Coffee Holding (JVA) microcap in the booming Coffee Markets

I see a lot of opportunities everywhere so also in the U.S.. China Investor King is mainly of course a blog that writes about Chinese companies. Sometimes I come across companies that are not Chinese but are anyway interesting bait. One of those companies that I investigated is an American coffee company that could be an interesting play for the microcap value investor that is patient and knows waiting some years can be more profitable to the investment.

COFFEE HOLDING (JVA)

While studies abound for the potential health benefits of coffee and tea consumption, questions remain about the bioavailability of the compounds they contain.

While the overall market for antioxidants was estimated to be worth $12bn (€8.8bn) in 2009, according to Euromonitor International, the combined markets of tea and coffee are much bigger, valued at over $70bn in retail sales a year for coffee and about $1 bn for tea.

Coffee and tea are two of the most commonly consumed beverages in the world and thus represent a significant opportunity to positively affect disease risk and outcomes globally, wrote Mario Ferruzzi from Purdue University in a recent paper in Physiology & Behavior (doi: 10.1016/j.physbeh.2010.01.035). He added:
A better understanding of how the beverage composition impacts phenolic profiles and their bioavailability is critical to development of beverage products designed to deliver specific health benefits.

Ferruzzi notes that coffee is one of the richest sources of polyphenols in the Western diet, with one cup of the stuff providing 350 milligrams of phenolics. Of these, the most abundant compounds coffee are chlorogenic acids, making up to 12 per cent of the green coffee bean. The most abundant of these compounds is caffeic acid.

The conclusion is that the consumption of coffee can get a boost the coming years if more studies publish the major health benefits that drinking three cups a day can have. I have been wondering which companies can profit from it the most and are still relatively undervalued when you look to the sector in general.

In my opinion Starbucks (SBUX), Caribou Coffee Company, Inc. (CBOU), Green Mountain Coffee Roasters Inc. (GMCR), Peet's Coffee & Tea, Inc. (PEET) are all overvalued when you look to some fundamentals like P/E, P/B etc. An opportunity for the coming years that fundamentally is still undervalued could be the microcap: Coffee Holding Co. (JVA).

Coffee Holding Co. conducts wholesale coffee operations, including manufacturing, roasting, packaging, marketing and distributing roasted and blended coffees for private labeled accounts and its own brands, and it sells green coffee. The company’s sales are primarily to customers that are located throughout the United States with limited sales in Canada. Such customers include supermarkets, wholesalers, gourmet roasters and individually-owned and multi-unit retailers. The company closed its manufacturing operations at its Brooklyn, New York location in May 2009. The majority of the company’s coffee processing capacity has been moved to its La Junta, Colorado facility and its facility in Brecksville, Ohio from New York in October 2009.

Some major strengths

Positioned to Profitably Grow Through Varying Cycles of the Coffee Market
One of the few coffee companies that offer a broad array of branded and private label roasted ground coffees and wholesale green coffee across the spectrum of consumer tastes, preferences and price points. While many of their competitors engage in distinct segments of the coffee business, the company sells products in each of the following areas:

Retail branded coffee;
Mainstream retail private label coffee;
Specialty retail coffees both private label and branded;
Wholesale specialty green and gourmet whole bean coffees;
Food service;
Instant coffees; and
Niche products.

Their branded and private label roasted ground coffees are sold at competitive and value price levels while some of their other branded and specialty coffees are sold predominantly at premium price levels. Because of this diversification, the company’s profitability is not dependent on any one area of the coffee industry and, therefore, is less sensitive than their competition to potential coffee commodity price and overall economic volatility.

Wholesale Green Coffee Market Presence
As a large roaster-dealer of green coffee, JVA is favorably positioned to increase its specialty coffee sales. Since 1998, the company has increased the number of its wholesale green coffee customers, including coffee houses, single store operators, mall coffee stores and mail order sellers, by 88% from 150 to 282. In addition, although JVA hasn't any formalized, material agreements or long-term contracts with Green Mountain Coffee Roasters, it has a 17-year relationship with GMCR, its largest wholesale green coffee customer.

Management Has Extensive Experience in the Coffee Industry
The company was founded and incorporated in New York State in 1971 and has been a family operated business for almost 40 years. Throughout this time, it has remained profitable through varying cycles in the coffee industry and the economy. Andrew Gordon, the President, Chief Executive Officer and Chief Financial Officer, and David Gordon, the Executive Vice President – Operations, have worked with Coffee Holding for 27 and 29 years, respectively. David Gordon is an original member of the Specialty Coffee Association of America.

Growth Strategy
The company believes that significant growth opportunities exist by selectively pursuing strategic acquisitions and alliances, targeting the rapidly growing Hispanic market in the United States, increasing penetration with existing customers by adding new products, and developing their food service business.

Recent news and results
On June 25, the company announced that its Board of Directors has approved a regular quarterly dividend program of $0.03 per share to shareholders. This dividend will be paid on July 29, 2010 to shareholders of record on July 16, 2010. 'A regular quarterly dividend program accomplishes our goals of creating shareholder value while sending a signal to the marketplace as to the company's current strength,' said Andrew Gordon, President & CEO.

We want to reward our investors with this modest income to give them further reason to back our company for the long haul at a time when many investors are looking for both value and stability in what has become an increasingly difficult and unstable economic and investing environment. This payout, with its current 2.4 % yield, will not prevent us from our achieving our other corporate growth initiatives, as we continue to generate free cash flow.

