Asian Citrus Holdings (ACHL)

Most of the progress so far has been made on the original Hepu orange plantation which has 1.2m trees. The Xinfeng plantation, which has 1.6m trees, has only started producing in commercial quantities this year. Most of the 121,000 tonnes of oranges produced in 2006-07, a 9 per cent increase on the year, came from Hepu. A further 2.4m trees are planned for a plantation in Hunan but won’t produce commercial quantities for some time. There is cash in the balance sheet to finance this.

By year four, orange trees produce 8-10kg of fruit and this rises until by year 10 a tree produces more like 120kg of fruit. From then on the crop yield tends to decline. Most of the Asian Citrus trees are still some way from peak production and its reported profits include gains on biological assets, derived from the revaluation of trees as they mature.

Of course, the weather can always affect a crop, but the Asian Citrus plantations are in areas where the temperature is unlikely to reach freezing - but there are large variations in temperature between day and night which oranges need in order to ripen.

Asian Citrus is the largest orange producer in China, yet it has a tiny share of the overall market. The competition is fragmented and mainly consists of small farmers. The second-largest Chinese orange supplier is one-tenth of the size of Asian Citrus, and it buys up oranges from farmers and sells them on.

Chinese consumption of oranges has risen from just over 4m tonnes in 2003 to nearly 4.7m tonnes in 2006. It is difficult to get freshly squeezed orange juice in China, so Asian Citrus plans to begin its own juicing in the first half of 2008.

Orange production has fallen in the main growing countries of the world. Brazilian farmers are cutting down orange trees and replanting their fields with sugar cane that can be used to make ethanol. And US production has been hit by the hurricanes and poor weather in Florida and crop disease.

All this is pushing up the orange price globally although Asian Citrus doesn’t necessarily get the world market price for its oranges as most of its production is sold domestically. Even so, prices are rising and this is supplemented by more sales to supermarkets which accounted for nearly one-third of sales last year. It recently gained its first supermarket contract outside of Guangxi province. There are plans to sell oranges using the company’s AAA brand.

Asian Citrus has plans for a secondary listing in Hong Kong later next year as it believes there are Asian investors who would take an interest in the shares if they were traded on a local market. Asian Citrus is also keen that there should be more local analyst coverage. Three UK analysts cover the company, but it believes that a Hong Kong listing will encourage Asian brokers to initiate coverage.

Former house broker Evolution China was a seller of the shares for much of 2007, but became a buyer just prior to October's full-year results. Even stripping out the gains on biological assets, this year’s profit is forecast to be £23.6m, valuing the company at 12 times 2007-08 earnings, falling to nine next year. A 4.4p a share dividend was paid for 2006-07 and this could rise to 6p a share in 2007-08.

Continued growth plus the benefits of the potential Hong Kong listing mean that Asian Citrus shares should ripen in 2008. Buy.

Bull Points

Growth in demand for oranges in China

Output growing as orange trees mature

Supply of oranges from US and Brazil is falling

Bear Points

Crops are dependent on weather conditions

Reported profits include book gains on biological assets

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