Hanfeng (HF)

Just made a small purchase. This was a media darling in the fertilizer industry, and is now at 52 week low based on a mediocre quarter. Even at current earnings levels, I calculate a 12 year payback period ((stock price - net assets per share) / earnings per share). With earnings consistent with last quarter, that drops to 5 years. An average around 8 seems reasonable.

Need more time to research the stock, so I am limiting my exposure for now. Maybe if they are using chemical fertilizer and environmental regulations are restricting chemical fertilizer use, it may be a reason for decline. At this point I really don't know and am just speculating.

To paraphrase the MD&A: Lower production in first quarter and seasonally slow period as well as unually hot weather. Used the downtime for maintenance. Also inventory being set aside for a joint venture project with Agrium caused increased costs without the increased sales.

Pros:
weighted average exercise price on options at $5.82 (only 480,000 options out of 67,000,000 shares currently outstanding, so dilution potential is not strong).

Share repurchase agreement to expire on Dec 3, 2010 to repurchase 10% of outstanding shares.

They seem to have lots of projects in the works expanding outside of China as well. Agrium is a 20% owner of the company, so they should have the connections to take on these kind of projects.

Balance sheet is incredibly strong. $300M in assets vs. $6M in liabilities (of the liabilities, very little is debt). Approx $0.45 cash per share, Approx $4.50 book value.

Cons:
A hell of a lot of receivables and inventory. Inventory is explained in the MD&A, but still seems like a lot of risk exposure to bad credit. Once they sell down all that inventory, and consume the advances to suppliers, they should be in great shape. In fact, this is primed for increased profit in future periods. A conspiracy theorist like myself might even be tempted to say it looks like they front-loaded all their costs in order to have a bad quarter so they could drive down the price of their stock so they could complete the repurchase agreement expiring in Dec, and next quarter should look very good as they will see all the income in next quarter, but all the costs have already been paid.

Income side, they have current quarter earnings of only $0.04 per share, but that reflects only a 3-month period, and that is the worst three month period they are likely to have for the year. Works out to minimum of $0.16 per share earnings on an annual basis. Not great, but can go up quite a bit from there.

I got a couple of tips from Jason (from China) who mentioned that the risk of obsolescence of some proprietary technology being banned for environmental reasons is low. Makes sense, China is still using coal for their main source of power I think. He says the most likely problem will be competition, which is fierce in China. The government invites foreign companies in to partner with them, and then steals there technology and turns their back on them. Interesting insight, and I am not sure how it will play out in this case.

I saw a note in the financial statements that management actually considered its internal controls to be ineffective, and there is the potential for material misstatement in the financial statements. Definitely had me raising an eyebrow, but they went on to certify that they believed there was no material mistatement in the financial statements anyway (so at least I know who to sue in case of fraud), and they laid out a half-hearted action plan to resolve the internal control issues. Not a lot of detail in the financial statements in general (hedging, exercise prices for options, etc) but overall I am satisfied.


SUMMARY:
I like it. A lot. I will be buying some soon.

TRADING:
As far as buy and sell targets, I think anything around $5 (where it is now) is a great deal. I am terribly conservative with sell targets, but I would be happy with $5.50 - $5.75. Certainly has the potential to reach $6.00 (someday) based on recent history. Buying in blocks of 500 shares (approx $2,500) in $0.10 - $0.15 increments. Might start off with a little extra in the first purchase. Based on my history, the stock will decline about 6 increments before it reaches bottom from the time I start buying (in this case $5), so keep that in mind.


Any other comments on this stock? Give me the BS charting analysis if you like, any information is welcome. Better go to Stockhouse and see if I can find any crazy rumours to scare me off.

Snuck in an order for 900 shares (part fill of 1000) at $5.15 seconds before it shot up to $5.25. This is adding to the 500 shares I bought yesterday at $5.11. It is higher than yesterday's price, but I figure it should do fine. Now I have enough initial position to begin to average down if necessary without worrying about missing the profits if it goes up. Because I made a significant purchase up front, I may have to expand my increment for averaging down to every $0.25. We will see where it goes during the rest of today.

Note the strategy here. I am equally happy to see the stock fall as I am to see it rise. As long as I have confidence in my initial analysis, and watch the news to see if there are any fundamental changes in that analysis, every time the stock declines, I should be even more willing to put more money in (if I like it at $5.15, I like it more at $4.75). Until I reach my position limit, every drop in stock price will provide an opportunity to reduce my average cost and increase profits.

I am literally investing in a pile of crap (fertilizer). I like the industry. To me it is far more important in good or bad times than gold. I am waiting on the next quarter's results (may even be the quarter after that), where they will realize profits from all the inventory built up as the catalyst for the price to move. With the earnings increase, the stock should be valued at $4.5 + (8 or 10 x avg projected earnings for the year). At minimum earnings from the current quarter, this works out to roughly $5.70 (you will note this is around the range I am planning to sell the stock as described earlier). In previous years earnings of approx $0.30, this works out to approx $7.50.

Anyway, I am not betting on the earnings, I am betting on the spread between current business value and stock price. This should be a relatively low risk trade as long as I exit at the specified prices. To hold longer would certainly increase profits, but at greater risk and would greatly extend the time commitment (opportunity cost if money can be put to better use elsewhere). Looking at 3-6 months for this stock to turn around, but speculation leading up to the earnings release could cause me to sell before that time as long as my price target is triggered.

Sold HF at $5.36 for 5.7% gain today.

I am really getting over-cautious on the market, and it is going to be tough to sit in cash and wait while everyone else is making money.

This stock is up to $5.90 this past week. Definitely need to have more confidence in my own analysis.

well any positive gain is a good gain!

I have the some problem. only I don't have enough confidence in my picks to buy them in the first place....I'll watch them for a few days as they rise and then convince myself it's too late....then watch them continue to rise

Buying back in on this one slowly. Price is $5.60. Getting closer to next quarter results, and should see some movement in anticipation.

Sold for 4% gain today.

Bought back in at avg price around $5.50, but HF has forsaken me too with the resignation of their CFO (which is a prelude to a revelation of fraud). This along with CCME are probably going to permanently put me off of investment in Chinese stocks.

OK, after all the trading back and forth, I think I have still made a profit on this stock, but I decided to sell a few weeks ago around $5.30. Glad I did so far.

This is the type of failure that I like. I had my analysis, developed my theory, gave a timeline for it to play out, and when things didn't work out the way I planned, and new developments such as the CFO mysteriously quitting came up, I reassessed and bailed. A small loss on my last trade of about 3% or so rather than a complete meltdown.