Monday, April 18, 2011

China New Borun Corp (NYSE: BORN) Q2 2011 Price Target

Recent price: 9.51$
P/E Ratio: 5.51
3 Months Target Price: 14.50$

Company Description
According to data obtained from Reuters, China New Borun Corporation, incorporated on July 15, 2008, is a producer and distributor of corn-based edible alcohol in the People's Republic of China based on tons of edible alcohol produced. The Company’s edible alcohol products are primarily sold as an ingredient to producers of baijiu, who further blend the Company’s products into finished products sold under various brand names throughout China. Baijiu is a grain-based alcoholic beverage made from corn, wheat or barley, clear in color, with alcohol content ranging from 18% to 68%. Baijiu is sold throughout China in retail stores, bars, banquet halls, restaurants and other locations, where alcoholic beverages are consumed.

During the production of edible alcohol, the Company also produces DDGS Feed and corn germ as by-products, which are sold separately from its edible alcohol. It is also constructing facilities to manufacture liquid carbon dioxide from waste carbon dioxide emitted during the production process, in order to create an additional stream of revenue. The Company owns and operates two facilities: one in Shouguang, Shandong Province and the other in Daqing, Heilongjiang Province. Its Shouguang facility has an annual production capacity of 160,000 tons of corn-based edible alcohol (90,000 tons of Grade B edible alcohol and 70,000 tons of Grade C edible alcohol). Its Daqing facility has an annual production capacity of 100,000 tons of corn-based edible alcohol (70,000 tons of Grade B edible alcohol and 30,000 tons Grade C edible alcohol). The Company is also constructing an additional 120,000 tons of capacity (all Grade B edible alcohol) at its Daqing facility.

Confidence Margins
Strong resistance $20.50 (+116%)
Light resistance $14.75 (+55%)
Light support $7.59 (-20%)
Strong support $6.65 (-30%)

Fourth Quarter results and revenue guidance for the coming year provided by the company came short of what analysts were expecting. This sent the stock on a slow path down. The company is still comfortably profitable and offers great value at current prices.

Entry strategy
For the cautious investor:
Buy the stock for 10$ or less.

For the risk-taking trader:
The September 2011 10$ out-of-the-money call option contract seems to be the right position to take, they can be acquired for about 190$ per contract.

Exit Strategy
For the cautious investor:
Sell when the stock reaches 14.50$, or keep it until 20$ if you are more bullish in your own analysis. It is highly recommended to keep the position on check if it goes sour as there is a lot of uncertainty with Chinese based companies.

For the risk-taking trader:
The contracts should be kept until the underlying reaches around 14.50$. This should provide a satisfactory return if the underlying reaches the target price as the contracts will get in the money.

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