China Agritech (PINK:CAGC)

Roman and Renshaw on CAGC                                         06/16/2011

CAGC: Terminating Coverage

Termination of Coverage

Effective immediately, we are terminating coverage of China Agritech Inc. (“China Agritech”) to allocate resources more efficiently within our coverage universe. Upon termination of coverage, any of our prior financial projections on China Agritech should not be considered reliable.

Rating

China Agritech was last rated Under Review.

Delisting from Nasdaq

On May 20, 2011, the company announced that the Nasdaq Hearings Panel denied the request of the company for continued listing, and the shares were delisted and trading was suspended on the Nasdaq Stock Market effective at the open of business on that day.

Dismissal of Ernst & Young

On March 14, 2011, China Agritech announced that it dismissed Ernst & Young Hua Ming as its independent auditor effective the same day. (Please note that the company announced on November 15 of last year that it appointed Ernst & Young Hua Ming as its auditor.) Subsequently, on March 29, 2011 the company announced that a Special Committee of its Board engaged the law firm of TroyGould PC to advise it in connection with the Committee’s independent investigation of certain allegations on the company made by third parties. On the same day, TroyGould retained BDO China Li Xin Da Hua Certified Public Accountants Co., Ltd. to assist in the investigation of various accounting issues. On April 12, China Agritech announced the appointment of Simon & Edward, LLP as its new independent auditor starting from April 6, 2011.

Valuation

On February 7, 2011 we put our rating on China Agritech under review due to uncertainties surrounding the company with regard to various negative allegations raised against the company.

Notice Regarding Privacy and Confidentiality:


This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman & Renshaw on CAGC

3Q10 Result Summary 

China Agritech Inc. (“China Agritech”, Ticker: CAGC, Market Outperform) announced 3Q10 results with both the top and bottom lines significantly missing our expectations as well as the Street consensus. Total revenue decreased 11.7% YoY to $23.9 million, considerably below our estimate of $37.2 million and the Street consensus of $36.0 million. Revenue from liquid fertilizers was down 5.8% YoY to $14.2 million. Sales of granular compound fertilizers plunged 18.2% YoY to $9.7 million. Gross profit was $9.0 million, compared to our estimate of $12.9 million. Gross margin, however, expanded to 37.6%, representing a 210bps improvement from 3Q09 and a 290bps sequential increase, and exceeded our expectation of 34.7%. Non-GAAP net income (excluding stock compensation expenses and provision for doubtful debt) came in at $4.6 million, or $0.22 per diluted share, below our respective estimates of $6.8 million and $0.34 as well as the Street consensus of $6.4 million and $0.30. 

3Q10 Highlights and Discussions 

The dismal top line result was attributable to a combination of a few factors leading to dwindled sales volume. Management cited the severe flood across central and southern China in the summer as having a significant impact on the sales of the company’s fertilizer products. Secondly, the company started to tighten its credit terms on granular products, requesting customers to pay cash on delivery going forward rather than continuing to grant them the 90-day credit term that was initiated during the product launch period. With the adverse summer weather impact gradually fading, we believe sales volume should rebound in Q4, especially for granular compound fertilizer products, which are primarily sold during the period from October to March. That being said, we believe the stringent cash payment policy could dampen the demand for the company’s granular compound fertilizer products, especially when considering the abundance of similar products in the market. 

The improvement in the overall gross margin was attributable to margin expansions in both the granular and liquid fertilizer segments, which recorded gross margins of 22.3% and 48.1%, respectively. Thanks to the increase in ASP from $349/MT to $367/MT, the gross margin of the granular segment improved more than 200bps YoY. The improved liquid fertilizer margin was partially a result of enhanced production efficiency. We also believe the summer flood played a role increasing the ASP and expanding margins. Income tax expenses during the quarter were $2.1 million, implying 53.4% effective income tax rate. The hike in effective tax rate was due to a large increase in non-deductible expenses ($1.1 million vs. $0.2 million in 3Q09) and no benefit from tax holiday. The soaring income tax expenses also contributed to the lackluster bottom line. Non-GAAP net margin for the quarter was 22.8%, above our estimate of 18.7%.

