My China play: SDTH

[David Randolph]

Just three days to go for SDTH's 3rd quarter earnings release. No doubt I'll hold through them.

[David Randolph]

SDTH almost touched its ascending 50 days SMA today, and we know how that's usually a sweet spot to buy fundamentally attractive stocks for the long term.

Today is the last day to sell before the earnings release on Monday morning, but I'll naturally hold through earnings, not only because I expect SDTH to beat expectations of $0.11 EPS for the quarter, but also because the stock is cheap from an earnings multiple perspective, given its growth rate.

I also expect the earnings release to clarify investors, because they've been bombarded by misleading information on SDTH, specifically from Forbes magazine, which called SDHT a "nanotech  bubble stock".

I'll keep holding SDTH for the long term.

[soxguy]

Form 10-Q for SHENGDATECH, INC.


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9-Nov-2007

Quarterly Report



ITEM 2-MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the financial statements and related notes and the other financial information appearing elsewhere in this quarterly report on Form 10Q. This discussion and analysis contains forward-looking statements that involve risk, uncertainties and assumptions. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including those identified below, in "Risk Factors" and elsewhere in this quarterly report.


Overview
We are a leading manufacturer and supplier of NPCC for tires, plastics, paints, inks, papers and other products in China. We are selling our NPCC products mainly to tire and plastics manufacturers in northern China and recently into the international market. We also manufacture coal-based chemicals including ammonia bicarbonate, liquid ammonia, methanol and melamine. Our coal-based chemicals are delivered directly to our customers or through distributors in Shandong Province, China.

Reorganization

We were organized as a Nevada corporation on May 11, 2001 under the name Zeolite Exploration Company for the purpose of acquiring, exploring and developing mineral properties. We conducted no material operations from the date of our organization until March 2006. On March 31, 2006, we consummated a share exchange pursuant to a Securities Purchase Agreement and Plan of Reorganization with Faith Bloom Limited, a British Virgin Islands company, and its stockholders. As a result of the share exchange, we acquired all of the issued and outstanding capital stock of Faith Bloom in exchange for a total of 50,957,603 shares of our common stock. The share exchange is accounted for as a recapitalization of Zeolite and resulted in a change in our fiscal year end from July 31 to December 31. Faith Bloom Limited is deemed to be the accounting acquiring entity in the share exchange and, accordingly, the financial information included in this prospectus reflects the operations of Faith Bloom, as if Faith Bloom had acquired us.

Faith Bloom was organized on November 15, 2005 for the purpose of acquiring from Eastern Nanomaterials Pte. Ltd., a Singapore corporation, all of the capital shares of Shandong Haize Nanomaterials Co., Ltd and Shandong Bangsheng Chemical Co., Ltd., which are Chinese corporations engaged in the manufacture, marketing and sales of a variety of nano precipitated carbonated calcium ("NPCC") products and coal based chemicals for use in various applications. On December 31, 2005, Faith Bloom acquired all of the capital shares of Shandong Haize Nanomaterials Co., Ltd and Shandong Bangsheng Chemical Co., Ltd.

As a result of the transactions described above, Shandong Haize Nanomaterials Co., Ltd and Shandong Bangsheng Chemical Co., Ltd. are wholly-owned subsidiaries of Faith Bloom, and Faith Bloom is a wholly-owned subsidiary of Zeolite. On April 4, 2006, Faith Bloom formed a wholly-owned subsidiary in Shaanxi, China to run the new NPCC facility in Shaanxi. Effective January 3, 2006, Zeolite changed its name to ShengdaTech, Inc. Our corporate structure is depicted in the following chart:

[[Image Removed]]



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Revenue

We derive our revenues from two segments: NPCC and coal-based chemicals. The most significant factors that directly or indirectly affect our revenues are as follows:

manufacturing capacity of NPCC;
pricing of our NPCC; and
industry demand.

Manufacturing Capacity of NPCC. Our manufacturing capacity of NPCC products has been 30,000 metric tons annually from April, 2003. Sufficient capacity ensures a stable supply of NPCC for our customers which typically have a large demand for NPCC. We increased our annual manufacturing capacity of NPCC to 90,000 metric tons as of December 31, 2006 and 130,000 metric tons as of September 30, 2007. We plan to add an additional 60,000 metric tons of capacity in 2007.

Pricing of our NPCC product. The pricing of NPCC products is generally determined by competition, demand, market conditions, the value brought to customers, the Company's margin targets, and other market factors. The more we manufacture, the lower our cost and more competitive the price of NPCC at which we can sell to customers. For example, with respect to tire and PVC building materials, the pricing of NPCC products is principally affected by the cost saving benefit our customers realize by replacing some of the relatively expensive carbon black and PVC. With respect to paper, the pricing of NPCC is principally affected by comparable imports. In the next few years, we may reduce the selling price in order to compete with relatively small competitors. However, we still remain confident in retaining the current gross profit margin level because our unit costs of products are reduced by achieving economies of scale.

Industry demand. Our business and revenue growth depends on the industry demand of NPCC. The downstream industries we supply are tire, PVC building rubber, paints and oil ink. Given the difference between the overall demands of those industries, our growing R&D capacity and the quantity we currently supply to our customers, we believe in the growth potential of our business.

