My China play: SDTH

[David Randolph]

Hmm. Kind of a disappointing reversal in the markets today.

I believe it is just filling the gap at $154.26 on the SPY, normal market behavior.

Sorry to burst anyone's bubble here and I'm not going to be popular for saying this, but I sold most of my SDTH today. I already had  concerns about it and intended to sell some, but after this came out I decided to sell most today if only temporarily.

No problem BigSully1, always nice to read different opinions.

Now, this article from Forbes, at least to me, is a joke, the author didn't do his homework on the company:

«Nanotechnology takes place on a scale difficult to envision, and the surge of Shengda Tech is similarly inconceivable. The tech stock saw its market capitalization inflated to $454 million after the share price grew 136% since May.»

What's "inconceivable" about trading at $7.69/$0.59 = 13 times 2008 EPS estimates?

I actually believe this $0.59 EPS estimate is way too conservative, because there's absolute evidence that revenue will more than double in 2008 when compared to 2007, simply because:

«Once the second phase of the Xianyang facility is completed, the Company's total NPCC capacity will be 190,000 metric tons, an increase of 111% from a capacity of 90,000 metric tons at the beginning of 2007.»

Over the medium term the plan is to increase capacity to 1 million tons a year:

«The planned production capacity of Shengda Technology Industry Park (Shaanxi Haize Nano Material Co.,Ltd.), which has been invested and built in Shaanxi, is 1 million tons of NPCC per year.»

The stock does appear  undervalued for growth, but I don't believe NPCC is exclusive at all to SDTH. So I have some questions. Maybe the process by which they claim they can produce it cheaper is exclusive and patented, but not NPCC itself. Is it really any cheaper or better than other processes? Is it actually used to enhance other products, or is it just used as a substitute (cheap) filler in other products like rubber, paper, plastics, etc. Is there a real barrier to entry here? After all limestone is one of the most plentiful substances in the world.

Rubber is a natural and expensive product. It's supply can't keep up with the worldwide growth in demand for tires:

«It does a couple of different things. It enhances durability, strength, heat resistance, stabilization and also reduces the cost of manufacturing by acting as a substitute for some of the more expensive raw materials, for example rubber in tires. There is a growing range of application. We've got four primary markets that we will tell you about. We are just scratching the surface. There is a ton of new applications out there and as we speak, we are in the lab exploring some new applications that are totally different from what we're doing today.»

«Four current applications, our largest one is tire manufacture. We are dealing with all of the major manufacturers in China including Triangle Tire. In that application we are the only one in China that is qualified on tires and we maybe the only one in the entire world. We're not 100% sure of that, but we believe we are.»

Your post has many more interesting questions BigSully1, so I'll come back to it over the following updates.

I remain a believer that SDTH will earn at least $0.9 EPS in 2008 and that should put the stock in the $18 area. I don't trade, just invest - can't lose my position. Anyway, good luck with your short term trades

I'll continue holding SDTH for the long term.

[BigSully1]

Here is one guys opinion, for what it's worth, can't say I agree with all of it, especially the part about "should only trade at 5 to 7 times earnings"   

I'd really like to understand the reasoning behind that statement, but there is none offered.

I'm just the messenger here guys. Don't shoot me

http://seekingalpha.com/article/49104-hot-china-stocks-a-bubble-to-avoid?source=yahoo

[David Randolph]

Here is one guys opinion, for what it's worth, can't say I agree with all of it, especially the part about "should only trade at 5 to 7 times earnings"   

I'd really like to understand the reasoning behind that statement, but there is none offered.

I'm just the messenger here guys. Don't shoot me

http://seekingalpha.com/article/49104-hot-china-stocks-a-bubble-to-avoid?source=yahoo

Ok messenger, don't worry about being shot

But the author of the message you bring, putting JRJC, trading at 96 times earnings, and SDTH, trading at 17 times earnings, in the same bag, just because they both entered the market as reverse mergers, doesn't deserve my reverence as a financial analyst. 

Thanks anyway

[kpunarc]

Do you think that gap on SPY at $154 is really significant enough to be filled?

[David Randolph]

Do you think that gap on SPY at $154 is really significant enough to be filled?

Yeah, probably, this morning's rally is a short covering move to touch the midpoint of yesterday's red candle's body, which was $156.2 (today's high so far = $156.18). This is bearish short term technical action. Probably there's going to be a sell off in the afternoon to close that gap. But I wouldn't try to time the market, the long term trend is bullish, good luck

[BigSully1]

China and coal

http://www.iht.com/articles/2007/04/16/bloomberg/bxinvest.php

[jorgegr]

China and coal

http://www.iht.com/articles/2007/04/16/bloomberg/bxinvest.php

This is why I've invested  on YZC as I mentioned it in another thread

[BigSully1]

China and coal

http://www.iht.com/articles/2007/04/16/bloomberg/bxinvest.php

This is why I've invested  on YZC as I mentioned it in another thread

That was a good investment decision Jorge, but the relevance of why I posted the article here is the following from an SDTH filing. Just something to think about..

