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CONCLUSION
Migao’s Q3 fiscal 2011 revenues missed consensus expectations, but the short-fall was largely due to a lower temporary
natural gas shortage at the Sichuan facility which actually shut down production for a period. The revenue
shortfall was offset to a large degree by stronger product pricing and margins. In fact, Migao’s gross profit margin
was 25.6% of revenue for the third quarter, exceeding the company’s targeted 22-24% range. Gross margin for
the first nine months of fiscal 2011 also exceeded expectations at 25.3%. The improved gross margin is a result
of favourably priced purchases of the raw material potassium chloride, combined with increased selling prices
of finished goods. EBITDA for the third quarter of fiscal 2011 increased to $11.9 million, or 18.5%, of revenues
versus $11.6 million, or 17.3%, of revenues for the same period last year.
After working through around 15 months of stagnant production, growth appears to be back on the horizon for
Migao and earnings estimates are once again on the rise. The market is expecting global potash prices to continue
to strengthen over the course of 2011. With potash being Migao’s primary input cost (raw material) one might
expect pressure on margins moving forward; however, we do not see that scenario playing out as Migao has been
able to historically generate stable gross margins (in the 22-24% range in up and down pricing environments) on
sales of potash-based fertilizer products by passing on higher input costs via higher selling prices. If we apply a
relatively stable gross margin to rising prices of its primary products, it should translate to ongoing increases to
gross profit. Factor in Migao’s rising production profile, the case for earnings growth becomes more compelling.
Additionally, the company’s solid financial position and access to capital should allow the company to expand
beyond its current plans, if the right opportunities present themselves.
Management recently stated that the improvements to pricing and demand throughout the fertilizer industry
over the past couple of months will positively influence the current quarter (Q4 2011) as prices for the period
ended December 31, 2010, did not reflect these price increases due to prior sales commitments. The company
expects increased sales volume in Q4 2011, including production from the new joint venture with SQM as well
as the likelihood of delivering product at the end of March from its new Shanghai facility. We expect this strength
to continue into 2011.
The long-term growth story remains the same as when we originally recommended Migao back in 2006. China’s
citizens continue to benefit from strong economic growth, the demand for improved crop yield, higher quality
food, and increased variety, which is fuelling the growth of the fertilizer market in China. The company’s specialty
fertilizers increase yield, enhance the quality of the crops they are applied to, and provide a higher return to
farmers, allowing Migao to continue experiencing high demand for its potash-based products in the PRC.
For fiscal 2011 (current year) the consensus estimate is now $0.69 per share and if we look out to fiscal 2012 (this
coming year), the estimate is now $0.92 per share (a figure we believe could be handsomely exceeded given the
right conditions). We expect Migao to earn $0.95 per share in fiscal 2012. As such, Migao trades at a reasonable
11.86 times this years’ expected EPS and an attractive 8.62 times next years’ expected earnings with a solid balance
sheet. Migao remains on our Focus BUY list and is attractive in the near term and long term in its current
range or below.