Friday, February 18, 2011

China Agritech: more miracles in the plant

This post continues to demonstrate the super-human staff of China Agritech.  It is proof that the US cannot possibly compete with the Chinese in any total factor productivity sense.

I covered the super-hero status of China Agritech's staff in a previous post.  To recap the Anhui plant of this company  - according to company filings - manufactures 100 thousand (metric) tonnes per annum of dry fertilizer.  My estimate (again based on the corporate accounts) is that the plant uses just over $2 million in capital equipment and somewhere between 30-40 staff to do this.

100 thousand tonnes is 2.5 million 40kg bags of fertilizer.  This fertilizer has to be manufactured (something that normally requires some plant), put into bags, have the bags sewn shut and then loaded onto trucks.  These staff may look like Clark Kent - but underneath their clothing are men-of-steel - men who ordinary companies cannot hope to match.

To further demonstrate the utter superiority of China Agritech and their staff the company have released a further 11 photos of their Anhui plant.  (Peculiarly these photos are labelled 1 to 13 on the China Agritech website - but photos 8 and 11 are missing.)  

None of these photos deal with the manufacturing of the fertilizer - something that is usually capital and manufacturing intensive - all we see is a spartan bagging plant and the Chinese Adonis who ply the floor.

This is the land of superhuman staff.  Remember 2.5 million bags per year is 17.4 bags per minute, 8 hours per day, 300 days per year.

Photo 1

This is a photo of some trucks.  Obviously it contains none of our super-heros but it gives you a scale of what they load.  Assuming the trucks carry 60 tonnes they have to load 1666 of these per year - say 5.5 per day based on a 300 day year.  Maybe 5 per day if there are more than 300 working days per year.

Photo 2

This is just another photo of the trucks.  The number plate has been pixelated.  However we can begin to get an estimate of how many bags go on a truck.  This looks like about 20 bags high, 15 bags long and 4 bags wide (ie 1200 bags) plus another few hundred bags on top.  Call it 1500 bags.  That is my 60 tonnes.

Note the bags on the trucks are not sitting on pallets suggesting fork lifts were not the main way of loading this truck.

Photo 3

This is our first photo inside the plant.  We see some bags on the ground (no pallets).  We also see an a loading chute and an industrial sewing machine with two (large) white spindles.  These are used to sew the bags closed.  In all the photos we only see this machine so if the needle breaks or the thread runs out we stop loading.  Moreover we do not see good automated ways of handling the bags around the sewing machines which suggests the bags are lifted up.

Photo 4

Now we see two of our superheros - strangely standing on a pallet - but putting bags on the ground.  Thees bags are clearly labelled China Agritech (note there are no such labels on the bags on the truck).

The superhero on the left has his back arched.  He has clearly not seen any of the literature on the correct way to lift heavy loads - if he were an ordinary person he would be stuffed within hours of this work-pace - but he is a superhero (along with all the other Chinese superheros).

Photo 5

In Photo 5 we eventually see a forklift.  The bags are not on pallets on the truck - but they are lifted up to the truck level using pallets and forklifts.  This will of course reduce the workload our heroes face.  So far the time-and-motion study is peculiar.  The fertilizer is manufactured in a part of the plant we can't see.  It is taken by conveyor belt to a loading chute and then - by hand - moved to an industrial sewing machine.  The loaded bags are stacked on the floor.  They are then re-stacked onto pallets and then moved by fork-lift to truck level.  (I point out that most factories have an elevated loading deck so that all the heavy stuff starts at the level of the loading tray of the truck.)  After that they are taken off the pallets to be loaded onto the truck (presumably by hand).  (I presume they loaded the trucks in the first two photos - though we should note that the labels of the bags disappear...)

Photo 6

Photo 6 we have one pallet load being moved by a forklift.  All the rest of the super-heroes are standing around.  I remain puzzled as to why the other bags are not on pallets - after all I presume the too will also be moved by a forklift.  [There is an alternative explanation - which is that the bags are being delivered to the Ptomkin Village by forklift...  that would explain why in photo 4 we mysteriously see bags being taken off the pallets by our superheroes.  However that explanation does not hold up - because in this photo people are milling around the sewing machine - and they look to be sewing up a bag.]

Photo 7

Photo 7 proves the point that the sewing machine and loading facility is being used.  The dropping of fertilizer into the bags (understandably) creates dust.  Our staff must work in that dust - and so now they have donned dust masks.  They must however sweep this factory incessantly because there is no big piles of dust on the floor - limited footprints and the like.

We also see - for the first time - a tool which explains our heroes amazing productivity - a lifting trolley.  Its a pretty simple one - but hey - its a tool.  Maybe our heroes are human after all.

