3SOF

Buy recommendation just out for SDTH. Merriman Curhan Ford sets price target at $14-$17. I've attached the full 16 pages report below.

Two positive highlights:

«Closer Location to Raw Material Supply Improves Profitability

ShengdaTech's new factory location in Shaanxi Province is very close, within 20 kilometers, to one of the best sources of limestone in China, which reduces the transportation cost of this major raw material. Raw materials account for around 60% (including packaging materials) of the cost of goods sold of NPCCs, with the two primary contributors being limestone and anthracite (a hard coal). Further costs include electricity at 16% and fuel at 12% with labor at around 4% and depreciation at around 9%. Limestone currently costs approximately $11 per ton in Shandong Province near the company's older 30,000 ton manufacturing facility. However, at the company's new NPCC manufacturing location in Xianyang City, Shaanxi Province, it only costs around $6.50 a ton, or 41% cheaper because this facility is located much closer to the highest quality limestone mine in China. The difference in price is driven by the transportation costs of the limestone from one province to the other. Having a larger manufacturing facility closer to the source of limestone should help the company improve gross margins or provide the pricing flexibility to expand current markets and enter new markets.

The company is adding capacity in chunks of 40,000-60,000 tons at a time, which equates to approximately $16-24 million revenue increments using the current ASP of around $400 per ton. However, the company assumes a 300-day working year and can easily flex capacity 15-20% higher than the stated total capacity.»

I see SDTH transforms 1 ton of limestone costing $6.5 into 1 ton of NPCC it sells for $400 (of course, there are other costs, but ...). This is the first time someone comes up with this information of the 300 working day ... SDTH can increase NPCC production capacity by 15-20% even without new lines of production. It just needs workers for more days and work is just 4% of the company's total costs, meaning it wouldn't cost much to do this.

SDTH should have a good day today ... I'll keep holding for the long term.

QuoteSDTH should have a good day today ...

Indeed, investors were inspired by the analysis published yesterday and pushed the stock higher by 9.7%.

Cool

nice chart action today 

SDTH: Short Interest UP 4.1% to 3.1M at the End of Apr 2008
Monday , May 12, 2008 06:00ET

According to new short interest data from NASDAQ, short interest for ShengdaTech, Inc. (NasdaqNM: SDTH) INCREASED 4.1% to 3,055,268 shares as reported at month-end April, 2008.
Based on SDTH's 20-day average daily share volume of 410,445, it would require approximately 8 day(s) of buying to cover this short interest.

Need a close above $10

    Are these guys diluting on us yet again??...

ShengdaTech Announces Proposed Offering of $100 Million Convertible Senior Notes

TAI'AN CITY, Shandong, China, May 14 /Xinhua-PRNewswire-FirstCall/ -- ShengdaTech Inc. (''ShengdaTech'') (Nasdaq: SDTH - News) a leading manufacturer of nano precipitated calcium carbonate (NPCC) in the People's Republic of China (PRC) and a major manufacturer of coal-based chemical products in Tai'an City, Shandong Province, PRC, today announced that it intends, subject to market and other conditions, to offer an aggregate of $100 million of senior convertible notes due 2018, in an offering to qualified institutional buyers pursuant to Rule 144A under the United States Securities Act of 1933, as amended (the ''Securities Act''). The notes will bear interest and be convertible into shares of ShengdaTech's common stock at terms and a conversion price to be determined at the time of pricing of the offering. ShengdaTech intends to grant to the initial purchasers a 30-day option to purchase up to an additional $15.0 million of the notes to cover over-allotments, if any.
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ShengdaTech currently expects to use approximately $56 million of the net proceeds from the offering of the notes to expand its NPCC production capacity. ShengdaTech plans to use the remaining proceeds for potential coal-based chemical acquisitions, strategic investments and to fund working capital requirements.

The convertible senior notes and ShengdaTech's common shares issuable upon conversion of the notes will not be registered under the Securities Act or the securities laws of any other jurisdiction. ShengdaTech will be obligated to file a shelf registration statement under the Securities Act for resale of the notes and the common shares issuable upon conversion if the notes and common shares issuable upon conversion are not eligible for sale under Rule 144 beginning 180 days after issuance. Unless they are registered, these notes may be offered or sold only in transactions that are exempt from registration under the Securities Act and the securities laws of any other jurisdiction.

Update:

New developments concerning the convertible notes:
- ShengdaTech Prices $100 Million Convertible Senior Notes

Quote(...) today announced the pricing of $100 million of 6.00% senior convertible notes due 2018, in an offering to qualified institutional buyers pursuant to Rule 144A under the United States Securities Act of 1933, as amended (the ''Securities Act''). ShengdaTech also granted to the initial purchasers a 30-day option to purchase up to an additional $15.0 million of the notes to cover over-allotments, if any. The notes will pay cash interest semiannually at a rate of 6.00% per annum and will be convertible into shares of ShengdaTech's common stock at a conversion rate of 100.6036 per $1,000 principal amount of the notes (which represents a conversion price of approximately $9.94 per share). The sale of the notes is expected to close on May 28, 2008(...)