Our ammonia-based chemicals supply local farmers and chemical plants located in Shandong and other surrounding provinces. We have a good relationship with our customers and our products have a good reputation in their markets. We believe the demand for our coal-based chemicals will remain stable in the next few years. But our chemical factory is located in the residential district. With the strong China governmental security and environment protection standards, it is possible the government will order us to shut down the factory or move to another location. As of September 30, 2007, we haven't received any such order or notice from the government.

Seasonality. Our chemical business is generally the busiest between February and November of each year, when our ammonium bicarbonate is in the most demand due to the farming season in northern China. Our chemical revenue from this season generally accounts for 70-80% of the total chemical revenue per year. December to January is typically our slowest period during which the price of our ammonium bicarbonate drops approximately 6-8%.



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Cost of Revenue
Cost of revenue for both NPCC and chemicals consists primarily of (a) consumption of raw materials and auxiliary raw materials (b) use of water and electricity (c) machinery's depreciation and (d) workers' salaries.

The most significant factors that directly or indirectly affect our cost of revenues are as follows:

processing technologies of NPCC; and
availability and price of coal.

Process technologies of NPCC. The advancement of NPCC processing technologies is crucial in order to deliver value to our clients. We have successfully completed the research of a new generation membrane-dispersion technology in conjunction with Tsinghua University. The technology has been verified by experts and is in the process of becoming patented. The Company and Tsinghua University each have 50% ownership of the technology and the Company has the exclusive (100%) right to use the technology. This new technology will enable us to produce NPCC in a more efficient and cost effective way.

Availability and Price of Coal. Coal is the key raw material for making our coal-based chemicals as well as the key fuel for calcination of limestone. We have long-term relationships with our coal suppliers. We have developed a network of supplier alternatives for backup purposes. Coal prices have fluctuated in the past few years and the price curve turned relatively flat in the second half of 2005. The average price of coal was approximately $70 per metric ton in 2004 and increased to approximately $80 per metric ton in 2005 and $90 in 2006. In the third quarter of 2007, it was approximately $85 per metric ton.

Gross Profit

Our gross profit has been, and will be, affected by many factors, including (a) the demand for our products, (b) the average selling price of our products, which in turn depends in part on the mix of products sold, (c) new product introductions, and (e) the volume and costs of manufacturing of our products.

Operating Expenses

Operating expenses consist of sales and marketing and general and administrative expenses. Sales and marketing expense consists primarily of (a) salaries (b) sales commissions, (c) travel, lodging and other out-of-pocket expenses, and (d) other related overhead. We expect our sales and marketing expense to increase in the future as we further increase our sales. In the second quarter of 2007, we lowered the commissions to sales staff from 5% to 3%, for the maturity and expansion of NPCC business. As a result, we plan to employ more sales staff and pay more commission based on the growing sales.

General and administrative expense consists primarily of (a) salaries (b) labor union fees, (c) insurance fees, (d) lease for housing and property, expenses related to being a public company and (e) other related overhead. We expect general and administrative expense to continue to increase. Being a publicly traded company, we will incur additional expenses related to costs of compliance with securities and other regulations, including increased audit and legal fees and investor relations expenses.

Significant Accounting Policies

Basis of Presentation and Translating Financial Statements - The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The functional currency of the operating subsidiaries in the PRC is the Chinese Yuan Renminbi (CNY); however, the accompanying financial statements have been expressed in United States Dollars ("USD"). The accompanying consolidated balance sheets have been translated into USD at the exchange rates prevailing at each balance sheet date. The accompanying consolidated statements of operations have been translated using the average exchange rates prevailing during the periods of each statement.



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Consolidation - The accompanying consolidated financial statements include the accounts and transactions of Shengda Nano and Shengda Chemical through June 2005, the accounts of Eastern Nano from September 2004 through November 15, 2005, the accounts and transactions of Faith Bloom and its wholly owned subsidiaries from November 15, 2005 through March 31, 2006 and the accounts of ShengdaTech, Inc. and its wholly owned subsidiaries from March 31, 2006. These combined entities are referred to herein as "the Company."

Fair Values of Financial Instruments - The carrying amounts reported in the consolidated balance sheets for trade accounts receivable, other receivables, advances to suppliers, receivable from related parties, trade accounts payable, other payables and accrued expenses, advances from customers, and payable to related parties approximate fair value because of the immediate or short-term maturity of these financial instruments.

Cash and Cash Equivalents - Cash and cash equivalents include interest bearing and non-interest bearing bank deposits, money market accounts, and short-term certificates of deposit with original maturities of three months or less.

Accounting Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

Revenue Recognition - The Company recognizes revenues from the sale of products when they are realized and earned. The Company considers revenue realized or realizable and earned when (1) it has persuasive evidence of an arrangement, (2) delivery has occurred, (3) the sales price is fixed or determinable, and (4) collectability is reasonably assured. Revenues are not recognized until products have been shipped to the client, risk of loss has transferred to the client and client acceptance has been obtained, client acceptance provisions have lapsed, or the Company has objective evidence that the criteria specified in client acceptance provisions have been satisfied. The Company sells all products to end-users and recognizes revenues when the products are shipped. The Company has no post-delivery obligations on its products sold.

