China Trip: China Agritech

By Eric Jackson
RealMoney Contributor
3/29/2010 11:00 AM EDT
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Friday, I met with Steven Zhu, COO of fast-rising stock China Agritech (CAGC - commentary - Trade Now), a maker of organic fertilizers. The stock has been on a tear since last fall, rising from $4 in September to $27.36 last Friday. The company will be announcing its Q4 and full-year earnings this week. And while I walked away from the meeting feeling that this is a solid company, I would avoid holding the stock this week and wait to enter at a lower price.

Fertilizer companies around the globe have been on fire over the past half-year. Agrium(AGU - commentary - Trade Now) has been in a bidding war for CF Industries (CF -commentary - Trade Now), which was making a play -- and did so successfully -- for Terra(TRA - commentary - Trade Now). Agrium is up 45% in the past six months, while Terra is up 30%. Potash Corp (POT - commentary - Trade Now), another large integrated fertilizer company, is up 35% in the same period. In growing economies, these fertilizer companies have had a price advantage, selling to farmers looking to increase the yield of their arable land and maximize what they can sell to hungry and growing populations.

In China, these macro trends have been even more pronounced. The world's most populous country, with almost 1.5 billion people, has been experiencing a mini-boom, increasing demand for food. At the same time, arable land in China is scarce. With the larger cities continuing to increase in size and smaller conurbations growing to house the expanding population, farmers have had to make the most of the arable land available. China's annual fertilizer output reached 67 million tonnes last year, up 16% from the prior year. Most Chinese farmers are simple and are looking to buy the cheapest fertilizer possible to maximize their land's production.

Within the Chinese fertilizer space, organic fertilizers -- which China Agritech manufactures, along with competitors likeChina Green Agriculture (CGA - commentary- Trade Now) -- are a still a small segment, accounting for only 10% of the market. Such fertilizers increase yield while protecting the long-term health of the land compared with traditional fertilizers. They're more expensive, so they require a more sophisticated sales force to explain to farmers how they will be better off in the long run by using these fertilizers, even though they will cost more initially.

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