Research and Trading Portal for US-listed China Stocks · March 25, 2017
China Tracker - Details for China Gengsheng Minerals (CHGS)
China Gengsheng Minerals
During the first half of the year, we launched several strategic growth initiatives to address the large and growing fracture proppant market, including capacity expansion, and a joint development agreement with a North American fracture proppant distributor to address the U.S. and Canadian markets. We believe these initiatives will position GengSheng to capture additional market share as we build brand recognition, both domestically and internationally and continue to leverage the strong, rapidly growing demand from oil and gas producers.
Although we have faced challenges in the last several quarters, we believe our business is on the right track and are optimistic with regard to the future. We have two important catalysts in fine precision abrasives and the international expansion of fracture proppants. We expect our full-year blended gross margin to improve to 27% to 30%, and to achieve profitability as we are improving production efficiency, to ramp production volume and improve our raw materials sourcing capabilities, while continuing our efforts to better manage accounts receivable and collections.
China GengSheng Minerals today announced that it has signed an agreement to acquire 24.5% ownership in the Yili Yiqiang Silicon Company for RMB 15 million (approximately US$2.3 million). Yili Yiqiang is a manufacturer of green silicon carbide (SiC), which is the primary material used in the production of GengSheng's fine precision abrasive products. The Company funded this investment through a combination of cash from operations and domestic commercial bank loans. It is expected to close by April 10th, 2011. Yili Yiqiang has green SiC reserves of approximately six million metric tons, and current annual production capacity of approximately 16,000 metric tons. Yili Yiqiang expects 2011 revenue of approximately $24 million, based on current production capacity and an average green SiC price of $1,500 per metric ton.
"Acquiring a minority stake in Yili Yiqiang enhances our emerging fine precision abrasives products and furthers our strategy to increase our sales and margins in this segments of our business. With raw material costs high and continuing to rise as a result of tight capacity, our ability to improve the sourcing of high-quality, cost-effective green SiC was crucial to our success in this market. In addition to cost savings, we believe this investment will allow us greater control over the raw material production process, further improving the quality of the green SiC that Yili Yiqiang manufactures."
We believe the current macroeconomic environment is highly conducive to GengSheng's top and bottom-line growth. In addition to increased drilling activity and a great deal of potential in the solar industry, we believe the steel market in China is poised to build upon a record year in 2010, when output totaled 626.7 million metric tons, which is encouraging for our refractories business. Given our position as a leading innovator in the Refractories market, we are actively working toward the development of new, value-added products that help address the efficiency, environmental and cost issues currently facing steel manufacturers. We are excited about the potential that exists in each of our end markets, and confident that we have the right strategy and the resources necessary to build our business, expand our margins and improve our bottom line, ultimately leading to increased shareholder value.
China GengSheng Minerals today announced that it has signed a definitive agreement with a local affiliate in Gongyi, Henan Province to manufacture 30,000 metric tons of its fracture proppants through the end of 2011. With this addition, China GengSheng has increased its total annual fracture proppant capacity by 20% to 90,000 metric tons. In conjunction with this new agreement, the Company has decided to terminate its operating lease, entered in October 2010, and ceased production of fracture proppant products at its leased manufacturing facility in Gongyi, Henan Province.
As a result of the rapid economic development in Gongyi City, the local government has implemented measures aimed at improving quality of life for Gongyi residents, including construction and development of both rural and urban areas. The leased facility, which was expected to increase GengSheng's annual fracture proppant manufacturing capacity by 15,000 metric tons, to 75,000 metric tons, is located in an area of the city impacted by the government's development plans. The facility has been subject to regular power outages and other restrictions that have impacted manufacturing operations, rendering the facility unsuitable and impractical for the large-scale production of proppant materials. Given the cause of the lease termination, the facility's owner has released GengSheng from the lease agreement without penalty and liability.
"The worldwide increase in drilling activity continues to drive demand for our fracture proppants from both domestic and international customers. In 2010 our fracture proppant orders totaled $14.3 million, and we have received 2011 orders totaling approximately $15.9 million thus far in the first quarter. To better capitalize on the maturing fracture proppant market, we are actively looking to further increase our manufacturing capacity in 2011. We are currently evaluating strategic acquisition or new construction to effectively deploy our assets and best capitalize on the near- and long-term opportunity within this growth market where we believe we can achieve substantial revenue gains and expand our margins."
"During the second quarter, we began the remodel of our fine precision abrasive production lines in order to prepare for the commercial launch of the product. We completed this work at the beginning of August and expect to launch commercial production late in the third quarter. The expected release of this important product line, coupled with increases in sales activity and order flow in both our refectories and fracture proppants businesses, gives us a great deal of confidence that we will grow our business in the second half of the year."
We have secured approximately $9.5 million in fracture proppant contracts during the first two quarters and continue to see strong growth prospects early in the third quarter as we shore up existing relationships and attract new customers. The recent upgrade of our phase II production line has significantly enhanced our manufacturing capabilities and we are well positioned to address increasing demand for our high-margin, premium products. We are working diligently to continue growing this segment of our business during the second half of 2010 and we are confident that demand will remain healthy as new and existing customers recognize the benefits of our fracture proppant products.
China GengSheng Minerals today announced that it has completed its technological improvements and commenced production on its upgraded fracture proppant manufacturing line. With these enhancements, GengSheng expects to realize cost reductions of up to 10% annually, as well as produce a broader range of proppant products for the oil and gas exploration industry.
Because of our market leadership, new growth initiatives and reputation for quality, we believe that we are well positioned as steel, oil and solar markets begin to improve both in China and abroad. Looking ahead, we are optimistic about year 2010. Based on our current sales estimate, we expect our growth to continue.