Trade Receivables and Allowance for Doubtful Accounts - Trade receivables are carried at original invoiced amounts. As a result of the Company historically having no write-offs and all accounts receivables being current, there were no doubtful accounts recorded as of September 30, 2007 and December 31, 2006

Inventory - Inventories are stated at the lower of cost or net realizable value, with cost determined on an average cost basis.

Valuation of Long-lived Assets - The carrying values of the Company's long-lived assets are reviewed for impairment annually or whenever events or changes in circumstances indicate that they may not be recoverable. When such an event occurs, the Company projects the undiscounted cash flows to be generated from the use of the asset and its eventual disposition over the remaining life of the asset. If projections were to indicate that the carrying value of the long-lived asset will not be recovered, the carrying value of the long-lived asset is reduced by the estimated excess of the carrying value over the projected discounted cash flows.

Property and Equipment - Property and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred and major improvements are capitalized. Gains or losses on sales, trade-ins, or retirements are included in the statements of operations in the period of disposition, determined by reference to their carrying amounts.



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Advances to Suppliers and Advances from Customers - The Company, as is the common practice in the PRC, will often pay advance payments to suppliers for materials and manufactures for equipments and plants, or receive advance payments from customers. Advances to suppliers were $530,290 and $872,289 as of September 30, 2007 and December 31, 2006, respectively. Advances from customers were $0 and $119,923 as of September 30, 2007 and December 31, 2006, respectively.

Cost of Products Sold - Cost of products sold include wages, materials, handling charges, and other expenses associated with the manufacture and delivery of product.

Shipping and Handling Costs - Shipping and handling billed to customers is recorded as revenue. Shipping and handling costs are included in cost of products sold.

Research and product development expenses - Research and product development expenses are included in general and administrative expenses in the statements of income and include researching, developing, and testing of the Company's products.

Retirement Benefit Plans - The Company contributes to various employee retirement benefit plans organized by provincial governments under which it is required to make monthly contributions at rates prescribed by the related provincial governments. The provincial governments undertake to assume the retirement benefit obligations of all existing and future retired employees of the Company. Contributions to these plans are charged to expense as incurred.

Basic and Diluted Earnings per Share - The computation of basic and diluted earning per share is based on the weighted-average number of shares outstanding during the period presented.

Other Comprehensive Income - Other comprehensive income presented in the accompanying consolidated financial statements consists of foreign currency translation adjustments.

Credit Risk - The carrying amounts of trade accounts receivable and other non-trade receivables included in the consolidated balance sheets represent the Company's exposure to credit risk in relation to its financial assets. No other financial assets carry a significant exposure to credit risk. The Company performs ongoing credit evaluations of each customer's financial condition.


Results of Operations

Comparison of Three Months Ended September 30, 2007 and 2006

Revenue

                       For the Three Months Ended September 30,              Period to Period
                          2007                         2006                       Change
                                of Total                    % of Total
                  Amount($)      Revenue     Amount($)       Revenue       Amount($)       %
Chemical           14,047,758       51.70     13,450,007          71.47       597,751       4.44
Nano-Material      13,123,032       48.30      5,368,200          28.53     7,754,832     144.46
Total Revenue      27,170,790      100.00     18,818,207         100.00     8,352,583      44.39




The revenue of our chemical business increased by $597,751 or 4.44% for the quarter ended September 30, 2007 compared to the corresponding period of the prior year. The increase was mainly due to (i) a $310,532 (1,540 tons) increase in sales of liquid ammonia which was partially offset by a decrease in sale price by $2.81 per ton; (ii) a $24,269 (35 tons) increase in sales of melamine which was partially offset by a decrease in sale price by $4.65 per ton; (iii) a $421,029 (705 tons) reduction in sales of methanol combined with a decrease in selling price by $22.5 per ton; (iv) $30,267 decrease in the selling price of ammonium bicarbonate by $0.72; and (v) a $713,256 favorable change of the exchange rate between RMB and USD. The appreciation of RMB increases the translated revenue in USD. The increase and decrease of sales for the chemical products were caused by the adjustment of our product mix due to market conditions and the fluctuation of the chemical market.



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The increase of total revenue from our NPCC business was $7,754,832 or 144.46% for the quarter ended September 30, 2007 compared to the corresponding period of the prior year. The increase was mainly due to (i) $8,513,232 additional revenue from an increase in sales of 20,707 tons from our capacity expansion which was partially offset by $1,100,569 resulting from a decrease in the selling price of NPCC by $32 per ton; and (ii) additional $342,169 from the change of the exchange rate between RMB and USD as the appreciation of RMB to USD increased the translated revenue in USD. We have a cost advantage due to the adoption of new technology and lower raw materials cost at our Shaanxi NPCC facilities. As a result, we sold our products to our customers at a more competitive price while being able to maintaining our gross profit margin.

