Guanwei Recycling Corp (NASDAQ:GPRC) is China's largest manufacturer of recycled low density polyethylene (LDPE). Adhering to the highest "green" standards, it has generated rapid growth producing LDPE from plastic waste procured mostly in Europe for sales to more than 300 customers (including over 150 active, recurring customers) in more than ten different industries in China. Guanwei Recycling Corp is one of the few plastic recyclers in China that has been issued a Compliance Certificate by Umweltagentur Erftstadt, which issues certificates of approval for certain plastics manufacturers which meet strict environmental standards in Germany.
Shares Outstanding(1) 10,407,827
Total Cash $13,236,896
Cash per Share $1.27
Total Debt $383,118
Net Income/Share(3) $0.59
Shares Outstanding are based on a 1:2 reverse stock split effective December 5, 2012
Includes revenue for the first 3 quarters of 2012 and the 4th quarter of 2011
Calculated from net income for the first 3 quarters of 2012 and the 4th quarter of 2011
According to the Plastic Industry Statistics & Research Report (2008), since 2004, with national production capacity exceeding 20 million tons, China has become the second largest plastics products manufacturing country in the world after the United States. China's plastics industry has benefited greatly from its low production and labor costs, as the manufacturing and recycling of plastics products have been outsourced from higher-cost countries to China and other low-cost countries. The lower production costs have allowed the plastics industry worldwide to experience strong growth in sales over the last several years. In the U.S. and Europe, plastics industries outperform overall manufacturing industries and are a strong force in international markets. According to the Plastic Industry Statistics & Research Report (2008), the worldwide average annual growth rate of the plastics industry from 1999 to 2005 was 5.02%, while the average GDP growth rate for the same period was 2.43%. In China, the growth rate of domestic plastic consumption from 2001 to 2005 exceeded 19% annually, while the Chinese GDP growth rate averaged 9.5% for the same period.
The Plastic Industry Statistics & Research Report (2008) further states that, in particular, China's plastics manufacturing industry experienced an annual growth rate of greater than 18% from 1990 to 2001, and in 2008 the growth rate was 11%. According to the website of the Chinese national plastic industry (51plas.com), in 2007, 14,592 Chinese plastic manufacturers realized a total profit of RMB 802 billion (approximately $110 billion), and 16,300 manufacturers realized a total profit of RMB 964 billion (approximately $141 billion) in 2008. China consumed more than 50 million tons of plastics in 2008, 24% of which was produced by recycled plastics.
So why Guanwei Recycling Corp? At its current price of $1.80, we see the stock trading at one half of its current fair value and at nearly one quarter of its future value, and here's why:
The company recently reported that net revenues in the 2012 third quarter increased 7.36% to $17,905,974 compared with $16,679,012 in the same period last year based on increases in sales prices and tonnage sold. Revenues for the nine months ended September 30, 2012, which included the low margin sale of $3,462,238 of certain raw materials in the first half of 2012, increased 13.30% to $52,772,402 compared with the year ago period.
More importantly, Mr. Min Chen, Chairman and CEO of the Company, stated:
Despite the economic downturn in China we again managed to generate quarter over quarter sales growth from our increasingly diversified customer base, and saw what we believe is a key turning point in the third quarter with costs moderating as our revenues continued to grow. Looking ahead, we anticipate further moderate increases in selling prices while costs for raw materials, labor and overhead should continue to stabilize or perhaps increase slightly. With the expectation of continued long-term strong demand for recycled LDPE, we remain very optimistic about our continuing growth potential in an improving economy.
Extrapolating on the company's recently announced financials, we project revenue for the current fourth quarter to be within a range $18,000,000 to $18,500,000 bringing the revenue for 2012 to north of $71,000,000 with EPS at $0.65.
Short Term Target (<90 days)$3.90
Long Term Target (1 year $6.82
Our short-term target is based on current cash per share plus EPS inclusive of our projections for the current 4th quarter. Our long-term target is based on the projected 2012 revenue per share. Our projections did not take into account any modest recovery in the Chinese economy or any potential premium reflected in a potential privatization or acquisition. Our projections may be overzealous if costs for raw materials spike with a recovery in the Chinese economy or if China were to experience a cyclical downturn in the near future. If either event were to occur, this would require us to lower our revenue and net income projections.
As a company operating in the Peoples Republic of China (PRC), Guanwei Recycling Corp may be affected by certain political and economic conditions. The PRC may adopt regulations relating to the establishment of offshore special purpose companies by PRC residents and the acquisition of PRC companies by foreign entities, exert substantial influence over the manner in which Guanwei Recycling Corp must conduct its business activities and the currency conversion and exchange rate volatility could adversely affect its financial condition.
In addition, Guanwei Recycling Corp's ability to generate revenue depends upon its ability to secure raw plastic. There is a world-wide market for these materials, and the company faces competition from other low-cost users. To the extent that we are unable to secure enough raw plastic, our business, financial condition and results of operations will be materially adversely affected.
As with any microcap or Chinese company, we suggest caution in opening new positions. DO NOT chase price movements. Pick entry and exit price targets and stick with these as a steadfast rule. Stocks of microcap companies can be difficult to obtain a fill when volume dries up.
Disclaimer: We currently own 3300 shares at prices from $1.70 to $1.85. We will continue to add to our position as the stock price appreciates. Trailing stops will be implemented upon the addition of stock to our position.