On June 11, the company announced its operating results for the three and six months ended April 30, 2010. In this release, the Company:

Reports that net income increased $399,798, or 99.8%, to $800,448, or $0.15 per share (basic and diluted), for the three months ended April 30, 2010 compared to net income of $400,650, or $0.07 per share (basic and diluted), for the three months ended April 30, 2009;
Reports net sales of $41,276,459 for the six months ended April 30, 2010 and $19,917,308 for the three months ended April 30, 2010; and
Reports sales growth of 11.4% for the three months ended April 30, 2010 compared to the three months ended April 30, 2009.

The increase in net income primarily reflects increased net sales, which resulted in an increase in gross profit and an improvement in gross margins.The increase in net sales reflects increased sales of both green coffee and private label coffee to their largest customers.

Subsequent to the end of the reporting period, on May 17, 2010 the company completed the purchase of substantially all of the assets, including fixed assets, inventory, trademarks, customer list and supply-chain relationships of Organic Products Trading Company (OPTCO), a Washington corporation. OPTCO works directly with coffee farmers in South America and Central America to develop and import high quality certified organic green specialty coffee which is sold directly to small and medium-sized roasters throughout the United States and Canada. Its core business is highly complementary to the existing current business strategy of Coffee Holding. Both companies mutual customer bases will now be merged into one enhancing an already solid position as one of the largest purveyors of specialty green coffee in the U.S. today.

We are both pleased and excited to report our latest quarterly results showing almost a twofold increase in net income and an 11 % growth in revenues. Our recent strategy of focusing on higher margin business while continuing to expand our customer base has proven to be successful as indicated by our recent results, said Andrew Gordon, President and Chief Executive Officer of the Company.

This has been an interesting few months for us with the completion of the OPTCO transaction along with the changes we have implemented in our existing business model. We expect to continue to see continued growth as we walk that delicate line between expanding our profit margins while increasing our sales at the same time. The now completed addition of OPTCO and their customer base should assist in this as their high end Organic, Fair Trade gourmet Arabica offerings should increase both our revenue base and average gross margins on green coffee sales.

Conclusion
Despite the liquidity in the stock is low Coffee Holding could be an interesting investment in the long run. The chance of a take-over by a bigger competitor is a realistic scenario. Green Mountain Coffee Roasters (GMCR)would be a possible candidate. Also the booming market of organic green coffee puts the company in the spotlight. The valuation is low (P/E 7,11) compared to stocks as Starbucks, Caribou Coffee Company, Inc., Green Mountain Coffee Roasters Inc., which are traded at P/E-ratios of at least 20.

The experience of the management in the coffee markets is a great plus and gives confidence that the company can benefit in the cycles and trends of the coffee and convenience goods markets.

Some highlights:

Price & Volume

Recent Price 5.04
52 week high 5.60
52 week low 2.80
Beta 2.70

Earnings
EPS Incl Extra (TTM) 0.71
P/E Incl Extra (TTM) 7.11
EPS Growth 3 Yr 69.21
EPS Growth 5 Yr 22.58

Revenue
Revenue / Share (TTM) 14.52
Revenue / Share growth 5 Yr 14.32

Profitability
Gross Margin (TTM) 14.15
Operating Margin (TTM) 8.39
Net Profit Margin Percent (TTM) 4.92
Return on Avg Equity (TTM) 36.53
Return on Avg Assets (TTM) 21.31

Capitalization
Market Capitalization (Mil) 27.67
Shares Out Current (Mil) 5.49
Float (Mil) 2.54

Financial Strength
Quick Ratio (MRQ) 2.32
Current Ratio (MRQ) 3.44
Total Debt / Equity (MRQ) 0.00

Rodobo International (RDBO) raises $3.0 million from institutional investors

On June 18 Rodobo International ( RDBO) announced today that it has signed an agreement with various institutional investors for the private placement of an aggregate of 1,111,112 shares of its common stock and warrants to purchase 555,556 shares of its common stock for an aggregate purchase price of $3,000,000, or $2.70 per share. The warrants are immediately exercisable following issuance, have a term of exercise of 5 years and an exercise price of $3.50 per share.

The company intends to use the proceeds of the private placement for general corporate purposes, which may include working capital, capital expenditures, acquisitions of new businesses and investments.

Rodman & Renshaw, LLC, a wholly owned subsidiary of Rodman&Renshaw Capital Group, Inc. (Nasdaq: RODM), served as the company's lead placement agent and FT Global Capital, Inc. served as the company's co-placement agent for the transaction.

The institutional investors include:
Whitebox Multi Strategy Partners, L.P
Whitebox Small Cap Long Short Equity Partners, L.P.
CNH Diversified Opportunities Master Account, L.P.
Chestnut Ridge Partners, LP
Iroquois Master Fund Ltd.
The USX China Fund
Alpha Capital
Empery Asset Master, LTD
Hartz Capital Investments, LLC
Hudson Bay Fund LP
Hudson Bay Overseas Fund, LTD.
Rodman & Renshaw, LLC
Cranshire Capital LP
Freestone Advantage Partners LP
FirsTrust Group, Inc.

A good sign that these funds think Rodobo (RDBO) has potential. I already mentioned in earlier posts that the company has a strong footprint in the expanding dairy market.

Investment idea: China Organic Agriculture (CNOA)

Investing is quite difficult nowadays. Where do you look at when you analyze a company you want to invest in?

The recent turmoil of China Organic Agriculture (CNOA) in all the senses has had influence on the stock price. We also were negative and sold our small position. Despite all the recent events, we see some positive signs that can create stability. The coming quarters will be important to gain investor's trust.

