Big Money, Big Growth, And Lots Of Copper!

We’ve been covering a lot of China stocks recently. In terms of value it’s hard to beat some of the asset rich Chinese companies. The most important factor for many of these companies though is growth.  As we all know growth has slowed considerably in the US and a bit in China.

But China has been a manufacturing machine for a while now.  Many of those companies are still expanding rapidly which is creating a ravenous demand for materials… and it doesn’t show signs of halting.

 

QUICK FACTS

Ticker                                      LIWA

Industry                                   Copper

Recent Price                            $6.13

Market Cap                              $182.48 m

Shares Outstanding                  29.8 m

Average Volume                       93,056

Dividend Yield                          N/A

Website                                  http://www.lihuaintl.com/

 

COMPANY DESCRIPTION

Lihua International (LIWA) manufactures copper products. Their four main lines are copper anode, pure copper wire, pure copper rod, and copper-clad aluminum wire.  Most of these products are purchased and used by other businesses in their products.

The company gets a lot of their copper from a proprietary recycling process.  Lihua says this process is more cost effective than using newly minted copper.  What’s more, the purity of their recycled copper actually exceeds government and industry standards according to management.

Just last year, the company doubled their copper recycling capacity to 50,000 tons annually.

 

FINANCIALS

Year over year revenue in Q2 saw a massive increase. Over 121%, to $92 million!   Best of all, the company’s net income is up over $4 million… a huge 45.9% increase.

One reason profits aren’t growing as fast as revenue is product mix.

The company began manufacturing copper anode in August 2010. There’s obviously a lot of demand for the product, as it accounts for 44% of their revenue just a year into production.  The downside is anodes are a lower gross margin product.

In Lihua’s Q2 conference call management made their case for the anode business. It has a short production schedule and cash conversion cycle. Despite the lower gross margin net income is actually going up. It’s more cost effective than investing similar assets into their higher margin wired products.

Plus, you can’t argue with the demand.

 

KEY METRICS ANALYSIS

Trailing P/E                                       3.9 x

Price / Sales                                     0.3 x

Return on Assets                               22.5%

Insider ownership                               54.7%

Short Ratio                                        7.5 x

Current Ratio                                      8.2 x

Total Debt To Equity                            1.3

 

RECENT EVENTS

In late June the company received an environmental import license from China’s environmental protection ministry. Importing scrap copper for recycling is surprisingly cheap.

The company estimates $150 per ton savings on imported scrap. It’s certainly a good way to start lowering the cost of goods sold.

Despite doubling their recycling capacity last year, it’s not enough.  So at the end of 2010 they broke ground on another plant. That facility, slated to begin production in Q4, will again double capacity. From 50,000 tons to 100,000 tons annually.

 

MANAGEMENT TEAM

Jianhua Zhu – Chairman and CEO

Yaying Wang – COO

Roy Yu – CFO

Daphne Huang – EVP of Corporate Finance and Director of Investor Relations


STOCK ANALYSIS

 

 

 

 

 

 

Chart Courtesy of StockCharts.com

 

LIWA has been trading around its 50-day moving average for the past couple of months.

LIWA’s 52-week low was $5.19 and the 52-week high was $13.05.  Right now the stock is trading at $6.13.  The 50-day moving average is near $6.96 a share and the 200-day moving average is at $7.76.  The company has a market cap of $182.4 million and 29.8 million shares outstanding.

 

 

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