POSTERITY MEASURES

China’s inevitable growing pains

via Martin Wolf.

Best. Financial. Journalist. Ever.

This One Worked Well

Le Gaga Holdings - LTD (ADR) - GAGA: NASDAQ
ADR Price (open 02/24/12) USD 4.19

Target Price (6 months) USD 5.63
P/E (ttm) - 5.92 vs. Industry average (ttm) - 8
Mkt. Cap - USD 241M, Annual Reported Sales (03/11) - RMB 406.20

GPM - 74.7%, NPM - 37.2%, US IPO: 10/10

Despite an outlook for tempered national economic output this year, fundamental indicators suggest certain large incumbent firms in China’s produce market will enter a period of robust growth. The consumer base has expanded rapidly and demand for low-pesticide produce is high.

China’s agricultural sector accounts for over 10% of GDP and the country grows nearly half the world’s vegetables by volume. The retail value of China’s fruit and vegetable market is estimated to be USD 150B. Next week, Le Gaga Holdings, one of the largest agricultural companies in the country by arable land coverage (1490 hectares) as well as greenhouse coverage (553 hectares), will report earnings for 3Q12. Management’s guidance for revenue in the quarter is RMB 145 (USD ~23M), representing y-o-y growth of 52%, and an increase from the previous quarter of 42%.

The real sweet spot for Le Gaga though, has been net profit which was RMB 84.34M on 09/30/11; nearly 150% above the previous twelve month average of RMB 34M. Farming is seasonal so this increase in net margin is tipped to taper but should remain relatively elevated. Le Gaga is projected to fortify its impressive operating gains through improvements including dispossession of less profitable farms and the curtailment of export-oriented crops which fall outside its core product line.

Chaoda (682 HK), China’s current largest produce grower and Le Gaga’s main competitor, lost access to Chinese capital markets in 2011 after fraud allegations by the net collective Anonymous and a public investigation. The result is that Le Gaga will likely increase market share and encounter less competition going forward. Combined with management’s focus on increasing revenue per hectare and effective farm management, the firm appears a favorite for the industry.

Upside
Ÿ*    With inflation down (4.5% y-o-y for broad and 10.5% for food [01/12] vs 6.5% and 14.8% [07/11]), there is a far lower risk of state-imposed pricing controls this year.
*Ÿ    R&D has totaled RMB 27M (USD 4.3M) since 2009 and greenhouse coverage as a proportion of arable land increased from 20% to 36% between 06/10 and 09/11. Biological assets and yield improvement technology remain priorities for the firm.
*Ÿ    With land prices falling in China, Le Gaga will likely acquire more arable property, with the goal of expanding into the populous Yangtze River Delta.

Ÿ*    Agriculture is a subsidized industry and tariffs are maintained on imported foods.
Ÿ*    For USD investors an appreciating CNY (up roughly 4.5% y-o-y) enhances yield.

Downside
Ÿ*    Caution is advised concerning the connections between Le Gaga’s board and the fallen Chaoda. Four Le Gaga directors are former Chaoda employees and VP Na Lai Chiu was a cofounder of Chaoda with her husband, the company’s current chairman Ho Kwok.

Conclusion

Based on sales growth of 35% and projected EPS of USD .26 and USD .30 for the next two quarters my 6-month P/E-based target for GAGA is USD 5.63 or an appreciation of 34%.

The Public Pension Paradigm

Timely article here on a subject that will be making front page headlines before long. Nobody wants to know what a $4tn dollar tidal wave of debt looks like when it crashes and gets sucked back out to sea.

“…most state pension plans are still based on the assumption that their investments will continue to generate annual returns of around 8 per cent or more, in the coming years; but with 10-year Treasury bond yields hovering around 2 per cent, that assumption looks over-optimistic by several hundreds of basis points.

Thus academics, such as Joshua Rauh of Northwestern University, think that if a more realistic rate of return were used, this would reveal that state pension funds are now underfunded to the tune of $3tn-$4tn. Other observers are even gloomier. “This $4tn figure is a lower bound,” argues Robert Merton, economics professor at MIT. “Liabilities as reported by state and local governments seem to creep steadily up with each report due to ‘actuarial losses’ or overly generous assumptions about mortality and worker behaviour. In recent years, these have added growth of about 4-5 per cent per year to total liabilities.” And, of course, the longer that US interest rates – and bond yields – remain ultra low, the worse this underfunding gap becomes.”

Bogle OWS

Another John Bogle winner.

Canadian Ties

This is an interesting and premonitory article. While there’s no denying a moral hazard implicit in the reality of having an NYC-based hedge fund trying to ‘improve’ a regional Canadian railway service, I can’t ignore the fact that CPR sought investment in public capital markets, presumably without taking into account that there are hidden contigencies in everything. Who did they think would buy their equity? The average sightseeing passenger? 

