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China Direct, Inc. (CDS)

Roth Capital Conference

February 20, 2007 11:00 am ET

Executives

Marc Siegel - President

TRANSCRIPT SPONSOR
ChinaDirect Logo

Moderator

With that, I'll let Marc take it away

Marc Siegel

Okay, thank you. I appreciate it. My name is Marc Siegel, President of China Direct. At China Direct, we do two things. Number one, we take majority stakes in Chinese companies. And number two, we do full service consulting to help Chinese companies go public in the US.

Why China? Everybody in this room probably knows why China. But we have been on the ground since 2001. We did our first transaction in December of 2001. China is the fastest growing economy in the world, the fourth largest economy in the world, and that middle class is growing. Right now it’s over 100 million people.

We focus on small to medium-size companies in China. The reason we do that is there are 20 million small companies in China. Not only that, but they account for 75% of the 9.6% growth. Without the small companies, the Chinese economy would have only grown at about 2% to 3% rather than 9.6% they are growing at.

The last thing I want to say is they are ignored by mainstream institutions, not only US institutions but Chinese institutions. Quick stats, for who want to hear, of our fiscal year, calendar year, our stock is well at 3.9. I think the most important thing to show you here is that we have $17.8 million of total assets and we've raised a little under $5 million.

This is the most important slide, so try to memorize this one real quick. Again, our company does two things. One, we take majority stakes. In the majority stakes, we own at least 51% of the companies we consolidate the revenues of.

On this slide, on our Consulting Division, we take minority stakes. We help turnkey solutions to help Chinese companies go public in the US. We've done six transactions so far. These are our client companies. These are our portfolio companies. All right, take this picture of us.

TRANSCRIPT SPONSOR

China Direct Logo

China Direct (ticker: CHND.OB) is a diversified management and consulting company. Our mission is to create a platform to empower medium sized Chinese entities to effectively compete in the global economy. As your direct link to China, our organization serves as a vehicle to allow investors to participate directly in the rapid growth of the Chinese economy.

Read all investor conference presentation transcripts here.

To sponsor an investor conference presentation transcript please contact us.

At our Consulting Division, we have five employees. We provide a full turnkey solution to help the Chinese companies go forward. We do everything they need from their legal, their accounting, their translation, their investor relations, their press releases, and we stay with the companies long-term.

At China Direct, we do not take any cash fees for our services. We take only stock fees. Once in a while when we help with a strategic acquisition, we do get a cash fee. But as far as our consulting work, we take only stock, put ourselves on the same side as the management team.

Some of our client companies you may have heard of. Companies that were very liquid; Sunwin Neutraceuticals was our first transaction under China Direct; Linkwell, a disinfectant company in Shanghai; Dragon International, it’s a specialty packaging company; Dragon Capital, it’s an incubator of small-cap Chinese companies, that should go up to the bigger exchanges; and SEHO is looking actively for a Chinese company to acquire.

At China Direct, the Management Division -- this is the key point. We take control of these companies. But not only do we take control, we actively manage them. We put in our own accounting systems. We speak to the management on a daily basis. We have an office not only in Boca Raton; we have an office in Shanghai.

In our Shanghai office, there are five people and they monitor what's going on with these Chinese companies. In our Boca Raton office, we have five bilingual people, so we are available to our clients 24 hours a day, seven days a week.

What we do at China Direct Investments in the US, we mirror in China. So, we again monitor exactly what's going on. Once we give them the money, we just don’t abandon them. We are there on a weekly basis reviewing what the company's operations are, how the company is growing with the capital we brought in and with our advice.

We, also in China, do a very effective marketing campaign. Most of our competitors do not go into outskirts. They work in Shanghai, Beijing, and Guangzhou. We go to cities that a lot of people have never heard of before and I could be the only white guy who has ever been to those cities. But we help those companies in those cities and the politicians in that town to bring capital to that area.

Why is our model attractive? About two years ago, the rules have changed. The price of a shell used to be $185,000. Now it's about $600,000. The legal used to be about 70 grand. It's about 150 grand now. The accounting used to be about $50,000. Now it's about $85,000.

So for Chinese companies, if they want to go public in the US, they need to put up about $1 million of their own money to take the shot at raising money in the public arena. Most Chinese companies, in our experience, are not willing to do that. The China Direct model changes all of that.