Photo 9

There was no photo 8 on the website so we skip to photo 9.

Interestingly the bags have all changed color and there are lots more of them.  They are loaded onto some dolly-intermediate size truck whereupon they will need to be loaded onto the main truck.  The handsome Adonis capable of all this heavy listing are absent.

Photo 10

Our handsome Adonis is back.  He is putting a bag on the pallet - or is he taking it off the pallet.  Anyway it is yet another piece of manual handling of heavy bags.  Still he is strong - and he must be amazingly productive.

There are several more superheroes in the background.  They are also fiddling with bags - but none is actually lifting.

Finally we now have two lots of bags - one yellow with a hard to read logo - the other white with no logo.  The stuff on the ground (and coming out of the white bags) is black whereas the dust in the other room is white.  Obviously we are dealing with multiple products here.

Photo 12

Photo 11 is missing - so we jump straight to photo 12.

We have a fully laden truck we are now moving away.  This one contains bags with the China Agritech logos on them.  Again the bags are lifted to truck level using a forklift - but they are loaded onto the truck without pallets.

Photo 13

We are back in the factory.  Some bags are on pallets.  Some are not.  The white dust that required dust masks is gone attesting to the efficiency with which this plant is cleaned.

Some notes

This plant represents half of the dry fetilizer the company produces - and a substantial portion of the company revenue.

The stock price of China Agritech has fallen from 30 dollars to 8 dollars (with most that fall happening before any shortseller went public about their concerns).  The market cap is still 165 million dollars.

If you look at the equipment and plant shown in these slides you do not see anything that looks like even 5 million dollars - let alone a substantial fraction of the market cap.  But that is not what you are buying.

You are buying Adonis - nah - Adonis times 105 (the total manufacturing staff of the company).  No workers anywhere in the world demonstrate this sort of productivity.

Market cap of the company: 165 million dollars
Value of the plant: not very much
Owning your bit of 105 Adonis: Priceless.



Mark Tan said...

CAGC is down -34% year to date. Based on your positive CAGC blog post would you buy shares now?

John Hempton said...

If you believe the numbers it is fair value.

Of course the staff might be superheroes!


taxloss said...

They've also (badly) pixelated out both the number plate and the number painted on the rear of the truck in picture 12. Clearly there are privacy issues here!

Anonymous said...

John, it might be constructive in your next article to make an explicit estimate on what the plant can actually generate, given the highly manual production and loading methods, then compare that estimate to the claimed output. This puts an actual number on the production shortfall.

Hypothesis to consider: perhaps China Agritech isn't manufacturing this material, but is simply bringing in another manufacturer's products and then relabeling them in this factory, then immediately sending back out. Even in that scenario, it's not clear how they get the claimed throughput.

John Hempton said...

That is going to depend on what they actually do. The bags - when I have seen them close - say they are NPK fertilizer in a humic acid base. Humic acid is very loosely organic fertilizer - it is made either from plant material or brown coal - usually the latter.

If it is made from brown coal they use a lot of it as you need far more than a tonne of coal to make a tonne of humic acid - so this plant would have say 200 thousand tonnes of coal coming in one end. The handling facilities would be very large - and the idea it could be done - including the processing - with 2 million dollars of plant is ludicrous.

But they could buy the humic acid - in which case it is just a mixing job - but no technology and no margin.

If they would let us know what they actually do then I could estimate how much staff and capital it would require to do it...

But at the moment as far as I can tell they run ptomkin villages for western investors.


Nick said...

Maybe it is just me but I detect a certain level of sarcasm in this post and I don't think it is justified.

I have enjoyed owning many Western superhuman stocks in my time - CRZY, ENE, ALD, BSC etc... and finally I can crack into the Eastern superhuman market.

Thanks for finding access to these genuine superheroes, John.

Anonymous said...

Just wondering....since you are short and it is your job to tear down any evidence that shows CAGC is a valid, going concern...what pictures (or youtube videos) would satisfy your concerns?

You also seem to forget (conveniently) that this business is very cyclical, and so the size of the workforce increases substantially with temp workers during the busy season. Which would remove your tongue from your cheek if the super-heroes turned out to be nothing more than multiple copies of one temp worker.

Thanks for responding if you care to do so.

John Hempton said...

I started with 2 million of capital plus 37 staff to MANUFACTURE and LOAD 2.5 million bags of fertilizer.

The numbers/pictures/data that would convince me I am wrong is an explanation of what sort of plant and equipment makes that task possible.

Any picture of any plant that makes that possible would be nice.

These are amazing numbers. You might be able to do it with 2 million of capital - but you would have an army of staff.

