China Green Material (PINK:CAGM)

The GeoTeam® is somewhat intrigued by the China Green Mat Tech  story. The stock is currently selling at its book value per share.  The Company:

• is profitable
• has 43% pre-tax margins
• has no long-term debt
• has virtually no short term loans
• sports a current ratio of 11.19:1 with $5.5 million in cash
• should benefit from the Chinese government's encouragement the use biodegradable materials. "Our starch-based biodegradable technology has been included in the “863 Spark Program” sponsored by the government."

So why is the stock receiving little attention from Wall Street?

For starters, after superb growth during the first nine months, the company could not maintain EPS growth during its 2008 fourth quarter as it was impacted by the global recession. Furthermore, on the surface China Green Mat's 2009 second quarter EPS growth appears unimpressive. 

Combine this with the fact that CAGM has not issued a press release since April 2009 and has a limited operation history (2006), it can be understood why the stock has been relatively dormant.

Lets take a look and see if we have yet another opportunity to capitalize on a "diamond in the rough."

We need to discount the financial performance of CAGM's 2008 fourth quarter. In retrospect, it is just impressive that the Company was able to remain profitable. On an apples to apples comparison, further inspection of the 2009 financials will actually reveal a second quarter 2009 EPS growth of 14.6%.  This has been gleaned from the fact at in 2008 China Green Mat paid no taxes compared to 15% so far in 2009.

There was also some account receivable verbiage in the 2008 10k that may have caused concern:

"In order to spur the development of our market, we have granted our primary customers extended payment terms on a portion of their purchases from us. We expect to collect at least half of the outstanding balance in the second quarter of year ended December 31, 2009.  As our business develops, we expect to obtain payment for our products on more common commercial terms, and do not expect that it will be necessary for us to delay payments to our creditors. "

We could not find references to the above commentary in China Green Mat's latest 10Q filing, leading us to believe this minor issue has been resolved:

"As a result, as of December 31, 2008, we owed $1,294,838 to certain members of our management and shareholders. These loans are non-interest bearing, unsecured, and due on demand. Accordingly, we recorded them as current liabilities. We do not expect to repay the loans until cash from our operations is sufficient to repay the loans without interfering with the growth of our business."

As of the second quarter 10Q these short-term loans have been significantly reduced.

Finally, although the CAGM has not issued a press release since April 2009, the commentary in the release was rather uplifting and encouraging:

"If investors deal with the economic downturn properly, it is even a good time to invest Investors can take in mind that the rapid development of China's environment-friendly industry is attracting more and more attention from the international investors."

CGMT's cornstarch biodegradable packaging products are doing an excellent job in the China market, and the Chinese government is determined to develop the environment industry. These developments will attract more and more international investors, especially American investors. CGMT is bound to be the representative in the green industry to reverse the global economic situation and lead the wave of the new economy.

It is a good time for CGMT to identify itself in the tough American market and to attract investors' attention based on its excellent performance in China and its fast-moving starch biodegradable consumer products."

The GeoTeam® feels that CAGM warrants a closer look based on its strong balance sheet, ability to maintain profitability and strong company inferences that the stock is undervalued. We still need to keep in mind that current EPS growth is still well below the GeoTeam®  preferred 30% minimum.

We will attempt to interview the company to inquire about:

• Investor relation goals
• Liquidity needs and growth as detailed in 2008 10K excerpt:

"Our current resources are sufficient to fund ongoing operations for the foreseeable future. However, for competitive reasons it is crucial that we establish a substantial market presence as rapidly as is economically reasonable. In addition, we are planning to develop an additional manufacturing facility which we estimate will increase our annual production capability from 20,000 tons to 50,000 tons. The projected cost of the new facility will be $10 million. In order to achieve these two goals we are seeking sources of capital either through the sale of equity or the issuance of debt instruments.

CHFY has an annual production capacity of 16,500 tons. Due to the limit in product finishing equipment, it only has an operating rate of 40%. In 2009, we plan to acquire production plants through financing in capital market to add two semi-finished production lines and five finished product lines. Through such acquisitions, our annual production capacity shall reach 50,000 tons with an output of $70 million (this price estimate is based on RMB 18,000 per ton)."

We need to find out how the company is addressing these matters. We did not see a reference to the above statement in the most recent 10Q.

• Per the 2008 10K Four customers accounted for 71% of sales