New management has a challenging task to get the company on the rail again. We think it is possible. If we look to the fundamentals we see some undervaluation in terms of market pricing. As contrarian value investors we are ready to take a small bet on this turnaround play.

Their free cash flow (Price to Free Cash Flow per Share TTM: 4,90) and cash position, as of March 31 2010 they had cash and cash equivalents of $25.1 million up from $18.5 million as of December 31 2009 excluding restricted cash are healthy signs which we believe are important for their changing business model. The acquisition of Changbai Eco-Beverage Co., Ltd., was already a new step in their future development direction.

The new Chairman and CEO have both experience in the corporate M&A field which can result in more acquisitions this year. We hope they will appoint a Global-100 auditor and a good IR-relations firm to gain trust in the marketplace.

The stock is still trading under Book Value of $ 0.82. The shift to becoming less dependable on trading is positive and will lead to higher and stable earnings per share the coming quarters. We really believe an EPS-figure of $ 0.22 in 2010 is possible and maybe even conservative. The stock price doesn't reflect the opportunities that lie ahead and I would consider to take a small position at prices between $ 0.50 and $ 0.55.

For more information: www.chinaorganicagriculture.com/

POSITION: NOT YET

Newsletter - Idea

The first newsletter (idea) was sent today to three people. We give you a stock idea that we think is ready for some major price appreciation and has the 3U characteristics. Undervalued, Unloved and Underowned.

The newsletter is for free but is only for registered users. If you think it is worthly and you want to donate $ 1 you are welcome. Any amount is appreciated. Just click the donate button on China Investor King.

We want to give you some free ideas and research that gives you an advantage of making your investment decision.

Your Money is King!!!!

Personally I think the newsletter could have more in-depth research and have a more professional look. Maybe also a portfolio can be added. But this was a first try, so we learn from our mistakes.

China pharmaceuticals is a growing sector

China’s pharmaceuticals market growth will accelerate to 20 percent to 25 percent this year, spurred by rising government spending and increased investment from multinational drugmakers, according to Katherine Lu, director of China equities at Oppenheimer & Co. The market grew between 16 percent and 18 percent last year, she said.

“Investment is long overdue,” Lu, who covers health-care companies for the New York brokerage, said in a phone interview. “China is expected to become the third-largest health-care market by next year according to the IMF, that’s ahead of projections that this would happen by 2013. The long-term growth outlook for the health-care market is very substantial.”

The Chinese government spends $125 billion to start a national health insurance system. China’s pharmaceuticals market, including nutritional products and consumer drugs, will more than double to $110 billion by 2015 from $44 billion in 2008, Credit Suisse AG estimated in a November 2009 report.

“The Chinese government is committed to health-care reform,” Lu said. “China’s savings rate is very high because people need to save for health. One way to stimulate spending and free up savings is by spending on health-care benefits.”

The prices of pharmaceutical stocks don't reflect the huge opportunities that lie ahead. Emerging stocks like Renhuang Pharmaceuticals (RHGP), Lotus Pharmaceuticals (LTUS), Tianyin Pharmaceuticals (TPI), Biostar Pharmaceuticals (BSPM), etc. have much more room to grow.

POSITION: LONG (RHGP, LTUS)

China Business Books now also available at Investment Books Blog Shop

If you need investment, financial or business books. Investment Books Blog Shop is the place to be.

On http://thebestinvestmentbooks.blogspot.com/ you have the best books for a reasonable price. Amazon is one of the cheapest around.

Today China Business has been added to the Store. A selection of the most read business books regarding "Doing business in China".  

Friends, family, colleagues or other people interested in buying books please refer them to this site or the blog mentioned above.

China's environment becoming more and more important

As the largest developing country in the world, China has achieved rapid economic development, averaging an annual gross domestic product (GDP) growth rate of 10% over the past two decades. But this success comes at the cost of deterioration of the environment. China’s environmental problems, including outdoor and indoor air pollution, water shortages and pollution, desertification, and soil pollution, have become more pronounced and are subjecting Chinese residents to significant health risks.

In Chinese cities, outdoor air pollution is the biggest environmental challenge for public health. The source of air pollution in Chinese cities has gradually changed from conventional coal combustion to a mixture of coal-combustion and motor-vehicle emissions. Generally, China’s current air pollution situation is similar to to that of developed countries in the 1960s. The annual average concentrations of inhalable particles [particles < 10 µm in aero-dynamic diameter (PM10)], sulfur dioxide (SO2), and nitrogen dioxides (NO2), the three criteria pollutants in China, were 89 µg/m3, 48 µg/m3, and 34 µg/m3, respectively, in 113 medium to large Chinese cities (Ministry of Environmental Protection of China 2009). Many studies have documented the adverse health effects of outdoor air pollution in China, including increases in respiratory symptoms, hospitalization, and premature mortality (Chen et al. 2004). The World Health Organization (WHO) estimated that outdoor air pollution was associated with approximately 300,000 premature deaths per year in China (Cohen et al. 2005), and Chinese scientists have given similar estimates (Zhang et al. 2008).

In rural areas of China, coal and biomass fuels are still widely used in stoves and produce substantial indoor air pollution. The evidence for adverse health effects of solid fuels is strong, including lung cancer, acute respiratory infection, and chronic obstructive pulmonary disease (Zhang and Smith 2007). The WHO estimated that solid fuels used in Chinese households cause approximately 420,000 premature deaths annually (Smith et al. 2004).

