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Are Chinese Ag Stocks Set to Soar This Year?

Justin Rohrlich January 3, 2011 2:30PM|

    While US ag names remain overbought, money manager Shawn Hackett is bullish on China's as we begin the new year.

“There are a lot of things I may not know about China, but I do know that if they continue to grow at even half the rate they’re at now, they can’t keep relying on the rest of the world to supply their food.”

So says money manager Shawn Hackett, president and CEO of Hackett Financial Advisors, a Boynton Beach, Florida firm with a specific focus on agricultural commodities.

“I’m not sure how many people know that the worst performing stock market last year was the Chinese stock market,” Hackett tells Minyanville. “Most of the ag stocks around the world have had a phenomenal year while Chinese ag stocks have done nothing.”

And while many investors continue to search for value in an overbought US ag market, it’s getting harder and harder to do, with names like Archer Daniels Midland (ADM), Syngenta (SYT), and Mosaic (MOS) trading at or near their 52-week highs. That’s a reason Hackett believes it’s time to “rotate some money out of a market that’s not so cheap anymore.”

Hackett expects the Chinese economy to see the slowdown the government is looking to engineer by the end of the first quarter of 2011, though he maintains that the “agricultural economy will be unfazed and not affected.”

“In terms of a place to put money, Chinese ag stocks are a perfect place to look,” Hackett says.

With this in mind, the stock Hackett has his eye on is Chaoda Modern Agriculture (CMGHF).

“Unless you really know the Chinese agriculture market, you probably wouldn’t know about Chaoda, the largest fruit and vegetable producer in China by a long shot,” Hackett says. “They grow over 150 different crops, they continue to expand their acreage, they’re the largest greenhouse grower in the country -- which takes the weather issue out of the equation… it’s just a very profitable, very exciting company. It’s my #1 buy recommendation right now.”

“There’s just not enough food,” Hackett continues. “Beijing will continue to use every dollar they have to promote production, because they need every little bit possible. I can see problems with end-users not being able to raise prices, or middlemen getting squeezed. The government may squeeze the supermarket chains, but they need to keep growers growing. I see a huge backwind on this that the market doesn’t recognize right now. Even though they are engineering an economic slowdown, they are still going to pile fiscal stimulus into ag pursuits.”

This theory is borne out by fact, according to a passage in Chaoda’s most recent annual report:

“The government has maintained a number of preferential policies aiming at supporting agricultural development and bringing to an end of the backwardness of rural areas. For the seventh consecutive year, the annual “Number One” document focused on the “Three Rural Issues” (Agricultural Industry, Rural Areas and Farmers). This document, released in January 2010 by the Central Committee of the Chinese Communist Party and the State Council, emphasised the coordination of urban and rural development to strengthen the foundation of agricultural and rural development. The government has continued to increase its fiscal allocation to agriculture. In 2009, the central government allocated RMB725.3 billion for programmes for agricultural development. The investment is expected to increase by 12.8% in 2010 to RMB818.3 billion.”

Even though Chaoda is “huge in terms of total production, they’re still small in that there’s a tremendous opportunity to grow market share,” Hackett says. “They are doing everything China needs to do to make ag production work better. This is a company that’s growing in such a hi-tech, efficient way; they have no debt and tons of free cash flow, yet the stock is 50% below where it was in 2008, back when we had the last ag craze.”

Hackett says there’s no reason for this, other than the fact that “Chinese ag has been in the penalty box. There’s been no interest. Investors took profits and just left. Now you can buy Chaoda anywhere from five-to-eight times earnings. Doubling that at minimum for the country’s dominant food grower certainly seems reasonable to me.”

The top five institutional shareholders of Chaoda are:

* Janus Capital Management (JNS)
* JPMorgan Chase (JPM)
* SAM Sustainable Asset Management AG
* BlackRock Advisors
* Robeco Institutional Asset Management BV

Other names Hackett has on his radar include AgFeed Industries (FEED), one of the largest hog producers and feeders in China, Feihe International (ADY), a major dairy producer, China Agritech (CAGC), a leading fertilizer company, and Wilmar International (WLMIY), a palm oil concern.

Hackett doesn’t discount the squeamishness certain investors have about the myriad issues that can crop up when buying Chinese shares, but believes the risk/reward ratio involving these names is favorable.

“I think a basket of these higher quality names will work out well,” he says. “As a group, there’ll be a lemon or two in there, but there’ll be some huge winners in there as well.”

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