Hanfeng Evergreen Inc.
(TSX: HF)
Toronto, ON, Canada
Web Site:
www.hanfengevergreen.com
Hanfeng Evergreen, headquartered in Toronto, is China's leading manufacturer of
fertilizers for agriculture and urban greening. The company's focus is on
slowrelease fertilizers, which have many advantages in farming, among them
increasing yields and reducing labor inputs. Hanfeng's primary products include
slow-release sulfur-coated urea (SCU) and premium nitrogen, phosphate and
potassium (NPK) granules. Hanfeng's products are designed to meet China's unique
agricultural needs, including increased efficiency (increased yields, reduced
labor inputs), improved plant growth and crop yields, and reduced pollution
(runoff).
China must feed a population 4.5 times that of the United States on
three-quarters of the arable land. Despite this disadvantage, China's output
already exceeds that of the United States by US$40 billion (China: US$255
billion versus U.S.: US$215 billion).
The Chinese accomplish this miracle with various efficiencies and raw labor, but
China also is the world's largest consumer of fertilizer, the subject of today's
lesson. For those of you not steeped in the ways of the farm, fertilizer is
added to soil to supply various elements (primarily nitrogen, phosphate and
potassium, but also calcium, sulfur, magnesium and other elements) that are
required for plant growth and productivity. Fertilizers enhance the natural
fertility of the soil or replace the chemical elements taken from the soil by
harvesting, grazing, leaching or erosion.
Those numbers are not dwindling; China faces enormous hurdles in meeting its
food needs. China is challenged with supplying food for a
growing affluent, urban population with an appetite for higher-value products.
At the same time, the country is facing an aging population, thanks to the
one-child policy, which, along with rural-to-urban migration, is reducing the
number of workers available to farming. Moreover, China has lost approximately 8
million hectares (6.6%) of farmland to economic development over the past two
decades.
Also, as China's cities grow, so does the demand for urban green space. The
growing urban middle class is demanding access to amenities comparable to those
of Europe and North America, including urban parks and golf courses. These
demands cannot be ignored. And one of China's chronic problems is water quality
and availability. With a limited water supply in the country, some areas are
seeing shortages. Industrial runoff, pollution and some well-publicized
accidents have caused the government to formally address the environment.
All this means that greater efficiency must be extracted within the agricultural
industry by increasing crop yield, planting high-yield varieties, using better
farming practices and improving fertilizer use.
Hanfeng Evergreen is well-positioned to benefit from all these trends. The
company currently produces 650,000 metric tons of various engineered fertilizers
annually and is planning to increase output to 800,000 metric tons per year by
2009. It is accomplishing this growth organically and through strategic
partnerships with other fertilizer makers with established distribution systems.
The company is also well-positioned geographically in China's two prime
agricultural regions: the Eastern China region (Jiangsu, Shandong, Anhui and
Zhejiang provinces and Shanghai) and the Northeast China region (Heilongjiang,
Jilin and Liaoning provinces and the Inner Mongolia Autonomous Region).
Financial Results
For the nine months ended Sept. 30, 2007, revenues were $86.7 million,
versus $59.8 million for all of 2006. Total revenues for 2007 are estimated at
$122.6 million, up 105% from 2006. Revenue estimates for 2008 and 2009 are
$176.2 and $268.4 million, respectively. Per-share earnings are estimated to be
$0.31 in 2007, and $0.55 and $0.74 in 2008 and 2009, respectively.
The balance sheet is in great shape. The company has $46 million in cash with
zero long-term debt. Inventory is expanding, which is a positive sign as we
believe the company is ramping up production in anticipation of a break-out
year.
Outlook
We like the company and we like the industry. Revenues will continue to grow
and costs will be reduced due to economies of scale. Based on the increases in
production, we have upwardly revised analysts FY2008 EPS estimate to $0.63. This
is a 100% increase from the 2007 EPS estimate of $0.31. Hanfeng would be
currently trading at a forward P/E of 17 times forward earnings, which is low
compared to the industry.
Concluding Remarks
The market has yet to recognize the value of Hanfeng Evergreen. The company
has made expansions in production to meet the increases in demand and
shareholders will reap the benefits. A pricing multiple of 17 times forward
earnings is low for a company showing as much growth as Hanfeng. We currently
have a $16 target on Hanfeng, which we are basing on a forward P/E of 26 times
forward earnings of $0.63.