Water pollution is another cause for serious health concern in China, especially in rural areas. From 2000 to 2008, the quality of surface water worsened in northern China, where it improved slightly in southern China (Ministry of Environmental Protection of China 2009). In 2008, among 200 major rivers in China, water quality in 20.8% of 409 monitored sections was below grade V, the worst grade in the Chinese National Standard for Water Quality; water of this grade is virtually of no functional use, even for agricultural irrigation (Ministry of Environmental Protection of China 2009). Analysis of data from the 2003 National Health Services Survey (Ministry of Health of China 2004) indicates that two-thirds of the rural population does not have access to piped water. Exposure to contaminated drinking water has been associated with increasing rates of digestive cancers and infectious diseases such as hepatitis and cholera (Wu et al. 1999). The World Bank (2007) estimated that the health cost of cancers and diarrhea associated with water pollution reached approximately US$8 billion in 2003 in rural areas of China.

Other important environmental health problems in China include climate change, disposal and treatment of electronic waste, and heavy metal pollution in the soil. China is one of the countries most susceptible to the adverse effects of climate change. Although the Chinese government has paid great attention to climate change, there has been limited interest in the health impacts so far. Approximately 70% of the electronic waste generated worldwide is processed in China, posing substantial risk to human health and the environment (Ni and Zeng 2009). Also, pollution from heavy metals such as lead, mercury, chromium, cadmium, and arsenic has become increasingly prominent, seriously endangering the health of local citizens (He et al. 2009). The recent discovery of clusters of lead poisoning involving thousands of Chinese children has raised severe public concern (Watts 2009). Small-scale rural factories known as “township and village enterprises” play an important role in China’s growing pollution problems in the countryside.

China is striving to quadruple its GDP of 2000 by the year 2020, and consequently will face even more serious environmental challenges. Despite the environmental health problems described above, the Chinese government is beginning to focus on these issues and has embarked on the strategic transformation from economic development alone to environment and development in building an energy-saving and environment-friendly society. China’s economic progress can be the foundation of improvements in environmental health. In the early 1980s, the Chinese government invested US $1.6 billion annually, or 0.51% of China’s GDP, on environmental protection; in 2008, the number increased to US$66 billion, reaching 1.49% of China’s GDP (China National Bureau of Statistics 2009). In 2007, for the first time in recent years, China reported a reduction in national total emissions of chemical oxygen demand in water and SO2 in air, by 3.1% and 4.7% respectively, compared with the previous year. Also in 2007, China issued its first National Environment and Health Action Plan (2007-2015) (Ministry of Health of China 2007). The plan addresses the need to establish nationwide surveillance networks for environment and health, and for different government agencies and stake-holders to share information and take responsibility. According to the action plan, China will conduct national surveys to obtain accurate information on the nature and extent of environmental pollution and its health impact. China aims to form a comprehensive and efficient system for environmental health by 2015. Furthermore, the Chinese government will need to overcome policy and institutional barriers, such as lack of effective legislation, mechanisms for interdepartmental coordination, involvement of health authorities in environmental management, and adequate staffing at the local level.

The recent sell-off in Chinese environmental stocks gives investors a great opportunity to benefit from the environmental challenges the coming years. Stocks like RINO International Corp. (RINO), China Recycling Energy Corp. (CREG) and Daoyuan Global Water (DGW) can be the right picks in a growing and interesting market.

POSITION: NONE

The settlement case regarding China Organic Agriculture (CNOA)

Summary: According to a press release dated December 13, 2008, the complaint alleges violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and names as defendants China Organic and certain of its officers and directors. The complaint goes on to state the defendants took the Company public in early 2007 and made numerous statements during the Class Period regarding the Company's prospects and sales. Defendants, for example, claimed to be developing organic rice for sale in China, but according to the complaint, never developed any kind of product that could be sold at a competitive price. According to the complaint these and other Class Period statements were false and misleading, designed to inflate the price of the Company's stock. Indeed, according to the complaint, insiders sold tens of millions of dollars worth of Company stock during the Class Period, acquired for themselves a luxury retreat in California, sold off the Company's only significant operation and within eighteen months of taking the Company public left only an empty shell and huge shareholder losses.

On June 08, 2010, a Preliminary Order In Connection With Settlement Proceedings was issued by the Court.

China Organic Agriculture (CNOA) still on my radar

Despite that I sold my position some weeks ago, I am still keeping an eye on CNOA. The recent management changes by announcing a new Chairman and a new Chief Executive Officer can lead to new enthusiasm in the stock price in the nearby future.

The new Chairman Mr. Kyle Jiang has served as Banking Investment Director at Shenzhen Careall Capital Investment. He was in charge of a variety of significant investment projects, including the $18 million fund raising for Bo Run Industrial in Shangdong, and assisted in the acquisitions of Shenzhen Skyrise Technology and China Security & Surveillance Technology, and the capital restructuring of SiKeDa. Mr. Jiang’s extensive experience in capital markets has enabled him to build strong relationships with private equity firms, venture capital and investment firms, banks and law firms.

Also Mr. Qian Qi the new CEO has enough experience in the investment, accountancy and operational field, this makes him well suited to assume operational and strategic responsibilities at China Organic Agriculture (CNOA), and will enable him to provide investors with the information they need.

The experiences both men have in the field of investments can in my opinion lead to attractive acquisitions in the nearby future.