You might be able to do it with 37 staff - but you would have a very high (and hence expensive) degree of machinery.

I will be convinced if I see the machines that make it possible to use only 2 million of capital and 37 staff to do the job.


David Oliver said...

I haven't visited China Agritech but did join an investor field trip to a similar company, Yongye, back in 2009. I am not an investor in any of these companies but was writing an article about the Chinese fertilizer industry for a NZ agriculture publication. Interestingly Anne Wang Zheng and some of her Carlyle colleagues were on the same trip to Yongye and Carlyle announced their investment into CAGC not long afterwards.

After looking at the industry I have great doubts about the effectiveness of the humic acid/ fulvic acid-based products these companies (CAGC, YONG, CGA) produce. They are certainly not mainstream fertilizers in western countries and its hard to find independent trial data that verifies the claims made by these companies. The fact that they add N P & K nutrients as well as micronutrients to many of their products suggest that these nutrients may be what is having a beneficial effect on crops.

In their defence, and referring specifically to the photos:
- do they actually claim they are producing 100,000 tons a year at this facility or just that it has that much capacity?
- most trucks I see in China don't use pallets but carry bags as shown in these photos as they can fit on more that way
- the yellow & white bags may be raw materials coming to the factory

Some digging around the company website & filings came up with the following:

1. While there is a reference to them starting production of granular fertilizers in the company overview they do themselves no favours by not even mentioning granular fertilizers under products Only liquid fertilizers are mentioned.

2. Q1, 2009 results announcement - "The new fertilizers will incorporate honeycomb embedding technology and microelement deep complexing. These new technologies make the fertilizers more environmentally friendly and effective with a higher nutrient content."

What are 'honeycomb embedding' and 'microelement deep complexing'? A google search returned no results apart from references to CAGC's own announcements. I wonder what marvellous, proprietary technology they have come up with.

3. 'Organic fertilizer' is a widely abused term in China. From Wikipedia: 'Organic fertilizers are naturally-occurring fertilizers (e.g. compost, manure), or naturally-occurring mineral deposits (e.g. saltpeter).' Sometimes the company refers to 'organic fertilizer' and sometimes 'organic compound fertilizer' which seems to mean that they add nutrients such as N, P & K which wouldn't make them 'organic fertilizers' by western definitions.

4. In their prospectus they mention suppliers of nitrogen (N), phosphorus (P) and kalium (K). Kalium is a neo-Latin (early 19th century origin) name for the chemical element potassium which would suggest that whoever wrote the propectus doesn't have a clear grasp of fertilizer terminology.

5. In their prospectus they say that the peak selling season for their liquid fertilizers is Apr - Sep which makes sense, but that the peak selling season for granular fertilizers is Oct - Mar. This doesn't make sense as I doubt farmers would apply fertilizer in the winter.

Anonymous said...

You said it John.

Just went long based on this article.

USA just can't compete.

Huw said...

I hate to be picky - I log on every day to see whether you have blogged again - but I think you have it wrong with this 'Adonis' thing. Adonis was known for being good looking, not of superhuman strength. Perhaps Hercules/ Heracles would be better...after all, this is pretty close to task no 5 - cleaning out the Augean Stables - in its magnitude.

John Hempton said...

David Oliver - thanks for a few more things to add to my list of strange things about this company.


If their technologies include strange things like micro-element embedding don't you think there might be a little more plant?


Today's press release - about breakthroughs in drought resistance - is also a little strange.


Andreas Hippin said...

The China Agritech story is just great, John. Do they get any subsidies from the government? Maybe they get the stuff in the bags free of charge... Nothing would surprise me anymore.

Anonymous said...

Where is the rest of the plant? There is nothing there but a few bags of fertilizer. What a joke. I hope my broker can find me some shares to short.

Anonymous said...

Another good question to ask CAGC's CFO Gareth Yau-Sing Tang is whether the company is getting any subsidies from the Sun Yee On triad.

Greg Hao said...

John, just a quick comment. When I used to work for a lighting fixture manufacturer (who OEMs for major US retailers), whenever products would be packed into containers (or trucks for transport), they would often be moved off of pallets.

The process goes a little something like this:

assembly line -> products packed and stacked on pallets -> pallets moved to loading docks -> products offloaded manually into containers (in order to maximise space, since why would you ship pallets all over the world?). On the receiving end: containers opened up -> manual labour to put products onto pallets -> forklifted away.

That said, we sure weren't moving millions of tonnes of materials though! And while I most certainly agree with you that China Agritech smells fishy (well, probably more manure like..), just providing another perspective on the whole pallet/no pallet thing.

SqueekyFromm said...

Glad we have "Chinese Checkers" to catch this stuff. Perhaps we need to change the old idiom to "A BEAR in a China stop"???

