Chinese Graphite Leader Trades At A Quarter Of Its Book Value

| About: China Carbon (CHGI)

China Carbon Graphite Incorporated (OTCPK:CHGI) seems to have been left behind in the graphite boom as its peers experienced astronomical climbs in share value. With a current market capitalization of just $11.64 million, China Carbon Graphite Incorporated trades at a mere 24% of its $49 million book value. This depreciated share value is an overreaction driven by the burst of the graphite stock bubble in addition to short-term macroeconomic challenges. Investors should jump on this cheap entry point into the rapidly growing graphite industry.

Graphite industry

All the signs point to a coming graphite boom in the next few years. The 2010 Nobel Prize for Physics was awarded to Andre Geim and Konstantin Novoselov for their pioneering work with the graphite-based super-material, graphene. Famous for being as thin as an atom and many times stronger than steel, graphene is also incredibly conductive, with the potential to revolutionize microchips, batteries and by extension, the entire tech industry. This has motivated the world's most influential organizations, from Cambridge University to Nokia (NYSE:NOK) to the European Union to invest billions in researching applications for graphene.

In addition to the prospect of becoming the crux of future technology, traditional applications of Graphite in steel manufacturing are also increasing. Demand is projected to surpass supply within by 2014 and will continue on that trajectory through the next decade.

Investors have sprung on the overwhelming opportunity for graphite companies. In the past year, graphite companies became the darlings of penny stock traders, surging to absurd valuations. But the bubble has burst, pulling many graphite stocks back down and in some cases, well below their fundamentals.

CHGI the Best Value Pick

In the wake of the graphite stock crash, investors should look at fundamentals, rather than speculative growth, to determine the best picks. By almost all measures of fundamental value, there exists no better play than China Carbon Graphite Group.

China Carbon Graphite is the largest supplier of fine-grain, high purity graphite in China yet it as one of the lowest market caps among the major stocks in the graphite industry.

With a vast portfolio of property and land rights, CHGI holds $123 million in total assets, several times as much as other major players in graphite. For comparison, Northern Graphite (OTCQX:NGPHF), one of the better performing graphite company, holds just $16.8 million in assets yet has a market capitalization over $50 million. In fact, CHGI is one of the only graphite companies trading for less than assets, with some companies like American Graphite Technologies (OTCPK:AGIN) holding less than a $1 million in assets yet commanding market caps in the tens or even hundreds of millions.

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Of CHGI's $123 million in assets about $74 million can be offset by liabilities resulting in approximately $49 million in tangible net worth. The current share value of $0.48 represents a market cap of $11.64 million. At this price, CHGI's book value suggest a more than 400% upside to its current market cap.

In addition to a strong balance sheet, CHGI posted revenue of $28.43 million over the past 9 months, many times the revenue of other hot graphite stocks, many of which are still exploration stage. CHGI's a .44 price to revenue ratio is extremely modest, especially considering their prominent position in a rapidly growing industry.

However, while CHGI's revenue is huge, earnings have come under pressure lately from the Chinese economic recession. Due largely to a depreciated renminbi and a slowing Chinese construction industry, one of CHGI's major markets, gross profit has slid from $3.07 million to $1.77 million year over year for the quarter ending September 30. This left CHGI with a loss for the quarter as shown below.

As a result, shares are trading at less than half what they were before the crash. Investors should view this as an opportunity. CHGI has weathered the economic downturn well and even managed to increase gross profit by 4.4%. Despite the quarterly loss, CHGI has posted positive income for the year that can be attributed to a very strong Q1 before the Chinese recession. Furthermore, most economists agree that China will quickly reverse its slide. Chinese leaders have promised a return to annual growth around 7.5% through the next decade.

CHGI's revenue and margins will increase drastically as China's rebound is compounded with the projected 25% annual growth in the graphite industry. As business thrives, CHGI has the potential to trade well above its current book value. I believe it will exceed $1.00 by 2014 and $3.00 by 2016. Investors thinking long term should take a stake in the company now.

Disclosure: I am long OTCPK:CHGI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.