Given how quickly its stock price has been rising, one might be tempted to think Hanfeng Evergreen, which produces slow- and controlled-release fertilizers aimed at the fast-expanding Chinese market, was literally using some of its own product to grow the value of the company. The better explanation why Hanfeng has seen its share price jump so dramatically is its strategic position as the first company to bring higher-end fertilizers to the booming Asian country. “Hanfeng has superior growth prospects due to its excellent positioning in the Chinese market,” writes Canaccord Adams analyst Michael Deng in a recent research note.
In early April, Hanfeng announced it had raised more than $80 million in financing in two deals. In the first, Canada's second-largest fertilizer producer, Calgary-based Agrium Inc. ( TSX: AGU), bought nearly 20% of the company ? or 11.96 million shares at $6.22 each ? to expand sales of both firms' products in China. In a separate deal, Hanfeng sold one million shares to a division of PetroChina Petrochemical Co. and struck a joint-venture deal to build more fertilizer plants in Ningxia, an autonomous region in north-central China.
Bullish news like this is what gets the investment community so excited in a China play like Hanfeng, run by Dalian-born president and chief executive Xinduo Yu. Within a week of the company's announcement of its deal with Agrium, Hanfeng's stock price had skyrocketed by about 25%, topping $10 a share. But some analysts are predicting even more upside, with Canaccord's Deng giving the stock a one-year target price of $11. “The partnerships with Agrium and PetroChina will provide Hanfeng with the opportunities and capital for accelerated growth at lower costs,” Deng says.
There are some analysts who figure the shares will appreciate even faster. John Duncanson of Jennings Capital Inc. in Toronto says Hanfeng currently has enough capacity to produce 550,000 tonnes of fertilizer per year. He expects that figure to expand to 600,000 tonnes in 2008 and 800,000 tonnes in 2009, and he estimates the company will earn 75¢ a share in 2009 and $1 in 2009. Based on this estimate, and with a price-earnings multiple increase to more closely match Agrium's valuation, Duncanson has a one-year target price of $13.50. While Hanfeng stock, which was trading at less than $3 a share in early 2006, has since grown, well, like a weed, those who follow the company figure it isn't about to shrivel up and die anytime soon.