This new offering is not good news, and will affect new estimate ratios on a negative way, but even so not «thesis changing» from a Fundamental point of view. SDTH is trading at discount and even with implied dilution on a scale of 1/5 the stock is still attractive.

From a technical analysis perspective, the last few days were very volatile, first because of this bad news, then because of the broad market selling. Even so, SDTH continues to trade inside the same pattern, current support approximately at $7.75.

Trading Plan:
HOLD SDTH

Update:

Q1 results were out:
- SHENGDATECH, INC. Financials
- Shengdatech Inc. Q1 2008 Earnings Call Transcript

QuoteNet income in the first quarter of 2008 was $7.4 million, up 37.1% from $5.4 million in the same period a year ago.
Fully diluted earnings per share for the first quarter of 2008 were $0.14 compared to $0.10 in the same period last year.

Compared with Q4-2007, revenues were flat and net income had a slightly decrease, but the same happened last year and the year before, so I think it could be something seasonable.
Results were inside the estimates range, from my source I only see 2 research departments covering SDTH, Roth Capital expecting a $0.14 EPS and Merriman expecting a $0.16 EPS, so no big surprises.

From a technical perspective, SDTH is inside an ascending range and trading near the support level right now. It is important that the stock holds above $7.75 otherwise it may compromise the current layout, so the current level is important to watch.
I'll be setting a stop level just slightly below the most recent low.

Trading Plan:
HOLD SDTH with a stop @ $7.40

Update:

Just a quick chart update: SDTH reacted positively on the support of the current ascending channel.
Trading plan remains:

Trading Plan:
HOLD SDTH with a stop @ $7.40

Update:

Today a new research note was released, published by Global Hunter Securities:

Download full 17 pages note:



This is an initiating coverage note with a BUY rating and $11.50 price target. Analysts at GHS estimate $0.71 EPS for 2009 (11.2x P/E) which is in accordance to current reuters consensus for the same period.

Just a quick chart update: SDTH keeps trading inside the channel, but it’s once again near the base (support). The Trading plan remains:

Trading Plan:
HOLD SDTH with a stop @ $7.40

Update:

Just a quick chart update: SDTH is still trading inside the ascending channel. Taking into consideration the Friday's general market behavior, SDTH managed to hold this technical layout pretty well.

Trading plan remains:

Trading Plan:
HOLD SDTH with a stop @ $7.40

Update:

SDTH managed once again to stay inside the ascending channel despite the turbulent market behavior. It is important that SDTH holds this key levels in order for us to keep this position.

Analysts at Roth Capital have initiated coverage on SDTH and published a Research Note:

See complete Note Pdf:


They started with BUY rating and a $11 Price Target, even so their approach is quite conservative while they estimate a $0.63 EPS for 2009 (compared with current Reuters consensus of $0.705 for the same period).

In this note the analysts made the following comments on Q1’08 results:

QuoteQ1'08 results outperformed our estimates. SDTH reported Q1'08 results
prior to the $100 million financing, with both top and bottom lines topping our
estimates. Q1'08 revenue rose 29% yoy to $28.6 million, beating our
estimate of $28.3 million. Net income grew 37% yoy to $7.4 million, or $0.14
per share, compared to our estimates of $7.1 million or $0.13 respectively.
Fertilizer prices continue to climb and break records, making the chemical
segment a major catalyst for upside surprise in FY08. We expect further
gross margin expansion in this segment.

Visit to Shanghai R&D center gives us confidence in the firm's
capability in product development. We recently visited SDTH's R&D
center in Shanghai and met with Dr. Zhude Xu, the head of R&D. Based on
our discussions, we believe SDTH has a strong pipeline of product
development.

Acquisition and capacity expansion are under evaluation. Management
indicates that it is at the final stage of acquisition process of a local chemical
business and plans to expand NPCC capacity in Shandong province, with a
target date of production in Q3'09.

Adjusting estimates. We are raising our revenue estimate for FY08 from
$132.1 million to $135.7 million, but lowering our EPS estimate from $0.62 to
$0.59. We are further raising our 2009 revenue estimate from $149.3 million
to $160.7 million, while lowering our FY09 EPS estimate from $0.67 to $0.63.
We expect the interest expenses and related amortization of financing cost to
impact FY08 and FY09 EPS by $0.08 and $0.13, respectively, partially offset
by increased sales and margin expansion from the chemical segment. Our
estimates do not incorporate the impact of pending acquisition, which
we believe could be accretive.

