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China Stocks to Bet on Consumers - Part 2

The company has already reaffirmed 2010 net income guidance at approximately $20 million, and this implies a very strong fourth quarter. As a result, I am buying the stock while others have been selling.

There will be two key drivers for the business and the stock going forward.

First is the mitigation of seasonality. Management has made clear to me that it is making solid progress here.

SkyPeople is beginning to offer new products with complementary harvesting and squeezing seasons. Historically, the company has offered pear, apple and kiwifruit products. Going forward, it is adding jujube, mulberry and pomegranate, because these fruits have complementary harvesting seasons that will boost inventory into the second quarter.

In addition, the company is currently expanding capacity in its juice concentrate business. The shelf life of juice concentrate is very long, and SkyPeople can use it to produce and sell retail fruit juice in all seasons under its own label.

Once the seasonality is smoothed out, the opportunity to buy the stock on the seasonal dips will disappear.

The second key driver of the business will be distribution.

SkyPeople already distributes products through all of the WalMarts in Beijing, as well as in other retail outlets in cities across China.

The company is currently looking to distribute products through WalMarts in Shanghai as well.

In addition, SkyPeople is focused on exports, and already exports via distributors to the U.S., Europe and the Middle East as well as other countries in Asia. The company is approved by the U.S. Food and Drug Administration and is Kosher certified, which is beneficial for its exports.

I visited the company's key distributor in Beijing and noted that in addition to WalMart, the distributor has access to 7-Eleven, Carrefour and other major retail outlets in China, so I am optimistic that distribution will expand to these retailers.

From a financial standpoint, SkyPeople looks solid. The company has gross margins of 30%-50%, depending on the season, and net margins that are consistently in the 20%-25% range. As of the third quarter, the company had $46 million in cash, which is currently being used to finance a significant expansion of capacity and broadening of product ranges. The company generated more than $9 million in operating cash flow during the first three quarters, and as a result does not need additional financing in the foreseeable future.

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