Cost of Revenue and Gross Profit

                                  For the Three Months Ended September 30,                Period to Period
                                     2007                           2006                       Change
                                            % ofTotal                    % of Total
                           Amount($)         Revenue      Amount($)       Revenue       Amount($)        %
Cost of Revenue
Chemical                     10,109,472          37.21      9,870,260          52.45       239,212        2.42
Nano Material                 7,400,362          27 24      3,367,083          17.89     4,033,279      119 79
Total Cost of Revenue        17,509,834          64.45     13,237,343          70.34     4,272,491       32.28
Gross Profit
Chemical                      3,938,286          14.49      3,579,747          19.02       358,539       10.02
Nano Material                 5,722,670          21.06      2,001,117          10.63     3,721,553      185.97
Total Gross Profit            9,660,956          35.55      5,580,864          29.65     4,080,092       73.11




The cost of revenue for our chemical business increased by $239,212 or 2.42% for the quarter ended September 30, 2007 compared to the corresponding period of the prior year. Our cost of revenue decreased $284,787 but the change in the exchange rate between RMB and USD increased the translated cost of revenue in USD by $523,999 which completely offset the decrease in cost. The decrease of production cost resulted mainly from the technology improvement in the manufacturing process implemented in April, 2007. The decrease of $284,787 in cost of goods sold was comprised of: (i) a reduction of $362,129 due to decreased sales of 705 tons of methanol and reduced manufacturing cost of methanol by $21 per ton from the improved manufacturing process; (ii) a reduction of $20,206 from reduced manufacturing cost of ammonium bicarbonate because of the improvement in the manufacturing process; and (iii) additional $99,552 as a result of increased sales of 1,539.62 tons of liquid ammonia which was partially offset by saving in the manufacturing cost of $7.92 per ton.

The gross profit of our chemical business increased by $358,539 or 10.02% but its weight in total gross profit decreased from 19.02% for the third quarter of 2006 to 14.49% for the third quarter of 2007 because of the increase in NPCC capacity. The increase of gross profit in the chemical business resulted from
(i) $210,980 from the increased sales of 1,539.62 tons of liquid ammonia which was offset partially by the decrease of the average selling price by $2.81 per ton; (ii) $26,567 from the sale of 35 more tons of melamine which was offset partially by a $4.65 per ton decrease in the average selling price; (iii) a decrease of $58,900 resulting from 705 less tons of methanol sold and a decrease in the selling price of $22.5 per ton; (iv) a decrease of $10,061 caused by a decrease in the selling price of $0.72 per ton of ammonium bicarbonate; and (v) the appreciation of RMB to USD increasing the translated gross profit in USD by $189,265



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The cost of revenue of our NPCC business increased by $4,033,279 or 119.79% for the quarter ended September 30, 2007 compared to the corresponding period of the prior year. This was mainly due to (i) additional $5,341,433 from 20,707 tons of increased sales due to our NPCC capacity expansion in Shaanxi which was partially offset by $1,517,351 due to the adoption of new technology and lower raw materials cost at Shaanxi facilities; and (ii) an additional $209,197 from the appreciation in the exchange rate between RMB and USD which increased the translated cost of goods sold in USD.
Our gross profit of NPCC increased from 10.63% for the second quarter in 2006 to 21.06% or $3,721,553 for the third quarter in 2007. This was mainly due to (i) the gross profit margin increased by 6% from the introduction of new technology and the expansion of capacity with lower cost of raw materials at our new factory in Shaanxi (reduced the average unit cost of products by $44 per ton, even though the average selling price decreased by $32 per ton); and (ii) additional $132,927 from the appreciation in the exchange rate between RMB and USD which increased the translated gross profit in USD.


Operating Expenses

                                   For the Three Months Ended September 30,                Period to Period
                                     2007                            2006                       Change
                                           % of Total                     % of Total
                           Amount($)        Revenue         Amount(s)       Revenue     Amount($)        %
Sales and Marketing
Expenses
Chemical                        23,268            0.09           22,228          0.12        1,040        4.68
Nano Material                  412,143            1.52          287,184          1.53      124,959       43.51
Total Sales and
Marketing Expenses             435,411            1.61          309,412          1.65      125,999       40.72
General and
Administrative
Expenses
Chemical                       296,348            1.09          136,657          0.84      159,691      116.26
Nano Material                  413,272            1.52          365,958          0.25       47,314       12.93
Total General and
Administrative
Expenses                       709,620            2.61          502,615          1.09      207,005       41.19




Sales and Marketing expenses of our chemical business increased by $1,040 or 4.68% for the quarter ended September 30, 2007 compared to the corresponding period of the prior year. The main reason was that the appreciation of RMB to USD increased the translated sales and marketing expenses in USD.

The general and administrative expenses of our chemical business increased by $159,691 or 116.86% for the quarter ended September 30, 2007 compared to the corresponding period of the prior year. The main reason was increased audit, legal, consulting and other expenses related to being a public company.

Sales and Marketing expenses of our NPCC business increased by $124,959 or 43.51% for the quarter ended September 30, 2007 compared to the corresponding period of the prior year. The main reasons were (i) sales commission increased by $100,040 as a result of the increase of sales which was partially offset by the decrease in sales commission rate from 5% to 3%; (ii) an $8,022 increase in salary and other sales related expense in Shananxi; and (iii) the appreciation of RMB to USD increased the translated sales and marketing expenses in USD by $16,896.

