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Summary

  • According to Zacks, SUTR generates the highest Earnings Yield in the steel industry with 2013 earnings of 42c/share and sub-$2 pps.
  • The Company received High Tech Enterprise Status for the second time extending its preferred tax rate of 15% through 2015, compared with the normal 25% corporate rate.
  • SUTR is entering its next phase of growth as it gets poised to put on line its newly completed 25% production capacity expansion.

Sutor Technology Group Limited, (NASDAQ:SUTR) incorporated on May 1, 1997, manufactures specialty, and fine finished steel products. The Company utilizes a range of processes and technological methodologies to converts steel manufactured by third parties into fine finished steel products. The Company's product offerings are focused on finished steel products, specifically hot-dip galvanized steel (HDG steel), and pre-painted galvanized steel, or PPGI. In addition, the Company produces acid pickled steel (AP steel), and cold-rolled steel. The Company's three operating segments are categorized according to the Company's three operating subsidiaries, which include Changshu Huaye, which manufactures and sells HDG steel and PPGI products; Jiangsu Cold-Rolled, which manufactures and sells HDG steel, AP steel and cold-rolled steel, and Ningbo Zhehua, which manufactures and sells welded steel pipe products.

Sutor's fully automated, state-of-the-art production lines have a total annual capacity of approximately 2 million tons of steel products. The Company's diversified finished products, due to its vertical integration model, are used extensively in solar energy applications, appliances, automobiles, consumer electronic products, medical instruments, industrial instruments and components, building & construction infrastructure, oil and gas transmission lines, and water resource and infrastructure applications. The company benefits directly from the increasing and sustainable demand for its products due to urbanization and industrial as well as energy upgrading in China. In addition to rapidly increasing domestic demand, the Company's primary export markets are Europe, the Middle East, SE Asia, Russia, and South America.

SUTR has been quietly making significant progress in several fronts in recent quarters. The Company has been winning contracts from a wide range of well-known companies domestically and globally, the most recent being Samsung. Much of its success is related to the creation of a myriad of products to address the specialized needs from dozens of clients. The company's award-winning R&D efforts have increased its patent portfolio from 20 patents in 2010 to almost 200 patents today (30 Invention Patents, 24 Utility Model Patents, 106 Appearance-Design Patents).

But all the specialized products that the Company can produce, and 100's of patents and know-how would be useless if it would not be able to translate this technological might into growing revenues and net income. But Sutor has grown revenues and increased the bottom line significantly in the last three years. This has not gone unnoticed as Zacks reported recently that SUTR generates the highest earnings yield in the steel industry. By definition, a high earnings yield also means that the stock price is undervalued.

The two tables below show: 1) revenues and net income for the last three years, and 2) several key valuation ratios that clearly show how ridiculously undervalued the stock price is today relative to its peers:

YEAR

Revenues, $MM

Net Income, $/share

2013

611.2

0.42

2012

531.6

0.3

2011

431.7

0,34

Valuation Ratio

Sutor

Sector

P/E Ratio (NYSE:TTM)

3.1

34.56

Price to sales

0.11

3.73

Price to Book (MRQ)

0.27

2.88

Price to tangible Book (MRQ)

0.28

3.05

Price to Cash Flow

2.24

13.63

Net Profit Margin

3.64

- 7.4

TTM = Trailing 12 months

MRQ = Most recent quarter

Note: SUTR competitors are: ArcelorMittal (NYSE:MT), Posco (NYSE:PKX), Nucor (NYSE:NUE)

I believe that SUTR's fair valuation should be $5 - $6/share. But "the cream rises to the top," and it's just a matter of time until value investors recognize SUTR as true sector gem with significant upside.

I believe SUTR is severely undervalued by lack of exposure, because of investors' fear that it could be a scam - as a result of the negative perception that has been created after Muddy Water's attack on several Chinese companies trading in US markets thus painting the entire sector with the same brush. However, SUTR's small short ratio of 0.3% or roughly 22K shares is testament that shorts don't believe that the company is a scam and should be afraid of its strong and improving fundamentals. Investors should know that Sutor is one of the most respected small steel producers in China having won several technical awards and having been recognized by many of its clients as a high-quality, reliable supplier of specialized steel products. Furthermore, SUTR's financial results are audited by well-known accounting firm Grant Thornton LLP.

