By Thomas Bishop
BI Research

        Whatever you are hearing about the global recession, China is not part of it. Yes they have some unemployment in the manufacturing sector, but several onsite reports that have come back to me in the past week all say the same thing- the place is still booming. China's idea of a slowdown is when GDP growth slows from 12% down to 8%. And to be clear, despite global economic turmoil, growth in 2008 was still 8% and the forecast for 2009 has recently been raised from 6% to 8% again. In Q1 their economy grew 6.1%, in Q2 it grew 7.9%...by contrast in the U.S. a great year is 3-4% growth in GDP...and by the way we saw GDP decline about 6% in the first half. If you need any further confirmation, Chinese auto production soared 48% year over year in the most recent quarter. All of this is to say if it seems like we are recommending a fair amount of companies in China...you are absolutely right. It's where the growth is. And if you think it's a risky place to invest, in some way perhaps it is. But they didn't have some of their biggest financial institutions fail or all but fail. They didn't have two of their three biggest car makers go into bankruptcy. They never saw GDP growth even come close to going negative as we have. They are not the ones borrowing from us. It is us borrowing from them. So where is the riskier place to invest again?
       As China rides a wave of emergence and development, its middle class is swelling and they want all the things that much of the rest of the world has- cell phones, internet access, television, appliances, better healthcare, more meat in their diet and just better food in general, including "greener" food (not quite organic as we define it in the U.S.). While China has a number of important initiatives in healthcare, energy and pollution control is just to name a few, one of its most important, if not the most important is to help Chinese farmers grow enough food to feed their own country. China does not like to import if it can possibly help it.
       As a result, China is now the world's largest consumer of fertilizer using about $36 billion dollars of the stuff. However, consumer food safety and environmental concerns have led to an increased resistance to overuse (often nearly twice the safe limit in developed countries) of harsh chemical fertilizers from the perspective of consumers and the government. As a result, green fertilizer products like those produced by China Green Agriculture (CGA) are occupying an increasingly important niche in China's fertilizer industry.
       Through its wholly owned subsidiary Shaanxi Teach Team Jinong Humic Acid Product Co ("Tech Team"), founded in 1998, China Green Agriculture develops and manufactures proprietary humic acid-based liquid compound fertilizers which substantially increase the fertility of soil. It distributes these to retailers of agricultural products and private wholesalers in 27 provinces throughout China. China Green currently offers 131 different liquid fertilizer products, all of which are certified as Green fertilizers by the PRC Ministry of Agriculture and can be used for growing "Green Foods," which contain little or no chemical materials, as certified by the China Green Food Development Center. Currently Tech Team produces and sells about 15,00 metric tons per year, about all existing facilities were capable of. However, the Company has just completed a new 148,000 s.f. facility ultimately capable of producing an additional 40,000 tons (for a total of 55,000 tons). The new facility should be on line producing by August and ramp up to full capacity within three years. Based on its growing distribution network, strong marketing efforts and sustained market demand for its green fertilizer products, the Company expects that its increased capacity will be quickly absorbed by the Chinese fertilizer market. China Green was the first company in China to build an entirely automated manufacturing system which precisely measures and mixes key ingredients to formulate its unique fertilizer products, and this new facility is automated as well, increasing efficiency and reducing reliance on manual labor. This new facility will fuel the Company's growth for the new fiscal year ending 6/30/2010 as the Chinese government seeks to increase farmer's income and boost the growth of diversified crops, especially for organic food. Currently China Green has less than 2% of the liquid fertilizer market.
       Traditional chemical fertilizers have a negative impact on the soil after a negative impact on the soil after a period of overuse (to get the most of a shrinking amount of arable land in China) and their chemical residual would contaminate ground water over time. China Green's humic acid based liquid fertilizers increase the Cation Exchange Capacity of the soil which means that it will help 'mine' the excess fertilizer in the soil. As a result solid quality is improved as are crop yields and produce quality, including better taste and even smell. Plants grow faster and stronger with bigger and greener leaves. And the Company should know. It is generating 22% of its sales from its own 1.2 million s.f. R&D Center with greenhouses where it tests its own products, shortening the time to market, and then selling the resulting flowers, vegetables and fruits to high-end grocery stores.
       The Company's products have been on the market since 2000 and are now well recognized by farmers. The Company hardly spends anything on advertising. It has 511 distributors, every year growing that total by about 10% even while eliminating the bottom 10% of distributors on the basis of performance, regardless. This makes China Green one of the few fertilizer companies with nationwide distribution capability. The Company also has 100 field sales representatives who work with end users and provide customer support. Plus there are 100 on site sales people who talk to the end users offering online support. Informational seminars and training sessions are also provided.
       Tao Li the CEO is also the Vice President of an association supervised by the Ministry of Agriculture that generates industry policy, regulation and guidance for future development. So Mr. Li's industry knowledge and influence is a tremendous asset to this Company. In fiscal 2008, the Company introduced about 13 new products which accounted for 15% of sales and added about 15 new products in fiscal 2009 (ended 6/09). Management initially offered up guidance of $0.61 for FY 6/09, the raised that to $0.66, and with the release of Q3 results raised EPS guidance once again to a range of $0.71-$0.74, representing a 48% increase in profit. Revenues are now expected to have weighted in at around $33 million. By the way, Q3 beat the mid-point of guidance by about 10% on revenues and 35% on EPS which came in at $8.8 million and $0.21 respectively. Gross margin averages about 56% EPS growth to $0.92 (+28%) is projected for FY7/10. CGA has no debt and $13.6 million of cash as of 3/09. The BI Rank is a strong 11.6. CGA is a Buy to $9. For more information on China Green Agriculture visit www.cgagri.com.
       Editor's Note: Thomas Bishop is editor of BI Research, P.O. Box 133, Redding, CT 06875, 1 year, every 6 weeks, $120. Includes telephone Hotline Updates. Published continuously since 1981, BI Research uses fundamental analysis and emphasizes mid to smaller cap stocks. Included are detailed recommendations and a brief market commentary. For more information visit the website at www.biresearch.com.