Also the fact that the company had agreed to a settlement in the shareholder class action lawsuit commenced against it in December 2008 takes a lot of uncertainty away. Under the terms of the settlement, eligible class members would receive a total of $300,000 in cash together with shares of China Organic Agriculture’s common stock having a value of $300,000 in exchange for a release of all claims which class members have or may have against the Company, its directors, officers, affiliates, shareholders and agents, except claims arising out of or related to the settlement.

Qian Qi, the newly elected Chief Executive Officer of the Company commented, “The decision to settle this action reflects management’s desire to focus on the Company’s business and avoid the distractions that would result from mounting a defense to this lawsuit. Although we believe that the Company and its personnel did nothing improper, it is well worth it to pay the amount of the settlement and put this matter behind us and focus on growing our Company.”

POSITION: NONE

The Reverse Merger Failure

I came along this critical article from June 8 which I have to confess is worthly reading. Of course there are some points that are clearly the case but I also want to add the following points. The failure rate of 85% mentioned in the article has also to do with the the risk aversion of private and professional investors for Chinese companies in general and the naked short selling by criminal entities.

The Reverse Merger Minefield

Since 2005, 380 Chinese companies have executed reverse mergers in the US. They did so, in almost all cases, as a first step towards getting listed on a major US exchange, most often the NASDAQ. Yet, as of today, according to a recent article in Dow Jones Investment Banker, only 15% of those Chinese companies successfully “uplisted” to NASDAQ. That’s a failure rate of 85%.

That’s a rather stunning indictment of the advisers and bankers who promote, organize and profit from these transactions. The Chinese companies are left, overwhelmingly, far worse off than when they started. Their shares are stuck trading on the OTCBB or Pink Sheets, with no liquidity, steep annual listing and compliance fees, often pathetically low valuations, and no hope of ever raising additional capital.

The advisors, on the other hand, are coining it. At a guess, Chinese companies have paid out to advisors, accountants, lawyers and Investor Relations firms roughly $700 million in fees for these US reverse mergers. As a way to lower America’s balance of payments deficit with China, this one is about the most despicable.

You would think that anyone selling a high-priced service with an 85% failure rate would have a hard time finding customers. Sadly, that isn’t the case. This is an industry that quite literally thrives on failure. The US firms specializing in reverse mergers are a constant, conspicuous presence as sponsors at corporate finance conferences around China, touting their services to Chinese companies.

I was at one this past week in Shenzhen, with over 1,000 participants, and a session on reverse mergers sponsored by one of the more prominent US brokerage houses that does these deals. The pitch is always the same: “we can get your company listed on NASDAQ”.

I have no doubt these firms know that 85% of the reverse mergers could be classified as expensive failures, because the companies never migrate to NASDAQ. Equally, I have no doubt they never disclose this fact to the Chinese companies they are soliciting. I know a few “laoban” (Chinese for “company boss”) who’ve been pitched by the US reverse merger firms. They are told a reverse merger is all but a “sure thing”. I’ve seen one US reverse merger firm’s Powerpoint presentation for Chinese clients that contained doctored numbers on performance of firms it brought public on OTCBB.

Accurate disclosure is the single most important component of financial market regulation. Yet, as far as I’ve been able to determine, the financial firms pushing reverse mergers offer clients little to no disclosure of their own. No other IPO process has such a high rate of failure, with such a high price tag attached.

Of course, the Chinese companies are often also culpable. They fail to do adequate due diligence on their own. Chinese bosses are often too fixated on getting a quick IPO, rather than waiting two to three years, at a minimum, to IPO in China. There’s little Chinese-language material available on the dangers of reverse mergers. These kinds of reverse mergers cannot be done on China’s own stock exchanges. Overall knowledge about the US capital markets is limited.

These are the points cited by the reverse merger firms to justify what they’re doing. But, these justifications ring false. Just because someone wants a vacation house in Florida doesn’t make it OK to sell them swampland in the Everglades.

The reverse mergers cost China dear. Good Chinese SME are often bled to death. That hurts China’s overall economy. China’s government probably can’t outlaw the process, since it’s subject to US, not Chinese, securities laws. But, I’d like to see the Chinese Securities Regulatory Commission (中国证监会), China’s version of the SEC, publish empirical data about US reverse mergers, SPACs, OTCBB listings.

There is not much that can be done for the 325 Chinese companies that have already completed a US reverse merger and failed to get uplisted to NASDAQ. They will continue to waste millions of dollars a year in fees just to remain listed on the OTCBB or Pink Sheets, with no realistic prospect of ever moving to the NASDAQ market.

For these companies, the US reverse merger is the capital markets’ version of 凌迟, or “death by a thousand slices”.

Source: Peter Fuhrman (China First Capital)

Renhuang Pharmaceuticals (RHGP) almost ready for uplisting to AMEX

Renhuang Pharmaceuticals is an integrated developer, manufacturer and distributor of a broad line of high-quality nutraceutical, biopharmaceutical, and natural medicinal products. The company provides three major product lines including the Acanthopanax-based natural medicinal products, biopharmaceutical products, and Traditional Chinese Medicines. Renhuang’s key product line is an Acanthopanax-based product series, a natural medicine effective in treating depression and melancholy, and provides numerous other health benefits. By controlling an estimated 70% of China’s natural resource of Acanthopanax (also known as Siberian Ginseng), the company possesses a unique competitive edge and, therefore, occupies a dominant market position in Acanthopanax-based medicinal and nutraceutical products.


