ShengdaTech: Roth Capital Conference Presentation Transcript

TRANSCRIPT SPONSOR

ShengdaTech Inc. (SGAT.OB)
Roth Capital Conference
February 21, 2007 3:00 pm ET

Executives

Daniel Lee - Roth Capital Analyst
Rick Dean - US based representative
Gerry Pascale - Director of Finance

Presentation

Daniel Lee

Once again my name is Dan Lee. I am research analyst with Roth Capital. Our next company is ShengdaTech. ShengdaTech is a leading manufacturer of (inaudible). It's an additive used in the wide range of (inaudible) product. Representing the company is Shegdatech's US representative Mr. Rick Dean. Rick?

TRANSCRIPT SPONSOR

Vanguard Equity Research Corp ("VERC") is an independent equity research firm specializing in providing high-quality, objective equity research for micro and small-cap companies. Our analysts are MBA’s and CFA’s with vast experience in the equity research arena. Our continuing year-long program of research coverage allows less visible companies to gain a thorough, independent analysis of their competitive position, along with independently developed earnings and valuation models that otherwise would not be available to interested investors and institutions. Research is prepaid by our clients and distributed free to investors through a massive network of investor contacts and financial data and information providers. For more information about our services or to review reports on current covered companies, please visit www.vanguarderc.com. Read all investor conference presentation transcripts here. To sponsor an investor conference presentation transcript please contact us.

Rick Dean

Thank you very much Daniel, I appreciate it. Thanks for coming everyone. Also with me I would like to introduce Gerry Pascale, Gerry is ShengdaTech's Director of Finance also based here in the United States. We have been representing the company for about a year or so. So, very pleased to be here today. Does anyone want me to read the Safe Harbor statement? Okay, didn’t see a show of hands so we will move right along.

Just at the glance, the ticker on ShengdaTech is SGAT. Our official name just went effective in early January. Our recent pricing is in the $5 range, our market cap $270.5 million. Nine months revenue that’s through nine months of '06 around $49 million, net income around $11.4 million, and we have 54.1 shares outstanding fully diluted, and our EPS is around $0.23.

From an investor's perspective, the key points that we want to make today and leave you with is that we are as Daniel said, the leading manufacture of nano precipitated calcium carbonate or NPCC. It is a functional additive. We will give you a lot more detail on that in the course of the presentation.

We have just come up with a breakthrough manufacturing technology that has really raised the bar in terms of lowering cost and increasing quality on this product, making it a lot more valuable to our customers. We have also embarked upon a very aggressive increase in our capacity that is going along very smoothly and it's going to have a significant impact going forward on our revenues and our profitability.

We also have a chemical business, a coal-based chemical business that generates consistent cash flow in the neighborhood of about $13 million a year, and it's important and that is, it does provide a steady cash flow, which helps us to finance this exciting NPCC business. The company is very strong financially, very solid balance sheet, good cash position and no long-term debt.

In terms of just a brief overview, we are the leader in manufacturing NPCC in China. We are innovators both from a standpoint of research and development coming up with new products, new applications for our current customers and new customers, and also driving innovation in terms of manufacturing technology. We'll talk quite a bit about that. We are public; we are listed on the bulletin board. We did a reverse merger with the Halter Financial folks back in March of 2006. That same month we did an equity raise, we raised approximately $15 million that was used to help fund this new factory that we will be telling you about.

Our official name as of January 3rd is ShengdaTech. The company was founded originally back in 1993. We are in Shandong Province, and we have about 1,000 employees or so.

NPCC, what is it? What does it do? Why is it important? Essentially, as we have said it's an additive. It’s a powdered additive it's used in a wide variety of products. If you are familiar with functional additives, this is different and that it is reduced down to the nano level. Essentially the key raw material is limestone. It's processed through heat pressure, some proprietary processes to the point where it’s a very, very fine powder. Each particle is sub-microscopic. In order to qualify as a nano product, each particle has to be refined to less than one-tenth of a micron in size.

Just to give you some perspective on that. One-tenth of a micron is smaller than the wave length of visible light. So it's very, very fine. And that’s gives it some great bonding capabilities and allows it to be used in a wide variety of different products.

It does a couple of different things. It enhances durability, strength, heat resistance, stabilization and also reduces the cost of manufacturing by acting as a substitute for some of the more expensive raw materials, for example rubber in tires. There is a growing range of application. We've got four primary markets that we will tell you about. We are just scratching the surface. There is a ton of new applications out there and as we speak, we are in the lab exploring some new applications that are totally different from what we're doing today.

The important thing too from a customer standpoint, there is no investment on their part in terms of capital equipment in order to embed nano precipitated calcium carbonate in their manufacturing process and get all of the benefits out of it.

Four current applications, our largest one is tire manufacture. We are dealing with all of the major manufacturers in China including Triangle Tire. In that application we are the only one in China that is qualified on tires and we maybe the only one in the entire world. We're not 100% sure of that, but we believe we are.

