Capacity Discrepancies At Lihua International

| About: Lihua International (LIWA)

In its various annual reports, Lihua International, Inc. (NASDAQ:LIWA) has indicated the following information regarding its CCA and copper wire product line:

  12/31/12 12/31/11 12/31/10 12/31/09
Shipment Volume (ton) 46,273 34,743 28,388 15,353
Drawing Machines 80 80 80 80
Production Capacity 26,000- 27,500- 27,500 25,500
(metric tons per year) 33,000 32,500    

In its 2011 and 2012 annual reports, LIWA states that "[t]he above referenced copper wire production capacity does not include the production of the thickest class of copper wire, that with diameter range of 1.65mm to 2.60mm."

However, on August 4, 2011, the SEC questioned "the fact that during 2010 the volumes sold of CCA and copper wire appear to have exceeded 100% of your disclosed capacity." On September 22, 2011, LIWA responded that "[b]ased on the smallest (i.e. 0.03 mm) and largest wire diameter (i.e. 3 mm), we are capable of producing annual production capacities for CCA and copper wire in the range of 6,000 - 8,000 tons and 20,000 - 27,000 tons, respectively." Furthermore, LIWA went on to state that "[c]urrently we do not have plans to expand the production capacity for the existing CCA and copper wire products."

The number of drawing machines has remained the same from 2009 to 2012. LIWA told the SEC in 2011 that capacity was 26,000 - 35,000 tons, based on the diameter of the wire, and that they did not plan on expanding capacity. With CCA and copper wire inventory essentially flat between 2011 and 2012, LIWA cannot ship 46,000 tons of CCA and copper wire in 2012 when they can only produce 26,000 - 33,000 tons.

LIWA reported CCA and copper wire sales of $394 million and an average selling price per ton of $8,510 in 2012. Based on LIWA's reported production capacity, CCA and copper wire sales could not exceed $281 million ($394 million/ 46,273 tons x 33,000 tons), a difference of $113 million. In other words, LIWA inflated their 2012 CCA and copper wire sales by at least $113 million according to their average selling price and stated production capacity.

LIWA's current stock price (5.69 as of May 24, 2013) is close to the stock price as of our last article (6.25 on January 10, 2012). In the past, we have written about missing loans, little/negative retained earnings, and net losses based on the 2008 and 2009 Chinese government filings. LIWA's reported book value was $9.35 per share as of December 31, 2012. Evidently, the investing community has already put a substantial discount on the stock price.

However, the accuracy of LIWA's annual reports is still a binary event. Either LIWA's annual reports are correct and the stock price is undervalued or LIWA's annual reports are incorrect and the stock price is overvalued. Our belief is that these capacity discrepancies continue to point to the latter scenario.

Disclosure: I am short LIWA. 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.