Review of Three China IPOs

by: super-trades

1) Duoyuan Global Water Inc. - NYSE Listing (DGW)

What They Do:

We are a leading China-based domestic water treatment equipment supplier. Our product offerings focus on addressing the key steps in the water treatment process, such as filtration, water softening, water-sediment separation, aeration, disinfection and reverse osmosis. Founded in 1992, we offer a comprehensive set of more than 80 complementary products across the following three product categories:

• Circulating Water Treatment Equipment
• Water Purification Equipment
• Wastewater Treatment Equipment

Links: F-1 Filing, Roadshow Presentation

The Numbers:

  • Float will be 5m. Outstanding will be approximately 21m. (Each ADS represents two ordinary shares. There will be approximately 42m ordinary shares outstanding after this deal).
  • Revenue growth 40% 2008 vs 2007 and 39% Q109 vs Q109. Net Income growth 63% 2008 vs 2007 and 92% Q109 vs Q109.
  • They did 19.5m of Net Income in FY 2008.
  • Expected Pricing $13-$15

Super-trades Summary: This is perhaps one of the sexiest sectors that exists. Water is a scare resource, especially in China. China is predicted to lead the world out of this recession.

When I take the 19.5m of net income divided by the post-IPO ADS shares outstanding of 21m I get .93 trailing EPS with the company growing revenue and net income in Q109 by 39% and 92%, respectively.

At $15 pricing that is about a 16 trailing P/E. Mix in a 5m float and I expect this IPO to generate strong interest. The only question is how high does it gap up. Under $20 I will try some shares.

Sympathy Plays:

  • CLWT - Small cap play on this IPO similar business. Due to release annual report in June. I am sure those that like lower priced stocks come for this in a sympathy trade.
  • OTC:RINO - Similar business with much better EPS and priced at what I consider to be ridiculously cheap. (Currently P/E of 4-5) Read why I think RINO.OB is a much better play than DGW. Applying the 16 P/E on RINO.OB recent EPS run rate would make it a $32 stock.

2) Chemspec International - NYSE Listing (NYSE:CPC)

What They Do:

We are a leading China-based contract manufacturer of highly engineered specialty chemicals. In particular, we are the largest manufacturer of fluorinated specialty chemicals in China based on sales with a share of approximately 21% and 25% of the Chinese market in 2007 and 2008, respectively, according to a commissioned report prepared by Frost & Sullivan. We manufacture specialty chemicals, which are typically highly engineered chemicals used as building blocks in the manufacture of more advanced chemicals or to enhance the performance of the end products manufactured by our end users in various industries including electronics, pharmaceuticals and agrochemicals.

Links: F-1 Filing , Roadshow Presentation

The Numbers :

  • Float will be 8.1m. Outstanding will be approximately 36m. (Each ADS represents 60 ordinary shares. There will be approximately 2.1B ordinary shares outstanding after this deal).
  • Revenue growth 60% 2008 vs 2007 and 23% Q109 vs Q109. Net Income growth 34% 2008 vs 2007 and -44% Q109 vs Q109.
  • They did 45.9m of Net Income in FY 2008.
  • Expected Pricing $7-$9

Super-trades Summary: China is predicted to lead the world out of this recession. When I take the 45.9m of net income divided by the post-IPO ADS shares outstanding of 36m I get 1.28 trailing EPS. The company grew revenue by 23% in Q109, yet net income declined by 44% due to lower margins and increased R&D expenses. They also mentioned a slowdown due to the global recession that they gradually see recovering

I am sure that affected the pricing range. At $9 pricing that is about a 7 trailing P/E. I need to see how well this is received, but I think a 10 P/E range would not be unreasonable for this company. It could get a higher one if they convince investors that net income growth will continue. Would try some around the pricing range or 10% above but will not chase unless I sense it is getting interest.

Sympathy Plays :

  • CPC may not have enough interest to push some sympathy plays. However if this IPO is well received, then OTCPK:NOEC and OTC:SDTH are two small cap sympathy trades to watch.

