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Nutrastar - The Greatest Opportunity for 2014

January 13, 2014 | About:
Libertadpp

Libertadpp

2 followers

Company History and Business

Nutrastar International (NUIN) is a leading producer of Cordyceps products, a very popular ingredient used in Chinese medicine to enhance health. Its effectiveness is proved, and we also use it in the occident for many purposes: strengthening the immune system, improving athletic performance, reducing the effects of aging and improving liver function in people with hepatitis B.

Nutrastar is the only company that can produce the sought-after natural herb on a mass commercial scale. The company is the largest producer of this ingredient, currently producing 72 tons annually where the estimated global capacity is around 250 tons. So it has a very attractive and durable competitive advantage, that can be seen in its incredible operating margin of 63%.

The company also produces organic and specialty food products.

In the last five years, the revenue has grown at 23% a year, and EBITDA at 34% a year.

So, we have a  good business, that is easy to understand but not easy to replicate, and growing faster than the market.

Financial Strength

The company has no debt, and it can expand its operating margin without incurring new debt, so we can be quite unconcerned. GuruFocus gives Nutrastar a financial Strength of 9/10.

We will talk about valuation later, but it's important to say at this point that Nutrastar's price is less than NCAV, even less than net cash, is growing its NCAV year by year:

 Management

The company has a deputy director of the Institute of Edible Fungus, very important for knowing all about Corcyceps, and a Certified Public Accountant that holds a B.S. degree in accounting and finance and an MBA, but the most important thing is that recently acclaimed value investor, Richard Fearon, significantly increased his ownership of the company through private transactions.

Richard Fearon is the manager of Accretive Capital Partners, and was recipient of HFM Week Magazine’s 2011 Best Single Manager Long-Term Performance award among all U.S. hedge funds under $250 million.

Now, chief executive officer and founder, Ms. Lianyun Han, has been decreased her voting power from approximately 52.7% to 47.2%. It's important for a company not to be controlled by one individual, and I'm sure Richard Fearon can add value to shareholders.

Valuation

Now we get into the best part, price. Nutrastar is now selling at $2 per share, when its net cash is $5.57 per share, and net cash is growing month by month. It's selling at a PER of 1.6 and price to tangible book of 0.3, below its conseravative liquidation price.

So, here we have a good business, growing year by year, selling each dollar of net cash for 40 cents, and having a recent investment of a very good value investor (and  insider buys). Maybe they are preparing a share buyback program.

I think it's the greatest opportunity for 2014.

Risks

The only risks I see are the volatility and the bid-ask spread; sometimes it's fair, sometimes it's wide. But if you keep calm and wait, I think the margin of safety is so huge that the risk is very limited.

This is the trend of google searches of the word "Cordyceps":

(I'm now long on NUIN.)


Rating: 3.9/5 (9 votes)

Voters:

Comments

Hapkido
Hapkido - 8 months ago

Sounds too good to be true::)

eqp53
Eqp53 - 8 months ago
That's what I thought when I saw Google selling at 300$, or apple at 400, or when I see a company selling for less than NCAV. it's too good to be true, there must be a reason. But then...the results come, you notice your analysis was right, and you learn what Buffett says: " the market is there to serve you, not to instruct you ".
libertadpp
Libertadpp premium member - 8 months ago

I think there are two reasons for this cheap valuation:

1.- the  eastern medicine products are misunderstood in the occident. But there are a lot of studies about Cordyceps.

2.- The lack of confidence in chinese companies, But Nutrastar has increasingly American directors and shareholders. And now, China is opening the markets.

And of course, big funds are not going to care about a little company of only 30 million.

 

 

 

libertadpp
Libertadpp premium member - 8 months ago
vgm
Vgm - 8 months ago

Thanks for drawing attention to this company. Intriguing. At first glance it does look too good to be true ("If something looks too good to be true then it probably is" Buffett) but on the other hand it has several idiosyncratic features which would make potential investors cautious, as the author explains. Richard Fearon's involvement is highly encouraging. The 10K is a good read. 

