our title is a half truth! There is no such thing as "limitless RMB" but when it comes to investing in China companies listed in the U.S. China Carbon Graphite Group (CHGI) is about as close as it gets. As of today, November 12, 2010 China Vesting is adding CHGI to the undervalued index at a price of $0.94. Conversely, we have decided to remove Songzai International Holding Group, Inc. (SGZH.OB) which recently changed its name to US
China Mining Group Inc.
China Carbon Graphite Group has been on our radar for quite some time but not for good reasons. The company seemed to be decent back in early 2009 when the company reported fiscal 2008 net income of $3.98
million or $0.21 per share.
2009 turned out to be just downright terrible with revenues
and net income turning into a net loss of $1.47 million or $(0.16)
to say investors abandoned ship and now China Carbon is like
the hundreds of other China companies listed in the U.S. that are
pretty much ignored. Why is China Vesting interested?
The stock has been a relative loser but things look to be turning
around. We never want to say "never" but we've never seen a
company in China obtain a bank loan equal to almost 150% of its
market capitalization and it is pure debt with no convertible
feature...meaning there is no dilution. Also, the loan is
from a REAL bank...China Construction Bank.
You can read the company's press release China Carbon Graphite Group, Inc. Announces
RMB 180 Million Loan From China Construction Bank here on Yahoo Finance.
So what does this roughly $27 million USD (180 million RMB loan mean?
Let's just quote the company:
of these loans has a one year term with an interest rate of 5.41% per
year and will be renewable at the lender's option after the expiration
of the loans. The loan agreement provides for operating and financial
covenants typical for loan transactions of this type. Proceeds of the
loans will be used by the Company to purchase raw materials,
specifically focusing on higher purity graphite and fine grain graphite
materials. This loan facility enables China Carbon to significantly
reduce the risk of price inflation of raw materials and leverage
increased facility capacity, and expand its profit margin, by allowing
the Company to buy larger amounts of raw materials in advance in order
to receive better pricing.
"We believe the price of
raw materials will continue to rise in the coming years, the loans we
received from China Construction Bank will allow us to lock in the
price of our raw materials by facilitating larger advanced purchase
arrangements at better pricing, in order to hedge against the risk of
inflation. Furthermore, with the increasing sales and price of our
products, we believe we will deliver improved results in next few
quarters, showing incremental increases in our top and bottom line,"
said Donghai Yu, the Chief Executive Officer of China Carbon.
ability for us to
receive these loans on such favorable terms from one of the largest
Chinese banks further shows the confidence of our business operation
and future industry potential," Donghai Yu continued.
Based on the company's most recent SEC Quarterly Filing as of
August 16, 2010 there are 20,160,161 shares of common stock issued and
outstanding. Based on Thursday closing price of $0.94 per share
the total market capitalization is $18.95 million. With over $8 million or
$0.40 per share in cash China Carbon Graphite Group has an excellent balance
What the company needs to do is increase their top and bottom
line. This $27 million USD loan should help take care of that.
From looking over the company's 2009 Annual Report China
Vesting believes that CHGI should be getting some Chinese Nuclear
Plants as clients in the near term (see Overview Of Business section below).
With shares trading at $0.94 per share
China Vesting believes that the company is
undervalued and will reward shareholders who have a long term...(12-24
months) view. The stock is up 17.38% today
making us sick for not introducing China Carbon last week to China
Vesting readers. We thought about waiting for the stock to pull
back a bit before adding it to the Undervalued index but based on the
company's cash position and now 180 million RMB loan, it is worth
taking a look at the company now.
China Carbon Graphite Group is engaged in the manufacture of graphite
based products in the People's Republic of China.
The company's products are either used in the manufacturing process for
other products, particularly metals, or for incorporation in various
types of products or processes. CHGI believes they are the
largest wholesale supplier of fine grain graphite and high purity
graphite in China and one of China's largest producers and
suppliers of graphite products overall. CHGI currently
manufactures and sells the following types of graphite products:
graphite electrodes; fine grain graphite; and high purity graphite.
Approximately 40% to 50% of CHGI's graphite electrodes are sold
directly to end users in China, primarily consisting of steel
manufacturers. All other sales are made to over 200
distributors located throughout 22 provinces in China. CHGI's
distributors then sell the company's products to end customers both in
China and in foreign countries, including Japan, the United States,
Spain, England, South Korea and India. In 2010,
CHGI's primary strategy is to increase gross profits by better aligning
overhead costs with existing levels of sales and pricing and to acquire
other businesses within the industry that manufacture products that
CHGI does not currently manufacture which CHGI expects to
generate significant profits.