The general and administrative expenses of our NPCC business increased by $47,314 or 12.93% for the quarter ended September 30, 2007 compared to the corresponding period of the prior year. The main reason was increased audit, legal, consulting and other expenses related to being a public company..



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Operating and Other Income

                                      For the Three Months Ended September 30,               Period to Period
                                         2007                           2006                      Change
                                                of Total                    % of Total
                               Amount($)         Revenue      Amount($)      Revenue       Amount($)        %
Income from Operations            8,515,925           0.31     4,768,837           0.25     3,747,088       78.57
Interest Income                      70,599           0.00        33,480           0.00        37,119      110.87
Provision for income taxes          775,264           0.03             -              -       775,264
Net Income                        7,811,260           0.34     4,802,317           0.26     3,008,943       62.66




Operating income increased by $3,747,088 or 78.57% for the quarter ended September 30, 2007 compared to the corresponding period of the prior year. This was mainly due to an increase in revenues of $8,352,583 which was partiallyoffset by an increase of cost of revenue of $4,272,491 and an increase in operating expenses of $335,209.

Interest income for the quarter ended September 30, 2007 increased by $37,119 or110.87%. Such increase was due to the fact that more cash was on deposit at our banks.

For the quarter ended September 30, 2007, an increase in income tax by $775,264 due to the fact that the tax holidays for two of our facilities expired. Under the Chinese tax law, these two facilities are subject to an income tax at the . . .


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[kslifka]

Very nice earnings.  I didn't think they were to be released until Monday. 

With SDTH climbing after hours...makes me feel better going into the weekend..

[tokyopua]

Oh yeaaaahhhh, its gonna be a good day in SDTH land!

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ShengdaTech, Inc. Reports Record Third Quarter 2007 Results

Nov 12, 2007 02:00:00 (ET)


TAI'AN CITY, China, Nov 12, 2007 /Xinhua-PRNewswire-FirstCall via COMTEX/ -- ShengdaTech Inc. ("ShengdaTech") (SDTH, Trade ), a leading manufacturer of nano precipitated calcium carbonate ("NPCC") and coal-based chemical products manufacturer in the People's Republic of China ("PRC"), today reported financial results for the third quarter ended September 30, 2007.


    Third Quarter 2007 Highlights
    -- Revenue increased 44.4% year-over-year to a record $27 million
    -- Gross margin increased 590 basis points to a record 35.6%
    -- Net income increased 62.7% year-over-year to a record $7.8 million
    -- Added nine new domestic customers and three international customers
    -- Completed construction of two new NPCC production lines, increasing
       capacity by 40,000 metric tons
    -- Began construction on new NPCC factory in Xianyang City, Shaanxi
       Province
    -- Added key members to R&D and Finance staff



Revenues for the third quarter of 2007 increased to a record $27.2 million, up 44.4% from $18.8 million in the third quarter of 2006. The increase in revenue is attributed to the increased capacity of the Company's NPCC production filling the continuing demand for its products. In July 2007, ShengdaTech added two new NPCC production lines with a total of 40,000 metric tons of additional capacity. The new lines were operating at 80% capacity at the end of the third quarter and are expected to reach full capacity by the end of November. The NPCC segment contributed 48.3% of total revenue and the chemical segment contributed the remaining 51.7% of total revenue compared to 28.5% and 71.5%, respectively, in the same period a year ago. Gross profit for the quarter was a record $9.7 million, up 73.1% from gross profit in the same quarter a year ago of $5.6 million. Gross margin was 35.6% compared to gross margin of 29.7% in the third quarter of 2006. Net income for the third quarter of 2007 was $7.8 million, up 62.7% from net income of $4.8 million in the third quarter of 2006. Fully diluted earnings per share were $0.14 compared to fully diluted earnings per share of $0.09 in the same period a year ago.

"Our record revenue and net income this quarter demonstrates the strong demand we continue to experience for our NPCC products. Over 70% of our new capacity was sold to current customers who increased their orders," commented Mr. Xiangzhi Chen, President, CEO and Director of ShengdaTech. "Moreover, we added nine new domestic customers and three new international customers, primarily for NPCC in producing PVC, tires and paint."

Revenue from the NPCC segment was $13.1 million for the third quarter of 2007, up 144.8% from $5.4 million in the third quarter of 2006. The increase in year-over-year revenue is attributed to the addition of 60,000 metric tons of NPCC capacity in September 2006 and 40,000 metric tons in July 2007. Total volume of NPCC sold during the third quarter of 2007 was 34,257 metric tons. NPCC used in tires and PVC contributed 46.0% and 37.1% of revenue, respectively. NPCC used in latex increased to 8.5% of total NPCC revenue from 1.5% in the third quarter of 2006. NPCC used in paint, paper and printing ink contributed the balance of 8.4% of total NPCC revenue.

Revenue from the chemical segment for the third quarter of 2007 was $14.0 million, up 4.4% from $13.5 million in the third quarter of 2006. Liquid ammonia and ammonia bicarbonate contributed 36.2% and 28.0% of chemical segment revenue, respectively, and melamine and methanol contributed 17.1% and 18.6% of chemical segment revenue, respectively.

