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American Lorain Corporation - On Sale for 87% Margin of Safety to Book Value

February 16, 2014 | About:
lfev

lfev

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Company History and Business

Founded in 1995 by Mr. Si Chen, American Lorain Corporation produces and sells chestnut products, convenience food products, and frozen foods products to most provinces in mainland China. The company has 13 production lines capable of producing over 200 varieties of products. American Lorain Corporation sells its products in over 40 countries including the United States, Japan and Taiwan. American Lorain Corporation is the is the leading producer of chestnut products in China.

The business openly states it is commited to quality production through food processing and has earned various international certificates of quality such as SKS Kosher and JAPAN JAS. In 2008, Lorain Group was cited as "The Leading Enterprise of National Agricultural Industrialization" by eight ministries of China, in which the Ministry of Agriculture is included.

In December 2013, American Lorain has completed the installation of a Chestnut Decladding Line.

In 2014, American Lorain Corporation obtained 51% control in the Athena Group, a leading brand and one of the largest producer of canned chestnuts and bean sprouts products in France. The France operation owns two highly automated production lines which are considered Europe-leading in technology and capacity. The Portuguese factory was established in 2013 and is located near Portugal's main chestnut producing region, which is essential to sufficient supply of raw materials given the falling chestnut output in Europe in recent years. Controlling interest in this business is good beause it provides the Corporation with raw materials, ie, chestnuts.

Athena is currently one of the largest suppliers of Asian foods to French supermarket chains and has a variety of imports such as coconut milk, noodle, soy sauce, and rice paper from China, Thailand, Malaysia, etc.

Financial Strength

American Lorain Corporation is selling for only 2.2 times earnings, and has increased its net income for three consecutive years in 2010, 2011, and 2012. Total assets over the same period have increased from 174,983 to 218,698 in 2011 and 250,365 in 2012. Net tangible assets over the same period have increased also. Profit margins are 7 percent and Return on Equity is 10 percent. The company holds .96 cents per share in cash which is used for the raw purchases of chestnuts.

This business has just recieved a purchase order from a Turkish customer for 5 million USD.

The balance sheet shows positive total assets and net tangible assets.

Current Assets
  Cash And Cash Equivalents 36,345 30,371 15,040
  Short Term Investments - - 9,448
  Net Receivables 76,066 63,555 42,568
  Inventory 38,073 34,349 29,807
  Other Current Assets 9,676 149 1,128
 
Total Current Assets 160,159 128,424 97,990
Long Term Investments 270 472 -
Property Plant and Equipment 84,640 84,377 72,095
Goodwill - - -
Intangible Assets 5,297 5,425 4,877
Accumulated Amortization - - -
Other Assets - - 20
Deferred Long Term Asset Charges - - -
 
Total Assets 250,365 218,698 174,983
 
Liabilities
Current Liabilities
  Accounts Payable 9,632 10,076 10,887
  Short/Current Long Term Debt 32,951 36,076 29,633
  Other Current Liabilities 1 - 89
 
Total Current Liabilities 42,584 46,152 40,610
Long Term Debt 27,079 15,598 5,031
Other Liabilities - - -
Deferred Long Term Liability Charges - - -
Minority Interest 9,949 8,628 7,432
Negative Goodwill - - -
 
Total Liabilities 79,612 70,378 53,072
 
Stockholders' Equity
Misc Stocks Options Warrants - - -
Redeemable Preferred Stock - - -
Preferred Stock - - -
Common Stock 35 35 34
Retained Earnings 84,098 65,940 48,688
Treasury Stock - - -
Capital Surplus 53,487 53,016 52,371
Other Stockholder Equity 33,133 29,331 20,816
 
Total Stockholder Equity 170,753 148,321 121,911
 
Net Tangible Assets 165,456 142,895 117,033

Recenlty the business has been showing high accumulation volume into 2014. The per-share price has increased 46 percent year-to- date.

Institutional investors such as Morgan Stanley have been purchasing shares of American Lorain Corporation as shown in the chart below, showing that institutional investors are interested in the business.

169406-1390501177456147-Dutch-Trader.png

Management

Mr. Si Chen is actively involved in improving the quality and efficiency of the products by creating value. The business is commited to their product and support this by purchasing new plant equipment and automation upgrades for key production procedures for chestnut products. This is done through introducing numerous new equipments such as an additional chestnut decladding line, automated chestnut packaging line, and chestnut vacuum saturator chestunt sorting line in 2013. This means the value of the business has improved while also improving the quality of the product. There are over 30 satellite offices in mainland China, and the purhasing of businesses to improve market share has meant the management is comitted to expanding the business to reach new customers.

Valuation

This business is selling for only 1.18 per share. The book value of these shares is 5.8 dollars per share. This business is priced below the book value per share by 80%. This stock has an 80% margin of safety to book value. The Graham number for this business is 7.84 dollars per share. Doubling price in this business per share value would still be lower than the book value for the business. Without consideration to the earnings growth of this business, it is selling at a discount and a large margin of safety.

Risk

American Lorain Corporation has established itself as a leader in chestnut produts. There are competitors in the Processed and Packaged goods industry that produce similar products with less interesting results. There are competitors in areas of the world with like businesses. There is near 1 million in shares short for this business but with a recent 46 percent year to date gain this number is expected to decrease.


Rating: 4.0/5 (5 votes)

Comments

lfev
Lfev - 9 months ago

Dow Jones Alert released today on American Lorain -

*DJ American Lorain Expects Farm To Yield 500 Metric Tons Of Chestnut Raw Materials In 3 Years

Mar 03, 2014 09:01:00 (ET)

kfh227
Kfh227 premium member - 9 months ago

Interesting comapny. Nice Revenue growth. But what is up with the FCF?

If FCF gets fixed, this is a 10 bagger.

balajisridharan
Balajisridharan - 7 months ago

lfev --- saw this article today. can you please help me with the following

a. Why does the company need $35M of Cash in the balance sheet? Which is probably 1.5 times the annual profit for the company?

b. The receivables for the company are growing so rapidly as compared to the revenues? Wonder why is that the case.

c. Why does the company need $60M of debt [short + long term] to run the business in addition to $170M of equity? Fixed assets are only $80M -- everything else seems to be stuck in trade working capital...

d. The shares issued by the company has gone up from 25M in 2009 to 34M in 2014.

Common stock at 1/1/2009 200,000,000 25,172,640

New shares issued to employees and vendors during 2009 Various dates56,393

New shares issued to PIPE investors 10/28/20095,011,169

New shares issued to service provider during 2010 2/10/20102,000

New shares issued to PIPE investors 9/10/20103,440,800

New shares issued to employee 9/23/20105,000

New shares issued as acquisition consideration 9/24/2010731,707

New shares issued to service provider during 2011 5/5/201125,000

New shares issued to employees per stock incentive plan 7/20/201127,092

New shares issued to employees per stock incentive plan 11/21/201136,073 New shares issued to employees per stock incentive plan 10/5/2012108,840 Common stock at 12/31/2013 34,616,714

e. No dividend or any return to shareholders

This looks like a shady company to me with a dubious balance sheet at best....

lfev
Lfev - 7 months ago

Hi Balajisridharan ,

These are great questions. I am not a member of the board and I do not have acess to answers for these questions. I also don't speak Chinese. Whether they are honest with their accounting practices and return profits to investors is in their hands. It appears the business is growing from the balance sheet and news of purchases.

Thank you.

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