For a company presentation:
http://www.slideshare.net/GeoTeam/renhuang-pharmaceuticals-march-2010-presentation

Second Quarter Fiscal 2010 Highlights and Recent Events

· Net sales grew 39.0% year-over-year to $12.1 million.
· Gross profit increased 44.5% to $6.2 million from $4.3 million in 2009 while gross margin increased to        51.4% from 49.4% a year ago
· Net income rose 63.0% to $3.4 million or $0.09 per diluted share, as compared to $2.1 million or $0.06 per diluted share in 2009
· New products, Banlangen Granules and Compound Honeysuckle Granules, accounted for nearly $3.7 million in sales in the quarter
· Appointed three new independent directors, strengthening corporate governance practices

“Renhuang continued to deliver robust growth in the second quarter of fiscal 2010 with strong increases in revenue and earnings,” said Mr. Shaoming Li, the Chairman and CEO of Renhuang. “We are pleased with the rapid market acceptance of our recently introduced products, Banlangen Granules and Compound Honeysuckle Granules, which were key drivers behind the sales growth and margin expansion to-date. Our operating leverage remained robust in the second quarter with a nearly 400 basis point operating margin increase year-over-year despite higher operating expenses.”

First Half Fiscal 2010 Results

Total revenue for the six month period ended April 30, 2010 was $29.2 million, an increase of 30.0% from $22.5 million for the first six months in fiscal 2009. Year-over-year growth was mainly due to the introduction of Banlangen Granules and Compound Honeysuckle Granules in late 2009, and an increase in ASP across the rest of the product portfolio.

Gross profit in the first half of fiscal 2010 rose 35.4% to $15.7 million, representing a gross margin of 53.7% as compared to 51.6% in the first half of fiscal 2009. Operating income grew 29.1% year-over-year to $10.8 million. In the first six months of fiscal 2010, net income was $10.8 million or $0.29 per diluted share, up from $8.4 million or $0.24 per diluted share in the first six months of fiscal 2009.

Financial Condition
As of April 30, 2010, Renhuang had $23.4 million in cash and cash equivalents. Working capital was $40.4 million with a current ratio of 17.4x, as compared to $32.0 million and 12.9x as of October 31, 2009. The Company had no debt on its balance sheet. At the end of the second quarter of 2010, shareholders’ equity was $61.1 million, as compared to $50.5 million at the end of fiscal 2009.

Cash flow from operating activities was $19.3 million for the six months ended April 30, 2010, as compared to $4.2 million during the same period in the prior year. The cash flow increase was primarily attributable to an increase in net income and a decrease in trade receivables that reflected a change in credit terms and more aggressive receive collection efforts year-over-year. Average days sales outstanding fell to 118 days in first half of fiscal 2010 from 186 in the first half of fiscal 2009.

Recent Events
In April 2010, Renhuang announced several major initiatives that further strengthened the Company’s corporate governance practices, including the appointment of three new independent directors to its board of directors. With the addition of the independent board members, the Company also established a nominating and compensation committee. This represented a major step in the Company’s active efforts to meet the requirements to move to a senior exchange during the fiscal year.

Additionally in May 2010, Renhuang engaged the global leader in Sarbanes-Oxley Section 404 (“SOX 404”) compliance consulting, PricewaterhouseCoopers (“PWC”), to assist the Company in establishing and maintaining its SOX 404 compliance program. Renhuang’s management team remains committed to work with PWC to further strengthen the Company’s internal controls, corporate governance and risk management procedures.

During the second quarter of fiscal 2010, Renhuang entered into a purchase agreement to acquire two office floors for approximately $5.6 million cash. The new office space, intended to become the Company’s new headquarters, is already housing some of Renhuang’s offices for administrative and human resources functions. Of the total purchase price, $3.9 million was paid in April 2010 as a deposit with the remaining $1.7 million due by December 20, 2012.

Outlook – Affirming Fiscal 2010 Guidance

Renhuang is affirming its fiscal 2010 guidance for net sales in the range of $54.7-$55.6 million, which represents a 26% to 28% increase over reported revenues of $43.4 million in fiscal year 2009. The Company continues to expect fiscal 2010 net income, excluding any non-cash, non-operating gains and expenses (such as the change in fair market value of warrant liability), to be in the range of $18.6-$18.9 million, up 26% to 28% from net income of $14.8 million in fiscal year 2009.

Third quarter sales and net income are historically modestly lower as compared to those in the first two quarters due to seasonality of Renhuang’s product portfolio. Demand for the Company’s products often peak in the fourth quarter, which represents the start of the flu season.

In the second half of fiscal 2010, Renhuang continues to expect the commercial launch of its Qing Re Jie Du Oral Liquid, a TCM for the treatment of influenza and upper respiratory infections, and Badger Oil, a natural medicine for the treatment of burns. The new product introductions and continued market penetration of Renhuang’s current product portfolio are expected to drive revenue growth for the remainder of fiscal 2010. The Company anticipates gross margin to remain above 50% during second half of fiscal 2010. Operating expenses are expected to increase in the second half of the fiscal year, with higher sales and marketing expenses to support new product roll out and increased R&D expenses as the development pipeline advances and grows.

”Renhuang completed a very strong first half performance with significant momentum for the remainder of fiscal 2010,” added Mr. Li. “Increased market acceptance of our portfolio of natural products and introduction of new products are expected to continue the Company’s strong pace of growth in the coming quarters. In addition to focusing on organic growth, Renhuang continues to actively evaluate external growth opportunities, including the potential acquisition of complementary operations and overseas expansion.”

I attended the Conference Call so at the end there was an Q/A-session. Here are the highlights:

Question from James Fuld, Bold Corporation:
QUESTION: Your receivables are now 118 days. What do you think they will be by the end of the year?
ANSWER: We are working on reducing the days, it should below 100 days.

