How Green Can China Be?

Short-sellers aren't showing any mercy on companies that gained access to the U.S. markets via a reverse merger. Poor China Green Agriculture (NYS: CGA) ! No matter how much the company is trying to defend itself from the fangs of pessimists, its stock is hitting rock bottom, touching its 52-week low yesterday at $3.10.

But, if you consider China Green's recent performance, its top-line and bottom-line growth have been impressive. Moreover, why shouldn't the agricultural sector's resilience work in its favor?

Can strong agricultural conditions, especially in China, work for China Green? Are its growth plans good? Let me give you a lowdown on all this and help you decide.

Global boom!
Across the board, companies have been cashing in on the global agricultural boom. From fertilizer companies to farm equipment makers, it's party time for all. PotashCorp's (NYS: POT) third-quarter revenues, for instance, grew an astounding 47% from the year-ago period to $2.3 billion as emerging markets drove demand.

Likewise, Terra Nitrogen (NYS: TNH) and CVR Partners (NYS: UAN) also reported solid revenue growth of 49% and 66.4% in their respective third quarters, thanks to rising crop prices and strong market conditions fueling prices of nutrients. With giants like CF Industries also betting big on agriculture boom, the future is likely to stay bright for some time to come.

Magnetic China
Agriculture has emerged as one of the most important sectors for China, contributing a little over 10% to the nation's total gross domestic product. The burgeoning population and higher spending power has fueled the demand for food, lifting agriculture production. A perfect example is its soaring demand for corn.

China, which exported corn until a couple of years back, recently made its biggest purchase of 900,000 metric tons of American corn. While this signals how China could play a big role in grain prices, it also translates into higher demand for nutrients and fertilizers, which is good news for companies like China Green.

It's not surprising, then, that China's high growth potential is pulling in lots of companies. PotashCorp feels its contract commitments to countries like China and India should strengthen global potash demand in the forthcoming quarters.

Seed giant Monsanto (NYS: MON) is also eyeing China for its long-term growth, and is strengthening ties with Chinese chemical biggie Sinochem to tap growing opportunities in the region.

And that's not all. Farm equipment makers and chemical companies, who have been making a lot of money lately, are also upbeat about the region. Deere, for instance, is building a new engine-manufacturing factory in China. And we all know how deeply attachedCaterpillar (NYS: CAT) is to China. It is undertaking big research and development expansions there. Even chemical giant Dow Chemical is accelerating investments in China through activities like the expansion of sales networks.

While all this could mean steeper competition for China Green in the future, the fact that it will also gain from all the growth cannot be ignored.

What's China Green up to?
China Green has been adding lots of new products. During the first quarter, it launched six new fertilizer products through its subsidiaries Jinong and Gufeng. The company also added more than 50 new distributors to expand its network.

Its integration of humic acid production into Gufeng's processes is also under way, with its focus on humic acid products remaining strong. China Green is banking heavily on Gufeng for growth. Wisely so, considering how Gufeng is leading the company's top line to new peaks, and also helping it tap more markets.

A big headache for China Green, though, is the flak it is facing from those who detest Chinese companies. The company is desperately trying to defend its reputation through direct responses to allegations and even hosting plant tours for investors. To top that, it is also considering upgrading to one of the "Big Four" auditors.

The only other concern is its high cost of sales. Thankfully, it increased only 30% in the first quarter, unlike the monstrous surge in the fourth quarter. This comes as somewhat of a relief, although China Green needs to get a grip on its costs if it wants to capitalize fully on Gufeng.

A peek at its latest numbers
Buoyed by strong sales in all four of its subsidiaries, China Green's first-quarter revenues climbed 34.5% from the year-ago period to $53.1 million. Gufeng's revenue accounted for 56% of total sales, growing 35.8% from last year to $29.6 million.

Sales in Jinong, the second-highest revenue generating subsidiary, grew 34.2% to $22.2 million, as aggressive marketing helped the company sell more humic-acid-based compound fertilizers. Peer Yongye International (NAS: YONG) , which primarily deals in such products, also reported a staggering 95.9% growth in its third-quarter revenues to $68.8 million, thanks to marketing efforts that paid off.

Strong top-line growth boosted China Green's bottom line by 37.8% to $10.7 million.

The Foolish bottom line
Needless to say, China Green's performance and growth have been exciting. And thankfully, no serious allegations have come to light yet.

China Green needs to hold its costs a little harder, and might have to work a lot more to prove its credibility. But as of now, going by its strong performance and positive industry conditions, I am voting like the majority of the CAPS members have -- in the affirmative.

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At the time thisarticle was published Fool contributor Neha Chamaria does not own shares of any of the companies mentioned in this article.The Motley Fool owns shares of Yongye International. Motley Fool newsletter services have recommended buying shares of Yongye International and China Green Agriculture, as well as creating a synthetic long position in Monsanto. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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