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The Hydropothecary Corporation (TSXV:THCX) recently announced ambitious plans of increasing its total capacity to over 100,000 kgs per year of dried cannabis

SmallCapPower | December 19, 2017: The Hydropothecary Corporation (TSXV:THCX), headquartered in Quebec, is a premium producer of cannabis, focused on product innovation and quality. Hydropothecary offers over 20 medical cannabis products including Elixir, the first and only cannabis peppermint oil sublingual mist. With ambitious expansion plans, Hydropothecary would be among the top pot producers in Canada with a total capacity of 100,000 kgs per annum by the end of December 2018. However the current valuation of $350 million in market cap does not reflect this massive expansion as peers with similar expansion plans are trading at much higher valuations (over $1.0 billion). Hence investors who want exposure to the rapidly-growing cannabis space could look at Hydropothecary as a value pick.

Investment thesis

Premium cannabis producer focused on quality and product innovation

Ambitious expansion plans could make Hydropothecary one of Canada’s largest cannabis producers

Low-cost premium producer focused on quality and product innovation

Unlike other cannabis producers that are focused on either scale or developing pharmaceutical-grade products, Hydropothecary Corporation is focused on both product innovation and scaling up its operations. Hydropothecary offers a total of ~20 medical cannabis products under four product lines – Decarb, H2, Time of Day, and Elixir. While Decarb is a novel pre-activated cannabis product line for consumption in capsule form, Elixir is the first and only cannabis oil based spray with peppermint in the industry. These innovative products have received awards at the inaugural Canadian Cannabis Awards, including a first-place award for Decarb cannabis powders and third place for Elixir.

20 products under four product lines

Hydropothecary also boasts of one of industry’s lowest costs, aided by its location in Quebec, which has low utility rates, reduction in hydro consumption due to natural sunlight growing, and centralized location. From about $1.79 per gram in 1Q17, cash costs decreased to $1.05 in 4Q17. Revenue per gram is high at $9.00.

Cost per gram continues to decline

Ambitious expansion plans – targeting over 100,000 kgs per year by end 2018

Hydropothecary currently operates a 50,000 sq ft facility at Gatineau, Quebec with a production capacity of 3,600 kgs per year. In October 2017, the Company broke ground on a 250,000 sq. ft. greenhouse complex at the same facility that will be completed in July 2018, increasing the total production capacity to 25,000 kgs per year. Expected to cost $25 million, the funding for the expansion is already secured with the closing of a $69 million financing in late November.

300,000 sq. ft. of Production Capacity on a 65 acre property

This month, Hydropothecary announced ambitious plans of increasing its total capacity to over 100,000 kgs per year of dried cannabis by constructing a new 1.0 million sq. ft. greenhouse on the newly-acquired 78 acres of land adjacent to its existing 65 acres in Gatineau. Requiring $80 million in capex, which will be funded through current financial resources, the expansion is expected to be completed by December 2018. The expansion will put Hydropothecary among the top cannabis producers in Canada – Canopy Growth, Aphria and Aurora Cannabis are all targeting more than 100,000 kgs per year capacity by end 2018.

Strategically located in Quebec

Widely known for unique and independent culture, Quebec has a French-speaking population that prefers products originating in the province. Recently the Premier of Quebec stated in the National Assembly that he would prefer adult-use cannabis sold in the province to be grown in the province. As Quebec’s only licensed producer with a full license (cultivation and sale) and one of only two licensed producers located in the province, Hydropothecary is well positioned to capture the large recreational opportunity, which is expected to be legalized in mid-2018.

Outlook and valuation

With its dual focus of product innovation and production scaling along with a strategic Quebec location, The Hydropothecary Corporation is well positioned to capture the large market opportunity of both medical and recreational cannabis. Hydropothecary is aggressively planning capacity expansion to over 100,000 kgs per year by end 2018, which would put the Company among the top pot producers in Canada. In terms of valuation, Hydropothecary looks compelling at a market cap of just $350 million, compared to its larger peers that are trading at market caps in excess of $1.0 billion.

Disclosure: Neither the author nor any of the principals at SmallCapPower, or their family members, own shares in the company mentioned above.

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