China Nutrifruit Group (NYSE AMEX:CNGL)

Rodman and Renshaw on CNGL                                                 2-17-2011

CNGL: Inline F’3Q11; FY'12 outlook hinges on pending TDR raise; Maintain MO Rating; $5 PT

F’3Q11 earnings complexion. China Nutrifruit Group (NYSE Amex: CNGL) reported F’3Q11 (ended December 31, 2010) EPS of $0.15 (vs. $0.11 LY), after deduction of ~$205k preferred stock dividends, inline with our $0.15 EPS estimate. Revenues of $22.1MM were a tad softer than expected but rose 24.2% YoY, as a mere 9.3% YoY increase in fruit concentrate juice was aided by double-digit growth in nectars, glazed fruits, fresh fruit, and others (concentrate pulp). Call-outs included newly introduced blackcurrant and seabuckthorn concentrate juice and glazed fruit, which collectively accounted for ~8.5% / ~$1.9MM of total sales. The gross margin expanded 78 bps YoY to 46.4%, as GM expansion for glazed fruits and concentrate pulp was partly offset by contracting margins in concentrate juice and nectars. Similar to the previous quarter, tight expense control was again a highlight, resulting in an above-expectation net income margin of 28.2%, 365 bps higher than LY. 

FY2011 guidance maintained. The company reaffirmed its financial guidance of $90-$95MM revenues and $22-$23MM net income. Given that CNGL reaffirmed its guidance mid-way through F’4Q11, we have reasonable confidence in the company meeting its guidance for FY2011. That said, assuming the lower end of the revenue guidance ($90MM) for FY2011, ~38.9% of revenues for the fiscal year are expected in F’4Q vs. an average of 36.6% over the past two years. We believe that the expected back-loading of revenues this year is attributable to the need to compensate for the delay in powder sales as CNGL is committed to meeting its topline guidance for FY2011. In addition, due to strong across-the-board price increases for concentrate juices of various fruits (on avg. up ~28% YoY fiscal YTD), CNGL likely withheld inventory to be sold for a higher price (i.e., higher GM) during the Chinese New Year. As such, it is possible that actual net income may exceed guidance for FY2011. 

FY2012 outlook hinges upon pending TDR raise, but the fruit & vegetable powders alone can account for most of the growth. Visibility on FY2012 outlook is limited given that capacity expansion is predicated upon the size and pricing of the primary portion (5MM shares expected) of the TDR offering. That said, note that the fruit and vegetable powder line has an annual revenue potential of ~$26MM (10,000 tons x $2,640/ton). Should the powder line successfully commence operations in June 2011, it could contribute up to $19MM in sales to FY2012, barring any further construction delays. That said, additional production lines made possible by the equity raise would diversify CNGL’s revenue stream and provide either topline upside or a viable Plan B for the achievement of FY2012 guidance. Lastly, note the inventory build to $20.1MM by the end of F’3Q11 vs. $13.7MM LY, which bodes well for sales moving into CY2011. 

Maintaining Market Outperform Rating and $5PT. We continue to see CNGL as an appealing investment for long-term investors, due to its low valuation (5.7x our FY’11 EPS estimate of $0.57) and positive pricing tailwinds, which we expect to continue near-term. We maintain our $5 PT, which assumes nearly 9x our FY2011 EPS estimate.

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).

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Member SIPC.

Rodman and Renshaw on CNGL                      02/02/2011

CNGL – New contracts bring visibility into achievement of the FY’11 guidance 

What Happened? 

China Nutrifruit Group (NYSE Amex: CNGL) this morning announced that it has begun to supply concentrate fruit juice to Cargill Trading (Shanghai) Ltd. in January 2011, to be resold to Mongolia. This initial contract, although only 120 tons (~$200k), marks the first time in which the company has sold its products beyond China’s borders, and is a step towards the company’s long-term strategic plan to tap into the international markets. The combination of 1) this contract, in addition to the 2) more sizeable $2.1MM/1,500 tons apple concentrate juice contract with Doehler Rizhao announced on January 24^th, 3) the upsized production of seabuckthorns and blackcurrants, and the 4) across-the-board double-digit increases in selling prices are expected to offset the two-quarter delay in fruit & vegetable powder revenues. These offsetting factors result in no change to CNGL’s FY2011 guidance of $90-$95MM revenues and $22-23MM net income. Recall that the powders were originally expected to begin production in earnest in September 2010 and contribute ~$13.5MM revs. to FY’11 (ending in March 2011).