Squeeky Fromm
Girl Reporter

Mike said...

The old catchphrase from Bandini may be apropos.

"Man dares to go where only cows have gone before."

Anonymous said...

I will posit that it would cost CAGC about 30-40k US to stop this. Simply by inviting one Mr. John Hempton of Sydney to see with his own eyes the super duper factory in full operation.

Surely, if you're this concerned, getting doubting Thomas to convert would be the best defence, and the money spent on hotel/first class ticket trivial comparable to the damage suffered otherwise? I'm implicitly assuming that we, and the world, would trust his integrity.

sneaky pete said...

The Japanese usually refer to Potassium as Kalium. Minor point, but it could be an Asian thing

Anonymous said...

The problem is you don't really understand the Chinese culture on business ownership. If you own a 10% stake, or even less for that matter, in a company then you 'own' that company and can list the equipment, sales, whatever, of that company on stuff you write down to impress people. This creates kind of a matrix ownership effect where in some not so extreme cases even the sign on the front of the building changes depending on who is showing up that day. I hope that clears the matter up.


Marc Jacobs said...

Potemkin village is misspelled.

But that's my only criticism.
Great post.

Shawn McSassy said...

Mr. Hempton, soon there will be rewards for you and your kind.

"Help us CAT(ch) bad guys by sending us good tips and there's MO(ney) in it for you and yours."

Anonymous said...

Why would you spend much time looking into these seemingly possible short positions when your upside can bet what, 100% at the very best?

All the while there are absolute heaps of companies who's stock will end up as multiple baggers?

Why does this possibly remind of your time wasted shorting FSLR?

Anonymous said...

>>Why would you spend much time looking into these seemingly possible short positions when your upside can bet what, 100% at the very best?

You can do better than 100% with puts, not that there is anything wrong with 100%

John Hempton said...

Why put so much into these?

We have 50 of these on - globally diversified. We have a LOT of shorts - for not much money each.

They have been profitable.

We can make more than 100 percent - we trade them - we buy options etc. But hey - why bother>

Fundamentally because they are fun.

Short scumbags for fun and profit.

Don't forget the fun!

Anonymous said...

Talk about risk.... Well over 80% of options expire worthless. Even if one counts their chickens before they hatch.

And, It would seem your clients, (especially your potential in pulling in future clients, the lifeblood of each and every LP fund), would be less interested in this "fun" you speak of.

John Hempton said...

I know most options expire worthless. Don't think this is a large position - it hardly matters. I have about 50 shorts - all of them look like this.

Most of them are flat shorts. I assure you shorting is a very profitable business.


Anonymous said...


We know you are not from The States. So, your quote about "The Fun"? If you only knew how you look with what you just said.

Search Youtube, "Chad Ridgeway The Fun".

-Chad Ridgeway.

Anonymous said...

For what it's worth, I spent a fair amount of time working with a large animal feed manufacturer, located in the US.

With approx 70 operating feedmills, 19 of them produced 100+ metric tonnes per year. The largest produced nearly 300 metric tonnes.

Can't comment on the capital invested in each plant - but they are all quite old and the current value of those assets is probably very little.

Staffing would vary, but a 100tpa plant would probably have a staff less than 30, including all the clerical, book-keeping, order-takers, etc..

Best of all, these plants would produce 25-50 different SKUs on any given week, with orders being taken for manufacture and delivery the NEXT day.

Nothing superhuman about it. When you deal with BULK materials, you get large numbers.

Anonymous said...

John, you state that you have 50 shorts, globally diversified. Would you like to share a few of the other shorts?

Anonymous said...

Perhaps they need to rent a few gweilos?

Sullivan said...

Hi John,

I think looking at pictures are far from getting solid evidences.

My point is that since Carlyle and Ernst and Young are very unlikely to be idiots, and CAGC could not be a simple scam as you and LM described.

What I am worrying about is that their products are overpriced now. Since the raw materials are very cheap and widely available (humic acids from peat and weathered coal, and micro-element mixture could be purchased from market with quite low price), and their technologies are untested and full of phony terms (I got a Ph.D. in chem, but their technologies are clearly jokes if you ever learnt chemistry in college or even high school). YONG, CGA and CAGC seem to rely heavily on marketing and sell their products like snake oil. If you read Chinese, you will find their Chinese website filled with big marketing terms like a new generation of farming technology etc.. If in US, they will surely be sued for misleading advertisement.

Anonymous said...

The pictures demonstrate that the plant is so inefficient it's a miracle they get any product out the door.

Someone probably spent a few grand to stage those pictures. It's definitely not the type of operation the management portrays it to be.

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The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.