Many of the successful Chinese companies we have covered typically follow this story line: Gain a leading market position, increase manufacturing capacity to meet demand, expand product offerings and expand into more Chinese provinces.

After talking to Spring Liu, the CFO of SkyPeople Fruit Juice ( SPU), we believe this company will follow that path.

The simplicity of the SkyPeople's business plan -- to market and manufacture juice products -- was prompted us to delve further into the company's story.

SkyPeople has two general product categories: a concentrate line and a branded juice line. The company sells the concentrate as nonedible solid raw material to customers who process and manufacture their own beverage products.

Currently, the company manufactures apple, pear and kiwi concentrate products. In 2008, the company's concentrate line generated 78% of revenues, with 13% and 69% coming from domestic and international sales, respectively. SkyPeople uses the remainder of the concentrate raw material to make its own branded juices.

SkyPeople made a smart decision to create its own branded line in 2008 in response to declining sales of concentrate during the global crisis. The move helped the company maximize its production capacity, by using excess supply to create its own products.

Thus far, the move has paid off, paving the way for product diversification, new customer channels and fresh market opportunity.

There is one aspect of the company's business that we're not particularly enthused about, however.

Historically, SkyPeople has experienced seasonality in its first and fourth quarters, which tend to be dramatically stronger than the others.

This is because the company is able to build its supply inventory only from July through April, which is referred to as the squeezing season.

Due to capacity constraints and strong demand for its concentrate line during this period, Skypeople has less inventory to carry over into nonpeak periods, essentially limiting its ability to generate additional concentrate or branded product sales.

We expressed this concern with Ms. Liu and said smoothing out seasonality may result in increased stock valuation multiples.

In response, she briefly outlined several aspects of the company's growth strategy:
"The main thrust ... is to increase our concentrate capacity, enabling us to accomplish several things. First, increasing our raw material supply will enable us to more fully satisfy current customers' demands as well as solicit new customers.

"Secondly, we can increase branded beverage production, where we experience higher margins, especially in our new cider beverages lines, which was introduced to the Chinese market in the first quarter of 2009.

"Our goal is to expand this line domestically, which is currently only available in one province and consists of two categories (kiwi & mulberry). The opportunity to achieve substantial gains exists if the company can penetrate more provinces.

"Third, increasing capacity will help smooth out seasonality by allowing us to build up inventory to sell past the squeezing season (concentrate has a two-year shelf life)."

We also asked Ms. Liu whether SkyPeople would emphasize any particular product line. She indicated that the company will increase the production of kiwi products domestically and internationally. She said the company has a competitive advantage with kiwi products, because it has access to the largest kiwi plantation in Asia and holds two patents for kiwi processing.

She said the company also recently doubled its apple juice capacity to 20,000 tons and noted that globally, apple juice is the second most demanded juice product.

Liu said the company hopes to attract more customers through its apple juice offerings and then introduce them to its kiwi product line, too.

Lastly, the company plans to increase its focus on higher quality branded juice products as the Chinese standard of living rises.

Overall, we are intrigued by the SPU's potential, especially because the stock has a trailing price-to-earnings ratio of around 9 and a book value of $2.25.

We would still like SkyPeople to show that it can address seasonality issues as well as post consistent EPS growth of 30%.

In order for the company to increase capacity it likely will have to tap the capital markets before the 2010 squeezing season.
At the time of publication, Soueidan was long SkyPeople Fruit Juice. Maj Soueidan founded The Market's Edge, Ltd. in 1994, The Markets Edge Hedge Fund in 2006 and GeoInvesting, LLC in 2007. Through his involvement with the equity markets, he developed the strategies that are now at the core of the hedge fund and geoinvesting.com. He currently leads a team of researchers and analysts (the GeoTeam) that help investors identify opportunities in today's volatile stock market. The team uses fundamental criteria to analyze stocks in the micro-cap to small-cap arena.

If you liked this article you might like

5 Stocks Under $10 Poised for Big Breakouts

5 Stocks Under $10 Poised for Big Breakouts

Why SkyPeople Fruit Juice (SPU) Stock Is Soaring Today

Why SkyPeople Fruit Juice (SPU) Stock Is Soaring Today

Today's Dead Cat Bounce Stock: SkyPeople Fruit Juice (SPU)

Today's Dead Cat Bounce Stock: SkyPeople Fruit Juice (SPU)

Perilous Reversal Watch: SkyPeople Fruit Juice (SPU)

Perilous Reversal Watch: SkyPeople Fruit Juice (SPU)

SkyPeople Fruit Juice (SPU) Is Today's Strong On High Volume Stock

SkyPeople Fruit Juice (SPU) Is Today's Strong On High Volume Stock