3) Skystar Bio-Pharmaceutical Company - Nasdaq Listing (OTC:SKBO)

What They Do:

Skystar is a China-based developer and distributor of veterinary healthcare and medical care products. Skystar has four product lines (veterinary medicines, microorganisms, vaccines and feed additives) and over 170 products, with over 40 additional products in the developmental stage. Skystar has formed strategic sales distribution networks covering 29 provinces throughout China

Links: S-1 Filing , Company Presentation

The Numbers :

  • Float will be approximately 1.5m. Outstanding will be approximately 3m. The company currently trades on the OTCBB and will do an IPO on the Nasdaq with the placement of 1m shares.
  • Revenue growth 70% 2008 vs 2007 and 42% Q109 vs Q109. Net Income growth 63% 2008 vs 2007 and 73% Q109 vs Q109.

Mind Boggling Numbers - In the S-1 filing, Skystar reported $3.07 EPS for FY 2008 and $0.57 EPS for first quarter 2009. Revenue was up 70% in FY 2008 vs. FY 2007. Revenue was up 42% and Net Income was up 73% in the first quarter of 2009.

More Mind Boggling Growth - From the S-1:

Manufacturing Facilities. We intend to complete a vaccine manufacturing facility with approximately $2.5 million from the net proceeds of the offering. Under our current plans, this facility is expected to be completed by the fourth quarter of 2009 and obtain GMP certification in late 2009. Once completed, we believe that this facility will increase production capacity by 6 billion units, or 2,300.0% from 250 million units, with a value of $14.0 million in projected revenue at a gross margin rate of 60-70%.

Additionally, we are planning to construct a new production facility for micro-organism and feed additives with approximately $1.5 million from the net proceeds of the offering. Under our current planning, the annual production capacity of this production facility will be approximately 4,000 metric tonnes, an increase of 48.7% from our current capacity of 8,200 metric tonnes. We anticipate construction to complete in the fourth quarter of 2009.

By my calculations, with the addition of these two facilities the company will have the potential to add up to $14m additional revenue at 60-70% gross margin rate from vaccines and approximately $3m in feed additives (facility increases capacity by 49% and they did $5.9m in this category in 2008 at a 65% blended gross profit margin - see the presentation).

If they can produce and sell this extra capacity, I calculate that as an additional $10m in gross profit. In Q1 2009 the Net Income margin was around 28%. So this extra capacity (if produced and sold successfully and at these same margins) could add another $1 EPS in 2010 by my calculations.

In 2008 (see the presentation and the S-1 they did $3.07 EPS on the shares outstanding), Skystar had $5.6m of net income that included $1.1m of non-recurring expenses, or $6.7m adjusted net income. If I divide that by the new post-IPO share count of approximately 2.9m, I get EPS of $2.31. Now, in the first quarter of 2009, net income was up 72% YOY.

If the company hypothetically can even grow net income by 30% for all of 2009 over 2008, that $2.31 would go to $3.00 EPS with the new shares offered.

In 2010 if they have these new facilities in place and produce and sell with the above assumptions from the S-1 that would calculate to another $1 EPS. Going by my calculations, I see a scenario where if all falls into place perfectly this company could do $3+ EPS in 2009 and $4+ in 2010. (Not to mention potential growth from the many products they have awaiting approval) You can use your imagination with a 10-20 P/E ratio. Again, this is what I see as potential when I look at their numbers and information, not a prediction or guarantee.

Lastly, according to the company website, they are also working on an Avian flu vaccine for the birds themselves.

While larger international companies are focusing on vaccines to prevent people from catching avian flu, Skystar's focus is on vaccines to be administered to farm chickens and other poultry to prevent them from catching H5N1 Avian Influenza. This type of vaccine is well within Skystar's current scope and expertise and could potentially prevent an epidemic/pandemic by controlling an outbreak at the source (the poultry).

Super-trades Summary: This is perhaps one of the most exciting scenarios I have seen in sometime. If the company can do $3+ EPS in 2009 then this is pricing at a P/E of 3! If DGW ends up with a P/E of 20+, applying that to $3 EPS would be a stock price of $60.

With this float and amazing EPS and low valuation, if the momentum/valuation crowd shows interest, I can see this stock being one of those rare stocks that runs to the $30-$50 range like EFUT did in 2006.

Sympathy Plays: Any low float China stocks with great EPS and low valuations.

Disclosure: I am long SKBO.OB. This blog is my opinion and not investment advice or a prediction of future prices.