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Andatee China Marine Fuel (AMCF) came out with its FY2009 results Tuesday, and at first glance, the company appeared to have done extremely well:

  • Overall revenue was up 57% to $124.3 million
  • Gross profit increased 234.2% to $14.1 million
  • Net income was $6.4 million representing a whopping 333.8% increase Y-O-Y
  • EPS was $1.11 compared to $0.25 in 2008

But in digging into the numbers, there were signs that caused me to worry:

  • 2009 revenues grew by 57%, but that was dependent on a sales volume surge of over 88%. This tells me that overall fuel prices were depressed in 2009 compared to 2008. Given the general economic malaise, that in itself is not so surprising.
  • Overall net margins for 2009 was 7.6%, but it was a mere 4.4% for Q4. This is definitely a cause for concern. With gross margins at 11.3% and 10.0% respectively for the two periods in question, this shows that operating costs are moving up even while gross margins are coming down. Not good.
  • The company ended 2009 with only $1.5 million in cash, which severely limits its ability to expand through acquisition. Sure, AMCF netted over $17m as a result of its IPO in January, but how sustainable is this move to grow the company?

The above, when taken together, paint a less-than-happy picture for the company. AMCF did mention in its latest press release that it was stepping up efforts in branding and selling directly to the end-users. However, no details are forthcoming.

The fact is, AMCF ultimately operates in a sector that just isn't that attractive in fundamental ways:

  • It is highly subject to fluctuation of marine fuel prices, over which it has little control. The company seems to suggest that it is able to pass these fluctuations onto its customers. However, that doesn't appear to be borne out by its figures. In Q4 2008, it had a negative gross profit of $1.1m. With increased competition, we could very well see a return to the days of negative gross margins.
  • The company's ultimate main customer -- the fishing boat -- cannot be said to be in a high-growth area of business. With the depletion of the oceans and the growth of fish farms, how quickly could AMCF grow in the future? Acquisitions aside, the answer appears to be "no".

AMCF is a company that has performed relatively well in the past, due to its leading position in Northeastern China, including a 25% market share in Bohai Sea. However, I suspect 2010 is going to be a transition year for Andatee.

Would it be able to establish and maintain its brand not just in its traditional markets but also in new geographical locations? In any case, how relevant is brand loyalty in selling and buying of a commodity like marine fuel? And how real is the company's moves to further disintermediate the middlemen and go directly to the end-users? Your guesses are as good as mine.

My Position: None.

Source: Worrisome Signs From Andatee China Marine Fuel's FY2009 Results