One of the rules that changed, you need to have your audits done within four days on a reverse merger. It used to be 75 days. And under our model, as a company, we can take majority stake, we do the audit, we pay for the audit, we pay for the legal, and as soon as we are done with the accountings, we give them their money.

There is no risk for the Chinese company in that regard. They don't put up a penny until they get money from us, then we own majority of the company.

It makes much easier for the Chinese companies to get public awareness. And also, we provide what I would call "training wheels" to these Chinese companies. They don't go public just on their own. They go public under our umbrella and we teach them what it’s like to be public in the US. How to do a road show? How to talk to your translators? How to talk to your investors, et cetera?

All right, let me tell you about our acquisition structure, because it's very important to understand this. In the last six transactions we have done, we paid one-time net tangible assets to buy these Chinese companies. Usually, that translates to one and two times earnings.

When we program for the US, it’s a big arbitrage play, because the company should trade in line with their competitors here in the US. And therefore, our returns on our money have won approximately eight to ten times our investment dollars, which is why our assets are going up so dramatically.

The way we do our transactions, we do it in cash and stock. The cash portion is always for working capital. That's very important. We do not buy-out the management. Our formula is we have management buy-in, not buy-out. So, we put ourselves on the same side of the table as them. They have stock in our company, so that their incentive is the same as ours. It's a very important [chart].

The second thing we do is we infuse the cash in stages. In other words, we give the Chinese companies benchmarks to hit. And when they hit those benchmarks, whether they would be on a quarterly basis or a semi-annual basis, we then give them a second tranche of money. We then give them the third tranche of money. So, we incentivize them and we make sure that there are on path with us.

Again, our acquisition model, I think this is really important to understand, is based on management buy-in, not management buy-out.

Let me go over our subsidiaries. These are the majority of subsidiaries. We have Lang Chemical, Chang Magnesium, Big Tree Toy Group, Jinan Alternative Energy Group, and CDI Magnesium.

Lang Chemical, a picture of one of their distribution facilities. Let me tell you what they have done. We own 51% of the company. They have 18 employees. They were in Shanghai. They are one of the largest wholesalers in Eastern China. They have customers that include BASF, Celanese, and Lucite. This year, 2007, the benchmark for this company is $44 million this year, with our infusion of capital, about $880,000 of profit.

Chang Magnesium is our largest company. Chang Magnesium has 415 employees. Again, we own 51% of the company. They are in Taiyuan, China, which is about 100 miles south of Beijing. They are one of the top magnesium companies in China.

Does anybody know what magnesium is? I will give you one quick example. Take aluminum can. Aluminum can is 98.5% aluminum, 1.5% magnesium. Why? Because it makes it stronger than the aluminum can itself. The top that you pull, so that you can drink it, is 4% magnesium. Why? So the top doesn't cave in when you open the can.

These guys sell to Alcoa, Alcan, Black & Decker. We take $2.5 million for this company. We believe that in 2007, they’ll do $52 million in revenue, bring $3 million to the bottom-line, our percentage of that would be about $1.5 million.

This is what magnesium looks like in its pure form, kind of like gold, but silver.

Big Tree Toy Group. We’ve just taken this company. We own 50% of it. They were in town called Shantou. In Shantou, there are 20,000 toy companies, i.e. (inaudible) that was not made in China. This company has 18,000 square feet of warehouse space, where they have showrooms.

What's important about that is because these 20,000 companies do what they do. These guys are a one-stop shop. So you can go in their showroom if you are a buyer for Wal-Mart, you are buyer for Kmart, you are a buyer for Carrefour; you can go to their showroom and see 170,000 toys on display. You don't have to go shopping around to 20 different places. At one place, you will find everything you need.

The most important aspect of this company is their customer service. In many of the Chinese toy companies, you pick and give the order, they ship it to you. You don't speak to anybody to get it. We follow up with the people every two days, where we call them, and tell them what the shipping is, when it's going to arrive, the quality of the shipment, et cetera.

The company also is putting together an OEM base, where they have deals already with Mattel, Hasbro, and Disney. In this company, we’ve put in $1 million, two tranches, $500,000 loan, another $500,000 loan, and we paid 250,000 shares of China Direct stock for this company. We expect that in 2007, based on the benchmark, to do 20 million in revenue and make about $1 million. This is a sample of the showroom.

