Tuesday, February 15, 2011

China Agritech: China's amazing productivity levels

China Agritech has put out an eight page shareholder letter rebutting claims of short sellers.  Readers know that in the past I have been inclined to take such letters under extreme caution.

But in this case I take the company statements as the gospel truth.  They illustrate just how miraculous Chinese productivity levels are.

Firstly China Agritech claim all their production facilities are working normally and give a few addresses.  (The addresses differ from the addresses in the 10K – a new complication.)  They also give some photos.  Here are the photos given of the Anhui facility.

The gate to the Anhui facility is the same one photographed by Lucas McGee – the shortseller who put out the scathing note on China Agritech.  [There has been some difficulty finding that facility.]

These photos from China Agritech – combined with the annual report - allows us to illustrate amazing total factor productivity levels in China.

The annual report gives the company staff numbers:

As of December 31, 2009, we had approximately 305 full-time employees, of which 45 were administrative and managerial staff; 150 were sales staff and 110 were manufacturing workers. We also hire temporary manufacturing workers to supplement our manufacture capabilities at periods of high demand.
The company has three dry fertilizer plants and a liquids plant.  The Anhui plant however is half the total dry fertilizer – so at a guess it represents about a third of the plant and equipment and a third of the staff.  (This is just a good educated guess – but the analysis would apply to all the other plants as well.)

So lets suppose – just running these numbers – that say 37 staff work at the Anhui plant (that is a third of the manufacturing staff).

The Anhui plant – also according to the annual filing – produces 100 thousand (metric) tonnes of dry fertilizer per year.  The bags in that photo are 40kg bags – so they produce 2.5 million bags per year – and they do all that with 37 staff.

The photograph – the elusive loading facility for which I searched – shows less than 100 bags - loosely - and I would guess manually - stacked on top of each other.

To move 2.5 million bags of fertilizer annually you would need an enormous army of manual workers whose muscles bulged like Popeye or machines.  I presume you would use machines.

I am not a factory guy – but I presume fork-lifts would be pretty basic equipment.  But if they used fork-lifts then the bags would be loaded onto pallets (again I am not a factory guy - but I am used to seeing pallets).  Instead – and here is the photo again – they are stacked somewhat irregularly on the ground.

These workers are amazingly strong.  They move 2.5 million bags of fertilizer with nary a fork-lift.

Of course there could be some heavy moving kit outside the photo.  So I went looking at the accounting for property plant and equipment.  Here is an extract from the last annual:

Yes – that is 5.8 million of gross manufacturing equipment and 0.6 million of vehicles.  A third of that equipment (my estimate) should be at Anhui.

So with just over $2 million worth of equipment the company claims to be able to manufacture and load 2.5 million bags of fertlizer per year.  Oh, and they do without an enormous army of low-paid workers – but a mere thirty-something superheros.

America is forever stuffed.  Westerners can never compete against this.


Disclosure: Bronte remains short China Agritech (indicating we do not think the above calculation should be taken very seriously except as an exploration of the accounts and claims of the company).  "Anne" Wang Zheng - the Carlyle nominee China Agritech's board has still not got back to me.  Perhaps she can shed more light on these amazing productivity levels.


Anonymous said...

I've seen more fertilizer than that stacked on a lawn in front of a house in Beverly Hills.

John Hempton said...

I have probably seen a third that number in an Australian house - and many times that number at a golf course.

Anonymous said...

Good luck with this one John. Personally I have always been sceptical of EVER being able to make money (being long) in China/India/ Asia where as your recent blogs have suggested there is a lot of insider trading/rorting and or dodgy accounting. That is unless you're the insider!
Furthermore in most Asian countries
the dog eat dog principle applies; it is not frowned upon to advance your own interests be they legal or otherwise. Laws and corporate governance are speed humps to negotiate around.

Anonymous said...

They produce almost 7,000 bags per day (assuming the plant runs 365 days per year) and they show a "loading area" with maybe 60 bags of fertilizer? There should be product as far as the eye can see. I think we can safely call this one a scam.

Unknown said...


I enjoyed reading your blog but this one is just hilarious.

Anonymous said...

I'm assuming that in their report they also claim little if any inventories, so you'd expect that they have to shift it all. I also assume that they don't sell it directly to the individual farmers, but wholesalers. Another angle would be to identify who they sell it to and confirm from the other side- for example, by a stream of invoices and actual payments. Of course, one then has to measure the dodginess/trustworthiness of the purchaser.