"The cost of our raw materials fluctuates significantly, which may adversely impact our profit margin and financial position. Both our NPCC and chemical businesses use coal as raw material. In the last two years, coal prices have fluctuated substantially. Although the price for coal dropped last year, it may go up again in the future due to the rapid development of the Chinese economy and the resulting huge demand for energy. If the price for coal increases again, our profit margin could decrease considerably."

[jorgegr]

Thank you for the explanation and your permanent good work.

[BigSully1]

Thank you much Jorge, for your good work. Coincidentally, it was you, that first brought my attention to the situation with coal in China several months ago.. I already own some YZC, indirectly though, through PGJ and FXI.

[tokyopua]

I dont know enough honestly to comment on the whole coal issue, but just looking at the chart I still think this one has legs for at the very least the short term.  Usually I dont like seeing dark cloud cover with such big down volume, but yesterday's close was OK, formed a doji harami, and it looks like a reversal day could happen Monday and then yet another explosive Gspot breakout waiting to happen with a close above 9.04   

[BigSully1]

Coal and India

http://www.platts.com/Coal/highlights/2007/coalp_icr_091107.xml

[David Randolph]

That was a good investment decision Jorge, but the relevance of why I posted the article here is the following from an SDTH filing. Just something to think about..

"The cost of our raw materials fluctuates significantly, which may adversely impact our profit margin and financial position. Both our NPCC and chemical businesses use coal as raw material. In the last two years, coal prices have fluctuated substantially. Although the price for coal dropped last year, it may go up again in the future due to the rapid development of the Chinese economy and the resulting huge demand for energy. If the price for coal increases again, our profit margin could decrease considerably."

This is an interesting and valuable information BigSully1, thanks

I think that SDTH, being the sole provider of NPCC to the tire industry in China, has pricing power to reflect the change in coal prices in NPCC prices. Anyway, I was already factoring in a small decrease in net profit margin, from the current 26.6% to 25%. Let's cut this some more to 20%:



The optimal selling price declined from $41 to $33. No big deal, for a stock currently trading at $7.79. Do you think I should cut net profit margin estimate some more? I think it is appropriate this way. Moreover, if Coal prices are set to rise due to strong economic growth, what to think of NPCC's substitute, rubber? It will probably rise even more, increasing SDTH's pricing power ...

My main worry on SDTH is the following:

«3) authorized the issuance of 10,000,000 shares of preferred stock, $0.00001 par value. The shares of preferred stock may be issued in one or more series and may be granted voting rights, at the discretion of the Company's board of directors.»

This power to create preferred shares is a worry for any common shareholder like I am, because preferred shares can take out the value of common shares. I wonder if it is written somewhere (perhaps in the company's articles of incorporation?) the conditions and the shape of a possible issuance of preferred shares. I'll study this for the upcoming updates and I'll be interested in reading opinions on the subject (or any other subjects).

But fundamentally and without any trick from management I see much higher prices coming for SDTH and I'll keep on holding SDTH for the long term.

[David Randolph]

I've been looking for a natural rubber market chart but still couldn't find one. I guess that like most natural resources, rubber has been in high demand and its price has been up. Just think of the worldwide production of tires ... remember when miners couldn't mine because they didn't have enough tires for their big trucks and machines?

NPCC seems to be the right answer at the right time. With hundreds of millions of people about to own cars for the first time, the tires can't continue to be made out of natural rubber.

Anyway, it is easy to see $0.9 EPS in 2008 for SDTH and there's no way the stock will be under $15 if that materializes (unless that preferred shares issue ...).

I'll continue holding SDTH for the long term.

[Se7en]

Natural rubber and Rubber Index futures are traded on the Osaka Mercantile Exchange (OME). The OME's natural rubber contract is based on the RSS3 ribbed smoked sheet No. 3 while the Rubber Index Futures Contract is based on a composite of 8 component grades from 6 component rubber markets in the world. Rubber futures are also traded on the Shanghai Futures Exchange (SHFE) and the Tokyo Commodity Exchange (TOCOM).

http://www2.barchart.com/comfund/rubber.asp


Click on the little charts:
http://www.csidata.com/cgi-bin/GetChartsForGroup.pl?group=WD-RUB