My China play: SDTH

[David Randolph]

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

Thanks for the awesome information Se7en

I put that second link on my favorites, now I know where to check the rubber market. As expected, it is in a long term bull market, more than doubling over the past two years.

China and India combined have 2.5 billion people. In China, car and truck sales soared 74% in 2006 alone (of course, still coming up from a small base). Here's an article on the subject:

China's Booming Car Market Defies Pundits

There's no doubt demand for tires will rise a lot over the World, especially in China. Natural rubber is going up a lot in price and NPCC is a good substitute for the material and SDTH is the sole provider, a company in a monopolistic situation.

If I agree that coal prices may go up, I don't think SDTH will have trouble in increasing NPCC prices so that it can keep a 20%-25% net profit margin. Tire prices for the end consumer will also move up.

I see $0.9 EPS for 2008 and that should put the stock at least at $18. But if we consider the multiples some other Chinese stocks have been trading ... it can be a lot more.

I'll continue holding SDTH for the long term, with confidence.

[David Randolph]

The Chinese don't know how to value stocks, and that's the only explanation I have to why SDTH doesn't fly much higher right away. Warrants holders have been converting warrants into common shares and selling them in this area, keeping the stock deeply undervalued.

But, because the stock is undervalued, I'm positive that demand will outstrip supply. When we get over with these warrants SDTH will most likely rise by 100% quickly.

I'll continue holding SDTH for the long term.

[tokyopua]

The Chinese don't know how to value stocks, and that's the only explanation I have to why SDTH doesn't fly much higher right away. Warrants holders have been converting warrants into common shares and selling them in this area, keeping the stock deeply undervalued.

But, because the stock is undervalued, I'm positive that demand will outstrip supply. When we get over with these warrants SDTH will most likely rise by 100% quickly.

I'll continue holding SDTH for the long term.

I remember AOB got bogged down by warrant selling pressure about 2 years ago too.  Look at it now, and that was one of your early picks as well!

[David Randolph]

I remember AOB got bogged down by warrant selling pressure about 2 years ago too.  Look at it now, and that was one of your early picks as well!

Yeah, but back then I knew little to nothing about fundamental analysis, or else I would have held AOB longer. It was obvious the stock was worth a lot more, just looking at the fundamentals.

SDTH is a similar situation from a fundamental standpoint, a profitable Chinese company undervalued and growing strongly. But this time I know how to recognize this type of stocks and have the confidence and patience to hold for the long term (say, 3 years?) and probably reap the reward of several bags of profits.

One thing I'm absolutely sure: I won't be shaken out by technical factors, or by minor fundamental information. I'll remain focused on major fundamental trends, in terms of revenues and EPS, the main factors moving stock prices over the long run.

I'll keep holding SDTH for the long term.

[soxguy]

 
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Heard on the Street Heard in Europe Heard in Asia All Heard
 
Big Interest in China Small Caps
As Allure Grows,
Lack of Research
Adds to Volatility
By DENIS MCMAHON
October 22, 2007; Page C6

SHANGHAI -- There's a lot of interest these days in small Chinese companies listed in the U.S., but not a lot of information about them.

To plug that gap, foreign research firms are expanding their China-based teams. The trend could improve the liquidity of the roughly 180 such small-capitalization stocks. Ultimately, it could narrow not only the information gap but also a valuation gap between these small-cap stocks and their mid- and large-cap Chinese cousins trading in the U.S.

The research deficit has exacerbated the volatility of these stocks, which have a market value of less than $1 billion, and their susceptibility to market talk, especially on the over-the-counter Bulletin Board. More research could temper some of that volatility.

Brokerages setting up in China to cover companies listed in the U.S. "are not about to pull up stakes and move on. It is not a fad," says Mark Fleischhauer, a portfolio manager in Hong Kong for Jayhawk Capital Management, which invests in China and uses research reports. "It is hard for Chinanot to become the biggest economy in the world, and you need to be there as an investor."

The U.S. listings of Chinese small-cap stocks can be found on the New York Stock Exchange, the Nasdaq Stock Market, on the OTC Bulletin Board and through the Pink Sheets quotation system. The biggest numbers are on Nasdaq and the OTC market.

Wall Street analysts who cover China's big companies, which typically employ English-speaking, Western-educated executives, tend to be based in the U.S. or Hong Kong, with the occasional trip to mainland China. For covering China's small caps, the picture is different.