The Bee’s Knees

Can’t believe I slept on this. Yesterday someone told me Mossad was employing robobees in recon missions so I did some online research. Couldn’t verify that claim but I came across the above which is equally impressive.

So does the disintermediation of the construction industry loom? Either way, I think a lot people would want to have one of these things around the house.

America’s Pension World: Faulty Warehouse

America’s pensions are in a bad way. The math doesn’t add up and in as plain language as I can come up with, here’s why.

Think of a pension plan as a big shipping and receiving warehouse. It has assets (things it brings in) and liabilities (payments) which are the things it ships out. Many of the assets are bonds and the rest are stocks. Bonds are contracts between a borrower and a lender. The pensions in this case are the lenders and the things they bring in from the bonds are bags of money. Eventually those go out as payments to retirees. Easy right? Almost.

The thing about bonds is that they have a feature called duration. Duration sounds like it could be a complicated concept but all it represents is a bond’s sensitivity to changes in interest rates. Simpler still, it’s how much the value of the bond drops when the cost of borrowing goes up. And vice versa. This happens because old bonds (previously established contracts) are worth less compared to new bonds created with higher interest rates. Duration is measured in years. That is, it’s the average of the times when the cash flows from the bond are received by the lender. A bond without coupons has a duration equal to the length of the loan, because it doesn’t have payments along the way. Low duration means a bond is relatively insensitive to interest rate changes. So short term bonds or bonds with big coupons (regular payments) have low duration.

Now here’s the problem. Pension assets (the bags of money coming in) have a lower duration than pension liabilities (the bags of money going out). The average asset duration is between two and five years and the average liability duration is between 15and 20 years. So the liabilities are from 400 to 1000 percent more sensitive to changes in interest rates. When interest rates drop, liabilities skyrocket. That is, the amount that the warehouses clients want rises substantially but there’s much less coming in with which to give it to them.

As anyone who’s looked at the laughably low interest in their savings account or considered trying to get a mortgage knows, interest rates have fallen to and stayed at historically low levels. The result is that pension liabilities have ballooned in excess of assets. This has happened with the backdrop of constrained growth for the corporations that support the pensions. Also, new regulations dictate that corporations have to declare their pension shortfalls on their public filings or as one bond manager put it, “they have to wear it on their shirts.” Companies with big pension obligations will therefore have a significantly harder time raising money from the investing public. Rightfully so. But still, these have to be high pressure times for pension managers.

You know that saying, ‘fool me once, shame on you; fool me twice, shame on me?’ Pension managers do. Especially those managers who could lose their jobs like everyone else who earns a salary in this economy. If pension funds take another big dump right as the boomer wave retires, heads are going to roll. So these days the managers are muttering the ‘fool me’ proverb as they modify their investment strategies (by matching assets to liabilities) to prevent further losses by locking in the current ones. The problem with this strategy is that it negates the possibility of realizing gains when rates rise again. It’s a confirmation that the certainty of misery is better than the misery of uncertainty (that would come from hoping rates rise again).

The end result is that companies are going to have to make greater cash-out-of-coffers contributions to their pension plans. This means less money for research and development and less money to be reinvested into the companies themselves. It will also mean lower wages and lay-offs for current workers. Which will constrain the economy further and make things even harder for the under 30s. 

The bigger they come, the harder they..[‘re hated]?

It’s a hard time to be a big offline corportation. My view on this is that these are companies that haven’t realized the power of online commerce and are in a defensive mode because their business models are failing. Maybe that’s too simplistic. BofA should’ve never told the public that it was going to charge fees for ATM usage.

Red curtains?

Funny how there are certain things that make headlines, stealth photo-wise. Middle Eastern weapons facilities (or doctored photos thereof right Colin?), people shoplifting, and now, Chinese ghost cities / industrial parks. The connection, I guess, is that the perps didn’t consider that they’d be broadcasted.

Maybe this photo was taken on the weekend. Either way, it’s starting to feel like China’s going to eat it. If only because the Western press says it is.

Generational money management issues

Will Silicon Valley go for Wall Street?

How much does Obama know about finance?

If the President knew more about markets and the theory behind the financial capitalist system in which we live, would he be better equipped to make independent decisions about how to handle the fall out from two decades of irresponsibility?

Was he too dependent on his advisors that are better schooled in the ways of banking in ‘08 and ‘09? 

How can a politician talk about finance without alienating people who know less about it and regard it as an elitist arena?

More of this, please

There’s a lot to think about here.

Morality and Abstractions

Good article.

And a MUCH better reply. A call to action, even.

The Wisdom of Will Rogers

“Every guy just looks in his own pocket and then votes. And the funny part of it is that it’s the last year of an administration that counts. [A president] can have three bad ones and then wind up with everybody having money in the fourth, and the incumbent will win so far he needn’t even stay up to hear the returns. Conditions win elections, not speeches.”

But politics is still a total circus and so like Altucher says, wake me up when the election is over.