SkyPeople emerging as sweet target in fresh fruit juice in China - November 26, 2009

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Established in 2001, SkyPeople has evolved from being a fruit juice concentrate player, to developing a fast -growing 'exotic' fresh juice beverages portfolio in China. Given its central location, innovation culture and access to vital raw materials, we believe it's an excellent acquisition candidate for big groups looking to acquire a 'new frontier' drinkable fruit producer in China.

An integrated fruit products producer ...SkyPeople is heavily vertically integrated, from kiwi plantations to RTD branded fresh juice products. Although the latter only makes up 20% of overall turnover, its growth rate is staggering, and the company has a strong R&D focus.

... with a strong raw material asset ...These factors, together with SkyPeople's central location, in one of the biggest fruit -growing regions in China (Shaanxi province), puts it on the radar screen as a health -related drinkable fresh fruit producer going forward.

The company is located in a region which producers 70% of China's kiwi crop, and, in that region, it owns the largest single plantation.

It's a question of human ingenuity before kiwi joins the growing list of 'super-fruits', with enhanced health properties. For that reason alone SkyPeople is an attractive acquisition candidate.

... its commodity side could attract a global buyerPredictably, given the early development stage of its domestic market, it's mostly an exporter of fruit concentrates (50% of which pear, 25% apple). It also makes frozen and freeze dried fruit and vegetables.

However, given the innovation trend and growing global demand for these commodities, and China's leading position in volume terms, SkyPeople could attract a major buyer for this side of its business (such as Cargill, one of its major customers).

The company's now developing a retail product portfolio ...More interesting, from a branded point of view, is the company's recently developed portfolio of single -serve fresh juices, in glass and PET bottles, that so far covers kiwi, mulberry, guava, peach, strawberry, grape, orange and wolfberry varieties, marketed under the 'Hedetang' brand. A big story can be built around such an exotic range.

... with huge distribution upside potential ...An issue for the company is distribution. Most of its fruit juice and beverage sales are its its local province, Shaanxi. However, given the central location of this province, the company's ambitious plans to develop new and more distant sales channels, and future breakthroughs in technology to extend the shelf -life of fresh juice, sales in that segment should continue to grow very strongly.

... and potentially an 'organic' storyAnother factor which could augment this growth story is the company's stated aim to be 100% organic in five years' time. However, whether the Chinese consumer would pay the additional premium, that this mission entails, is a debatable point.

Growth has taken off in Q3 2009 ...Turning to financials, SkyPeople is still a small business, with 2008 sales of just over US$ 40 mln. However, its growth rate is strong (see chart), and appears to have really taken off in Q3 2009.

In that period, its revenue grew by over 65%; its CEO attributed this to accelerated demand for fresh kiwi fruit, fruit beverages and fruit vinegar beverages in its domestic market, catered to by the creation of a new Vegetable and Fresh Fruit Division in that period by the company.

... coupled by consistently high profitability ...At the same time profitability, with an EBITDA margin of nearly 20%, appears very high for what is still mostly a commodity business (see chart). The company also seems to have succeeded in keeping profitability at a high level, at least since 2007, by offsetting changes in commodity prices with strict fixed cost control, as well as moving downstream into retail products.

... and access to capital for further expansionOn top of that, SkyPeople is well capitalised and quite transparent, thanks to its listing on the NYSE Amex exchange recently. With its net cash position, the company is well placed to continue to invest, and make acquisitions, going forward.