China Tracker - Details for China Gengsheng Minerals (CHGS)

 China Gengsheng Minerals
 Analyst Coverage
2011-08-15Rodman & RenshawReiterationMarket Performn/a
 

Watching the expenses In light of China's increasingly inflationary environment, the company's slightly below-expectation gross margin in Q2 did not strike us as a major surprise. The moderately higher than expected operating expenses were also not necessarily alarming, in our view. Our major concern resides in the significant increase of finance costs, and more specifically, increase in bills discounting charges, in the quarter. Based on our understanding, this bills discounting charge is effectively another form of interest expenses associated with bank acceptance that some Chinese corporate borrowers need to pay in order to receive funding. While we acknowledge Gengsheng's capital need for its capacity expansion efforts, as illustrated by the company's $8.3 million net cash outflow from investing activities during the quarter, the magnitude of these finance costs really was the difference between a profitable quarter and an unprofitable one. Thus we would certainly like to see the company better manage this expense item going forward.

2011-05-18Rodman & RenshawReiterationMarket Performn/a
 

For the fifth consecutive quarter, China Gengsheng Minerals delivered its quarterly earnings results that missed our expectations. Revenue in 1Q11 came in at $16.2 million, while up 36.4% YoY, did miss our estimate of $17.6 million. Gross profit increased 7.9% YoY to $4.3 million, but missed our estimate of $4.7 million. Gross margin in the quarter was 26.5%, more or less in-line with our estimate of 27.0%. Operating expenses of $3.6 million were a touch lighter than our estimate of $3.9 million. On the bottom line, Gengsheng incurred a net loss of $79,934 for the quarter, translating to an approximate $0.00 EPS, below our respective estimates of a net income of $0.5 million or $0.02 EPS.

2011-03-22Roth CapitalDowngradeSuspendedn/a
2011-02-01Rodman & RenshawReiterationOutperform$2.80
 

We are maintaining our Market Outperform rating and $2.80 price target on the shares of Gengsheng. The $2.80 price target is based on the shares trading at 8.5x our 2011 diluted EPS estimate of $0.33. Major risks to our rating and price target include the company's heavy dependence on the steel industry, refractory market demand risk, intense industry competition, capital raising uncertainty, business execution risk, fluctuation of raw material prices, environmental liability risk, as well as political and regulatory risks related to operating in China.

2011-01-03Roth CapitalDowngradeSell$2.60
 

Downgrade to Sell based on valuation – We increase our price target to $2.60 from $1.80 driven by broader market multiple expansion. Our PT is based on a 13x multiple to our CY:11 EPS of $0.20. However, we downgrade to Sell from Neutral given the recent upward move in the stock is not fundamentally driven. While we understand the company's proppant sales have gained significant improvement, upside is limited given the current capacity constraint. We are also conservative on our assumed abrasives product ramp until visibility improves and sales ramp.

2010-11-22Roth CapitalReiterationNeutral$1.80
 

We are encouraged by another qtr of strong proppant sales and expect the trend will continue in 2011. As expected, the refractory segment was impacted by a steel production slowdown. Total shipments of abrasives was, again, shy of management guidance and our expectation. Though management anticipates significantly higher abrasives sales going forward, we are still cautious on CHGS and await better visibility.

Top line beat on higher proppant sales – CHGS reported revenue of $16.7 mm, above our projection of $15.3mm, attributable to higher proppant sales. The company sold a total of 13.9K metric tons of proppants at $363/ton vs our estimate of 8.3K metric tons at $417/ton. EPS was $0.04, a penny below our estimate, affected by higher SG&A and interest expenses. Strong proppant sales continue – We are encouraged by proppant sales upside. With one additional production line added (partially offsetting obsolete capacity), combined with international orders, we raise our proppant output expectation for 4Q10 and 2011.

Abrasives revenue, again, below expectations – Management expected during Q2 that abrasive sales for 2H10 would be 2,000 metric tons. However, the company only shipped total 63 metric tons. While management projects 200 tons per month for this year and higher for 2011, we continue to take a conservative approach in our assumptions until visibility improves. We now predict a total production capacity of 85 metric tons for Q4, and 745 for 2011, significant lower than our previous estimate of 3,400 tons.