Gross profit for the third quarter of 2007 increased to a record $9.7 million, up 73.1% from $5.6 million in the third quarter of 2006. Gross margin for the quarter was a record 35.6%, up 590 basis points from gross margin of 29.7% in the same period a year ago. Gross margin was favorably impacted by a larger percent of revenue contribution from the NPCC segment along with improved production efficiencies in the chemical segment. Gross margin for the NPCC segment was 43.6% compared to 37.3% in the same quarter a year ago. Gross margin for the chemical segment was 28.0% compared to 26.6% in the third quarter of 2006.

Selling expenses for the third quarter of 2007 were $435,411, or 1.6% of revenue, compared to $309,412 or 1.6% of revenue in the third quarter of 2006. General and administrative expenses were $709,620, or 2.6% of revenue, compared to $502,615, or 2.7% of revenue.

Operating income for the third quarter of 2007 was $8.6 million, up 78.6% from operating income of $4.8 million in the third quarter of 2006. Operating margin for the quarter was 31.3%, up from 25.3% in the same period a year ago.

Net income for the third quarter of 2007 was $7.8 million, up 62.7% from $4.8 million in the third quarter of 2006. Net income for the third quarter includes a tax provision of $775,264, as the tax holiday on income generated from the original NPCC factory in Tai'an City, Shandong Province, ended on December 31, 2006. Fully diluted earnings per share for the third quarter of 2007 were $0.14 compared to fully diluted earnings per share of $0.09 in the third quarter of 2006.

Nine Month Financial Results

For the first nine months of 2007, total revenue was $72.0 million, up 45.8% from the first nine months of 2006 of $49.4 million. Revenue from the NPCC business was $32.9 million, up 160.9% from $12.6 million in the same period a year ago. Revenue from the chemical business was $39.1 million, up 6.3% from $36.8 million in the first nine months of 2006. Gross profit for the first nine months of 2007 was $24.3 million, up 77.4% from gross profit of $13.7 million for the first nine months of 2006. Gross margin was 33.7% compared to 27.7% for the first nine months of 2006. Income from operations for the period was $21.1 million, up 88.7% from $11.2 million in the first nine months of 2006. Net income for the period was $19.3 million, up 70.1% from net income of $11.4 million in the first nine months of 2006. Fully diluted earnings per share were $0.36 for the first nine months of 2007 compared to $0.22 for the first nine months of 2006.

Financial Condition

As of September 30, 2007, ShengdaTech had $41.1 million in cash and cash equivalents, no long-term debt and $39.0 million in working capital. Shareholders' equity stood at $79.0 million up from $57.1 million at December 31, 2006. The Company generated $21.9 million in cash flow from operating activities in the first nine months of 2007.

Business Outlook

ShengdaTech continues to increase its production capacity for NPCC. The 40,000 metric tons of NPCC capacity brought online in July is expected to reach full capacity by the end of November 2007. In September 2007, the Company began construction of 60,000 metric tons of NPCC capacity at its new facility in Xianyan City, Shaanxi Province. The new lines are expected to be completed and contributing to revenue in the first quarter of 2008. Capital expenditures for the full year 2007 are expected to be $54 million, of which $16.6 million has already been spent. Approximately $36 million of the $37.4 million balance is expected to be used for the construction of the new NPCC facility in Xianyan City. Management feels confident the Company will meet or exceed its guidance for the full year 2007 for revenue to be in the range of $96 million to $98 million and net income to be in the range of $23.0 million to $24.4 million with fully diluted earnings per share of $0.43 to $0.45.

"We are dedicating our efforts to increasing NPCC applications and expanding our penetration in international markets. We have recently added a top chemical engineer, Mr. Zhude Xu, to our R&D team to further our efforts to develop NPCC for use in paper," Mr. Chen commented. "We are also currently in discussion with several major international companies including PVC manufacturers in Japan and South Korea and a paper manufacturer in North America."

[Garoh]

Excellent result 
Now we have very nice both Technical  and fundemental views , It should act perfectly ....

Market will help it today also .

[terainvestment]

David,

which are your thoughts on SDTH?
Do these numbers are still good for your valuation model?

Cheers,

tera

[David Randolph]

SDTH's 3rd quarter results:

• ShengdaTech, Inc. Reports Record Third Quarter 2007 Results
PR Newswire (Mon 2:00am)

The company beat the revenue and EPS estimate by a significant margin:



The one analyst covering the company expected $25.33 M in revenues and the actual number was $27.17 M. In terms of EPS, he expected $0.11 and it was $0.14. So results were definitely better than expected.

Let me compare these results with the estimates I have in my valuation model:



1) Dilution Factor

I have 1%. In reality dilution was 0%:



2) Revenue CAGR

I have 2 in the valuation model, which means 100% revenue growth. Actually growth was significantly lower, just 44.4%. I believe the difference comes mainly from the following:

«ShengdaTech continues to increase its production capacity for NPCC. The 40,000 metric tons of NPCC capacity brought online in July is expected to reach full capacity by the end of November 2007. In September 2007, the Company began construction of 60,000 metric tons of NPCC capacity at its new facility in Xianyan City, Shaanxi Province. The new lines are expected to be completed and contributing to revenue in the first quarter of 2008.»