In tire it increases the durability, reduces abrasion loss, increases tensile strength and also reduces the cost of manufacturing. Our customers tell us about 3% to 5%. When you use NPCC in the manufacturing process their cost comes down about 3% to 5%. Again it increases the tire performance by 10% to 20%.

So it's a two pronged benefit in terms of the customer, lower cost of manufacturing, better quality product. Same thing with PVC building materials, these are PVC plastics that are used in construction, window frames, door frames, PVC pipe that's used in plumbing. And I'm sure you are all aware there is a huge growth in construction materials in China. The infrastructure was booming both commercial and residential construction as well as automobile sales. So these two applications were strategically picked because of the growth opportunities that will come just by the growth that’s taking place in China today in terms of the economy.

Two of the other current applications paints and coatings and paper. Taking a look at the addressable markets in our four primary markets as you can see, tires for example, from the research that we've looked at. We believe there are about 325 million tires that are manufactured in China today. That number is going to up dramatically as the economy improves and more people can afford automobiles.

So the market size if you take a look at the amount of NPCC that goes in to an average tire it's about $150 million market, less than 10% penetrated today. We have a 100% of the market, because we are the sole provider. We believe the growth rate, and I think these are conservative numbers 8% to 10% a year on tires.

PVC, again about $120 million market today, 15% or so penetrated and again similar growth rates as with the construction boom in China. And paper and paints you can also see. In our current markets there is plenty of room for growth. They are under penetrated and so there are some huge opportunities in our current market.

Our growth strategy going forward; we are going to continue develop applications and add customers and tires, PVC and paper, plus develop some new applications. We've invested in the new R&D facility in Shanghai, and we are going to be building three other ones through out the country to be close to our potential customers.

We are also just starting to expand internationally. We have an agreement with a Dutch in the paper business. We are talking to companies in Thailand, Singapore, and South Korea. So we do plan to aggressively market internationally, once we satisfy the demand in China.

In terms of growth strategies, the important thing to remember is that there is no off the shelf NPCC. Each product is custom formulated for a specific customer and a specific application. There is a close working relationship that takes place, engineer-to-engineer to develop the optimal product. It's about a six to nine months process from start to finish. Our engineer's working with their engineer's and that product then is really specific to that particular client. It tends to build long-term customer relationships, and it's also very difficult to switch. Once this gets embedded in the manufacturing process it's virtually impossible to switch to another product. So, we think that’s a big and important benefit.

We have a brand new sales team. We've hired 23 sales agents. They work directly for the company. They are motivated by very rich commission programs. They've all got Masters Degrees in Chemistry. We have four out of six sales offices open now, the other two will be opening in the next 30 days. Again growth strategy; new markets, new applications that aren’t even existing today and we're doing that in our labs.

Some of the markets that we are addressing, some of the projects that we are working on right now are in aerospace, cosmetics, food, pharmaceuticals. So, we can have a very wide portfolio of businesses and applications that we have besides the four that we have right now. So that’s going to fuel more growth. And as I said, we are going to have eventually three R&D facilities for Shanghai, we are going to have our grand opening next month. We have some very important and close working relationships with major Universities like Tsinghua and Qingdao University, very well thought of technical institutes.

The other key part of our strategy is to continually be the low cost provider, continually work to raise the quality of the NPCC that we make for our customers and drive down costs. This chart just shows the evolution of the manufacturing technology. The traditional method is pretty much outmoded, it was replaced by ultra gravity about five years ago. It was developed with by Beijing University. There were five companies that were licensed to use it. To date we have been the only ones that have been successful in commercializing the ultra gravity method.

There are some issues with this, the production costs tend to be high, quality control is a little bit difficult, and of course we had no proprietary protection on that technology. So, we started working very closely with Tsinghua University. They are kind of the MIT of China to co-develop this membrane dispersion method. That is a brand new manufacturing technology. It is being used in our new factory that we just opened up in September that I am going to be telling you about.

It's going to improve the particle size, its going to narrow the distribution, which means that from a cost standpoint for our customers, it's going to decrease their manufacturing costs more and it's also going to be a higher quality product. It's going to have much better bonding characteristics. Plus our product cost and manufacture is going to go down about 3% to 5%, as a result of using this proprietary manufacturing technology.

The important thing is that it is going to be covered by a patent. We applied for a patent on this technology, this manufacturing method in May of 2006, it's about an 18 month process in China. So, we expect that to be finalized by December of 2007. That’s going to give us 20 year patent protection. We have the exclusive commercial rights on the technology. The patent will be 50% owned by us and Tsinghua University. But we are the only ones that can use it commercially and it is going to be protected by patents for the next 20 years.

As I said, last year our demand was exceeding our supply, so we embarked on a very aggressive expansion plan. Phase I is to open up a brand new industrial park in the western part of the country. [Xian] is where it is. It's located next to the highest quality limestone, which is going to reduce our shipping cost. We opened that facility in July. We started shipping product in September, an additional 60,000 metric tons of capacity in addition to the 30,000 that we had in place before. That is ramped up, it's fully ramped up. There were few glitches in terms of getting it up and going.