Changes to our model – We increased our Q4 revenue estimate on higher proppant sales but lower our EPS projection, attributable to higher interest expense. For 2011, we lower both revenue and EPS estimates to reflect decreased abrasives projections. Maintain NEUTRAL rating and $1.80 PT based on a 9x multiple to our CY:11 EPS of $0.20. While we believe there is upside potential in the abrasives segment, we await better visibility on abrasives production and sales.

2010-08-12Roth CapitalReiterationHold$1.80
2010-08-11Rodman & RenshawReiterationOutperform$2.80
 

We maintain our Market Outperform rating but lower our price target to $2.8 on the shares of Gengsheng. The shares of Gengsheng are currently trading at 7.2x and 3.8x our respective 2010 and 2011 EPS estimates, relative to a projected 2008-2011 EPS CAGR of 27%. This in our view still represents a fairly attractive valuation. Our new 12-month price target of $2.8 is now based on the shares trading at 8x our 2011 diluted EPS estimate of $0.35. The 8x multiple represents a 27% discount to the average P/E multiple of 11x currently commanded by Gengsheng’s peer group.

2010-06-08Rodman & RenshawReiterationOutperform$4.00
 

We are not adjusting our top line and bottom line estimates at this time since we have already factored in significant growth in the fracture proppant segment in our model. Thus we maintain our Market Outperform rating and price target of $4. Our price target of $4 is based on the shares trading at 15x our 2010 diluted EPS estimate of $0.27.

2010-05-19Roth CapitalDowngradeHoldn/a
2010-05-18Rodman & RenshawInitiationOutperform$4.00
 

We have tweaked our model and revised our estimates. For Q2, we expect the company will realize $17.9 million of revenue. Among them, the monolithic refractory line will contribute $13.0 million, fracture proppants will generate $4.2 million, and $0.4 million will come from fine precision abrasives. We estimate pro forma net income will be $1.8 million, or $0.07 per diluted share. For FY2010, we estimate revenue will be $73.5 million, and pro forma net income will be $6.4 million, or $0.27 EPS.

2010-04-15Red ChipReiterationBuy$4.50
2010-04-01Rodman & RenshawInitiationOutperform$5.00
 

Our 12-month price target of $5 is based on the shares trading at 15x our 2010 EPS estimate of $0.34, representing a PEG ratio of 0.3.

2009-12-10Red ChipInitiationBuy$4.50
 

Supplying precision abrasives to the surging solar industry offers new growth potential for CHGS in 2010 with the potential to double the Company's revenue within three years. With its abrasives production line completed and its first shipment expected to be delivered in the fourth quarter of 2009, we see significant upside potential if the Company can build upon this initial order. We estimate CHGS' current manufacturing capacity of 20,000 mmt per year allows for approximately $88 million in annual revenue at current sales prices. Better still, gross margins of 50% or better are expected for the new abrasives product compared to margins in the 20% and 30% range for the Company's legacy products.

CHGS
Steel
SCORE
2
READ: Score Cards Explained
SAFETY/RISK SCORE
HIGH RISK
DETAILS: Safety/Risk Model for CHGS
Current Price:  $0.01
F10k Day (2007-10-17): -99.87%$3.75
2009 Close: -99.78%$2.25
2010 Close: -99.91%$5.15
2011 Close: -99.28%$0.69
High (2012-02-03): -99.58%$1.18
Low (2012-08-20): -98.53%$0.34
Exchange: PNK
Market Capitalization: 0.13 mill
Total Shares: 26.63 mill
Float: n/a
Avg Volume: 306.70 k
Short Interest: 883.50 k
Short Ratio: 0.03%2.9 d
Last Quarter: 2011-03-31
Revenue (MRQ): 16.18 mill
Net Income (MRQ): -0.34 mill
Op. Cash Flow (MRQ): -0.46 mill
all financial data provided without warranty