Nick said...

I am not so sure about that "army" of workers.
Say it takes 1 minute to manually load a bag.
2.5m minutes is 1,736 days of work (24x7).

Running a 12 hour shift, 5 days a week, with a little vacation gives you 120 days of work per year from one fella.

So 15 guys could do this easy. Although they would indeed look like Popeye and have broken backs within a week.

Fair disclosure - this is clearly a fraud and I know nothing about manufacturing.
I suspect my 1 min per bag estimate is WOEFULLY inaccurate.

Anonymous said...

And they do not even have any fertilizer on the conveyor belt feeding the hopper.

Anonymous said...

Total bags per year = 2.5 millions
Total bags per day = 6850

Assume bags are loaded as soon as it comes out of factory and there are only 15 loaders per shift.

Total bags to be loaded per hour=286
Total bags per worker per hour= 19 bags.

I think it is possible with additional temporary workers. Less bags in photo are also good sign that company might be working with almost no inventory.

If it is not possible then company would not have posted the photos at all.

I think we need to wait on an independent analyst review.

Alex Sebastian said...

I can't read Chinese characters, but I really hope the cardboard sign to the left of the gate reads "China Agritech".

Anonymous said...

There is another way to measure the amazing productivity of CAGC's workforce.

CAGC has 305 employees and TTM sales of $94mm. That is rev/employee of $308k.

Oracle (ORCL), generally regarded as a well run company with excellent margins, has 105,000 employees and TTM sales of $32.1bn. That is rev/employee of $306k.

If stacking and packing poo was a better business than selling database management software, one could be pretty sure that there would be more competition in the poo space, and a lot less in the database space.

Plus, Larry Ellison would be very angry!

Anonymous said...


Sorry, but i do think you are getting yourself into a box here. The Anhui plant has been expanded, and the number of workers might have as well. Then, the picture was taken in a hurry while the Chinese New Year was still underway. That COULD explain the low number of bags and workers. Had they also put up some loading equipment you porbably would have called that "borrowed" and "arranged"?
John, you may be right, but you should look at this with a clear head and not from the perspective of having to stick with earlier claims and interpreting every news item in a way that supports these former claims.
See, the biggest plus for cagc is, that the LM "report" has obviously been made-up - and that by purpose, not by neglect. irrespective of the anhui production capacity I think this is something we can agree on, no? When someone needs to fabricate a report to bash a company, then there must be pretty little hard evidence available to support the short thesis?!

regards, fx

Anonymous said...

Another thing. If they were making and moving that much product (sh*t, really) in those kind of bags, you would think there would be some spillage or other debris across the floors and equipment. But everything is pristine.

Did they say how much money they have spent on cleaning equipment and cleaning staff?

Anonymous said...

In Los Angeles, there used to be this gigantic mound (about 100 feet high) of fertilizer jokingly called "Bandini Mountain" - and there used to be this TV commercial in which some guy was skiing down it. You'd expect to see some similar mountain here.

Anonymous said...

If you're going to make a comparison like that, at least use a company in the same industry like Potash.

Rev: $5.136B
Employees: 5,136

Rev/Employee: $1.134M

Anonymous said...

285 bags an hour if they are working 24/7 365.

Take it the other way, they need to move that much into the factory, and probably have to elevate it.

Calculate the "head" on those 2.5 million bags. Use a modest 10 foot drop. You would need an estimate of the local utility cost.

Anonymous said...

to me this is almost certain a fraud, the simplest way to prove their inncence in this would be shoot a short video of all their factories and plants and uploaded on youtube.

I see they haven't even done that, smell like scam here to me.


David Smerdon said...

John, it was nice running into you today (albeit in the Canberra rain). I was intrigued enough by the sound of your fund's strategies that I googled around and found your blog - fascinating stuff! To be fair I'm more interested in the behavioural side of things, but there's not a total lack of intersection.

I'll mention to Tim Reilly that I ran into you the next time I see him.

Cheers, Dave

Anonymous said...

Many thanks for your excellent
Probably this company represents a kind of Chinese Miracle and therefore goes beyond our capacity to understand it.....
Best wishes

Anonymous said...

