Too Chicken To Make This Investment?

| August 16, 2010

Longtime readers of the Dynamic Wealth Report have no doubt heard of my excitement for Yum! Brands (YUM).  I’ve written about the company a number of times.  They’re growing like a weed because of an intense focus on emerging markets… like China.

Here’s a quick refresher for you…

YUM owns a number of restaurant chains like Long John Silver’s, Pizza Hut, Taco Bell, A&W, and of course, KFC.  Not only are these restaurants popular here in the US, they’re also a hit in China.

China’s their number one market for expansion.

In 2009, the China Division contributed more than $469 million to operating profits… and that number’s growing.  So why all the excitement over a chain of fast food restaurants?

Keep in mind, China has a population of more than 1.3 billion people.

Many of these people are working their way up to a middle class lifestyle. Euromonitor estimated 80 million people comprised the Chinese middle class in early 2007.  It’s a fairly large group to say the least…

What’s jaw dropping is their projections.

They estimate by 2020, China’s middle class will number more than 700 million people!  That’s twice the number of people in the US!  Hundreds of millions of Chinese are reaching a middle class lifestyle… and it’s changing the Chinese way of life.

As people escape poverty, their lifestyles change.

No longer are they living hand-to-mouth.  They’re no longer struggling to survive.  Once you enter middle class, you find yourself in a unique situation.  You suddenly have disposable income!

With disposable income comes demand for new products.  Consumption patterns change.  When you’re poor, you spend most of your income on food… just trying to survive.  In the middle class, you spend a smaller percentage of your income on food… and you buy other things like a house, car, television, or computer.

But that’s not the only thing to change.

The diet of a middle class family changes as well.  When you move into the middle class, the consumption of rice and vegetables starts moving lower… middle class families start consuming more protein.

It’s a small change, but it has a huge impact on business.

We can see the change directly in YUM’s business.  Their most popular restaurant in China is KFC.  The amount of chicken they sell every day is astounding.  The demand for chicken in China is growing at around 9% per year!

But before a chicken reaches a KFC, or the pot in the family kitchen, it needs to come from somewhere.

That’s how I found Yuhe International (YUII).

The company sells day-old chickens.  Yuhe operates 28 breeder farms and two hatcheries with a total annual capacity of 1.2 million sets of breeders and 120 hatchers.

Now this is a business with legs (pun intended)!

The demand for dietary protein is only going to increase along with the growth of the Chinese middle class.  And while the middle class numbers will grow over a number of years, Yuhe is already seeing some impressive growth.

Just this morning the company posted their second quarter results… and they looked good to me.

Revenue is growing at 26.9%;

Profit margins improved to 33%;

And net income increased to $3.1 million.

The company’s sitting on over $19 million in cash.  And best of all, in just the last six months, they generated $6.2 million in operating cash flow. These are all great numbers!

But, what really caught my eye was management’s comment about the future.  They reaffirmed their 2010 guidance and estimated net income for the year would reach $17 million.

This is fantastic news.

From a valuation perspective, the company is mis-valued.  Assuming they generate $17 million in net income, their 2010 P/E ratio is 8.1x.  Keep in mind, the S&P 500 average is 15x… and YUM Brands has a P/E of 18x.

Clearly Yuhe has lots of room to run!

If you like investing in companies addressing huge and quickly growing markets… if you like companies with quickly growing revenue and earnings… if you like investing in mis-valued companies… then take a closer look at Yuhe.  It might be just right for you.

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Category: Foreign Markets

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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