Jinan Alternative Energy, this is the most exciting company we have. Jinan, we own 51%, they have 32 employee. What these guys do is they manufacture a machine, a machine probably twice the size of this room. New tires go in one side, diesel fuel, [carbon wax], crude oil, depending on the catalyst, which by the way is proprietary to them. Oil comes out the other side. No pollution, oil recycling green companies.

We paid $1.25 million in cash. We put all those in stages. In four stages, we’re paying this company. 400,000 was the first, 350 the second, et cetera. We expect on a benchmark, revenues of 20 million this year, net about $1 million. They only have two competitors is China. This product, again, is patented in the alternative energy sector.

CDI Magnesium, we’ve created a joint venture here. We are using a facility of one of the companies that we know very well. Eight employees put up $500,000, 22,000 shares in China Direct stock. These guys manufacture and sell magnesium alloy, which is one step after magnesium. Magnesium alloy is a mixture of metals.

Magnesium alloy is used for mag wheels, the 24-inch spokes that Ludacris probably has in his cars, aluminum cans, cell phones. They are one of the leaders in the business and we expect them just from a start to do a minimum of $2 million to make about 10% bottom-line. That’s what magnesium alloy looks like.

We will not acquire a company unless we believe that we could add substantial value to that company. I want to give you a couple of examples of how we add value to these companies and why we actually acquire them.

In the case of Lang Chemical, which was our first acquisition, which I mentioned, did $31 million audited in 2005. We are expecting $44 million this year on a benchmark. We’re going to help them add a new manufacturing facility.

The reason we are doing that is because as a chemical wholesaler, they work on very low margins. By adding the manufacturing facility, we can increase their margins from 2 to 3% to roughly 10 to 12%. We also raised the line of credit so they can have better cash flow and turnover the chemicals faster. We are also looking to make them an exporter as opposed to an importer.

Traditionally, China has been a major importer of chemicals. We believe, over the next five years, they will become a major exporter of chemicals. It should make their profits go up as well.

In the case of Chang, how we add value?

By creating our capital structure that we did, which was a joint venture with the US, we reduced their taxes by 30%. That was our first value-add. In addition to that, in the US, it’s been airtight [dumping rolls] for magnesium, and that allowed us to bring magnesium into the US from China.

Because they are now a subsidiary of a US public company, we already are in place lobbying in Congress to try to get that exemption lifted for our company, because they are a US-based company.

We are also getting them money to build a new 20,000-ton facility. That facility will add $40 million in revenue for the company this year. Because they are the third-largest producer, not an exporter of magnesium in China, we are trying to now use our money and use the capitalization of the company because it’s the best capitalized company in its town.

And by the way, China produces about 70% of the world’s magnesium. We are trying now to try and monopolize that business.

How are we going to continue to grow?

As I have already mentioned, our company started formally in January of 2005. 2007 numbers, I'll get to in a minute, but I think that you will see that they've grown very, very rapidly.

We are going to grow by increasing the companies that we have already acquired internally, adding a manufacturing facility to our Toy Group for the OEM side, developing new markets for our products, helping them import to the US, increasing revenues from our consulting clients. That's how we'll grow internally.

Externally, we see significant growth. We've already acquired six companies. We have six more on the burner, and we are very, very careful the way we acquire these companies.

Don’t forget, we only use cash and stock. The one-time net tangible assets, the cash [isn’t] used slowly, but we don't take a lot of risk, and we look for certain things in our management team.

They have to have a proven track record. They have applied with competitive advantages over their competitors. And most importantly, we need to value-add. If we don't think that we could grow the company's business by minimally 50% over the next 18 months, we don't do the acquisition.

Our target candidates, anywhere from 20 to $50 million in revenue, strong management, at least 20% growth in revenues, and again, we could actively manage this company and we could add value. So with many companies we find that you can do more than the others, but it's very difficult to [climb above], as you can do both where the management is cooperative. So those are our criteria.

We just recently came back from China. We were there for three weeks. We have done a number of acquisitions that we believe will be very accretive to China Direct. We found an oil refinery, a logistics company, another alternative energy company, an ethanol company, a food processing company, and iron ore mining company. If we did three of these, we would add about $300 million in revenue to the company.