Another short article has been published:

http://seekingalpha.com/article/1954001-nutrastar-5_80-cash-per-share-and-a-highly-profitable-business-for-less-than-2-per-share?source=email_rt_article_readmore

Thanks for the stimulation. 

libertadpp
Libertadpp premium member - 8 months ago

Very interesting, thank you. The interest for this company is rising. It would be very important to trade on Nasdaq, to expand internationally to get foreing currencies, or to get the ability to exchange chinese yuans to dollars, 2014 is the year for new chinese financial laws. I have 20% of my portfolio on Nuin now. I will wait with patience.

LwC
LwC - 8 months ago

"Its effectiveness is proved…"

From Drugs.com:

"In vitro evaluation and animal studies of cordyceps and its chemical constituents suggest potential therapeutic applications; however, despite a significant number of clinical studies, the overwhelming majority had poor methodologies. Very few large, randomized, controlled clinical trials have been conducted (several of which evaluated cordyceps in combination with other agents), making definitive statements about the efficacy of cordyceps premature." (bold emphasis added)

http://www.drugs.com/npp/cordyceps.html

Too good to be true indeed. Count me as a skeptic, though lack of evidence for the efficacy of the stuff may be no deterrent to above average performance of this company's stock.

vgm
Vgm - 8 months ago

LwC -- it's well established that proving clinical efficacy of Traditional Chinese Medicines (TCM) according to Western medical protocols is extraordinarily challenging. Even the universally-recognized benefits of green tea are difficult to 'prove' in the clinic. The reasons are many. There is, however, abundant in vitro (ie, laboratory not clinical) evidence for biological effects of individual chemical constituents of Cordyceps - eg, anti-oxidant - which are consistent with clinical effects. There is in fact also some preliminary positive clinical data:

http://www.ncbi.nlm.nih.gov/pubmed/22544231

However, the reasons why TCM remedies have survived for (literally) thousands of years is that they work. People derive benefit(s). If there were none, they would not have survived. They sell because they work. The better the effect, the more desirable they will be. For Nutrastar, the questions are do their products work, can they maintain a moat, and can the market be increased.

If you want bona fide Western-style clinical validation as a sine qua non for considering NUIN, you're wasting your time. Judging Chinese remedies requires a different mental approach.

vgm
Vgm - 8 months ago
LwC
LwC - 8 months ago

Well thanks for another lecture Vgm. Rest assured I'll give it all the consideration that IMO it deserves.

"I learned long ago, never to wrestle with a pig. You get dirty, and besides, the pig likes it." - George Bernard Shaw

vgm
Vgm - 8 months ago

"Well thanks for another lecture Vgm."

LwC - thanks, any time. You completely deserve it. You always do.

libertadpp
Libertadpp premium member - 8 months ago

The fear in Chinese stocks is too big.....not rational. But that is changing.

libertadpp
Libertadpp premium member - 8 months ago

Big volume today, and 2.28$ now. This stock is awakening.

libertadpp
Libertadpp premium member - 8 months ago

3$ per share. +50% today, and still very cheap.

libertadpp
Libertadpp premium member - 8 months ago

1 million dollar traded today, price per share at 3,45$, new 52-week peak at 3.89$. +15%.

Conservative Target price for 2014 is 6$.

libertadpp
Libertadpp premium member - 7 months ago

Shareholders waiting with patient for last quater results.

libertadpp
Libertadpp premium member - 7 months ago

Nutrastar is now at 3,15$, it has gone down these days with low volume, so I'm going to use it to buy more at these prices. 52-week peak is 3,95$.

lfev
Lfev - 7 months ago

Thanks, great article - since you wrote this there have been purchases of this business and there have been other articles writen

libertadpp
Libertadpp premium member - 7 months ago

Thank you very much. Yes, there have been other very interesting articles after mine. I have also talked with Richard Fearon. I'm waiting for 2013 results, at the end of march, and I'm using current prices below 3$ to buy a little more. Patience will be rewarded.

paulwitt
Paulwitt - 6 months ago

Does anyone have thoughts on SIAF?

