THERE must be some investors out there very disappointed by the China Dairy Corporation (ASX code CDC). When the shares were finally launched on the ASX in April, the shares soared. In the first week they hit a peak of 50 cents, two-and- a-half times the issue price, with more than eight million shares changing hands in a day.
A fortnight later they were half that, and well on their way to a low of 15c in June.
Since then they have hung around 18c to 21c but nobody is terribly interested. Some days as few as 10,000 shares are traded.
Of course almost the whole dairy market has gone sour. And for most investors, CDC is a rather strange beast. It is a Hong Kong-registered company controlled by China Modern Agricultural Information Inc, which is listed in the US on the OTC market – the poor cousin to the New York Stock Exchange.
Its business model is unfamiliar to Australian dairy farmers, with the company paying 179 individual farmers in China to feed and breed most of its cattle and supply it with milk.
The company generates revenue on milk sold from cows it owns and from cows owned by farmers it is partnered with. Of the 33,000 cows owned by the company, approximately 23,800 are reared and milked by outsourced farmers.
The company’s partners purchase their cows directly. CDC arranges the sale of milk from these cows to its customers. In exchange, CDC receives 30pc of the milk sales revenue generated.
All its earnings are in China, so their value to Australian investors depends heavily on the Chinese government’s control of the exchange rate.
The accounts CDC released in May for the nine months to the end of March were presented in US dollars, with no cash flow.
But they did show a $US 20 million net income attributable to shareholders for the nine months, up from $US10m at the six-month stage. Moreover, the company has paid an interim dividend of $A0.57 a share (unfranked) based on that profit.
That’s a gross dividend yield of around three per cent, no more than you would get on a risk-free term deposit.
What still interests The Punter is the company’s declared intent to expand into the processing of liquid milk for children.
When you look at the money the likes of Bellamy’s (BAL) have made from selling infant formula to China, then maybe CDC is now cheap enough to be worth a speculative flutter.
The Punter has placed a cheeky bid for 10,000 CDC at 15.5c, three cents below the market at the time of writing.
• The Punter has no financial qualifications and no links to the financial services industry. He owns shares in a number of companies here.
