Guangzhao IFB good time ahead...

I have been following the company since its IPO on and off. If you looked at the price chart, it would know this is a volatile stock. Volatile because the fundamental is shaky. Since its listing, it remains as a concept play. The company profit is good, but the cash flow is negative. That means, they are unable to bringing cash while the tree grows on ground. That was a time when auditor/analyst raise the question whether the company can still survive. However, they keep having bond/warrant issue which raises new cash to keep the company running. I think nobody likes the share dilution. But to keep the company up, maybe that's the only way.

We know the 2008 would be a watershed year. Because they would start logging and bring in the cash. Once the cash flow is positive, then the company's future would be brighter. Monday Kim Eng issue the following report, maintaining a buy on the company. However, don't buy too expensive, there might not be much upside left.

Propagating the `Green Revolution’
- Sprouting new branches with rich pickings
Commonly viewed as a fledgling poplar forestry company in the PRC, GIFB has been
quietly building up its biotechnological knowhow and its R&D efforts is starting to yield
significant results. The key success factor hinges on its ability to rapidly propagate its
plant tissue culture beyond the laboratory into mass production. Having achieved this
critical breakthrough, the company is now ready to commercialise its ornamental plant
seedlings, tropical fruit plantlets/seedlings and jatropha plantlets on a mass scale.

- Tropical fruit/orchid seedlings – strong overseas demand
Under a 5-year supply contract worth RMB16m, GIFB is cultivating 13.5m orchid
seedlings at its Shanghai facility (annual capacity: 12m) for export to Japan, Taiwan and
Europe. Through its new Malaysian JV, Jalur Lipur, the group will be delivering an initial
10m tissue-cultured tropical fruit plantlets to Malaysia’s Department of Agriculture over the
next 5 years. The first batch of 600k banana plantlets has been shipped in late Sep. Jalur
has a tissue-culture facility in KL and plans to set up a 50-ha nursery to produce 40m
plantlets annually. This, coupled with its ongoing research in disease resistant oil palm,
would pave the way for the group’s entry into the lucrative SEAsian agriculture market.

- Jatropha – powering the biofuel of the future
High crude oil prices and environmental concerns have spurred several biodiesel projects
in the Asia-Pacific region. Amid soaring prices of traditional feedstocks such as palm oil,
some producers are turning to jatropha curcas, an inedible hardy shrub that does not
compete with food crops for scarce arable land. Utilising tissue culture techniques, GIFB
has selected and developed 2 superior jatropha cultivas, which has attracted interest from
at least 2 Singapore-based firms. In collaboration with NTU’s IESE, it has signed an MoU
with APVC Holdings (which is constructing a 300k mta biodiesel plant in Ningpo, PRC) to
supply jatropha plantlets over the next 3-5 years with a total contract value of $100-120m.

- Poplar/Orient fir – nearing harvest time
To-date, the group has harvested 3.2k m3 of pine trees and has contracted a buyer to log
another 41k m3 of its Jiangxi forest in 2H07. Continued demand and shortage of timber
and pulp in PRC has pushed up wood prices ahead of large scale logging of its poplars
this winter. GIFB is awaiting licencing approval to harvest 30-40k mu of poplar plantations
(15-20% of planted area). Meanwhile, the group is exploring opportunities to reforest
marginal land tracts in Xinjiang and the Mid-East with its salt-tolerant poplars. It has also
received orders from the Chinese government for 400k sapling of Orient fir which could
act as an excellent wind barrier in typhoon and flood-prone coastal cities.

- First growth target price: $0.60 with room for possible re-rating
With the impending sale of its poplar/pine timber and quicker revenue streams from
seedlings, plantlets and saplings soon to kick in, GIFB is expected to turn cash flow
positive by end 07. Consequently, we are switching our valuation model from P/B to DCF
(WACC: 12%) and raising our TP to $0.60(previous: $0.33). Thiss does not include a few
possibilities of G2 poplar/jatropha plantations, which could lead to future re-rating of GIFB.