I'm also long NUIN

libertadpp
Libertadpp premium member - 6 months ago

Well, SIAF is a good company, you can see a lot of videos on youtube of all the operations. They are growing very fast and exporting products, so they can pay dividends. But it's important to see that only 3 months ago NCAV was only 0,25. And the most important thing, every month there are more and more shares outstanding. Net income has increased 2400% since 2010, but EPS only 600%. So, even with a 10% dividend yield, that is not a good strategy for adding value to shareholders.

That's a very important reason I prefer NUIN than SIAF,but there are many others.

paulwitt
Paulwitt - 6 months ago

@Libertadpp

Thanks for your opinion of SIAF - I like to get all viewpoints. If you haven't checked out HERB it was up 42.8% today. It's in the same space as NUIN and SIAF i.e chinese microcap Ag

libertadpp
Libertadpp premium member - 6 months ago

Waiting for the 2013 Results, at the end of this month.

libertadpp
Libertadpp premium member - 5 months ago

Press Release

Nutrastar Announces Full Year 2013 Results

Revenue Up 17.9% Year-Over-Year; Gross Margin at 77.8%

Financial Highlights

  • Net revenue was $43.35 million, an increase of 17.9% from full year 2012.
  • Gross profit was $33.72 million, an increase of 20.4% from previous year, representing a gross margin of 77.8%.
  • Net income was $22.17 million, an increase of $4.93 million from year 2012, representing a net margin of 51.1%.
  • Basic and diluted EPS were $1.38 and $1.30, respectively, with 15.95 million basic shares and 17.09 million diluted shares outstanding.
libertadpp
Libertadpp premium member - 5 months ago

Now NCAV has reached 6$ a share !!. I have benn talking with Richar Fearon to make a visit to the factory. Good numbers, great margins.

paulwitt
Paulwitt - 5 months ago

I like the numbers!

long NUIN

libertadpp
Libertadpp premium member - 5 months ago

It's true that some numbers and guidance are below espectations, But NCAV is 100% bigger than price. Ok, money is in Chinese currency, that's a con, but with patiente, we will have to wait to the internationalization program. I think one reason for low valuation is the luck of confindence, that's the reason I thought of make a visit and talked with Richard Fearon.

I can't make it personally now, but I asked a company to make a verification report of Nutrastar, and I gave them all the e-mails, phones and address.

By the moment, they have said me twice that :"We can't get in contact with this company. Nobody answers."

I will keep trying, but I think it's fair to tell you all the things about Nutrastar, good ones, and bad ones.

I think Richard Fearon are not going to invest 3$ million in a fake company, or a scam, but I would like to have the verification report, with a real visit to the factory.

we will see what happens at the end.

ceaneff
Ceaneff premium member - 5 months ago

Libertadpp, If Richard Fearon has not been to the company, have you spoken with the CFO who has a California phone number as to his site visit(s), if any?

friskyromp
Friskyromp - 4 months ago

Free cash flow per share is around $1.40. At today's stock price of $1.87 that's a 75% return on cash! To quote Peter Lynch, "Pinch me, I'm dreaming."

carlosklein
Carlosklein premium member - 3 months ago
Libertadpp, have you already been in contact with the company or Richard Fearon?
libertadpp
Libertadpp premium member - 3 months ago

I emailed Richard Fearon to talk about Nutrastar, but he said me : "talk with them". Then I try to talk with them and nothing.

carlosklein
Carlosklein premium member - 3 months ago
Hmm. ok. thanks anyway!
ceaneff
Ceaneff premium member - 3 months ago

June 7 Reuters issued a report, making their numbers more widely available. Up 20% or so

MichaelBoller
MichaelBoller - 3 months ago

I see some red flags with this company. This company seems to control about 30% of the worldwide cordyceps market. However, in the internet, I didn't find a lot information about this company. Cordyceps grows everywhere in the world - so is it really likely that this company produces 30% of the worldwide output? Prices of Cordyceps have increased enormously in the past- meaning that the prices can go down again. Further, the profit margins of this company sounds too good to be true. Inventory is low compared to total sales and why do they keep such high cash balances (and pay no dividend). It would be good to know how long it takes to grow cordyceps - to see if it is possible to produce 72 tons in-house.

batbeer2
Batbeer2 premium member - 3 months ago

>> It would be good to know how long it takes to grow cordyceps - to see if it is possible to produce 72 tons in-house.

