3 China Agriculture Stocks for 2011

NEW YORK (TheStreet) -- In 2011, agricultural commodities prices will depend on crop prospects, according to a Food and Agriculture Organization (FAO) report. A sharp deterioration in crop outlook will affect price movements adversely. The FAO's index of 55 food commodities rose for the fifth straight month in November, touching two-year highs. Unless the global output of agricultural commodities improves in 2011, food prices will continue to spiral up, according to FAO.

Prices of agricultural commodities will rally next year, driven by rising demand from emerging markets, as per Rabobank Group. In addition, surging crude oil prices, depleting global food stockpiles and a weakening dollar may push prices higher.

If energy and food prices surge, it would raise the attractiveness of biofuels, made from farm commodities, pushing fertilizer prices higher. Down the value chain of commodities, any upward movement in energy prices affects sugar and corn prices.

A recent Chinese commerce ministry statement said as pressure mounts due to escalating prices and tight supplies, acquiring new supplies will play a key role in softening inflation and curbing speculation. For this, China has decided to tap international markets for sugar, cotton and meat, especially from India and the U.S., among others.

While China's CPI closely correlates to food prices, the country recorded a 5.1% CPI growth in November, with food and household expenses contributing 92%. Among agricultural commodities, as grain prices increase, food production costs and beverage processing costs rise.

We have identified three China agriculture stocks that will likely provide attractive returns to investors. These stocks are stacked base on upside potential.

China Agritech ( CAGC), operating through its subsidiaries, manufactures and sells organic liquid compound fertilizers, organic granular compound fertilizers, and related agricultural products in China. Of all the analysts covering the stock, 75% recommend a buy. The stock has a 32.5% upside based on the consensus target price.

During the first nine months of 2010, the company posted a 41% year-over-year increase in net revenue, while cash equivalents more than doubled, indicating a strong financial base. Looking ahead into the fourth quarter and upcoming year, Agritech said prices of agricultural products are on a roll and it is leveraging the favorable trend to achieve its annual target. Analysts at Bloomberg estimate Agritech's fourth quarter revenue at $31.3 million, compared to $23.9 million recorded in the third quarter.

Agritech recently opened the first branded large-scale distribution center in Henan province and plans to construct more such facilities in 2011. Each of these would cover 85-100 franchised stores, which will sell 50% of the company's products and 50% of third-party products. On one hand, the cost of building one distribution center is almost $1 million, while on the other, annual revenue contribution is estimated at $3.7 million, once the plant becomes operational.

Zhongpin ( HOGS) is engaged in the processing and distribution of meat and food products in China. Of all the analysts covering the stock, 78% recommend a buy. While there is no sell rating on the stock, the remaining analysts recommend a hold. Zhongpin has a 36.4% upside based on the consensus target price. Based on the positive trend in pork prices and the company's significant capex plans, the stock seems attractive and is likely to generate handsome returns in 2011.

Zhongpin has filed a registration for a potential equity offer, debt, and/or other instruments to raise up to $250 million, as per company sources. The main aim of the registration is gaining additional flexibility for raising funds from equity in 2011, in the event of interest rate hikes and a credit crunch. Meanwhile, timing and offer price have not been disclosed in the registration filed.

Zhongpin recently announced plans to build a production, research and development, test, and training complex in its home city Changge in Henan, China. The company plans to invest $58.5 million on the facility and construction for the first phase with a capacity of 50,000 metric tons is scheduled to start in the first quarter of 2011 and will be completed in third quarter of 2011. With this facility, the company will be adding 100,000 metric tons of capacity for prepared pork products.

Yongye International ( YONG) operating through its subsidiary, is engaged in the manufacture, research and development, and sale of fulvic acid-based liquid and powder nutrient compounds used in the agriculture industry. Of all the analysts covering the stock, 80% recommend a buy. Yongye has a 85.4% upside based on the consensus target price.

At the end of 2010 third quarter, the company had a gross margin of 58.7%, sales growth of 145.1%, and a trailing 12-month sale of $196.2 million. Among peers in the fertilizer and agricultural chemical industries, Yongye has the highest gross margin, indicating investment potential. In comparison, Monsanto ( MON) and Potash Corporation of Saskatchewan ( POT) have gross margins of 44.1% and 35.8%, respectively.

After reporting third quarter results, the company achieved its set target for the full year 2010 within a span of three quarters. For 2010, the company sees revenues ranging between $200 and $205 million, and adjusted net income to increase in the range of 90.8% to 98.4% from prior year levels. Looking ahead, the company estimates at least a 50% annual growth rate in its revenue in 2011 and 2012.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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