SDTH - Undervalued Chinese Chemical Stock

SDTH Stock Profile:

ShengdaTech is engaged in the business of manufacturing, marketing and selling a variety of nano-precipitated calcium carbonate (”NPCC”) products and coal-based chemicals for use in various applications. The Company converts limestone into NPCC using its proprietary technology. The unique chemical and physical attributes make NPCC a valuable ingredient in tires, paints, polyvinyl chloride (”PVC”) building materials and other products. NPCC enhances the durability of many products by increased strength, heat resistance, and dimension stabilization. The Company is also engaged in the manufacture and sale of coal-based chemical products namely ammonium bicarbonate, liquid ammonia, melamine and methanol. The Company markets and sells its coal-based products mainly for chemical fertilizers and raw materials in the production of organic and inorganic chemical products, including formaldehyde and pesticides.

Fundamental Evaluation:

SDTH had a very strong first year reporting as a publicly traded company posting some impressive earnings. For fy 2006 they posted revenues of $72.6m with a 28% gross margin and minimal operating costs at just $3.9m SGA leaving them with net income of $17.5m on the year. SDTH’s financial condition was quite impressive as well when i looked over there balance sheet. Currently they’re sitting on $34.6m in cash with an outstanding current ratio of 4.38, 2 is optimal, 4.38 is very nice to see. On top of that SDTH is currently subject to zero long term debt so there financial condition is very healthy and look more that set to move forward with growth.

Industry Comparison:

SDTH looks very undervalued when comparing them to the industry averages. SDTH is trading at just 15.17x earnings compared to the Chemical Manufacturing average of 31.8x so we could expect SDTH’s price action to continue its bullish trend as it attracts more investors, especially since its currently holding a very low forward PE of just 9.53x earnings. The price to sales ratio is slightly above the industries with SDTH at 3.83x and the avg of 2.5x. But the P/S ratio is usually of not that much significance. I like to see it below but with SDTH’s PE ratios so undervalued its not of much importance. As i said before the current ratio of 4.38 is very attractive compared to the avg 2.6.

07′ guidance:

SDTH reported very strong fiscal 07′ guidance on Friday which gave way to a very bullish technical breakout on heavy trading and lead me to further analysis of the company.

Report as follows:

Quote

For fiscal year 2007, ShengdaTech expects to generate revenue of $96 - $98 million, up 32.2% to 35.0% from $72.6 million in 2006. The Company expects net income to increase approximately 31.2% to 36.9% to $23.0 - $24.4 million for earnings per share of $0.43 to $0.45. The Company also expects margins to improve throughout the rest of the year as its higher margin NPCC segment contributes a greater percentage of overall revenue.

”We are very pleased with the progress we have made to date and expect continued growth going forward,” commented Mr. Xiangzhi Chen, CEO of ShengdaTech. ”We continue to operate at full capacity in both of our factories and will have an additional 40,000 metric tons of NPCC capacity in Xi’an City online this month. We also expect to increase NPCC capacity by an additional 60,000 metric tons by the end of 2007.”

Technical Analysis:

SDTH had a very bullish breakout last friday after the PR of their fiscal 07′ guidance was released. Sending price up to as high 33% at one point. Though profit taking took over and drug price down to close up 18% on the day with very attractive volume. Although the closure of the day formed an extended upper shadow with some bearish implications the breakout was solid from the ascending triangle neckline, which signifies the likely possibility of a bullish continuation in price especially when considering the fundamentals in conjunction with technicals. I’m still yet to fill a position but will look to buy in tomorrows session as i think the bullish trend will continue here.

Regards,

Cameron Fous: Portfolio Manager of TheTechnicalTrader.net