China Green May Have a Problem

This Chinese play has rocked the Street with some solid numbers. China Green Agriculture's (NYSE: CGA  ) fourth-quarter bottom line has surged 57.4%, driven by higher sales.

But sadly, all might not be well at China Green.

The numbers
China Green's revenues have been shooting through the roof. Buoyed by a significant contribution from Gufeng, which China Green acquired last year, its revenues surged more than three times to $60.3 million from $16.2 million a year ago. Gufeng contributed a huge 67% to the total sales. China Green's other subsidiaries also reported higher sales.

However, what's worth noting here is that on one hand, Gufeng contributed to top line, but on the other it also resulted in astonishingly high costs. China Green's cost of sales went up by a whopping 452.6% (yes, that is the correct figure) to $39.2 million, 80% of which was related to Gufeng.

What's concerning is that this surge in cost of sales is way above the 272% rise in revenues, which isn't good news for any company. Obviously, China Green's gross profit margin has slipped drastically, from 56.3% to 35% year over year.

However, in spite of such unbelievably high costs, strong top-line growth helped China Green's bottom line jump 57.4% to $9.4 million.

The Gufeng growth
The acquisition of Beijing-based chemical company Gufeng is adding to production capacity as well as helping China Green expand operations. For instance, in the last quarter, Gufeng started delivering compound fertilizers to the emerging market of India. Earlier this year, Gufeng also signed its largest export contract with a China-based company. Looks like the Gufeng buy was a good one.

China Green has also been spending on new products, introducing nine new ones in its last quarter. Moreover, it has plans to develop more humic acid-based fertilizer products. This will definitely add value to the company's business and, more importantly, place it in a better position to take on major competitor Yongye International (Nasdaq: YONG  ) .  

On a high
The chemicals and fertilizer industry has been on a high, with things going just too well for it. Most of the players have reported hot numbers driven by the agriculture boom. PotashCorp (NYSE: POT  ) , for instance, reported a staggering 75% surge in its second-quarter bottom line, driven by higher sales and prices. Similarly, higher sales also drove up Mosaic's fourth-quarter bottom line by 64%.

And the agricultural sector is not showing any signs of slowing down. China Green also stands to gain from it all. But let's not forget that it will also mean intensifying competition, as some U.S. chemical players have been eyeing markets such as China more keenly now.

Monsanto (NYSE: MON  ) , for instance, is in talks with China-based Sinochem for strengthening ties, eyeing a deeper penetration in China. Diversified chemical player Dow Chemical (NYSE: DOW  ) is also focusing on expanding sales networks in China. A KPMG report also states the company's intention of building a large manufacturing site in China. These moves indicate that steeper competition may be on its way in the Chinese chemical market.

The Foolish bottom line
The recent numbers might be exciting, but cost efficiencies remain a major concern for China Green. How long can a company truly benefit from rising sales if its costs rise by a much higher percentage at the same time? And the main cause of concern here is that these higher costs are associated with the production and selling of Gufeng's products. Clearly, the company has to control costs first if it wants to fully capitalize on Gufeng.

China Green may be a Motley Fool Global Gains recommendation, but I'm personally going to wait for better cost-control measures before getting too bullish about the company. And once they are in place, given the good performance, strong growth plans, and optimistic industry outlook, I might well have a better view of the stock.

In the meanwhile, stay up to speed on the top news and analysis on China Green, or any other stock, by clicking here to add it to your stock Watchlist.

Fool contributor Neha Chamaria does not own shares of any of the companies mentioned in this article. The Motley Fool owns shares of China Green Agriculture and Yongye International. Motley Fool newsletter services have recommended buying shares of Yongye International and China Green Agriculture, as well as creating a synthetic long position in Monsanto. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (14)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 26, 2011, at 2:26 PM, ChinaInvest wrote:

    Okay, as an investor in CGA, personally I think this is just another scare tactic post from Mr Chamaria, who is likely shorting this company now in an attempt to make a quick buck. While CGA's costs HAVE gone up, for a small cap stock like this, the growth and profit it's made is extraordinary! It is currently one of the most under-valued fertilizer companies on the NYSE, and has HUGE growth potential, partnered with a solid base and, as mentioned in this, the genious aquisition of Gufeng, I still think it's a bullish stock. I just recently bought more stock at 4.41 each thanks to Mr Chamaria over here, and I'm not worried at all about these relatively minor problems.

  • Report this Comment On September 26, 2011, at 3:48 PM, Swede46 wrote:

    Another poor article that doesn't look past the raw numbers to the reasons behind them. CGA has been a specialty fertilizer manufacturer. (Think Miricle Grow) They are expanding into the commodity fertilizer business where potential sales volumes are much much higher, but margins are lower. They still maintain high margins on their humic acid specialty products. The author obviously hasn't done any research on the company.

  • Report this Comment On September 26, 2011, at 5:04 PM, kidchicago2 wrote:

    "The Foolish bottom line" is that the analysts who run Global Gains (as opposed to the independent contractor who wrote this "article") have rated CGA a Buy. They've visited CGA multiple times and spent, I would guess, hundreds of hours studying and communicating with the company. They have addressed this very issue, which of course non-paying subscribers can't know. Thanks for your thoughts, which are always titillating, if not correct.

  • Report this Comment On September 27, 2011, at 11:11 AM, kidchicago2 wrote:

    This, by the way, continues the Fool's policy of paying independent contractors to bash stocks that their paid subscriber services are recommending. Something to consider if you're thinking about actually paying the Fool for stock suggestions - the company will take your money then ignore your interests. It's a great business model if you can pull it off.

  • Report this Comment On September 28, 2011, at 1:45 PM, ChinaInvest wrote:

    And since when is 60.3 million 272% of 16.2 million? Last time I used a calculator, it was 372%. This writer is really not giving me any faith in his word, or his math at all, which leads me to believe he has no idea what s/he's talking about.

    "...its revenues surged more than three times to $60.3 million from $16.2 million a year ago."

    "What's concerning is that this surge in cost of sales is way above the 272% rise in revenues,"

  • Report this Comment On September 29, 2011, at 12:30 AM, adb11 wrote:

    What are worthless post, using percentages comparisons when merging 2 businesses with different models and margins, your entire article is meaningless.

    You are saying that 67% of revenue increase is from Gufeng - which is about $40 million.

    Then, the 80% of the cost of sales is also related to Gufeng, at $32 million.

    So Gufeng still brought in more money and the only valuable conclusion from your post is that the bottom line jumped 57%.

  • Report this Comment On September 29, 2011, at 5:08 PM, Pat4Ra wrote:

    Tryst me the writer is she. - Pat

  • Report this Comment On September 29, 2011, at 5:09 PM, Pat4Ra wrote:

    Sorry the word is "trust".

  • Report this Comment On October 28, 2011, at 8:18 PM, alestane wrote:

    ChinaInvest,

    It's not a math issue, it's an English one.

    "surge to X" -> X is the new value

    "surge by Y", " a surge/rise of Y" -> Y is the difference between the new value and the old one.

    So if we're talking percentages, X = Y + 100%.

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