Wednesday, July 8, 2020

Imperial Ginseng

Ginseng is popular for consumption in Asia, but grows well in Ontario. Imperial Ginseng (IGP) is an Ontario grower and exporter of Ginseng that has hit a slew of what are hopefully temporary issues that have caused the stock to fall by about 80% over the last two years.

As a result, the company trades for less than 1/10th of its $21.6 million book value. As recently as 2017, the company generated almost $6 million of operating cash flow.

IGP is also a net-net, with cash and other current assets of $10 million, against total liabilities of $6.6 million. All the harvesting and processing equipment and millions of dollars worth of ginseng growing in the ground is thrown in for free.

Now to the causes of the destruction in the company's price. One major issue has been a decline in the price of ginseng itself. Like most commodities, it can fluctuate in price significantly from year to year. This is mostly a self-correcting mechanism over time, as higher prices result in more planting and higher supply, which leads to low prices and vice versa. But this particular commodity takes 3-5 years to grow from the time it's planted to its eventual processing and sale, so an over and under-supply situation may last a long time. But there is some discretion on the part of growers as to when they can harvest the root. For example, when prices are low, ginseng that is only 3 or 4 years old can be left in the ground for another year.

Another recent problem is that it has been a bad weather year for the company. A wet summer season resulted in lower yields per acre, further exasperating the company's situation. Heavy frost this year also caused damage to the company's ginseng.

Political tension between Canada and China is also playing a role in the company's ability to sell its goods as easily as it has in the past. Canada has put a Huawei executive under house arrest, and China has been retaliating in several ways, trade sanctions among them. The US-China trade disputes have also affected the company's ability to sell.

Finally, if these issues were not enough, Covid-19 has also taken a bite out of the business. Not only was demand for Ginseng reduced by lockdowns, as consumers were unable to acquire the product, but there is a labour shortage now as the company usually brings in foreign workers to help with the harvest. IGP was only able to bring in about half of its usual workforce because of issues surrounding the pandemic.

These issues are all costly, but they may all be temporary. It's entirely possible that the company can't make it out of these temporary issues, as IGP has to pay for harvesting; if sales dry up again, it could run out of cash. At the same time, however, if the company can survive these issues, the payoff from returning to anywhere near book value is massive at the current price. I consider the risk-reward to be worth it as a small, basket-sized position with the understanding that it could go under if things stay wrong for some time.

Disclosure: Author has a long position in shares of IGP


Anonymous said...

Hi: interesting find! I/S is weird. How do you explain the "other operating expenses" negative (source of income) in all years except 2019?

Very nice blog; keep it up!

Saj Karsan said...

Thanks Anon!

Can you be more specific? I don't see that line item on the I/S I'm looking at linked here:

defensiven said...

Hello, I appreciate your posts about net-nets! Looks like Imperial Ginseng has been trading below 0,2x book for most years going back to 2010. Could this be an indication of risk for fraud? Only one year since 2010 with a dividend (source morningstar) . Are there any owners with large stakes?