China Organic Plants the Seeds of Growth

　　China Organic Agriculture, Inc. (CNOA.OB: 0.3189 -0.34%) announced strong year-end 2008 financial results in its 10-K filing with the SEC. The company reported net income of $20.47 million, or $0.35 per share, on sales of $112.69 million.  With a stock price of just $0.33 per share, the company’s stock is trading with a P/E ratio of under 1.0. Meanwhile, the company is also well-capitalized with a $7.33 million cash position and a current ratio of just 5.58x. So, is this stock a screaming buy or a hidden danger?

　　China Organic came into existence on March 15, 2007 through a reverse merger with an operating subsidiary called Jilin Songyuan City ErMaPao Green Rice Ltd. This operating business generated revenues of approximately $44.5 million during 2007 before being sold in October 2008. The sale is part of the company’s effort to transform from a rice producer to an agricultural distributor, which is apparently paying off given 153 percent jump in sales levels and increase in net income.

　　China Organic now has three operating segments under its roof. Ankang Agriculture is a wholly-owned subsidiary that focuses on grain processing and trading. Dalian Huiming is a 60 percent owned subsidiary that reflects the company’s prior involvement in rice production through ErMaPao, which produces “green” and “organic” rice. And finally, the company operates a wine segment that consists of the Bellisimo Vineyard in Sonoma, California, Far East Wine Holding Group, and Polisi Ice Wine Ltd.

　　China Organic plans to grow and diversify through acquisitions and offer a spectrum of premium food products, not just in mainland China, but also in the special administrative region of Hong Kong, and other Asian countries as well. The company is also positioning itself as a purveyor of international food products, from California wines to high quality rices produced in China itself, all being distributed to Chinese and Asian customers.

　　Despite positive results, shares have continued to trade at very modest levels. Investors are both skeptical given the company’s limited operating history in its current state as well as cautious about future growth levels given the amount of recent changes and competition. Prudent investors would be wise to wait on the sidelines for confirmation of this success, but some speculators are taking this opportunity to get in the stock at very low levels.