen has brought it into exclusive relationships with many of China's largest financial institutions and government agencies, including Bank of China, Agricultural Bank of China, and the Postal Savings Bank of China.
Harbin Golden Sea also earns a portion of its revenue (approximately 13% in 2009; 32%in 2008) from its position as a distributor of plasma arc cutting machinery and consumable parts manufactured by Hypertherm, Inc. of New Hampshire, U.S.A. Hypertherm's plasma arc cutting systems are designed to provide metal workers with clean cuts for metal work that permits little tolerance for error, and are well-known worldwide.
The earnings per share in 2009 were $ 0.05 compared to $ 0.15 in 2008, which means that in the last quarter they had a very small profit. The global recession in 2009 has reduced demand for capital goods in China. During last year, this situation had a negative impact on both of the company's business segments. Overall, the revenue during 2009 decreased by 37% to $8,627,306 from $13,686,332 achieved during 2008. The decrease was most dramatic in the equipment distribution business, where revenues declined by 74% to $1,147,696 during 2009 from $4,397,281 during 2008. The decline in equipment distribution reflected delays in the construction of new manufacturing facilities in China, as potential customers wait to see whether demand for their products is revived. The decline reversed a surge in equipment sales that the company had experienced in 2008, and returned this business segment to a 13% contribution to our overall revenue during 2009, a level similar to their experience in 2007 and 2006. The future of this business segment will depend, in part, on the success of the economic stimulus initiated by the Government of China.
Revenue from the printing business fell by 19% to $7,479,610 during 2009, compared to $9,289,051 during 2008. The decline occurred, in part, due to the weakening of the Chinese banking industry, as many of the customers are conserving cash pending stabilization of the international credit markets. The decline also occurred because the company moved their entire production operation to a larger facility at the end of 2008, which interfered with the printing business. Today, however, the new facility is fully operational, and they expect the traditional growth of their printing business to be renewed.
Over the longer term, the continued revenue growth in the printing services business will require further capital investment. As China's banking industry rapidly modernizes, customers demand additional product offerings similar to those available to the banking industry in Europe and the U.S. The ability to meet that demand will determine the long term growth of the business. Immediately, the development of these new products will require substantial capital investment. For that purpose, the company secured a $2.9 million collateralized loan during the third quarter of 2009, and applied $748,379 to improvements in plant and equipment during the second half of the year. At March 24, 2010 they had $2,213,667 in backlog of firm orders, all of which is for delivery during 2010. At March 17, 2009 they had $1,147,761 in backlog. A sign of improving.
The 32% gross margin realized by their subsidiary, Harbin Golden Sea, on sales in 2009 was lower than the 37% gross margin realized in 2008. Although, as has always occurred, the gross margin on printing operations in 2009 (33%) was significantly better than the gross margin on equipment distribution operations (21%), the primary reason for the overall decline in gross profitability was a reduction in the profitability of printing operations. The companies business plan contemplates that gross margin from printing services will average approximately 45%, albeit within a range of 35% to 50%, depending on the components of the business. During 2009, however, three factors caused margins from printing operations to fall below that standard:
- the disruption in the Chinese banking industry forced to price products more aggressively;
- The move at the end of 2008 to a larger manufacturing facility with upgraded equipment increased annual depreciation expense by 52%and the reduction in sales volume led to inefficient use of the new larger facility.
As the Chinese banking industry is moving towards stabilization, the company expectation is that it will be able to revive their sales growth and return their printing operations to the levels of profitability that they sustained prior to the international credit crisis.
The book value of Xinyinhai Tech Ltd (XNYH) is $ 0.75 and the stock is trading around $ 0.20. The problem is that it is thinly traded. I expect earnings per share this year to be around $ 0.10 (2008: $ 0.15). At these price levels this stock could be interesting for the long term investor and a price of $ 0.50 at the end of the year could be a real possibility.
POSITION: LONG (ENTRY $ 0.34)
Winner Sea is a business company organized under the laws of the British Virgin Islands in 2006. It has conducted no business. It is a holding company whose only asset is shares in Harbin Golden Sea that represent 90% of the registered capital of that company. The remaining 10% of Harbin Golden Sea is owned by Xie Guihong. Ms. Xie is a member of the Board of Directors of Xinyinhai Technology.
Harbin Golden Sea Technology Printing Co., Ltd. is a private company located in Harbin, China. Founded in 1998, Harbin Golden Sea has developed into a leading participant in China's financial notes printing industry. Harbin Golden Sea is a company to which the Chinese government has issued the Special Industry Operating Permit and the Government Securities and Documents Duplicating Permit, which are the licenses required in order to be engaged in printing bank vouchers in China.
