Yesterday (Nov 23), Origin Agritech Limited (SEED) rose sharply ($5.24 or 100.58%) on the news that it received the Bio-safety Certificate from the Ministry of Agriculture as a final approval for commercial approval of genetically modified phytase corn. Those who missed entering the stock at $5 level would be in a dilemma to buy the stock or wait for better opportune moment.

So far so good

Origin Agritech's phytase corn is the first transgenic corn to be officially approved and sold commercially into the domestic marketplace. Phytase transgenic corn will allow animal feed producers the ability to eliminate purchasing phytase and corn separately. The company's GMO phytase-producing corn is expected to reduce the need for inorganic phosphate supplements as animals will directly absorb more phosphate from their feed, reducing animal feed's high cost.

Phytase is currently used as an additive in animal feed to breakdown phytic acid in corn, which holds 60% of the phosphorus in corn. Phosphorus is an essential element for the growth and development of all animals, and plays key roles in skeletal structure and in vital metabolic pathways. The Phytase enzyme increases phosphorus absorption in animals by 60% and is used as a mandatory additive for animal feed in Europe, Southeast Asia, South Korea, Japan, Taiwan to reduce the environmental impact of livestock manure. The worldwide phytase potential market size is $500 million, including $200 million for China alone. The corn seed market in China is estimated at $1 billion.

Financial performance stable

Origin Agritech's revenues for the year ended September 30, 2008 were RMB513.49 million ($75.63 million), an increase of 4.93% from RMB489.38 million ($65.31 million) in the fiscal year ended September 30, 2007. The company's gross profit for the year ended September 30, 2008 increased to RMB108.70 million ($15.94 million) from RMB26.53 million ($3.54 million) for the year ended September 30, 2007. However, the company recorded net loss of RMB43.29 million ($6.37 million) in the year ended September 30, 2008, as compared to the net income of RMB163.20 million ($21.78 million) for the twelve months ended September 30, 2007.

More recently, the company returned to profitability in the third quarter. In August 2009, Origin Agritech's third-quarter net income increased to RMB74.97 million or $10.98 million from RMB 60.12 million or $8.77 million in the year-ago period. On a per share basis, earnings rose to RMB3.26 or $0.48 from RMB2.62 or $0.38 in the prior year period. The company's revenues for the quarter declined to RMB477.17 million or $69.84 million from RMB490.71 million or $71.54 million in the comparable period. However, this 3Q09 revenue figure is exclusive of the RMB53.69 million ($7.86 million) in Deferred Revenue for the three-months ended June 30, 2009, carried as a liability on the balance sheet, which should be recognized in Q409 pending a price confirmation. More importantly, the company reiterated its full-year revenue guidance to be in the range of RMB560 million - RMB580 million.

So…does the stock have potential to rise further?

I believe the stock has the potential to rise further in the medium term and long term. However, this potential doesn't translate into share price gain in the near term as this had been factored in already.

The company's revenue and profit guidance don't support its share price in excess of $7. Those who entered the stock with a near term view at $5 level are likely to book their profits. However, those with a long term view are likely to hold the stock.

Looking at options traded on SEED, I believe, the stock is likely to receive support at $7.5 and resistance at $10. Option traders appear to be selling covered calls in the December contract. Approximately 21,000 calls were sold at the December 10 strike for an average premium of 40 cents per contract. Investors retain shares of the underlying stock as well as the 40 cents premium on the sale if shares of SEED remain below $10.00 through expiration. Covered-call sellers appear happy to have shares called away at $10.00 should the call options land in-the-money by expiration.  Finally, some traders purchased the December 10 strike calls as 3,700 lots were picked up for approximately 40 cents per contract. Option implied volatility is sky-high at 107.5% over the opening reading of 73.18%. Currently, the sentiment is bearish. Trading volumes in the stock cannot be sustained over an extended period as the recent trade volume of 45.39 million is up by 32391% over the typical daily volume (139.7k) over the past 6 months. So, I guess investors are likely to consolidate positions at $7.5.