@Anonymous 7:25am

Point taken, although Bill Doyle just isn't as funny as Ellison. POT, having huge mining operations, and complete vertical integration, is really not a comp either, however.

So lets make a much more valid comparison.

Using the Bloomberg's RV function I brought up a screen of companies comparable to CAGC. I then sorted by revenues to see the ones closest to CAGC in turnover.

The first four on the list (Luxking, China Jishan, Fabchem China, and Changtian Plastic) do not produce fertilizers, but rather other specialty chemicals, and in the case of FabChem, explosives!

However the fifth company on the list, Changjiang Fertilizer (CJFH SP) does produce fertilizer.

Bloomberg reports $53mm (US) in TTM sales, and 473 employees. Rev/employee of $112k versus CAGC's $308k.

I think that 112k for a Chinese fertilizer company is a much more reasonable figure.

Anonymous said...

Why don't we wait until the 10-K comes out? The audit will be intense, and we'll have an exact headcount for 2010 as well as its production levels. Like 98% of these fraud allegations, your allegation will probably be false as well. Only time will tell.

And again, you'll be short a company that is growing at 30% per year w/ a forward PE of 5- iow, its true value will be 5x its current price.

At some point, the smart money is going to step in and start buying up these companies because more and more people are starting to see what MW/Citron/Bronte is doing. And it'll be hard to push prices down more than 80% below what they are actually worth.

Anonymous said...

Wow - you really are a genius to have gleaned that much information from 1 photo ! The assumptions you draw from what ISN'T in the photo are truly childlike.

There is no forklift pictured - so clearly they don't own any. The floor is clean - so clearly no manufacturing is going on. You can only see a small number of bags of product - so total production must be small.

Honestly John, my 3 year old daughter has a better grasp of deductive reasoning than you....

John Hempton said...

No - I did not glean that much from one photo - I gleaned it from careful reading of much material sent by this company - along with actual on-the-ground investigation.

What Sir did you buy your long position based on?


Anonymous said...

I am not now, nor have I ever been long the stock John. I usually just wait for the crescendo of inaccurate reporting, misguided speculation and outright fabrication to peak. Then I'll get long.

I too have done extensive on-the-ground research. It's strange, because whenever I contact a company and enquire about visiting their facilities, they are usually very welcoming. It also means I don't waste my time turning up and photographing the wrong factories ...

John Hempton said...

Good luck getting long this.

You are not half cynical enough.

If you ask for a tour you will be taken to a Ptomken village...


Fat lot of good that will do you.


Anonymous said...

Your analysis is full of holes, naming the comparison of CAGC with ORCL. If you compare across similar industries, you will find that CAGC is smack in the middle of the range of productivity per employee (e.g., POT, MOS, etc).
You also seem to still place some reliance on the LM report, which has been fully debunked. A report that was so laughable in the making that it was an obvious part of a scam by shorts to drive down CAGC price right at the peak of the Chinese New Year. The fact that hundreds of puts were bought on the 3 days before the release of the LM report showed that the entire scheme was a fabrication designed to bring about maxiimum profit. And it worked!
For you to give any credibility to the LM report debases your own "research" and motives. If I had submitted your report as a paper in an MBA class that I took some years ago, I'd be laughed out of the classroom for trying to present it as evidence of fraud. Your research deserves little respect in this case.

Anonymous said...

I find it stunning that people claiming to bre "licensed" money managers try to drive a stock down (which they have shorted earlier) with posts ona blog by using superficial speculation. This is the kind of "analysis" that is obviously used to manage other peoples' money?! If I were a client of "Bronte Capital" , I would withdraw my money asap and run as fast and far away as I could.

Anonymous said...


You should already be in jail regarding your lies on UTA. I suppose people have short memories but I don't. The company is fine and you my friend are a lying fool who only profits by scaring investors out of their investments


Anonymous said...

This blog is awesome.

Anonymous said...

@ Anonymous 11:55pm

John never compared CAGC to ORCL. I did. CAGC is surely no ORCL, and it is surely no POT or MOS either. But if you had bothered to read the comments all the way through, you would have seen that I also compared CAGC to a true peer, Changjiang Fertilizer (CJFH SP).

I also described how Changjiang was found, so you can repeat my little experiment at your home or office, and see that it was not cherry picked.

Anonymous said...

Fresh delivery from the Potemkin village :


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