Update on the Chicken Farm
November 05, 2009
– Comments (8)
The birds are about two months old, and are getting nice and fat. However, our first growout is likely to be our last. We are planning on selling the farm for whatever we can get, and hopefully we get close to breaking even. There were a whole lot more expenses involved that our "expert" failed to mention, and the venture proved to be not profitable enough for us to stick around. I have no regrets and actually I think the whole thing was worthwhile. I've learned some important lessons, and the tuition was affordable.
What makes a business great? Chicken farming is a pretty bad business to be in. You are a price taker, at the whims of feed and chicken market prices. You only make money every 2-3 months. Any expansion of the business would require a major fixed investment.
On the other hand, our henhouse and greenhouse construction business has much better fundamentals. The factory for the poles was relatively cheap to set up, and any expansion would only require a few hundred bucks for another machine and some more cement flooring. There is no real limit to how often it could make money. The man who taught us the technique ran a factory in Shandong province and was building a greenhouse every day and having to put people on a waiting list. Seeing as how there is presently very little organized competition in this industry and considering the uniqueness of our product, we might be able to charge a bit of a premium and still beat out any other alternative.
It only takes one person to manage this business, so we are leaving it in the hands of our "expert" and getting the hell out of this place. This was his idea, and he is the one who knows all the farmers in the area, so it's up to him to make it work.
It's important to always have a solid plan B. We're moving to Hainan island, where we have a couple of friends. The weather is always warm, the food is great, and girls are much prettier. I'm taking the first level of the CFA exam in December, heading home for a month to start up an investment partnership, then returning to Hainan where I can live cheaply off my investing while I make money with other people's money. Seems risky, you say? That all depends on how you invest. If you invest in wonderful businesses priced to shrink, you don't have much to worry about. Interestingly enough, most of the businesses are small companies in China. Here's another example:
CHIO China INSOnline Corp.
First of all, the Chinese insurance industry has decades of growth ahead of it. The U.S. has about 5000 underwriters, China has about 100. The average american is 300% covered for various things, but the average chinese is about 10% covered. The central government knows that private industry is going to drive economic growth and so they are slowly loosening the reins and letting private businesses compete. CHIO is only a few years old but look at their revenue growth and margins. They run the only website in China that serves as a one-stop shop for several types of insurance. They maintain good relationships with all the major state-owned insurers while they are moving forward with plans to acquire smaller agents and underwrite their own insurance. The management team is impressive, and the forward guidance is equally so. In the long run, the sky is the limit. In the short run, 4x trailing earnings and about 2x 2011 earnings means that a buck a share is probably as cheap as you're going to get.
Remember, Buffett absolutely loved insurers back in the day when America was poised for 50 years of economic domination, much like the China of today. Will this be the Geico of China? Who knows, but at this price, there is absolutely no reason not to own it.
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