Management, I am not going to read these slides. My partner James Wang is born and raised in Shanghai. He is one of the smartest guys I know. He is a Ph.D. in Immunology. It’s for people that have got to combat viruses. He has been a CEO of a public company before. It was called GTEC. GTEC was the symbol. And he runs our China operations.

I am in charge of the US operations, been on Wall Street for 20 something years and I don't want to say how long I have been in the brokerage business. The most important thing I think I bring to China Direct is that I know how to buy companies. I know how to build them. I know how to sell them.

By the way, James and I have been together since 1998. So, it's not like we’ve got together yesterday, or we are getting divorced tomorrow.

David Stein, our Chief Operating Officer, he has been with me since 2000. He is a quarterback. What he does is to make sure that our company reports quality numbers on a timely basis. He quarterbacks between the Chinese companies, the accountants, and the auditors to make sure our Qs and Ks are on time and they are filed correctly. It's a very important function.

Jenny Liu is our CPA. Jenny runs a team of four different girls, all with accounting degrees. She goes and checks all the numbers in addition to our SEC approved auditor here in US to [ensure] the company. She goes over to China five times a year to make sure internally that we check these numbers.

Quick selected financial data. Our cash at the end of 2005 was $39,000, is $3.5 million. Most importantly, our shareholder equity has gone from $516,000 to $6 million in 2006, unaudited.

Okay, financial outlook. In looking at the first 6 weeks of the year, we believe that besides the two companies we didn’t take, the four other acquisitions we made, all these companies will add to our numbers in 2007. We believe, based on the benchmarks, that we have in place right now, that we will go out from 2005 audited of $1.4 million, we will do over a $100 million in revenue in 2007, and make at least $5 million.

Let me summarize. Why is that you want to buy China Direct? You have access to Chinese companies not at the start-up stage, but at the expansion stage. We have a very unique structure that allows these Chinese companies to get access to the US markets quickly and efficiently. We get value and growth in one investment. We do the due diligence for you.

Again, we have an office in Shanghai for six years. The management buy-in approach is not a buy-out approach, but a buy-in approach, so these guys want the same thing as us. There is no reason for them to have any conflicts with us.

Our team has done six transactions. So far, they’ve all worked. So, we are pretty experienced in doing this. Management team is native to Shanghai, they were born and raised there. And I have some experience on Wall Street.

Lastly, investment highlights. You have access to the most dynamic and fastest growing economy in the world. You have a proven team, strong growth in revenues and earnings, proven track record and our model is scalable.

Right now, we have six subsidiaries that we own 51 to 60% and then we have our consulting clients. Our model has been put in place (inaudible) with the infrastructure we have today.

The last thing I want to say is two or three times in your life you get the chance to be in the right place in the right time, and I think that we are there now.

So, I am finished. I will take questions if you have any.

Question-and-Answer Session

Unidentified Audience Member

[Question Inaudible]

Marc Siegel

Sure.

Unidentified Audience Member

[Question Inaudible]

Marc Siegel

Number one, right now we went from about 7 employees in 2005 to about 16 employees in 2006. We have a stock option plan that we give to our people. We have James’ brother working in our Chinese office. We have people looking for jobs there almost every day.

We have had difficulty, just so you are aware, of finding bilingual Chinese people in Boca Raton, Florida. We could find a lot of Spanish-speaking Americans, but it’s hard to find Chinese. But we have been able to find them through universities.

But as far as management of people that goes in place, we have are a very, very solid management team that we have been together now to work for 7 years, the best is James and I have been 9 years together. But the stock option plans and our health insurance plans, I think, is a key to retention, and we [bet] these people over 3 to 5-year terms.

Unidentified Audience Member

[Question Inaudible]

Marc Siegel

$51 million, 13 million shares of $4 coming off. There are warrants, but they are not issued. So, there are 3.1 million warrants at 4 and there are 3.4 million warrants at $10 and everything has been registered with the SEC.

Moderator

That's it. Thank you.

TRANSCRIPT SPONSOR

China Direct Logo

China Direct (ticker: CHND.OB) is a diversified management and consulting company. Our mission is to create a platform to empower medium sized Chinese entities to effectively compete in the global economy. As your direct link to China, our organization serves as a vehicle to allow investors to participate directly in the rapid growth of the Chinese economy.

Read all investor conference presentation transcripts here.

To sponsor an investor conference presentation transcript please contact us.

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