The company's long-term strategy is to expand product offerings by
manufacturing nuclear graphite used as a reflector or moderator in
nuclear reactors in China. The profit margin on these products would
be significantly higher than the profit margin on the company's current
line of products. There are currently 11 nuclear power plants
in China, with 15 more plants currently under construction.
These power plants currently purchase their nuclear graphite from
manufacturers in foreign countries, including Japan, Germany and the
United States, which involves greater costs than purchasing from local
Chinese companies. CHGI knows of only one graphite
manufacturer in China that currently produces nuclear graphite that
meets the specifications of these power plants. Only graphite rods with
a diameter of more than 840 millimeters and a purity of more than
99.9999% may be used in nuclear power reactors. To date, CHGI has
produced only samples that meet these standards. The largest
graphite that we currently produce in large quantities that contains
such a high level of purity has a diameter of 600 millimeters.
|Fiscal Year December 31, 2009
|Full-year Results (USD)
|(Years ended December 31)
|GAAP Net Income (Loss)
|Adjusted Net Income
|GAAP EPS (Basic and Diluted)
|Adjusted EPS (Basic and Diluted)
In connection with the
private placement offering in December 2009 and January 2010, the
Company agreed to certain covenants in the event that the Company did
not meet the performance target for fiscal year ended December 31, 2010
of net income of at least $5.1 million ("Make Good"). It
looks highly unlikely that the company will achieve its "make good"
numbers unless the next two quarters are just blockbuster.
Here is what the company had to say for the first six months of 2010,
During the six months ended June 30, 2010, we had sales of $8,095,000
as compared to sales of $6,551,000 for the six months ended June 30, 2009,
an increase of $1,544,000 or approximately 23.57%. The low sales
revenue in the first two quarters 2009 was primarily due to weak demand
of graphite products, graphite electrode in particular in 2009, as well
as the residual effect of the closedown of our facility in anticipation
of the 2008 Olympics. Our revenue for the six months ended June 30,
2010 was mainly from sales of fine grain graphite, graphite blanks and
semi-processed graphite products. We experienced a significant decrease
in the demand of graphite electrodes and high purity graphite during
the six months ended June 30, 2010 resulting from the global economic
the six months ended June 30, 2010, two customers accounted for 10% or
more of sales revenues, representing 32.9% and 18.8%, respectively of
the total sales. As of June 30, 2010, there were three customers that
constitute 23.3%, 16.9% and 10.8%, respectively of the accounts
receivable. As of December 31, 2009, there were three customers that
accounted for 17.6%, 15.4%, and 14% respectively of the accounts
of sales; gross margin. During the six months ended June 30, 2010, our
cost of sales was $6,842,000 as compared to $4,857,000 during the six
months ended June 30, 2009, an increase of $1,985,000 or 40.87%. As a result,
our gross profit decreased $441 or 26.03%, for the six months ended June
30, 2010. Our gross margin decreased from 25.86% for the six months
ended June 30, 2009 to 15.48% for the six months ended June 30, 2010.
The decrease reflects the variance in production mix. We increased
sales of graphite blanks and semi-processed graphite products due to
the significant decrease in demand of high purity graphite and graphite
electrodes. These products have much lower gross margin.
Net income. As a result of the factors described above, our net loss
for the six months ended June 30, 2010 was $(138,000) as compared to
net income of $1,000,000 for the six months ended June 30, 2009, a decrease
of $1,138, or 113.8%. At June 30, 2010, cash and cash
equivalents were $8,059,541.
As you can see from the chart below, CHGI traded in the range
$1.25-$3.25 late April of 2010. The stock went on a crazy run in
March of this year for no apparent reason. The company issued
guidance for $5.1 million net or $0.25 per share on April 19, 2010 but
the stock started taking off a month earlier. The only other
news/events at that time was the announcement on March 3, 2010 with China
Carbon Signing a Letter of Intent to Acquire Chiyu Carbon Graphite
Limited. The point we wanted to illustrate is that CHGI can
move quickly on the upside and the downside.
The 200 day moving average (DMA)
is currently at $1.09 per share.
If CHGI breaks through this resistance line we believe there is
not much to hold back the stock until the $1.40-$1.50 levels.
Based on Thursday closing price of $0.94 per share
the total market capitalization is $18.95 million. With over
$8 million or $0.40 per share in cash and a 180 million RMB loan from China Construction
Bank....China Vesting believes CHGI is undervalued and will begin to
see improving fundamentals.