Ossen Innovation: Newly Profitable IPO With Competitive Advantage in Rare Earth Metals Space

by: Andy Li, CFA
Ossen Innovation Co., Ltd. (NASDAQ:OSN) manufactures and sells an array of plain surface prestressed steel materials and rare earth coated prestressed steel materials. These materials are used in the construction of bridges, highways, and other infrastructure projects in the PRC and foreign countries. According to the Chinese Academy of Social Sciences (CASS), OSN was among the top five prestressed concrete or PC material producers in China in 2010.
OSN has experienced significant growth since operations began in 2004. Its revenues have grown from $17.2 million in 2005 to approximately $101.1 million in 2009, representing a CAGR of 42.5%. The net profit margin has increased from 11.52% in 2005 to 19.78% in the first 10 months of 2010. Prior to 2008, OSN focused on the demand for steel products in foreign markets in order to generate profits. However, the financial crisis in 2008 made overseas markets less attractive. In addition, the Chinese State Council announced 10 measures designed to drive domestic demand and promote economic growth in November, 2008. The government took RMB 4 trillion to implement these measures in the next few years. With the rapid rise of domestic demand for steel, OSN began paying more attention to the domestic market, especially products such as prestressed materials with higher margins. These prestressed materials have been used in highways, bridges, railways, wide-span bridges, offshore structures, airport construction (runway and terminal), and pressure vessels in nuclear power stations.
Transportation has historically been among the key factors restricting the economic development of the PRC. In recent years, there has been a rapid development of highway, bridge, and railway systems in China. It is expected that transportation construction will continue to be the subject of key infrastructure projects in China throughout this decade, as indicated by China’s new 12th Five-Year Plan. In addition, over the next decade, China is expected to build four cross-sea bridges and tunnels, which will require approximately 8 million tons of prestressed materials.

More than 50% of OSN’s total revenues are generated by sales of rare earth coated prestressed materials. The rare earth coated products are sold to manufacturers of steel cables for bridges and other infrastructure projects, both in the PRC and in foreign countries. Rare earth coated prestressed materials (including PC wires and PC strands) are anti-corrosion prestressed materials that have recently gained increasing attention.
In special circumstances, the rare earth coated prestressed material can be used in place of traditional zinc coated materials to prolong the service life of these products, thereby generating social and economic benefits. In China, OSN is the only company that produces rare earth coated prestressed products. To continue producing increasing levels of rare earth coated prestressed materials and providing top-quality prestressed steel products for world class bridges, OSN completed the acquisition of Shanghai Pujiang Cable Co., Ltd., on September 28, 2010. Shanghai Pujiang Cable Co., Ltd., is the first professional manufacturer in the Chinese bridge cable industry. Its projects include the Nanjing Yangtze Bridge, the San Francisco-Oakland Bay Bridge in the United States, and others. This acquisition has broadened OSN’s industrial chain, expanded its production and management scale, and laid a solid foundation for the accomplishment of its strategic objective.
“The future of rare earth is great. What is happening is the prices are going through the roof because the Chinese do control the supply, but it is pure simple capitalistic economics now,” Rogers told India’s business television channel, ET. The future of rare earth metals is bright because China controls more than 97% of the world’s rare earth metals and claims it will crack down on illegal mining and curb exports.
By applying rare earth alloys to prestressed materials, OSN has a unique competitive advantage in the prestressed material market. OSN is expected to earn approximately $0.81 in 2010, which means the forward P/E is less than six today and suggests OSN is a significantly undervalued company with great growth potential. OSN went public in December, 2010, and the quiet period will end on January 29, 2010. More analysts will begin to add coverage for this stock, which is also an optimistic sign for OSN.
In 2010, we saw a huge rally for many rare earth companies, such as Molycorp (MCP) and Rare Element Resources (NYSEMKT:REE). As the only prestressed steel material manufacturer that produces rare earth coated materials in the PRC, OSN’s rare earth coating capabilities provide it with a competitive advantage. I believe OSN will benefit from rising rare earth prices and increasing demand for infrastructure in China.

Disclosure: I am long OSN.