The company has in recent years developed a prestigious clientele, and its share of the market for financial notes printing in China is growing. The three primary factors responsible for Harbin Golden Sea's growth have been:
The company provides printing services whose quality equals the highest standards worldwide. Harbin Golden Sea imports state-of-the-art printing equipment from Germany, and installs on its advanced software systems, such as anti-falsification software. The company's investment in technology means that few competitors can offer China's financial industry the level of service that Harbin Golden Sea offers.
Harbin Golden Sea's focus on providing high quality service has distinguished it from its competition. In 2000 Harbin Golden Sea received Certification of Compliance with the ISO 9000 International Standard. In 2003, Harbin Golden Sea's quality management system was accredited under ISO 9001-2000, recognition that Harbin Golden Sea's business practices meet the world's highest standards. In 2006 Harbin Golden Sea achieved GB/T28001 Certification of Occupational Health and Security Management System as well as ISO14001 Environment Management System certification. Harbin Golden Sea has been awarded "Best Performance" and named "Most Creditworthy and Reliable" enterprise by the Chinese government every year since 2001.
The company's marketing acumen has brought it into exclusive relationships with many of China's largest financial institutions and government agencies, including Bank of China, Agricultural Bank of China, and the Postal Savings Bank of China.
Harbin Golden Sea also earns a portion of its revenue (approximately 13% in 2009; 32%in 2008) from its position as a distributor of plasma arc cutting machinery and consumable parts manufactured by Hypertherm, Inc. of New Hampshire, U.S.A. Hypertherm's plasma arc cutting systems are designed to provide metal workers with clean cuts for metal work that permits little tolerance for error, and are well-known worldwide.
The earnings per share in 2009 were $ 0.05 compared to $ 0.15 in 2008, which means that in the last quarter they had a very small profit. The global recession in 2009 has reduced demand for capital goods in China. During last year, this situation had a negative impact on both of the company's business segments. Overall, the revenue during 2009 decreased by 37% to $8,627,306 from $13,686,332 achieved during 2008. The decrease was most dramatic in the equipment distribution business, where revenues declined by 74% to $1,147,696 during 2009 from $4,397,281 during 2008. The decline in equipment distribution reflected delays in the construction of new manufacturing facilities in China, as potential customers wait to see whether demand for their products is revived. The decline reversed a surge in equipment sales that the company had experienced in 2008, and returned this business segment to a 13% contribution to our overall revenue during 2009, a level similar to their experience in 2007 and 2006. The future of this business segment will depend, in part, on the success of the economic stimulus initiated by the Government of China.
Revenue from the printing business fell by 19% to $7,479,610 during 2009, compared to $9,289,051 during 2008. The decline occurred, in part, due to the weakening of the Chinese banking industry, as many of the customers are conserving cash pending stabilization of the international credit markets. The decline also occurred because the company moved their entire production operation to a larger facility at the end of 2008, which interfered with the printing business. Today, however, the new facility is fully operational, and they expect the traditional growth of their printing business to be renewed.
Over the longer term, the continued revenue growth in the printing services business will require further capital investment. As China's banking industry rapidly modernizes, customers demand additional product offerings similar to those available to the banking industry in Europe and the U.S. The ability to meet that demand will determine the long term growth of the business. Immediately, the development of these new products will require substantial capital investment. For that purpose, the company secured a $2.9 million collateralized loan during the third quarter of 2009, and applied $748,379 to improvements in plant and equipment during the second half of the year. At March 24, 2010 they had $2,213,667 in backlog of firm orders, all of which is for delivery during 2010. At March 17, 2009 they had $1,147,761 in backlog. A sign of improving.
The 32% gross margin realized by their subsidiary, Harbin Golden Sea, on sales in 2009 was lower than the 37% gross margin realized in 2008. Although, as has always occurred, the gross margin on printing operations in 2009 (33%) was significantly better than the gross margin on equipment distribution operations (21%), the primary reason for the overall decline in gross profitability was a reduction in the profitability of printing operations. The companies business plan contemplates that gross margin from printing services will average approximately 45%, albeit within a range of 35% to 50%, depending on the components of the business. During 2009, however, three factors caused margins from printing operations to fall below that standard:
- the disruption in the Chinese banking industry forced to price products more aggressively;
- The move at the end of 2008 to a larger manufacturing facility with upgraded equipment increased annual depreciation expense by 52%and the reduction in sales volume led to inefficient use of the new larger facility.
As the Chinese banking industry is moving towards stabilization, the company expectation is that it will be able to revive their sales growth and return their printing operations to the levels of profitability that they sustained prior to the international credit crisis.
The book value of Xinyinhai Tech Ltd (XNYH) is $ 0.75 and the stock is trading around $ 0.20. The problem is that it is thinly traded. I expect earnings per share this year to be around $ 0.10 (2008: $ 0.15). At these price levels this stock could be interesting for the long term investor and a price of $ 0.50 at the end of the year could be a real possibility.
POSITION: LONG (ENTRY $ 0.34)
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