Rally On, Traders!

You might have heard about China Xiangtai Food Co Ltd. (NASDAQ:PLIN) . . . the little pork company stepping up to help over 1 BILLION Chinese get the pig products they covet. They've just kicked the game up a big notch.

But first I need to be clear. It's okay if you abstain from everything coming out of the China market, but remember: you could be turning down some of the investment opportunities of a lifetime.

Consumer staples stocks have done really well over the world. These are companies that make and sell things like food, soap, aspirin and precious toilet paper. 

Many of these "back to basics" stocks have gone from dullsville to dynamic . . . you know the market is paying attention when supermarket shares soar 50% in a year just for staying open and keeping the cash register ringing.

In China, these stocks are up 33% YTD. That's huge. It's like there was never even a pandemic in the first place. And if you turn your nose up, you miss out!

PLIN has definitely kept the cash flowing. They're a meat packing company specialized in turning hogs into sweet pork products. A LOT of pork products. Last year alone they processed 3,000 tons (6 million pounds) of meat, 4 tons of pepper flakes, 2 tons of spice, 2 tons of salt. 

They just signed a deal to take over another 2,500 square meter (easily 22,000 square feet) hog farm. Industry experts say that's enough space for another 2,500 pigs (optimal spacing), about 2 herds a year, 270 pounds per finished animal.

This deal just added 1.35 million pounds of pork to PLIN's capacity. Multiply by a 5-year lease and even if the meat is frozen and not fresh it's worth $5.19 per kg ($11.45 per pound) . . . $77 million revenue bump here at current prices.

Not bad, right? Even right now, all that pork (and chicken and beef and lamb and duck and rabbit) adds up to $100 million in annual revenue. Big bacon!

It's a volume business but 6 million pounds of meat still generates $4 million a year in profit, $0.21 earnings per share. Down here with PLIN trading around $1.50, that's a trailing multiple of around 7X earnings.

And in a world where the S&P 500 commands a valuation closer to 22X FORWARD earnings (speculative, who knows where the numbers will actually go?) it's clear that little PLIN is trading at a deep multiple discount compared to the market as a whole as well as the usual suspects . . . mighty Apple trades at 30X, Microsoft at 35X, Amazon at 140X. Tesla? Don't even ask.

The point is that PLIN is profitable and if you're a classical investor type just looking for profit at the right price, you can get it here for a lot less than the market as a whole. No wonder the analysts over here did the math and they say this stock is currently trading at a fraction of what it's really worth. I can't even bring myself to type their target here. It's that high.

Let's just say that if PLIN is worth even HALF of what those guys estimate and moves like they think it will move, it should trade closer to 13X earnings, from a mere 7X today.

So why the "deep discount?" Part of it is the way the butcher stocks have been a bumpy ride as the quarantine ripped through the meat markets, causing outages and shortages in some areas and confusion everywhere.

Smithfield had trouble in South Dakota and almost closed its biggest slaughterhouse. Tyson is fighting in North Carolina, Oklahoma and all over the map. Hormel? Minnesota , Kansas . On and on.

The companies are running the processing lines as fast as they can to keep America fed. The stocks have dragged on the cost of new safety precautions and the challenges that come with opening and closing plants. Wall Street sees the headlines about disruption and swerves. You've probably noticed they're jumpy on Wall Street these days.



So it's no shock that meat stocks still show the marks of the outbreak when so many others have already shaken off the spring slump and gotten back to work. But you know the market pendulum swings both ways, so when the "discounts" get too big, money naturally flows toward the low multiples. Everyone on Wall Street can screen for these slowpokes. And when we see the pendulum swing, it's hard to resist the temptation to crowd in before we get left behind.

What I'm saying is that Tyson currently looks a little unloved, trading below 14X forward earnings, not even 0.5X revenue. Hormel has kept its friends and fans at a steep 29X earnings and 2.7X revenue. Yeah, the spam company and Apple are valued roughly the same right now, dollar per dollar of profit. It's a crazy year.

But little PLIN trades at just 7X earnings and 0.3X revenue. Weigh it by pound of meat and the valuation gap is probably even more severe. If you want exposure to the meat market at the lowest possible price, this is probably the place.

After all, the joy of meat is that the global economy marches on its stomach. Even in an apocalypse scenario, meat will be precious . . . the whole point of holding gold, for example, is so you have something to trade for food in a crisis.

And in the more likely event that the wheels keep turning, people still need to eat even if it means forgoing a new phone, selling the car, whatever it takes. This business is truly essential. It's as recession-resistant as it gets.



Now why is PLIN cheaper than bigger butcher stocks? I'll be honest, it's obscure and fairly new (established 2018), so a lot of investors don't know what makes it tick yet. And it operates in China. If that scares you, that's okay. Just remember, this is not your typical "China stock." 

For one thing, the headquarters are in the Cayman Islands, out from under the Chinese government's thumb. The auditor is an old-school established New York City firm. There's a New Jersey accountant on the board . . . she went to business school here.

And we don't need to worry about "government-linked enterprise" as long as the CEO controls 60% of the stock and doesn't plan for that to change. Basically we're getting the chance to invest alongside her. If you like what she's doing, she'll let you share the ride.

After all, 1.4 billion Chinese need to eat. Every day. They love pork. It's so essential to their diet that they're talking to IBM about protecting the supply chain with blockchain. When pork prices climb, Beijing gets nervous. And after the trade war cut off U.S. agricultural supplies, swine flu decimated the herd and pork prices doubled. Beijing got nervous. We got that trade deal.

Can they get all the pork they need with U.S. packing plants reeling in the pandemic's wake? Heck no. They still need local pig farms to pick up the slack. So PLIN took a look around and started a joint venture to raise its own stock. Vertical integration, farm to table . . . a recipe for growth and margin expansion. 

For that matter, PLIN is buying into a lot of pig farms. They rented a 2,500 square meter facility recently just to help fill their own supply gap . . . figure one pig per six feet, about two pigs per slot per year. Not a "big pig" operation but it's just one data point in making sure the supply chain is as strong as it gets. The CEO says it's business as usual over there, by the way. Operations are back to normal.

But it isn't all pigs. Once you're in the shopping cart and have the farm relationships, you can reach toward other areas of the kitchen. PLIN just signed an $8.5 million contract to sell 10,000 tons of soybean oil in the next four months. To do that, it made sense to buy a soybean company, which they did back in April. 

That soybean company had a run rate of $70 million last year. Bolting it onto PLIN instantly generates 70% revenue growth. You read that right. This time next year, the top line on this "little" company might be almost TWICE as high.

What does that do to the valuation math? And pigs eat soy oil as part of their feed. Bring that cost center in house and what does THAT do to the margins?

Look at that analyst report again. They say "we would not be surprised to see PLIN emerge as the Hormel Foods of China in the coming years." You know what Hormel is worth on the market today. If PLIN has that kind of potential, these shares are going to turn a lot of heads.

For that matter, if I was a Big Pig executive, I'd be looking for ways to bolt PLIN onto my operation and open up the Chinese retail market. When Smithfield went private, it went for $4.7 BILLION . . . 27X earnings. Down here at 7X earnings, there's a lot of room for those M&A wheels to turn.

Bottom Line: China eats half of all pork on the planet. This business is as defensive as it gets, truly essential. What else can I say? Oh yeah, this "boring" business is actually looking at blockbuster growth as acquisitions come online. Today might be the first time you hear about PLIN, but there's no better time to get it on your screen.

After all, they just found a way to deliver another million pounds of pork product a year. That's a big belly play!

Happy, Happy, Happy Trading!