I accounted for this capacity increase but of course it takes time to be in full power.

Also, NPCC is growing 144% but it still accounts for a bit less than half of the total company's revenues:

«Revenue from the NPCC segment was $13.1 million for the third quarter of 2007, up 144.8% from $5.4 million in the third quarter of 2006.»

«The NPCC segment contributed 48.3% of total revenue and the chemical segment contributed the remaining 51.7% of total revenue compared to 28.5% and 71.5%, respectively, in the same period a year ago.»

NPCC is getting more and more weight and it is growing faster than 100% a year ... Anyway, I guess that perhaps 100% revenue CAGR is too aggressive, I'll push this estimate down to 75%.

3) Net Profit Margin Estimate

I had 20% in my model and net profit margin in Q3 2007 was 32.7%. I'll adjust my net profit margin estimate to 25%.

4) EPS Multiple Estimate

I have 20, which is the minimum to expect for a company growing this fast. I'll keep it this way.



The optimal selling price given by my valuation model declined from roughly $33 to $27.63. Still, with a 79% expected share price CAGR, SDTH remains extremely attractive at the current market price.

The report also brought us some more interesting information about the company's international expansion and the potential use of NPCC in paper (a new and big market for the company).

Management reaffirmed guidance:

«Management feels confident the Company will meet or exceed its guidance for the full year 2007 for revenue to be in the range of $96 million to $98 million and net income to be in the range of $23.0 million to $24.4 million with fully diluted earnings per share of $0.43 to $0.45.»

The company already made $0.35 EPS in the nine months so far in 2007 and it continues to grow, so I have no doubts that it will beat its own guidance for the year. I'm expecting at least $0.5 EPS for 2007. With a 20 times earnings multiple the stock should close the year at around $10. This is my short term expectation.

Longer term I expect SDTH to be an exceptional investment, I'll keep holding SDTH for the long term. 

[David Randolph]

SDTH posted great results, yet the stock fell 7.3%

When, after the good news, the stock turned negative traders thought "going down on good news, it's a sell", so the selling gained momentum. I expect that after this "traders' paradise" investors will kick in and buy the "sell the good news", because there's more good news to come.

Q3 EPS was $0.14, or $0.56 annualized. It is clear that there will be growth in 2008 ... say, 2008 EPS will be at least $0.8? So SDTH is trading at 8.7 times forward earnings, in my view. This is very attractive, given the company's growth rate and it should definitely go up.

I'm listening to the conference call now and will write about it at tomorrow's update.

I'll keep holding SDTH for the long term.

[David Randolph]

The more NPCC's weight in SDTH's revenues, the higher the gross margin:

«Gross margin was 35.6% compared to gross margin of 29.7% in the third quarter of 2006.»

And the trend is for NPCC to represent a higher and higher proportion of SDTH's sales:

«Revenue from the NPCC segment was $13.1 million for the third quarter of 2007, up 144.8% from $5.4 million in the third quarter of 2006.»

«Revenue from the chemical segment for the third quarter of 2007 was $14.0 million, up 4.4% from $13.5 million in the third quarter of 2006.»

«The NPCC segment contributed 48.3% of total revenue and the chemical segment contributed the remaining 51.7% of total revenue compared to 28.5% and 71.5%, respectively, in the same period a year ago.»

A higher gross margin generally translates into a higher net profit margin which generally translates into a higher EPS. There's leverage in SDTH's business model.

How much leverage? Something to calculate over the next update.

I'll keep holding SDTH for the long term.

[David Randolph]

How much leverage? Something to calculate over the next update.

Leverage isn't the right issue to think about today. I want to talk to you about the safety of this investment. Even though the company is starting to sell some products internationally, no doubt the bulk of its sales come from China and inside China, from tire manufacturers.

The market for tires undoubtedly is correlated with economic growth. Everybody knows and expects the car market in China to grow immensely over the years, but recently many doubts were raised about China's economy continuing its long term expansion.

I believe it will, because of two main factors:

1) The Chinese GDP per capita in 2006 was $2,001  and the country still ranks in #107 in a GDP per capita comparison list. For comparison, US GDP per capita in 2006 was $44,190. This means the average Chinese still earns 22 times less than the average American. Do you think China's growth has matured? I don't, I think the Chinese GDP per capita will grow to at least 1/3 of the US.

2) The Chinese save a lot, so they have the cash to keep the expansion going until their standards of living approach those of the West:



The Chinese won't suffer much if there's a recession, they have an incredible amount of cash.

Everything keeps telling me China has another 10 years of very strong economic growth and SDTH is a ten bagger. Yesterday's drop tells me ... nothing.

I'll continue holding SDTH for the long term.

[la-onda]

seeking alpha update:

ShengdaTech Surprisingly Cheap During 'Capacity-Catch-Up' Cycle
posted on: November 26, 2007 | about stocks: SDTH   

In the face of an extremely difficult market environment, we searched for a new small cap stock with all the right defenses: market leadership, demand, growth, value, visibility, technical momentum, lots of cash, zero debt and a risk/reward profile with built-in upside and a measured downside. We think we found it all in this week's selection, with one exception... it's in China. WAIT! Before you change the channel, hear us out.

