Daniel Gladiš is Director of the Vltava Fund, a value-oriented investment fund based in Brno, the Czech Republic. The Vltava Fund seeks out value globally. Previously, Daniel was Director and Chairman of the Board of Directors of ABN AMRO Asset Management (Czech) from 1999–2004. He was also Director and founder of Atlantik finanční trhy, a.s., a member of the Prague Stock Exchange. Daniel is a graduate of VUT Brno and has authored the best-selling book Naučte se investovat (Learn to Invest).
Asian Citrus (Hong Kong: 0073) is the largest orange plantation owner in China. It bought its first plantation in the 1990s from PepsiCo. Today, it owns and operates three orange plantations: Hepu, Xinfeng and Hunan. Hepu is fully planted, mature and produces around 120,000 tonnes of oranges per year. Xinfeng is fully planted, young and currently yields about 126,000 tonnes annually. When fully mature, it will produce approximately 190,000 tonnes per year. Hunan is presently being planted and will first start producing in 2014. Once mature, it will yield about 240,000 tonnes per year. The company’s current annual production of 246,000 tonnes should grow to around 550,000 tonnes, or by 124%, by the end of this decade.
The company sells fresh oranges to wholesalers and supermarket chains — all of them domestic. The country’s consumption is still low compared to levels in the western world, but it is growing rapidly. Domestic competition is fragmented. The second-largest producer is about one-tenth the size of Asian Citrus. Domestic production does not fully satisfy the demand, and the deficit is covered by imports. Imported oranges are priced significantly higher than those produced domestically and are therefore only a weak substitute. It is not possible, however, for the local supply to grow quickly as it takes at least seven years from land acquisition to commercial production. The company’s leading position is very solid and its growth potential is huge, with relatively low risks.
Since most of the total costs are fixed, and because margins for mature plants are so high, the company as a whole represents a great inflation story. High inflation — something rather likely to occur in China — nicely benefits the company.
The long lead time required for orange production brings large margins. A mature orange plantation is a business with gross margins well above 50%, sometimes even up to 70%. Worthy of note is that two of Asian Citrus’ plantations are fully planted and the third is in the midst of being planted. The company’s fixed investment is thus mostly behind it and free cash flow lies ahead. (An orange tree produces for about 25 years before yields start to decline and replanting becomes necessary.) Since most of the total costs are fixed, and because margins for mature plants are so high, the company as a whole represents a great inflation story. High inflation — something rather likely to occur in China — nicely benefits the company.
Last year, Asian Citrus acquired a second line of business by buying juice concentrate producer BPG. Although a different business, there are obvious synergies between running a plantation and a juice concentrate producer. BPG is an established enterprise whose customers include Coca-Cola, PepsiCo, Cargill. Asian Citrus is debt-free with about Rmb 2.4 billion in cash. In that the management is very capable, shareholder-friendly, open and honest, it represents a rare phenomenon in China. Management owns about one-quarter of the shares. Temasek Holdings is also a significant shareholder.
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