Three Fertile Chinese Stocks

Investors looking to gain from China's agricultural growth story should focus on fertilizer producers.
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NEW YORK (TheStreet) - As part of our series based on the Chinese growth story, last week we had recommended four small-cap Chinese food stocks that are poised to ride the opportunity arising out of the country's strong -- and sustainable -- demand for food and agricultural products.

This week, we present another three opportunities for investors looking to gain from China's agricultural growth story.

While the already high food demand is all set to grow even further going forward, the arable land base in China is on the decline due to industrialization, soil degradation and the continued population growth. As a result, the increase in food demand can only be addressed by increasing agricultural productivity, which in turn implies the increased use of both organic and chemical fertilizers.

China is the world's largest producer and consumer of fertilizers, consuming in excess of 60 million metric tons per year, accounting for one-third of total global consumption.

Our picks for this story --

China Green Agriculture

(CGA) - Get Report

,

China Agritech

(CAGC)

, and

Changda International

(CIHD)

-- are fertilizer companies that have posted strong results and are on track to benefit from the rapid market growth.

Despite being significantly smaller than their U.S. peers,

Agrium

(AGU)

,

CF Industries

(CF) - Get Report

, and

Terra Industries

(TRA)

, these Chinese companies are set to witness exponential sales and earnings growth even though they are currently trading at inexpensive -- and attractive -- valuation multiples.

China Green Agriculture

The company produces and distributes humic acid-based organic liquid compound fertilizers across China through a wholly owned subsidiary.

According to the Ministry of Agriculture, demand for organic fertilizers is estimated to grow at a CAGR of more than 30% over the next several years. The increased demand for organic compound fertilizers stems from the higher consumption of green foods and the need for increasing soil fertility in a sustainable manner with minimal environmental impact.

Sales are likely to zoom from $35.2 million in 2009 to $49.5 million in 2010 and further to $69.9 million in 2011, according to analysts polled by

Bloomberg

. At $13.6, the company's stock is trading at an attractive PE of 10.4, compared to North American counterparts like

Agrium

and

CF Industries

, which are trading at 24.0 and 12.0, respectively.

China Agritech

China Agritech manufactures and sells organic liquid and granular compound fertilizers through three wholly owned subsidiaries --

Anhui Agritech

,

Beijing Agritech

and

Pacific Dragon

.

Compound fertilizer consumption still accounts for less than 30% of total fertilizer consumption, which is far below the 50-80% average in developed countries, implying sufficient room for future growth.

The company reported fiscal year 2009 revenues of $76.1 million, a year on year increase of 68.3%. Going forward the company projects revenues to increase by approximately 50% during fiscal year 2010 to $114 million.

Having corrected 34% during the past month, the stock seems oversold and is currently trading at $19 on a PE of 25, in line with industry standards.

Changda International Holdings

The company produces and distributes chemical and microbial organic-inorganic compound fertilizers. The company has a multi-brand product portfolio comprising 10 product lines under two brands --

Changda

and

Fengtai Wosida

.

The company is looking to double its production capacity and has already invested $4 million toward developing its plant at Heze with another $19.7 million to be funded through self-financing and third party sources.

As part of the recently published full year 2009 results, the company reported a year on year increase of 14.5% in overall sales volume. The stock is trading at $1.80 on an attractive PE of 4.1 and is likely to appreciate as prices strengthen and new capacity comes online.