ShengdaTech, Inc. (nasdaq: SDTH) operates in two segments vital to a number of important economic industries. The Company's chemical's segment is a steady cash cow helping fund their exciting and rapidly growing nano-materials business, primarily the production of Nano Precipitated Calcium Carbonate (NPCC).

What is NPCC? For years, industries have used fillers like precipitated calcium carbonate [PCC] as a means of reducing material cost while increasing functional benefits, but SDTH is one of the first producers of PCC broken down to nano-sized particles. NPCC is used as an additive in tires, PVC, latex, paints, paper, printing ink, etc. The Company's NPCC production for tires currently dominates the market in China, but demand is coming from everywhere. So much demand, in fact, that SDTH is having a tough time building out enough capacity.

In 2003, SDTH had 30,000 metric tons of annual capacity. In August 2006, they built a new plant and added 60,000 tons. This summer, they added another 40,000 tons. Now, SDTH is in the process of completing another 60,000 tons of capacity. This additional capacity, expected online in 1Q08, will bring their total to 190,000 metric tons annually, and make SDTH the largest NPCC supplier in China. The way we see it, the only obstacle to continuing strong, high-margin, double-digit growth is keeping up with demand.

Now, does the marketplace understand the story? In our opinion, NO!

Currently, The Company's Enterprise Value is just over 13-times FY07 earnings and a ridiculously low 10-times next year's earnings. Of course, the market is probably relying on guidance from June that SHOULD have been bumped higher in last week's earnings release, but it was not. In the near-term, we believe SDTH has the potential for a significant upside surprise in 4Q07.

In the long-term, we think the stock could more than double by the end of FY08 based on conservative growth estimates incorporating new capacity and relative peer multiples. The game beyond that will be based on ever-increasing new markets for NPCC and the Company's ability to keep up with demand without losing their leadership position.

[David Randolph]

Thanks for this marvelous analysis on SDTH la-onda

It fully explains SDTH's story and hopefully it will help to dismiss that misleading and uninformed Forbes article.

Look, analysts have raised their full year 2007 and 2008 estimates for SDTH (since SDTH has been beating the estimates by an increasing margin):



Now, if we consider the following table we clearly see how cheap and attractive SDTH is, relative to the general market:



SDTH has been holding much better than the average Chinese stock, which is a clue that it will go up more than the average when some of the clouds surrounding China these days disappear.

As I've been studying more stocks of various sizes I see the China play has a lot to do with credibility. If the company is very small, it may have the greatest fundamentals, yet investors will attach a low multiple to it because they're suspicious that it's a fraud. But, if the company surpasses the $1 B mark, or even better, the $10 B, suddenly investors believe the numbers are real and then the multiples expand a lot. I see that small Chinese companies often have a P/E of 10 or even less, and the bigger companies sport a 30 plus P/E ratio.

So, the best of both Worlds would be to invest in a small company with the capacity to become a large company, because we would benefit from the company's growth and later from an intense multiple expansion (like it happened with BIDU, for example).

SDTH is currently a $364 M market cap now. Do I think it has the capacity to reach $1 B in the not so distant future? (say, two years time). You bet I do.

I'll keep holding SDTH for the long term. 

[Rmagos]

Would this be an important news??


Tuesday , November 27, 2007 16:21 ET

According to new short interest data from NASDAQ, short interest for ShengdaTech, Inc. (NasdaqSC: SDTH) INCREASED 5.6% to 2,066,026 shares as reported in mid-November, 2007.

SYMBOL       END OCTOBER    MID NOVEMBER          CHANGE       %CHANGE  DAYS/COVER
--------   -------------   -------------   -------------  ------------  ----------
SDTH           1,957,046       2,066,026        +108,980        +5.57%           5
Based on SDTH's 20-day average daily share volume of 497,350, it would require approximately 5 day(s) of buying to cover this short interest

[David Randolph]

Would this be an important news??

No, not relevant news in my view.

I guess the seeking alpha article la-onda brought to us is helping investors see the light in SDTH, since the stock made a bullish breakout of its short term descending trendline. SDTH's expected growth rate for 2008 is 30.6%, while its forward P/E is just $7.77/$0.64 = 12:



Let me type an excerpt of Peter Lynch's book, One Up on Wall Street, for us to understand what he thinks about this type of situation:

«We've gone on about this already, but there's a useful refinement: The p/e ratio of any company that's fairly priced will equal its growth rate. I'm talking about growth rate of earnings here.
If the p/e of Coca-Cola is 15, you'd expect the company to be growing at about 15% a year, etc. But if the p/e ratio is less than the growth rate, you may have found yourself a bargain. A company, say, with a growth rate of 12% a year (also known as a "12% grower") and a p/e ratio of 6 is a very attractive prospect. On the other hand, a company with a growth rate of 6% a year and a p/e ratio of 12 is an unattractive prospect and headed for a comedown.
In general, a p/e ratio that's half the growth rate is very positive, and one that's twice the growth rate is very negative. We use this measure all the time in analyzing stocks for the mutual funds.»

Just considering this, SDTH is a bargain. It should be trading with a p/e ratio of 30 (its growth rate), not 12.

I'll keep holding SDTH for the long term.