QUESTION: Your tax rate for this year is zero. What would it be in 2011 and 2012?
ANSWER: In China, to apply to be granted of official tax of 0%, we have to apply annually, therefore we will continue to apply for this 0% tax rate next year. However, there is no guarantee we will be granted this tax rate, if it is not granted our tax rate would be 25%.

QUESTION: You have deposits of US$18 million. Can you explain that to me, please?
ANSWER: The deposit of US$18 million is for down payments for purchase of three patents, land-use rights and production facilities.

QUESTION: And how much is the total payment?
ANSWER: The total payment is something about US$35 million. So we still have the remainder US$17 million, but the payment is due to 2011 and 2012.

QUESTION: And when do you hope to do an acquisition?
ANSWER: We continue interested in getting opportunities for acquisition, but at the moment we do not have any specific target.

Questions Dutch Trader, China Investor King
QUESTION: When do you plan for uplisting to a major exchange?
ANSWER: We are planning to uplift to AMEX, and we are working with AMEX to complete this in this year.

QUESTION:  And how do you want to achieve this? Is this by a reverse split, or by just meeting the listing requirements?
ANSWER: It will be just by meeting the listing requirements.

QUESTION: Do you think there is more dilution on the way this year, or it is under control?
ANSWER: At the moment, all the dilution has been listed in the financial statement. Going forward, depending on acquisition opportunities that come along the way, there might be more dilution, but that is something that I cannot confirm at this stage.

QUESTION: How do you see yourself, the Company, in five years from now?
ANSWER: Its our goal to be a global leading provider brand for anti-depressant and nervous regulation product, we will continue to work towards it with our products, currently these new products of Siberian Ginseng which with a single plant has proven properties in this area, we are continuing to working hard in terms of in our R&D to further develop and explore the opportunities. We are also working very hard to fit the Medical Quality Standards for this product, once that is fit, we will be more [unintelligible] in the market. We are already like the market leaders of natural anti-depressants and nerve regulation products for a single-plant base product in China, and we will reach towards expanding this advantage, as well as developing [unintelligible] product to enhance our product portfolio.

QUESTION: 3Qs are always the weakest, you mentioned in your 10Q. What are the Company’s plans to make the 3Q a consistent quarter in line with the other quarters?
ANSWER: We plan to introduce a new product, the Qing Re Jie Du Oral Liquid which with this we will be able to be as a successful product as we have achieved [unintelligible] in the 3Q, and we will continue also to [unintelligible] Siberian Ginseng to increase our sales of existing products.

Boyd Hinds, Equinox Capital:
QUESTION: You have announced that you have two new products that you are scheduling for launch here in the 2H10. Can you just discuss with us what your expectations are for revenues for these two products, and how much of that has already been built in your guidance?
ANSWER: For our first product, which is the Qing Re Jie Du Oral Liquid, we budgeted, we see sales on that to the rest of 2010 fiscal year of around US$1 million to US$1.5 million. In terms of the Badger Oil, which is another product that we plan to introduce in the 4Q, we have not quite seen the exact time for launching therefore we cannot budget for the exact sales contribution from that product. And in terms of our forecast guidance, we are actually basing on the sales of existing products, so we have not expected much of the revenue contribution from the new product launches.

QUESTION: You have got a big boost from new sales of your compound honeysuckle granules. Can you just discuss with us, once that segment has matured, what could we expect to see in terms of sales from that segment on an annual basis?
ANSWER: We believe it is still a growing market, so it has not quite reached the maturing stage yet. At this moment I do not have a number to give you. I apologize.

QUESTION: Let me just ask you a question about your current production capacity and utilization of that. You said that it is roughly 50%. Does any of that capacity include the Ah City facility that you discussed in terms of, you know, you have not fully completed the acquisition yet, but are you including any of that production capacity from that facility in your existing capacity?
ANSWER: Actually, previously we have [unintelligible] that facility, now we are acquiring [unintelligible].

QUESTION: It is included. OK. So, you have quite a bit of room to grow here. And what can we expect to see in terms of organic growth from your existing products? And how much of the growth in 2010 is going to come from just your existing product line?
ANSWER: We are planning for a growth around 26% to 28% this year.

QUESTION: Is that for fiscal year 2010 or fiscal year 2011 as well?
ANSWER: This is for year 2010 at the moment.

QUESTION: Let just talk about organic growth for a little bit. What do you think is sustainable going forward from what will be obviously a higher base level in fiscal year 2011?
ANSWER: We believe there will be a late growth of 26%.

QUESTION: I just had a follow up. I think there was a statement that you made earlier, about acquisitions and possibly issuing more stock to be able to acquire a company. I would urge the Company to resist that. If your stock is still trading at levels it is at right now, which is less than 4x earnings, it makes no sense to issue stock at these levels, unless you can purchase that company at less than that multiple. I would like to have your comment on that, please.
ANSWER: Yes, we are aware of that situation. We will consider any acquisition opportunity, this is a buying consideration that we have to have.

QUESTION: So, is the hope that any acquisitions you do are going to be accredited to earnings?
ANSWER: Yes. Definitely.

If you ask me a very promising company which trades around book value right now and has a trailing P/E of less than 4. The growth path is clear for the coming years and an uplisting can attribute to a higher stock price.

POSITION: LONG

Fill your shopping basket with Chinese stocks

Low prices are back in Chinatown. Chinese stocks in the U.S. have had in general a bad year, of course there are always exceptions but in general between minus 25%-30% compared with the closing price of December 31.