The following are other factors position SUTR above many of its peers:

  1. SUTR has gained compliance with major international engineering and quality standards. This ensures the production of consistent and high-quality products.
  2. SUTR has the only R&D center that focuses on fine finished steel technology in Jiangsu Province.
  3. As mentioned above, SUTR has a significant and growing intellectual property with almost 200 internally-generated patents.
  4. SUTR has a strategic alliance with Mid-South University: China's leading institute in steel technology research.
  5. SUTOR achieved API certification (American Petroleum Institute).
  6. The Company has been recognized as a "National & Provincial High-Tech Brand," and as the "Jiangsu Well-known Brand."
  7. Sutor is an approved supplier for Midea, Hitachi, Sunrain, LG, and many other well-known brands - and more recently, Samsung.
  8. The Ningbo Zhehua Division is a qualified supplier for CNPC, Petro China, Sinopec, and many other companies both domestically and internationally.
  9. The Ningbo Zhehua Division recently passed successfully the European Union PED Certification.

SUTR's technological superiority also benefits its bottom line. On October 16, 2013, SUTR announced that the Jiangsu provincial government had renewed the High Tech Enterprise status of the Company's wholly-owned subsidiary, Changshu Huaye Steel Strip Co., Ltd. As a result, Changshu Huaye is entitled to a preferred tax rate of 15% for the three years 2013 through 2015, compared with the normal 25% corporate tax rate. Changshu Huaye was designated as a High Tech Enterprise beginning in 2010.

It is clear by studying the above tables and the comments that I've already made that the recent company performance has been stellar but it's not yet reflected in the share price. But the company future is even brighter.

A glimpse into the future will be provided next week when the company reports its 3Q FY 2014 financial results. I expect that the company will beat last year's comparable quarterly results handily on revenues and net income because of a strong solar energy sector, and strong automobile and appliance production in China. The company has also won several recent major contract wins - here are some of them, starting with the most recent:

On March 31, 2014, Sutor that it had signed a product distribution agreement in Russia to sell high gross margin products including HDG, Galvalume and PPGI steel with an annual minimum sales volume of 5,000 tons.

On March 4, 2013, the company announced that Changshu Huaye Steel Strip Co., Ltd., a subsidiary of Sutor, has entered into a supply contract with SAMSUNG Group to supply a total of 6,500 metric tons of aluminum-zinc alloy coated steel (also known as Galvalume - a new product increasing in demand).

On February 20, 2014, Sutor announced that Changshu Huaye Steel Strip Co., Ltd., a subsidiary of Sutor, has entered into two international sales agency agreements with two sales agencies located in the Middle East market (covering Jordan and Iraq) and South American market (targeting Chile and Bolivia) to supply a total of 15,000 metric tons of coated steel coils annually.

On December 12, 2013, the Company announced that its subsidiary Ningbo Zhehua Heavy Steel Pipe Manufacturing Co., Ltd. ("Ningbo Zhehua") won three contracts to supply approximately 4,000 metric tons of spiral seam steel pipes to three water transportation pipeline projects in Zhejiang Province.

Other contracts and business updates are listed chronologically in Geo Investing's website.

I also expect that the company will update investors on the startup status of its newly completed 25% major expansion. On January 21, 2014, the Company announced that it has completed construction of the new 500,000 metric tons (MT) cold-rolling production line and moved to the phase of trial production at Jiangsu Cold Rolled Technology Co., Ltd, a subsidiary of Sutor. Former CEO Lifang Cheng commented: "We are optimistic that the new capacity will improve our operating efficiency, expand our product offerings and hence strengthen our competitiveness in the high-end product market."

Company management has been meeting recently with several IR firms, presumably because they believe that the stock is undervalued, and that more exposure is needed - particularly now that the company is entering its next growth phase with the startup of the new 500,000 metric ton expansion. This is not surprising because recently appointed CEO Mr. Zhuo Wang, and CFO Naijiang (Eric) Zhou are pro shareholders as both have Investors Relations' backgrounds. US-educated Mr. Zhou, for instance, was a stock analyst with Roth Capital Partners and held various positions at U.S Global investors.

I believe the time has come for SUTR stock to experience a well-deserved upward correction. I also believe that I am not alone as investors have been taking positions in recent days for what I believe could be a sustained rally towards fair valuation going forward. Even its perennial money-losing competitor China Precision Steel, Inc. (CPSL) has had a recent 200% upward explosion. But since no investment in the stock market is free of risks, investors should review all the risks and uncertainties as detailed in the company filings with the SEC.

Disclosure: I am long SUTR. 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.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: Sutor Technology Group: Poised For A Major Upward Correction As New Capacity Comes Online