NASDAQ Hearings Panel has granted a stay of delisting of the Company's securities pending the Company's scheduled hearing to be held on August 25, 2011. The Company is working diligently to complete its 2010 and 1H 2011 filings as soon as possible and continuing its full cooperation with the Audit Committee's investigation. With these filings and completion of the investigation, Keyuan believes that it will regain compliance with the requirements for continued listing.
Keyuan Petrochemicals announced today that the audit committee has received initial findings of its independent investigation of the Company's 2010 sales and revenue. Deloitte Financial Advisory Services, King & Wood, Pillsbury Winthrop Shaw Pittman LLP and a petrochemicals industry expert, separately verified the accuracy of information related to the Company's 2010 sales.
On March 31, 2011, the Company's audit committee hired Pillsbury, Deloitte, and King and Wood to conduct an independent investigation of issues identified by the Company's former independent public accountant, KPMG. A team of lawyers and forensic accountants reviewed scores of documents at Keyuan's offices, visited select customer locations throughout China, and interviewed representatives of the customers, and senior officers and personnel of the Company. The independent investigators also consulted an industry expert, who has years of experience in the petrochemicals industry, to analyze Keyuan's production plants and operations.
Based on results from the independent investigation, the independent investigators made the following conclusions: Nothing has come to our attention to indicate that the Company has inappropriately accounted for the specific customer transactions we were able to test, other than the documentation issues notes above; the Company-arranged interviews with selected customers supported that the customers transacted business with the Company in 2010; in the documents that we have reviewed, we have found no documents reflecting any intent by the Company to misstate revenues; plant visit and document review by an expert in the petrochemical industry supports the finding that the plant is operating and producing petrochemicals at a quantity consistent with the revenues stated by the Company; and interviews with management and selected Company personnel were consistent with the above findings.
"We are pleased with the results of the independent investigation. The findings support our assertion throughout this process that we are an excellent company on solid financial footing with a clear and focused growth strategy. Having cooperated fully with examiners and regulators during this extensive review process, we will continue to focus on completing our 2010 and 1H 2011 audits."
Keyuan Petrochemicals today announced that it has not completed its 2010 consolidated financial statements by the March 31, 2011 deadline. "Keyuan transitioned to a "Big 4" accounting firm as our auditor in January 2011. The Company believes that this is an appropriate and necessary step given our desire to satisfy the heightened expectations of our investors. The internal accounting team has worked diligently to complete all necessary field work in a timely manner, but has not been able to complete preparation of the financial statements, and management therefore has not completed its review of the consolidated financial statements. In addition, the accounting review conducted to date has identified various concerns that have prompted the Company's Audit Committee to undertake an independent investigation, which must be concluded before the Company will be able to complete its preparation and review of its 2010 consolidated financial statements. The concerns were primarily related to unexplained issues of certain cash transactions and recorded sales. The audit committee has engaged Pillsbury Winthrop Shaw Pittman LLP as its independent legal counsel, and such counsel will engage a separate independent accounting firm to assist in the investigation. Management is fully cooperating with the audit committee and will furnish all necessary materials."
"Management believes that this comprehensive review by the independent investigation will solidify our internal reporting processes and provide more confidence to investors and shareholders, and further hopes that the issues raised will be resolved to the satisfaction of both the audit committee and the auditors. However, there can be no assurance that these matters will be satisfactory completed by April 15, 2011, or that we will be able to file the Form 10-K Annual Report by such date. The audit committee is working as quickly as possible to complete the investigation, but at this time we don't know the timing. As soon as the filings are made, a press release and conference will be held. As a result of the delay in the filing and investigation by the audit committee, the Company requested a trading halt from NASDAQ."
In light of today's announcement and a halt in KEYP trading, we are placing our Market Outperform/Speculative Risk rating and $7 price target under review pending the resolution of the aforementioned issues and filing of the Form 10-K for FY10. We will continue to monitor company's progress in addressing these issues and adjust our rating accordingly.
Rodman & Renshaw
We are initiating coverage on Keyuan Petrochemicals, Inc (KEYP) with a Market Outperform/Speculative Risk rating and a price target of $7. Keyuan is an emerging provider of primary and intermediate petrochemicals utilized in the production of resins, plastics, chemical fiber, coatings, paints and pesticides for automotive, consumer, real estate and agricultural end markets. A relative newcomer to the petrochemical industry, the company is quickly establishing itself as a major player in the sector through aggressive capacity expansion and commercialization of proprietary patented technology that enables cost-effective production of aromatics from cheaper and more readily available heavy oil instead of traditionally used naphtha. Trading at 9x FY10 fully diluted earnings the stock is relatively inexpensive given the company's strong revenue growth and projected capacity expansion to over 1 million MT by the end of 2012. Overall, we believe Keyuan stands to benefit from the long-term economic growth in China which will fuel the demand for a variety of primary and intermediate petrochemicals.
Management guides for strong revenue growth in both FY10 and FY11, expecting revenues and net income of approximately $550 million and $36.3 million, respectively, on 660,000 MT sales in FY10 and revenues of $650.5 million on projected sales of 740,000 MT in FY11. We forecast revenues and adjusted net income of $550.1 million and $35.2 million (after preferred dividends) for FY10 and $654.1 million and $35.6 million in FY11, respectively, which translates to fully diluted adjusted EPS of $0.59 (including the effect of consumption tax rebate) in FY10 and $0.52 in FY11. We view the stock's present valuation as attractive and recommend investors accumulate positions at current level.
We initiate on Keyuan with a Market Outperform/Speculative Risk rating and target price of $7, implying a 37% upside to the current price. Keyuan is currently trading at 9x our FY10 fully diluted EPS estimate of $0.59 (including the effect of consumption tax rebate) and 10x our FY11 fully diluted EPS estimate of $0.52. These multiples are below the current FY10 and FY11 industry averages of 18x and 14x for the U.S.- listed petrochemical companies and 26x and 19x for the Asia-listed petrochemical peer group. On EV/EBITDA basis, the stock is currently valued at 6.3x our FY11 forecasts. We believe the current valuation does not fully reflect the company's technological advantages, rapid historical and projected revenue growth, increasing capacity and strong demand for its products. Our price target of $7 is based on the shares attaining a relatively conservative P/E level of 13x our FY11 fully diluted EPS estimate and 8x FY11 EV/EBITDA multiple.