Investing Performance for 2014 - ALN, GPRC, SKBI, BH

The year 2014 will be remembered as the let-down year for my performance. It was the type of year where I was patiently sitting and waiting for the intrinsic value of the undervalued companies in my portfolio that have attractive growth characteristics to be realized by other investors. It did not happen but this is only a test of my patience.

At the time of this writing as well as at the end of the year American Lorain Corporation represented slightly over 50% of the whole portfolio. Just to recap, here is an excerpt from last year's letter on why I am so heavily invested in Chinese Reverse Merger companies.

At the end of 2010, an accounting scandal of incredible proportions was affecting the sphere of Chinese reverse merger companies. Investors were relentlessly dumping their share holdings on the market and all companies related to china saw their share prices prices fall over 70%. 

ALN is one of the falling knifes I was able to catch right. Let's hope I did it before it hit the ground. At the time of writing this article on 23/02/2015 after market close, the company's stock has already returned over 32% year to date. I am convinced that more impressive gain s still remain to be harvested over the next two years.

There are also a few blunders to mention. Guanwei Recycling Corp. is one of the reverse mergers that burned me for the year. If it was not for that company, my performance for the year would have hovered around 0% for the year. This would have been acceptable considering that ALN, my main position, is still consolidating.

Biglari Holdings Inc, formerly know as (Steak n Shake) is the new addition for the year. A small position was opened just to follow and understand what the company's Chairman, CEO and biggest shareholder, Sardar Biglari is trying to build over time.

Here are my positions for the year:

Long:

Skystar Bio-Pharmaceutical Company
American Lorain Corporation
Guanwei Recycling Corp.
Biglari Holdings Inc

Taking those positions into account, my performance in 2014 was a disappointing -16.2%, and the S&P/TSX did 7.4%, so it makes it that I under-performed it by 23.6%. This is very in line with that I should expect with my level of experience in that market. Last years performance was likely due to chance and it is very improbable that I will be able to replicate it in the future.

Previous Years Performance:
2013
2010
2008

Investing Performance for 2013

2013 can be described as the year of the comeback after two very lean and very poor years, it is mostly due to the high concentration of almost 30% of my holdings in one specific company. It is also a year when I decided to get back to the basics, finding undervalued companies that have attractive growth characteristics.

As I look back at the year, the broad rally experienced by stocks in 2013 is fundamentally attributable to the quantitative easing measures by the Federal Reserve in the US and a slight improvement of the global economic environment.

My biggest position was certainly Skystar Bio-Pharmaceutical Company. At the end of 2010, an accounting scandal of incredible proportions was affecting the sphere of chinese reverse merger companies. Investors were relentlessly dumping their share holdings on the market and all companies related to china saw their share prices prices fall over 70%. I was lucky enough to have found this falling knife right before it hit the ground. Nothing much happened until the end of August when the stock started posting incredible gains. I decided that taking some profits off the able was warranted and sold 75% of my position on October 10th 2013 after the stock had gained over 200% for the year. This proved to be a wise decision because prices came back down to more reasonable levels.

There are also a few blunders to mention. As the price of gold was rising and mounting fears of inflation, I decided to take a long position in shares of Osisko Mining Corp, this proved to be a poor decision because gold prices have only kept coming down since then. Even the recent opportunistic bid by Goldcorp does nothing to get the price back up to my original entry price.

Here are my positions for the year:

Long:

Skystar Bio-Pharmaceutical Company
American Lorain Corporation
Guanwei Recycling Corp.
Osisko Mining Corp.
MTY Food Group Inc.
China New Borun Corp.

Winalta Inc.

Taking those positions into account, my performance in 2013 was an incredible 114.4%, and the S&P/TSX did 9.6%, so it makes it that I over-performed it by 104.8%. This is very encouraging but I remain cautious, this performance might be due a great deal to chance and it is very improbable that I will be able to replicate it in the future. The downside is that even if I showcased a better performance than this index, it will get harder in the coming year to find such attractive opportunities and repeat a relative performance of this magnitude.

SKBI Is Inching Closer to Fair Value

As expected, the market is slowly starting to recognize the true value of SKBI. The details of the calculation of the true value of the company can be found in this previous article:

What has happened over the past couple of weeks had been a gradual adjustment of the P/E ratio of the company by investors to bring it more in line with the rest of the industry.

From now on the real treats will start after every quarterly release. After each of them, the company will announce that more of their factories are operational. 

The biggest kicker will happen when the vaccines factory start producing as well.

 As seen in their previous earning releases  vaccines have the highest operating margin among all the products manufactured by the company.