Update on TDR Listing. CNGL is still looking to sell 5MM primary shares, along with 2.3MM secondary shares (sales by existing shareholders) on the Taiwan Stock Exchange, the proceeds of which will be used to build out production capacity to meet demand. Note that most of CNGL’s production lines are operating near full-capacity. Importantly, the company has engaged Deloitte Touche Tohmatsu as ongoing auditor for its Taiwan listing, which should differentiate China Nutrifruit from many of its U.S.-listed Chinese peers and instill a higher level of confidence into the accuracy of the company’s financials. Marketing of this round of equity raise is expected to begin after Chinese New Year.

Maintain Outperform Rating and 12-month PT of $5. We are pleased with the contingency plan that CNGL has put in place to meet its FY’11 revenue and net income guidance, which shows the company’s commitment in delivering results to shareholders. We are also cautiously optimistic with regards to its pending TDR listing. We note that the Taiwanese have arguably the highest annual fruit consumption per capita of 93.6kgs compared to the world average of ~47.8kgs, according to Euromonitor, and should be more receptive to listings of specialty fruit companies. We are maintaining our FY2011 EPS estimate of $0.56, but are adjusting our F’3Q11 (ending in December 2010) and F’4Q11 EPS estimates to $0.15 and $0.19, from $0.13 and $0.22 respectively. Our 12-month price target remains at $5 given that CNGL is currently trading at 5.5x our FY’11 EPS estimate. We believe that CNGL merits a higher multiple of 9x, given peer trading levels and growing visibility into its guidance of 24% topline and 18% net income expansion in FY’11, respectively.

Investment Risks. 1) Potential equity dilution from the TDR offering; 2) Highly seasonal revenues – 64% weighted towards F’2H11 assuming lower end of the guidance range; 3) Distributor reception towards new product introductions; 4) Commodity price and labor cost pressures。

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 China Nutrifruit Group

WHAT’S NEW? 

China Nutrifruit Group (NYSE Amex: CNGL) announced a production delay on its fruit & vegetable powder line due to the impact of adverse weather conditions on the facility’s construction schedule. CNGL now expects to delay full-line production to January 2011 (from October 2010). 

OUR VIEW 

Fruit & Vegetable Powder Line Update. We note that the fruit & vegetable powder line was not expected to become operational until October 2010; therefore we see do not see any impact on F’2Q11 results. However, we are now expecting only $7MM sales (all in F’4Q11) from the powder line in FY’11 vs. the prior guidance of $13.5MM, reflecting the shortened quarter-long production period vs. our expectation of two quarters previously. 

Seabuckthorn and Blackcurrant Glazed Fruit Update. The newly-introduced seabuckthorn and blackcurrant glazed fruits, as well as the blueberries, continue to drive sales in this segment. Recall that CNGL noted large repeat orders received for its blueberry glazed fruit in F’2Q11. Momentum in this segment will likely help mitigate the sales shortfall from the powder line. 

Fruit Concentrates Line Update. The $4.5MM upgrade of the fruit concentrate lines are yielding a gross margin boost that are a tad better than anticipated (100-200bps vs. 100 bps prior). In addition, CNGL replaced the production of a portion of crab apple concentrates with seabuckthorn and blackcurrant fruit concentrates, which command higher ASPs. This decision was made intra-quarter and will also likely help support the topline. 

2010 Guidance Intact. The company affirmed its prior financial guidance of $90MM-$95MM revenues and $22MM-$23MM net income, which we still believe to be achievable. 

Adjusting quarterly EPS cadence. As a result of today’s announcement, we are adjusting our F’2Q11, F’3Q11, F’4Q11, and FY’11 EPS estimates to $0.16, $0.13, $0.22, and $0.56, respectively, from $0.16, $0.15, $0.20, and $0.56. Net net, two pennies have been shifted from 3Q to 4Q resulting from the combination of 1) the expected 3Q revenue shortfall (we are expecting $20.2MM vs. $24.4MM previously); 2) the partial recoup in 4Q ($37.1 vs. $34.9MM previously) as CNGL attempts to fill orders for its powders; 3) sales upside from the fruit concentrates and glazed fruit lines due to higher ASPs on new products; and 4) a pinch of gross margin upside from the efficiencies gained on the fruit concentrate line upgrades.


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.