What comes down will always come back, maybe not this year but in some years.  Or maybe never but than we are all doomed. If you look at today's situation as an opportunity to buy rather than follow the crowd by selling I think in some years you can go to Las Ventanes al Paraiso in Baja California (Mexico) to retire from your profits.



If you run some valuation screens at http://www.fixyou.co.uk/valuation_main.php
or http://www.fixyou.co.uk/valuation_otc.php you see that a lot of stocks are traded at bankruptcy prices.

My advice for the contrarian value investor would be:
1.If you have cash to spend, buy into weakness.
2.If you are already invested, sit tight and don't sell - unless there are some red flags about a company.  Stocks with sound revenue and earnings growth will be come back if the markets improve.

My latest article on Geo Investing

For the people who missed my article on http://www.geoinvesting.com/

As a long-term contrarian value investor I am always looking for growth stocks that are fundamentally mispriced. My 3U approach Undervalued, Underowned and Unloved plays an important roll in my investment decisions.

That is why I prefer OTC stocks. The four stocks in this article can be big winners in the future and have in general the potential to list on a major exchange. One of them already got an uplisting this year.

The first company I like is China Kangtai Cactus Bio-Tech (CKGT). The company is a leading grower, developer, producer, and marketer of cactus-derived products. Cactus has been used since ancient times as both a food and as a medicine for its health benefits. A powdered form of Nopal has become popular in modern times as a treatment for a variety of metabolic, digestive and heart problems. I think this company can capture a significant portion of the natural health industry in China but also abroad with their cactus products.

Another company that I like is a survivor from the ashes of the internet bubble Artificial Life (ALIF). This company is a leading provider of broadband 3G content and technology solutions in the world, they develop and sell a wide range of mobile applications for 3G, 3.5G and 4G network-enabled mobile (smart) phones. With the strategic investor 3M on board I think they can expand their businesses in other areas. The downloads for their iPhone and iPad applications has started very well and they achieved many #1 rankings for their mobile games all around the globe. Also the upcoming launch of various iPhone games in Asian languages has to give revenues a boost.

Lotus Pharmaceuticals (LTUS) is another company that I like. They are a growing developer and producer of drugs and a licensed national seller of pharmaceutical items in China. Because of uncertain dilution issues the stock trades at depressed levels. Dilution is in my opinion under control because of the type of financing (Standby Equity Distribution Agreement). This is basically a type of line of credit for when Lotus needs money in addition to their cash flow.

The last one I believe has a bright future is the uplisted SkyPeople Fruit Juice, Inc. (SPU), a highly integrated producer and distributor of fruit juices, fruit juice concentrates and other fruit and vegetable products. They just did a public offering to speed up their growth initiatives. If they can brand their juices like some famous beverage producers did many years ago we are looking to the new Coca Cola.

POSITIONS: LONG (ALIF, CKGT, LTUS)

China Organic Agriculture (CNOA) what could be the reason?

I sold my position.

What could be the reason that the public certified accountants of ACSB don't want to do audits anymore at China Organic Agriculture (CNOA)?

By letter dated June 1, 2010, Acqavella, Chiarelli, Shuster, Berkower & Co., LLP advised China Organic Agriculture, Inc. (the "Company") of its resignation as the Company’s independent registered public accounting firm. Acqavella, Chiarelli, Shuster, Berkower & Co., LLP had served as the Company's independent registered public accounting firm since June 30, 2009.

The report of Acqavella, Chiarelli, Shuster, Berkower & Co., LLP on the Company's financial statements for the fiscal year ended December 31, 2009 did not contain an adverse opinion, a disclaimer of opinion or any qualifications or modifications related to uncertainty, limitation of audit scope or application of accounting principles. During the fiscal year ended December 31, 2009 and the period from January 1, 2010 to the date of resignation, the Company did not have any disagreements (within the meaning of Instruction 4 of Item 304 of Regulation S-K) with Acqavella, Chiarelli, Shuster, Berkower & Co., LLP as to any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure and there have been no reportable events (as defined in Item 304 of Regulation S-K).

A letter of Acqavella, Chiarelli, Shuster, Berkower & Co., LLP addressed to the Securities and Exchange Commission is included as Exhibit 16.1 to this report on Form 8-K. Such letter states that such firm agrees with the statements made by the Company in this Item 4.01 as they refer to such firm.

The Company is seeking a new independent registered public accounting firm to audit its consolidated financial statements for the fiscal year ending December 31, 2010.

Item 9.01 Financial Statements and Exhibits

Exhibit 16.1 Letter dated June 1, 2010 from Acqavella, Chiarelli, Shuster, Berkower & Co., LLP.

8-K filing

http://www.sec.gov/Archives/edgar/data/1337826/000143774910001785/coa_8k-060310.htm

China Insonline Corp (CHIO) management finally reacts to turbulance

I think it is a good sign that management took the word out and finally responded to all what happened to their stock price. I already mentioned in my last post that it is good for them to talk to their investors.

Mr. Zhenyu Wang, the Chairman of China INSOnline Corp. commented, "We have been working very diligently in last week to regain compliance with Nasdaq rules, and pleased to see the results. The Company remains highly focused on growing our core business in the domestic insurance market by introducing more value-added services and implementing new strategies to increase the revenue. We are very excited about the path to the future business growth ahead, and will working actively and diligently to create more value for our shareholders."

I want to arrange an Answer/Question-session with the company. So if investors have questions that they think are important, let me know and respond to this message. So we can bundle them and send an email.