Off the top of my head, cordyceps (if produced the natural way) takes about 5 weeks to mature. I checked out the SEC filings and they have enough area to produce the 72 tons annually. I imagine that's one full van each week. As for the gross margins it seems they are feeding zombie caterpillars leaves (probably mulberrys).

I think this industry is very similar to the age-old silkworm industry in China except that they do not use the caterpillars to produce silk but turn them into "zombie" caterpillars. That's what cordyceps is, a sick/dead caterpillar. The rest of the production cost is (cheap) labour for planting the mullbery and harvesting the caterpillars. I can see how a dozen low-paid workers could harvest 2 tons of the stuff in a week.

At first glance, the numbers seem to add up and the business model should be able to support the margins. I have two problems with this stock though:

1) Anyone can grow/breed cordyceps. I know I could. If this is so profitable, why are others not entering the business? Nutrastar says they have found a better way of producing this stuff but at these margins they are leaving an awfull lot of room for a competitor to do it the old fashioned way.

http://www.ehow.com/how_6859201_farm-grow-cordyceps-sinensis.html

2) Reporting numbers that add up is one thing but is the business really there? What's more, if the assets are there, will these managers ever return anything to the owners? These are not people with long track records of enriching minority shareholders. The fact that the managers of the business are not communicatng with shareholders doesn't instill a lot of confidence in this regard.

Just some thoughts.

MichaelBoller
MichaelBoller - 3 months ago

I also noted that the Auditor of NUIN is Crowe Horwath - it is the same auditor which audited the financials of Lihua International, another Chinese company which had a high cash balance and very low valutaion. The trading of the stocks of this company was recently stopped because of serious fraud allegations against the company. I recommend to invest only low percentages of your funds in such companies as the fraud and other risks are quite high.

MichaelBoller
MichaelBoller - 3 months ago

...another thing are the very low accounts receivables compared to the turnover. I have calculated a avarage time to settle the receivables of 0.7 days! (based on the financials as per Dec 31, 2013). So most of the sales must be paid directly in cash. I don't know if this is common in China.

batbeer2
Batbeer2 premium member - 3 months ago

>> So most of the sales must be paid directly in cash.

Or....

They settle everything the day before they report the quarterly numbers. Then the balance sheet on that date will not show much in the way of receivables.

If memory serves, they do not have a lot of customers. They are affiliated with some "energy drink" distributor. Maybe they sell most of their production to them and have arranged for that customer to pay their bills the day before the accountant comes.

MichaelBoller
MichaelBoller - 2 months ago

Overall I will not invest in this company. The high cash balance and no dividends is somehow suspicious. The argument that they cannot convert Yuan into USD doesn't convince me either as other Chinese firms pay dividends (such as XIN or ZA). The company structure seems very complicated. I didn't see pictures of their management on their web site. Further, the list of fraudulent Chinese companies is too long, see http://kreuzroads.blogspot.ca/2013/01/global-list-of-chinese-stock-frauds.html

MichaelBoller
MichaelBoller - 2 months ago

In addition, I noted that the company is set-up with a VIE structure which is risky. I understand that this means that the shareholder does not own any of the assets of NUIN. See the report: http://www.valuewalk.com/2014/06/chinese-firms-with-weak-vies-dumb-investment/?utm_source=mailchimp&utm_medium=email&utm_campaign=EMAIL_WEEKLY&utm_content=quick_link

kytad95
Kytad95 - 1 month ago

Why are the CEO and CFO selling their own shares, on an apparently very much undervalue company? http://insiders.morningstar.com/trading/insider-activity.action?t=NUIN&region=USA&culture=en-us

avantgardenot
Avantgardenot - 1 month ago

@Kytad95

The CEO said she is selling her shares to reduce her ownership. She wants to address investor concerns she owns too much stock.

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