"At a lot of these companies, there is no English-speaking member of management," says Gordon McBean, director of international research at Roth Capital Partners of Newport Beach, California, which set up a team of 10 Chinese analysts in Shanghai this year. "Even if there is, it's not a good idea to talk just with CEOs and CFOs."

The firm's research includes talking with suppliers, customers and industry associations, all of which needs to be done on the ground, Mr. McBean says. Roth's reports also include information on related-party transactions, capital structure and significant shareholders, Sarbanes-Oxley compliance and how the company communicates with shareholders.

The stepped-up research seems to be helping trading volume. Yucheng Technologies, a Nasdaq-listed provider of IT services to China's banking sector, has an average daily trading volume of 86,000 shares, up from 26,300 when Roth initiated coverage in April, according to the investment bank. ShengdaTech, a specialty-chemical maker on the OTC Bulletin Board, has seen daily trading volume increase to 276,000 shares from 5,200 when Roth starting covering the firm, then known as Zeolite, in December.

Of course, opening an office in China isn't without problems. "The biggest challenge in setting up a China team is undoubtedly finding personnel," Mr. McBean says. "Hiring bilingual, bicultural, Wall Street-savvy folks is not easy." And the China Securities Regulatory Commission has strict guidelines for foreign brokers wanting to open an office. Roth took nine months to navigate the process.

Some firms think it's not necessary to put in China the bulk of their analysts assessing the country's companies. Minneapolis brokerage Piper Jaffray, for instance, has just the one analyst in Shanghai and keeps the rest in the U.S.

"You need to be in close contact with the investors here [in the U.S.] to give them the information they need to make informed decisions," says Joel Denney, Piper Jaffray's head of investment research. "Given the time difference, it makes it difficult if you're trying to market to U.S. investors and you're based in China."

Nonetheless, the firm has a support team of consultants in Shanghai to help its 15 U.S.-based analysts. (A 16th analyst was transferred to Shanghai earlier this year.) Mr. Denney says he expects China-based staff to do more research in the future. Consultants help analysts by arranging interviews and gathering data.


Investor interest in U.S.-listed Chinese small caps as a play on the China growth story isn't surprising. Mr. McBean estimates that per-share earnings for these stocks as a group has risen about 26% over the past three years. The expected three-year EPS growth for the 17 Chinese companies that Roth now covers is 37%. By contrast, Mr. McBean says, the broad U.S. markets are probably seeing EPS growth around 10% or so.

The valuation of one Chinese small cap in the U.S., China Fire & Security Group, rose after it moved in July to Nasdaq from the OTC Bulletin Board. The company, which makes industrial fire-safety products, has a market cap of $317 million. Based on Thomson's average of three analyst estimates, China Fire trades at 24 times its projected 2007 earnings. Before the move to Nasdaq, according to Roth, it traded at 13.4 times 2007 earnings.

Firms such as Roth and New York-based Brean Murray Carret say their research is expanding interest in Chinese small caps. "The appetite for these types of stock ideas has grown dramatically in the U.S.," says David Dunn, managing director of Brean Murray, referring to companies with market capitalization of $75 million to $750 million, the firm's target range.

"When we first started," he says, "there were maybe 40 to 50 companies in that range, with virtually no coverage." Brean Murray now covers about 35 Chinese companies and has six analysts in Beijing, up from two when it opened the office in March 2006. The firm doesn't sell its research reports but uses them to generate brokerage and investment-banking business.

Roth, which generates reports for sale, expects to be covering the same number of companies as Brean Murray by the end of the year. It now covers 17 companies, including American Dairy, which produces milk powder, and wire manufacturer Fushi International.

Write to Denis McMahon at [email protected]

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[David Randolph]

Thanks for the interesting article soxguy

SDTH has been beating analysts projections:



In 2006 the second half of the year was much stronger than the first half, since the company reported $0.06 EPS in the 1st half and $0.20 EPS in the second. In 2007, the 1st half EPS was $0.21, so the 2nd half ... perhaps it can bring us $0.30 EPS?

That would put the full year 2007 EPS at $0.51, above the $0.45 expected and closer to the 2008 estimate (which I believe is way too conservative) of $0.59 EPS.

I'm eager for SDTH's 3rd quarter earnings results, which will probably be announced before November 15.

