"As the standard of living in China rises and the middle class swells, one of the things that comes along is an increase in meat consumption," says small-cap growth stock specialist Tom Bishop, editor of the BI Research newsletter.

As a play on this long-term trend, the advisor has chosen AgFeed Industries, Inc. (Nasdaq:FEED) as the latest featured stock in his publication. AgFeed, he says, is a market leader in China's fast-growing premix animal feed and hog-raising industries.

The latter is particularly important, he says, as 65% of meat consumed in China is pork.

"Pork sales are four times greater than either beef or chicken, with annual per capita consumption at around 53 kg and rising," he says.

China produces about 600 million hogs annually, he says, accounting for 50% of worldwide pork production. This compares to about 100 million in the United States.

Pork is such an important part of the diet in China, that Bishop says "China actually has a strategic pork reserve as well as a strategic grain reserve." Further, he says that as an incentive to produce pork, China does not tax profits from this sector.

This small-cap company (with a market cap of $381 million) operates in the "premix" market. This market, he says, is an approximately $1.6 billion segment of China's total $40 billion dollar animal feed market.

Within this market the higher-tech, higher-margined premixes are growing at 14% to 15% per annum, Bishop says. According to the advisor, these markets have historically accounted for 85% of AgFeed's business and are nutritional supplements high in essential vitamins, amino acids and minerals that are blended into the bulk feed (corn, wheat and sorghum).

"These premixes reduce the time for a hog to reach 220 pounds from one to two years to a little over five months," he says.

Meanwhile, Bishop says the company has made a strategic decision to enter the hog-raising arena as well. In November, the company purchased a 90% interest in the largest breeder farm in Jiangxi Province. And in December, he says, AgFeed closed the acquisitions of five hog farms, purchasing 50% to 100% interests at 2.5- to 3-times earnings.

Overall, he forecasts that the company currently has the capability to raise 120,000 hogs per year and targets total production of 400,000 hogs for sale in 2008 through additional targeted acquisitions that AgFeed anticipates completing by mid-April. At that point, he says, AgFeed will become the second-largest hog producer in China.

He adds that the company recently announced that one of its farms was granted a hog export license by the Chinese Ministry of Commerce that will enable it to ship hogs to the Hong Kong market.

In connection with these acquisition and working capital requirements for raising all those hogs, says Bishop, the company also announced that it has completed a $41 million financing that would suffice for the balance of 2008.

And because pork is a cash business in China, Bishop says, there are no accounts receivables associated with booking revenue. Also, he adds, AgFeed has put in place state-of-the-art vaccination and quarantine programs to prevent the outbreak of diseases.

Bishop reports that AgFeed has projected hog-production revenues will total $90 to $100 million in 2008 with associated net income of $21.5 million to $24 million (a 24% profit margin).

"On the traditional feed side of the business, 85% of which is premix, the company expects 25% growth to about $45 million yielding net income of about $9 million (a 20% profit margin)," he says.

The company released Q4 earnings, which he says were on target: $36 million and $0.25 a share. In addition, forecasts for 2008 were reiterated.

This market demands the highest quarantine standards and pays premium prices to those producers that have met stringent quality requirements, which doesn't hurt AgFeed either. The company says that hogs are now commanding $250 in the Chinese market place versus the $221 the company used in its 2008 guidance.

Meanwhile, Bishop is impressed with management, emphasizing that they are well-educated, and know both the business and its nutritional aspects. He adds that the company's board is "well-heeled" and the advisory committee includes the former CEO's of Purina and E. F. Hutton.

The stock has recently shown strength, says Bishop, on news that it had engaged a U.S. hog industry expert to explore strategic options for partnering with selected global agricultural companies to provide them with an entry platform into the Chinese pork market.

"Presumably one alternative that would have to be on the table would be to be acquired by a U.S. company," he says. He emphasizes that this is personal speculation, but says "it would certainly be one way for a U.S. pork company looking for entry into the Chinese market to go about it."

For disclosure, the advisor notes that he owns 2,000 shares, but that he suspended buying additional shares when he decided to recommend the stock. He also emphasizes that this is "a riskier company" as its hog operations are a new segment for its business. Adding to its risk, he says, are commodity-price issues as well as the company having its operations in China.

Despite these risks, he says, "With growth exceeding 100% and a P/E of 12, purchase is recommended to $13."

For more information this small cap, read our Watch List profile on the company: AgFeed Industries: Take that to the trough.

For 25 years, Steven Halpern has conducted an annual survey asking the leading newsletter advisors to select their favorite stocks for the year. His 2008 report features 120 top picks. You may download the report for free by clicking here.