The cheapest Chinese winery stock in the world! China Ouhua Winery RM$0.815

Question. Have you ever drank red wine from China? I have. What did I think of it? It was definitely no Bordeaux but it was decent. I love their names though. We have Great Wall, Dynasty etc. Wines named with the grandest of names. You have to hand it to the Chinese when it comes to naming things. Its either too cheesy or it is as grand as royalty. Why did I ask this question? I know last year one of my key calls was Trump Dragon, a Baijiu distiller listed in Singapore. That stock has done well for me and here I am once again calling for another alcohol stock. This time, I am going with a different drink, one that has a significantly larger international audience.

I know some of you must be thinking that I am a big alcohol lover. I do admit, I used to indulge in reckless drinking during my days in university but now I am a reformed alcoholic. No alcoholic anonymous groups for me but I used to border on a possibility of becoming a member. Now, I just like to invest in them. Why? A few reasons. Alcohol is one of the few legal drugs, where open consumption is allowed. The other is coffee. If you consider gambling in a more tangible sense, it can also be considered as a drug. In short, as long as there is the possibility of addiction involved, it is a fantastic business.

The stock I want to introduce to all of you is China Ouhua Winery. It has only recently listed in Malaysia and some of you may wonder why a Chinese winery would choose to list in our favourite neighbour's stock market. The reason given was that the listing proceedings in China takes to long and the company is looking to gain financing quickly for their expansion plans. The company's growth is slowing down due to its capacity limits and that is why it is looking to expand its production capacities to cope with the fast growing market.

Fun fact: China's consumption of wine will reach 1 billion bottles by 2012, but that would mean they would still only be 7th largest wine consumer in the world. France being the largest. Now that explains why the French are always so drunk all the time.

China Ouhua Winery's business involves:

* Production and distribution of Fazenda Ohua Wines produced from locally sourced wine materials and grapes including grapes from their very own vineyards

* Production and distribution of International Wines which are sourced from various wine-growing regions outside the PRC such as France, Australia, Spain, Chile and Germany through local PRC wine material traders

* Development of Fazenda Ohua Wines and International Wines and the marketing of these wines throughout PRC

* Research & Development for new and diverse offerings of wine

* Product design, product packaging and branding

They are one of the producers and distributors of quality grape wines in the PRC, with a portfolio that includes well-recognised proprietary wine labels distributed with approximately 3,100 point-of-sales across the PRC. Their business operations span across the entire value chain of the wine industry, from the cultivation of vineyards and production of wines to the strategic management of distribution networks for our wine labels, adding value at each stage of the value chain. The Group sold approximately 7,700 tonnes of wines throughout the PRC in 2009.

They produce red and white wines which they distribute for sale under their flagship Fazenda Ohua Wine labels. They distribute red and white wines produced from wine of French, Australian, Spanish, Chilean and German origins under their International Wine labels. As at September 2010, the company offers approximately 87 and 60 varieties of wine under their local Fazenda Ohua Wine labels and International Wine labels respectively.

Ouhua's wines are primarily distributed for sale within the PRC through appointed master distributors, who in turn distribute these wines to end consumers via an extensive retail network of Fazenda Ohua specialty stores, which are managed by experienced and knowledgeable service staff trained by our in-house winemaker. Other distribution channels include direct sales to retail intermediaries such as hypermarkets, retail outlets and third party specialty stores that sell alcohol as well as food & beverage establishments such as restaurants, hotels and entertainment outlets.

As at September 2010, their distribution network encompasses 13 appointed master distributors, 113 Fazenda Ohua specialty stores (including nine (9) Ohua Château type stores and 104 Ohua Manor type stores that are operated and owned by these appointed master distributors and sub-distributors) and their wines are, retailed at approximately 3,100 point-of-sales spanning no less than 13 provinces and cities throughout the PRC.

Ouhua's wine estate comprising of winery and vineyards is situated in Yantai City, Shandong Province. Yantai is a coastal city located in the province of Shandong, where it enjoys a moderate winter and summer. It is at the same latitude as major vine cultivation regions in France and Italy and is reputed to be the best place in PRC to grow vines due to its plentiful rain and abundant sunshine, earning the city the moniker of "Oriental Bordeaux". The industrialised production of grape wine in Yantai has been established for more than 100 years and today, Yantai is known as the wine hub of the PRC.

As at September 2010, their winery has a production capacity of approximately 12,480 tonnes of wine per annum, and their own two (2) vineyards in the Yantai-Penglai locality span across cultivation areas of approximately 5,500 Mu (equivalent to approximately 3.67 million sq m) in aggregate.

Why do I like it. Valuation wise, I have been searching for a cheaper China winery stock in the world. Dynasty wines, Anhui Golden Seed Winery and China Foods are the few I could find on Bloomberg and guess what is the average P/E for them? 40 times! What do you think is Ouhua's? 7.8 times! Is that cheap or what? Yes yes, we need to place a discount to the Malaysian market compared to that of the HK and China markets. But does that mean we should trade at a 80% discount? Hell no! In their prospectus, the company also stated their 1H2010 results and at the rate they were growing, it is only trading at 5 times 2010 earnings. Now I was astonished by the valuation and I figured it has a lot to do with the small size of the company and also the fact that it is listed in Malaysia did not help. Nonetheless, most importantly, the company is very cheap and dealing in an industry that is growing exponentially.

The company has stated that they currently have 2-3% share of the Chinese wine market. Lets be realistic, growth wise the company will not be able to compete with the big boys unless they spend more on their branding and also their capacity. I will be happy if they maintain their market share because this is a market that is growing extremely quickly thus the company's business will be pegged to the growth the market. That alone we are talking about almost 20% per year. Personally, I think the stock has very little downside from this point and it is a good opportunity to take a stake in it now while it is consolidating at this price. This is my number one call right now and I need to apologise for not writing on this earlier, but I really have been too busy.

Take a closer look at this stock cos it will be worth it.

Best,

SVI