Introducing BUY rating and $11 price target. We are introducing a BUY
rating and $11 price target on shares of SDTH (previously NR and no PT).

We’re staying with the same plan:

Trading Plan:
HOLD SDTH with a stop @ $7.40

Interesting developments:

- ShengdaTech Outlines Plan to Acquire State-owned Chemical Company and Relocate Existing Chemical Operations

SDTH up +11%

Update:

SDTH jumped 16% last Friday, reacting to exciting news.

Roth Capital research department issued the following comments, reaffirming their $11 price target for SDTH:

Quote
ShengdaTech | SDTH - $8.26 - NASDAQ | Buy

SDTH identifies acquisition target, announces
relocation of chemical operation
ShengdaTech announced this morning that it intends to acquire Jinan
Fertilizer Co., Ltd, a nitrogenous fertilizer company based in Jinan,
the capital city of Shandong province that is approximately 50 miles
away from Tai'an city where SDTH's current chemical facility is
located. Meanwhile, the Company announced that it received a
relocation notice for its chemical fertilizer facility in Tai'an city from the
city government on June 16, 2008.

Acquisition will substantially increase revenue from chemical
segment. The announcement confirms our expectation that SDTH
would acquire a similar chemical business in its neighborhood to
serve both purposes of capacity expansion and facility relocation.
Jinan Fertilizer is a mid-sized nitrogenous fertilizer manufacturer with
seven subsidiaries and 1,800 employees. Its product profile is very
comparable to what SDTH chemical is offering, which includes
concentrated nitric acid, synthetic ammonia, methanol, fertilizer and
carbon dioxide, compound fertilizer, liquid fertilizer, and polywoven
sacks. Management has not given an indication of its price tag, but
expects that the new chemical segment could yield an annual sales
three times the current chemical revenue with similar or higher gross
margin, which translates to approximately $160 million revenue and
30% gross margin. Assuming similar operating expenses, we expect
such acquisition could yield approximately $20 million additional net
income to SDTH's bottom line.

Management by affiliate shall ensure a smooth transition and
accretion. Based on our knowledge, Jinan Fertilizer is a failed
state-owned enterprise due to lack of capital and employee
motivation (we learned that many employees haven't received their
salaries for six months). SDTH's affiliate or former-parent company
prior to public listing, Shengda Group, has gained control of the
business and paid all back wages to employees of Jinan Fertilizer.
Production has resumed and employee morale has rebounded.
SDTH management expects the acquisition to be completed by
November 1, 2008, the same date that SDTH must cease chemical
operation at its current facility in Tai'an city.

Relocation expenses and loss of revenue could be
compensated. We expect the relocation of current chemical facility
may disrupt chemical production for one to two months, which means
SDTH will lose $5 to $10 million revenue between late Q3 and early
Q4 and incur some relocation expenses. However, we believe the
additional revenue contribution from Jinan Fertilizer could more than
offset the loss of Tai'an revenue, depending upon the timing of
acquisition. We also believe local government will somewhat
subsidize the company in form of tax incentive or one-time
compensation, given the fact that SDTH is an important player in
local economy as well as its long-established relationship with the city
government.

We maintain Buy rating and $11 price target with upward bias.
We are waiting for further details about the acquisition to revise our
quarterly estimates and related price target. However, we believe
such acquisition will be substantially accretive to FY09 earnings and
helpful to FY08 EPS. Our price target is based on 16x EPS for the
chemical business pre-acquisition and 6x sales for the NPCC
business.

VALUATION
Our $11 price target is based on peer group multiples applied to each of SDTH's business segments(assuming a diluted share count of 65.9 million) based on a sum of the parts, including 16x EPS for the chemical business and 6x sales for the NPCC business.

RISKS

Share Dilution and share price upside. We believe the conversion price of $9.94 serves the major hurdle for SDTH's share performance. Without a clear picture of chemical acquisition and updated management guidance, investors will be more concerned with the adverse impact of the $100 million debt financing, namely interest expense and dilution.
Inflation and rising commodity costs.  (…)
Management's ability to explore new application for NPCC and subsequent market penetration and commercialization. (…)

Friday’s candle was huge, complemented with the heaviest volume watched in 2008 so far. Despite any fundamental developments, we can spot several resistance levels near the current price:
-   $10 (May’s highs)
-   $10.40 (top of the current channel)
-   $11.35 (descending resistance)

We are introducing a sell limit order and also upgrading our stop level, so the new trading plan is:

Trading Plan:
Sell SDTH @ $10.25 stop @ $8.40

Update:

We missed our exit price for only 6 ticks, SDTH printed an intraday high of $10.19 and then started to drop for the rest of the session, consolidating the previous big white candle.

We'll keep the same plan for now:

Trading Plan:
Sell SDTH @ $10.25 stop @ $8.40