I'll continue holding SDTH for the long term. 

[David Randolph]

It's a good thing that volume in SDTH's shares has been high (719,200 shares traded yesterday, which means about $5.8 M), because this helps to dry supply coming from early investors selling.

Fundamentally I have no doubts the stock is worth a lot more, so this is just a matter of patiently waiting for the supply to dry and the stock will surely go up.

I'll continue holding SDTH for the long term.

[Thyme]

Hi David

SDTH are expected to release Q3 earnings on november 4.

Estimates are $ 0.11 per share.
Have You considered the risk of holding the stock during earnings release?

Anders

[David Randolph]

Hi David

SDTH are expected to release Q3 earnings on november 4.

Estimates are $ 0.11 per share.
Have You considered the risk of holding the stock during earnings release?

Anders

Hi Thyme, thanks for your question

I would call it the opportunity of holding the stock through earnings. Since production more than doubled since the beginning of the year, I can only assume SDTH will earn more than what it did in Q4 2006, when it earned 11 cents per share:

«In the same Xianyang City facility, ShengdaTech brought its latest 40,000 metric tons of NPCC capacity online in July 2007. These lines are operating at 80% utilization and are expected to be operating at full capacity by November. 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.»

[David Randolph]

More production capacity meant more revenues and profits in the recent past:

«Revenue from the NPCC segment was $10.8 million for the second quarter 2007, up 207.8% from $3.5 million in the second quarter of 2006. The large year-over-year revenue growth is due to the addition of the new Xi'an, NPCC facility in Shaanxi Province, in September 2006 with 60,000 metric tons of NPCC capacity. On a sequential basis, revenue from the NPCC segment increased 20.6% from the first quarter of 2007. The sequential increase was derived from a 21% increase in volume, to 28,029 metric tons of NPCC sold from 23,164 metric tons of NPCC sold in the first quarter of 2007. NPCC for use in the production of tires and PVC remained the largest contributors to revenue representing 51.4% and 34.4% of total NPCC revenue, respectively. NPCC for use in latex and adhesives applications experienced the strongest growth in the second quarter of 2007, up 263.9% quarter-over-quarter, representing 8.5% of NPCC revenue compared to 2.8% of NPCC revenue in the first quarter of 2007. NPCC for use in printing ink and paints accounted for 5.7% of revenue in the second quarter of 2007.»

Also notice the growth of revenues coming from NPCC's use in latex and adhesives applications, in just one quarter

I'll continue holding SDTH for the long term.

[David Randolph]

SDTH's chart is getting more constructive. I guess the high volume has been absorbing the shares coming from the warrants conversion, which seems to be ending. When it does end I see SDTH flying towards $10-$12 a share over the short term.

Over the long term my valuation model says SDTH should only be sold around $33 a share, given its current fundamental trends.

I'll continue holding SDTH for the long term.

[David Randolph]

Nothing new on SDTH, I'll keep holding the stock for the long term.

[David Randolph]

SDTH went down 8% yesterday simply because it was up 100% plus over the prior 6 weeks. But, according to my estimates, the company's fundamental value is much higher, so I'll keep holding SDTH for the long term.

[David Randolph]

At last SDTH's 3rd quarter results are coming:

• ShengdaTech Schedules Conference Call to Discuss Third Quarter 2007 Results
PR Newswire (Mon 8:00am)

More information can only make SDTH rise, since the last piece of information in Yahoo Finance was this misleading and erroneous article:

• Shengda Tech: A Nanotech-Scale Bubble?
at Forbes.com (Thu, Oct 11)

I'll keep holding SDTH for the long term.

[David Randolph]

On one hand this market is healthy because it isn't letting speculative bubbles get out of hand, on the other hand, in SDTH's specific case, it is unable to see beyond the macro story.

SDTH went sharply up on October 10th simply because it was a Chinese stock, and on October 11th it fell back down because of a "bubble warning" in the Forbes magazine covering the stock.

Both trading ideas are wrong, in my view.

Investors should look beyond SDTH being a Chinese company or not, and take an in depth look at the company's products and its fundamental trends. Then they would clearly see SDTH is worth more than triple of its current market value.

Fortunately 3rd quarter earnings will be released next Monday and hopefully that will shed some light into the company's intrinsic business and its value.

I'll keep holding SDTH for the long term.