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China Agritech: Dominating a Multibillion-Dollar Market

Companies / Corporate Earnings Sep 06, 2010 - 08:12 AM GMT

By: Investment_U


Best Financial Markets Analysis ArticleAlexander Moschina writes: You probably remember the agri-boom a few years back.

As grain prices rose to astronomical figures, it triggered an increase in food prices across the board.

But while food prices went up, some savvy investors scored huge profits from shares in agricultural chemicals and fertilizers. After all, without these commodities, farming would be impossible.

Unfortunately for many investors, though, the boom was over before they could reach for our wallets. And even if they could, knowing where to invest was a tricky task.

At least, that’s how it seemed.

The Power of Fertilizer

It turns out there’s still one fertilizer company that dominates the industry. It boasts 60% of the market share and not surprisingly, it’s based in an area where fertilizer demand is growing faster than anywhere else in the world… China.

Obviously, China’s ever-increasing population needs to eat. The country is already home to over 1.4 billion people, compared with just over 300 million in the United States, and must use all its farmable land to increase food production.

And that’s fattening the bottom line of China Agritech Inc. (Nasdaq: CAGC).

Shares of the Beijing-based company have soared by 57% over the past two months, following China Agritech’s record-breaking second quarter, where net sales hit $34.3 million. That resulted in gross second-quarter profit growing by 33% to $11.9 million.

And the company predicts fourth-quarter profit growth of 45%. Here’s how it all started…

The Chinese Government Steps in and Creates a Multibillion-Dollar Market

By 2000, East Asia was the single largest producer and consumer of fertilizer in the world. Between foreign and domestic brands, its market was totally flooded.

So in 2008, the Chinese government imposed an export tax on all home-grown fertilizers. The plan was to ensure product availability and keep costs low for local farmers. The result? Domestic fertilizers became remarkably cheaper than international brands.

Today, Chinese farmers – who represent 40% of the global fertilizer market – are buying Chinese fertilizer. And China Agritech is reaping the rewards.

But the growing market in China isn’t the only reason for the big upsurge. There’s another factor.

How Do You Take Your Fertilizer? Liquid or Granular?

If I said “dry pellets” to you, I wouldn’t be offended if you didn’t jump up and down with excitement.

But hear me out, because there’s a special type of “granular” fertilizer that comes in dry pellet form – and this cheap, easy-to-transport technology is catching on fast in the agricultural world. Simply put, this method works by slowly depositing nutrients in the soil so crops aren’t killed by an abundance of nutrients.

What’s more, it will help China Agritech score even bigger profits over the coming years.

According to Yu Chang, CEO of China Agritech, granular fertilizer is taking off. His firm has spent the past two years upgrading its technology and building production facilities, to the point where it’s now the largest granular fertilizer producer in the region.

And the proof of the pudding is in the company’s results: Its granular business almost doubled over the past year.

But that’s not all…

Booming granular sales are also boosting sales of liquid fertilizer.

You see, each type of fertilizer works best at a different stage during the farming process. Providing both ensures high demand in every season. And the strategy is clearly paying off – sales of China Agritech’s liquid fertilizer leapt by 46% during the second quarter.

And as the industry grows to support China’s population, so will sales. In fact, the firm is preparing investors for an even bigger third quarter.

Chang says: “While we are encouraged by our solid performance in the first half of the year, we expect that the second half will be stronger as the peak farming season is unfolding and our products are gaining traction.”

Get used to this trend. After all, China Agritech has reliably improved its earnings year after year. And since stock prices inevitably follow earnings, it’s safe to say that investors will be sitting pretty.


Good investing,

Alexander Moschina

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