Skypeople Fruit Juice (NASDAQ:SPU)

GeoTeam® September 2010 Rodman & Renshaw notes:

Skypeople Fruit Juice (NASDAQ:SPU)

• New pear fructose production line began operating in September. Will produce up to 10,000 tons @ $800 or $8 million revenue potential with 35%-45% margins.
• Will double apple processing capacity from 10,000 to 20,000 tons @ $1,000 or $10 million incremental revenue with 20%-28% margins.
• Growth strategy also focused on beverages, with a longer term target for beverages to account for 50% of revenues. Beverage revenues will make the overall business less seasonal.
• Five new series of beverage products to hit market in 4^th quarter.
• Pear fructose should double in revenue in 2011, adding about $6 million in revenue. Apple products could add $10 million to revenue this year and possibly $25 million next year.
• Only company in China that can produce concentrated kiwi juice at large scale to meet production needs. 45% to 55% margin on kiwi products.
• Have enough working capital for next two years.

When discussing SAIC, SAT and SEC filings, CFO said SPU's chairman observed that you can tell a good Chinese company by official government certifications, government financial support and the ability to get bank loans. "We have all of these."

GeoTeam Observations:

• Investors should exclude income from government subsidies when applying valuation models.
• We are still perplexed that SPU completed an offering after essentially implying that they wanted to wait for market conditions to improve and believed that the stock was undervalued. They offered stock near where they did about year ago. Balance sheet and cash position are strong. Why not do a combo of equity and internal cash or some debt to put forth a respectable growth plan?

Company Response:

SPU is in a highly competitive business. SPU needs to have an aggressive growth strategy to keep its position in the industry. The loans from banks are only for working purposes, and it is difficult to obtain loans for capital purpose. SPU's total capital expenditures are expected to be in the range of $60 million for 2010 and 2011, and it plans to get its expansion projects ready for the squeezing season of 2011, so that they can contribute to the revenue and net income of 2011. The timing of the offering is very crucial for the Company. The Company has postponed its offering twice due to the market conditions. If the Company postponed the offering a third time, it may miss the good opportunities that the Company currently has.