Since I published my analysis on the company, the stock went down. It has recently come back with a vengeance and is up over 100% since the April 2012 recommendation. As you can see in the table below, the stock still has a lot of room for growth in the future.

Feel free to let me know what you think about SKBI.

Disclosure: The author has a long position in SKBI.

Skystar Bio-Pharmaceutical Company (SKBI), the Hidden Chinese Pharmaceutical

Not too long ago, roughly at the end of 2011, there was a breakout of a huge controversy surrounding dozens of chinese companies that accessed the US capital markets with reverse mergers, effectively getting an IPO through the backdoor. These companies we being critisized for misrepresenting their financial information, some cases falling into the downright fraud category.

According to the company's website, Skystar Bio-pharmaceutical Company ("Skystar") is one of China's leading manufacturers and distributors of vaccines and medicines for poultry, livestock and domestic pets. Skystar has over 173 products in its current product line and has over 50 more products in development. Skystar employs over 200 people in Production Facilities located in Hu Xian, Xi'an City, Shaanxi, Province, PRC.

Skystar has opened its GMP Certified Facility that increased production capabilities by 200%. The demand for veterinary medicines and vaccines in China far exceeds the supply and Skystar's plan is to capitalize on its new GMP Certified Facility to increase margins while increasing production to help meet the growing and overwhelming demand for its products.

Skystar has an experienced management team, a solid and diverse customer base, proven products, key R & D relationships to develop new products that are in high demand.

Skystar was incorporated on July 3, 1997 in the PRC as a limited liability company without shares. On December 31, 2003, Skystar was restructured from a limited liability company without shares to a joint stock company limited by shares. Skystar is a high-tech enterprise, which has grown to become one of China's leading manufacturers and distributors of bio-pharmaceutical and veterinary products. Skystar Bio-Pharmaceutical (Cayman) Holdings Co., Ltd. was incorporated under the laws of the Cayman Islands on January 24, 2005. The Company is engaged in the research, development, production, marketing and sale of bio-pharmaceutical and veterinary products. All current operations of the Company are in the People's Republic of China ("China" or the "PRC"). Skystar does not conduct any substantive operations of its own and conducts its primary business operations through its variable interest entity ("VIE"), Xian Tianxing Bio-Pharmaceutical Co., Ltd. ("Xian Tianxin"). In 2005, Skystar executed a Share Exchange Agreement with the Cyber Group Network Corporation ("CGPN"), which is listed on the NASDAQ, and then Skystar was restructured into Skystar Bio-pharmaceutical Company ("Skystar" or the "Company") (Nasdaq: SKBI)
Time will tell if the company has really cooked it's books, but in the meantime, I adhere to a contrarian camp who thinks that Skystar has room for tremendous growth. Assuming a the current P/E ratio of 1.5, the current price assumes a decrease of Skystar's earnings of 1.02% annually over the next 5 years, giving us a 2017 price of 2.70$!! However, we know that the chinese firm has been growing earnings at about 38% a year over the past 6 years. Let's make another assumption and let's say that the highly puts some breaks on the growth of Skystar's earnings and that the company is only able to grow EPS at 10% per annum. We find ourselves with a 2017 price of 5.07$ per share.

For the long term investor who is knowledgeable of the pharmaceutical industry in regards to farm animals, this must be a great entry price, from a fundamental sandpoint, into a company that is operating in an growing industry as china industrializes further. With my limited knowledge of this particular industry, I used four different measurements and I came to the conclusion that the current price of Skystar's stock is overly pessimistic. The P/E method, which would be set at 7, gave me a 31.36$ price tag on shares of SKBI.

From another point of view, Skystar has managed to grow it's book value per share over the past 6 years at an incredible 70% per year. Assuming they can manage to keep that pace, we end up with a book value of nearly 23$ per share in 2017. At the current depressed Price/Book ratio of 1.6, we end up with a price per share of 38$.

We can also look at free cash flow per share, which I calculated to have grown about 7% per year over the same period, even if it has been swigging wildly as it can be seen on the above chart. Keeping Skystar's stock for 5 years and using a 10% discount rate, I ended up with a present value of 23.40$ per share for SKBI. Free cash flow per share would end up being about 2.40$ per share in 2017, If we use a reasonable Price/Free cash flow ratio of 7, justified by the fact that the market will gradually realize the value of chinese companies, we end up with a 2017 price per share of 31.36$ per share.

Assuming that my assumptions are not too flawed, it seems to me therefore that the market is being overly bearish on the long term prospects of Skystar. Investors with a long term view will be rewarded with above average returns by holding their positions in the company.

Disclosure: The author has a long position in SKBI.