Making money from Cactus plants and China with China Kangtai Cactus (CKGT)

How's that for a ridiculous article title, then again, you're aren't reading Forbes.com -- you're reading the Stockmasters. Did ever occur to you that cactus plants could be beneficial for people and that there is a company cashing in on cacti uses ? Didn't think so, why would you? If you aren't in the cacti field or playing Survivorman on a daily basis (which happens to be a money show), you would have zero idea. Just so happens, the Chinese have a remarkable tradition in using herbs and extracts from plants that dates back 2,500 years and that tradition includes using cactus plants. Which bring us to...

China Kangtai Cactus Bio-Tech Inc. (Public, OTC:CKGT)

What a name I know, I think they could afford to add in one more word in the company name but five words and a hyphen really do the job. Let's get to the company: CKGT's products target all ages and sexes and they claim to heal patients who suffer from minor to chronic illnesses by improving their body functions and blood flow in general. How do they do it? By quenching patients thirst with beverages and nutrients all made from cactus plants. They do have a website, www.biocatcus.com and their shares are trading for just under $1. CKGT commercializes the juice from cacti to produce a wide array of nutritional and pharmaceutical products in an innovative way. Not to mention they sell Cactus Fruit Dry Red Wine and Double Flower Tea, sounds good huh? Just like putting your tongue on a cactus I bet, but I'm sure it doesn't hurt as bad.

Regardless of how silly this sounds, China Kangtai Cactus has been increasing both its revenues and earnings with one digit multiples. Specifically the earnings for 2007 will be at least $2.8 million which makes the P/E as low as 6 ($17 million / $2.8 million) at the current shares price of $1. They may overcome $3 million for 2007 since releasing 5 new products since July 07 which could lower the P/E I just mentioned. Getting down to cactus needle - their P/BV is only 1 ($ 17 million/ $16 million) so both these multiples offer a significant margin for further increase at the stock price. The current ratio is as high as 10 and the stockholders equity cover the liabilities more than 10 times. How many other other companies can you name that trade with such an explosive blend of multiples and trade for under $1 a share? There aren't many and the ones that do are trading higher than $1 but let's also consider it is an OTC stock.

None the less, let's review their fact sheet right off their website:

• Profitable, with 30% 2006 annual sales growth over 2005
• Leader with 60% market share of China’s edible cactus production
• Rapidly expanding distribution network
• Experienced management and pioneer in the business
• Vertically Integrated with multiple barriers to entry
• Active R&D with 15 approved patents & 15 pending
• Strong new product development pipeline, including lines of
personal care & animal feed products

The directors at China Kangtai Cactus Bio-Tech apparently have faith in their company since they own 70% of the outstanding shares (thus the free float is limited). Last quarter CKGT achieved an increase in net sales of almost 49% for the second quarter of 2007, as compared with the same quarter last year, i.e. from $2,496,104 in the 2nd quarter of 2006 to $3,715,314 in the 2nd quarter of 2007. At the same time, net income increased approximately 570%, from $(196,864) in the 2nd quarter of 2006 to $925,393 in the 2nd quarter of 2007. The negative net income for the 2nd quarter of 2006 was due to a one-time expense in the amount of $982,700 related to payment of stock based compensation in June 2006. Excluding this extraordinary one-time expense, net income before income taxes for the 2nd quarter of 2006 would have been $785,836, as compared to net income before income taxes of $1,117,794 for the second quarter of 2007. Therefore, excluding the extraordinary one-time expense incurred in the second quarter of 2006, pre-tax net income for the 2nd quarter of 2007 increased by $331,958, or approximately 42%, as compared to the pre-tax net income for the same period of 2006 proving cacti are sexy.

One of CKGT's major plans for 2008 is the commercialization of the cactus health cigarettes as a healthy alternative to conventional cigarettes. Will cactus cigarettes really catch on? Tough to say, but one thing is for sure, people will never quit smoking and the 'quit smoking' business is big money, which is why CKGT is jumping on the band wagon. Why not try to bank some coin off all the smokers, give them a new product that won't put them behind bars? Then again, some guys just can put down the bong, like our President -- pass it to Snoop when you're done Bushy.

One more thing I like about China Kangtai Cactus is there is no dilution through warrants and there are no major placements yet since the company is unknown to those fund managers who are hunters of hidden values in the small caps. So is CKGT an undiscovered gem or just another prickly stock to avoid? I think the stock is worth more than a buck and I'm betting Wall Street will think so as well in a few months.

Article written by: Steve Reeves
Article posted on: October 2nd, 2007

Disclaimer: The Author has a long position in CKGT that was established 2 weeks prior to this article publication.