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Global Hunter on CAGC

China Agritech (Buy)
CAGC: Reducing Q3 estimate estimate following recent site visit.
 
We are reducing our Q3 expectations after having met with management during a recent site visit. It appears that the unseasonal weather patterns that occurred in Q3 may have impacted demand on a more macro basis, which in turn has more directly impacted CAGC as it relates to pricing. We have chosen to revise our revenue and earnings assumptions for Q3 as a result of this.
 
To our knowledge this situation has normalized, as has pricing, in Q4, but we will await further detail on the upcoming conference call. Shares have appreciated 36% over recent lows and are up 25% since our June initiation. We continue to view Agritech as the best positioned of the US listed Chinese fertilizer plays and we believe that its focus on granular fertilizer, although a lower margin play, is a stronger strategic position as it relates to share capture versus chemical fertilizers. As such we view the company as well positioned from a long term perspective and we maintain our Buy rating and $20 price target, which is predicated on FY 2011 estimates, but we are somewhat concerned that Q3 results could create near term volatility given the recent appreciation in share price.
 
Key Points:
 
Adjusting our Q3 estimates. Following our recent site visit and discussion with China Agritech’s management, we are lowering our Q3 revenue and earnings assumptions. We now expect the company to report $32.4MM in revenues and $7MM in non-GAAP net income in Q3, below our previous estimates of $37.5MM and $8.5MM, respectively. On a per share basis, this translates to an EPS of $0.33, below our previous estimate of $0.40. For the full year, we now expect the company to report revenues and non-GAAP net income of $110.2MM and $22.6MM, compared to our prior estimates of $115.3MM and $24.1MM. This is somewhat below the company’s full year guidance of $114MM in revenues and $23.5MM in non-GAAP net income.
 
We reiterate our Buy rating and $20 price target and continue to believe that CAGC remains the best way for US investors to play the compound fertilizer space. At Friday’s closing price of $14.71, CAGC is trading at 12.9x FY2010 and 11.3x FY2011 on a P/E basis and at 8.6x FY2010 and 6.3x FY2011 on an EV/EBITDA basis.Our target price of $20 per share is predicated on a 15.3x FY2011 on a P/E basis and 9.1x FY2011 on an EV/EBITDA basis, somewhat below the peer group averages of 17.5x and 11.6x, respectively. In our opinion, a $20 price target is easily justified by CAGC’s significant growth potential in the domestic organic fertilizer market, through the entrance of the much larger granular fertilizer market, recent production capacity expansion and rapidly growing market reach. In addition, the entrance into the branded large-scale distribution centers (currently not included in our estimates) could help the company to capture additional market share and ramp revenues in 2011 and beyond. CAGC also has a solid balance sheet with over $50MM in cash (following the recent equity raise and warrant exercise) and no debt, which translates into net cash of $2.62 per share.

Chardan Capital Markets took organic fertilizer firm China Agritech (CAGC) to Sell from Neutral and gave the stock a $9 price target on Wednesday morning. The analyst cited ongoing earnings quality and auditor concerns for the downgrade and noted that shares are overvalued compared to peers. The price target represents a -43% discount to Tuesday’s closing value.

As of Tuesday’s close, China Agritech is the only Chinese Agriculture Stocks Index component to post gains on a one-month basis. Elsewhere in the sector, Yongye International (YONG), AgFeed Industries (FEED), and China Green Agriculture (CGA) have all slipped by -18% or more for the period, and the Index is lagging the S&P 500 by -10%.

This morning’s Chardan downgrade comes just a week after Rodman & Renshaw started China Agritech at Market Outperform with a $20 price target. It will be interesting to see which of the analysts is on target, and where traders send the stock from here. So far in 2010, shares have traded for more than $30 and less than $10, and given the mixed consensus, investors can expect some more volatility.