So, we have already invested in equipment for the next 40,000 metric tons that we expect to be in place by April, May timeframe. And then, an additional 60,000 metric tons will come online in the fall. This will make us by a long stretch the largest NPCC supplier in China and enable us to fill large orders from our current, higher customers PVC customers plus some of these new applications we working on.

Some analysts asked us for a little help in terms of modeling, what the effect of this capacity increase is going to have on the financials and that's what we have done here. This is not meant to be providing guidance. Obviously we have to fill the capacity with orders, but essentially, what this says is that in 2007 with the added capacity we will have about 130,000 metric tons. Current average selling prices those are fairly conservative. You have to adjust for a value add tax.

Potential gross margin 37% to 38%, very accurate and very sustainable we believe. Potential operating margin 28% and tax rate of 15%. So, you guys can do the calculations, but this gives you an idea of what does this mean financially with adding all of this capacity that we are talking about here.

Competition, we have some. We track three companies in China, Guangdong Enping, Shanghai Perfection and [Shandong]. As you can see their volumes are much smaller than ours on NPCC. We don’t think the quality is nearly as good from what we have checked on them, and they are also operating at different market segments. None of them are manufacturing in the tire space or the PVC plastic space.

There's a company called [Shirishi], chemical company in Japan that sells some, although their pricing is very high because of duties and freights et cetera and again, they are operating in different markets completely paint, coatings, printing ink.

We think we've got some very sustainable advantages over these competitors and anybody that comes in from out of China; we think they are pretty sustainable first. But we are going to be clearly the largest manufacturer of true NPCC particles in China. A lot of the competitors we talked about are not true and it's not down to that one-tenth of a micron in diameter. We are using this advance membrane diffusion technology that’s going to give us better quality at lower cost.

We have very strong R&D, nobody has invested the kind of money that we have in R&D. That’s going to create a lot of new opportunities. Compared to international, potential competitors that could come in from offshore somebody like the BASF or Minerals Technology. We've got advantage in terms of cost for labor and also again the fact that there will be duties and so forth and pay the price for that.

And today, we are the only producer of NPCC in the tire industries. Wanted to take just a minute, it's not important to our growth strategy, but I did want to mention our chemical business as again as I said it's a coal-based business. Today it represents about 70% of our revenues but it really is acting kind of as a bank to help fund this high growth NPCC business.

Four basic products that we have; ammonium bicarbonate used in fertilizer, liquid ammonia used as a refrigerant in pesticides, methanol has been growing quite a bit. That's an alternative to fossil fuels and melamine which is environmental-friendly adhesive.

We are the leader in our region, but it does tend to be a regional business because of trade factors. It's important to note that most of the sales are direct. The farmers and factories very much of a cash-based business and our receivables are down around the 30 to 40 day range, which is almost unheard of in China. So again it's important and that it's stable, and it generates some nice cash $10 million to $13 million a year that's gets filed back into growing this NPCC business.

Strong management team, Mr. Chen, he is our founder; he is the number one stockholder. He purchased this chemical business and he actually founded the technology group of companies in 93. He purchased this chemical business in 2000. At that time it was doing just over $3 million in revenue and was in the process of going bankrupt. In five years he and his team turned it around to where it's now. A very profitable $60 million company, with no long-term debt, very nice margins and an exciting new technology.

Ms. Guo is our CFO. She has been with the company since its inception and we've got two gentlemen Mr. Xu and Mr. Ma who run the chemical business and the NPCC business respectively.

Just run through some numbers for you, this tracks our revenue growth, as you can see pretty solid revenue growth the last couple of years. Just want to note, these numbers these last two columns to nine months of 2006. We were capacity constrained on the NPCC side. So at the time it was falling a little bit behind pace but that’s going to correct itself now that we have got this new capacity coming on. This just gives you break out of revenue by segment, chemical versus the NPCC business. As I said, right now chemical is about 70%, so you are going to see that change dramatically in the next couple of years.

This is revenue by application. As I said roughly 60% is tires, 30% PVC, and the balance is put between the paper and paints and coatings and so forth. This is our chemical revenue by application. This tracks our gross profit and margins, and again little bit behind pace through the first nine months of last year and that’s directly attributable to the fact that we were bumping up against our capacity on the NPCC side.

You can see we've had nice growth in net income and profit margins, increasing earnings per share. Here is our balance sheet as I told you, very healthy 23 million in cash which is more than enough to complete this expansion that we are in right now. No long-term debt and real solid financials.

So, couples of point that we want to leave you with. We are the leaders, both in developing new technology, new manufacturing methods and so forth in the NPCC industry, not only in China, but in the world. This is an example, kind of is an example of a technology that is really being created in China as opposed to making something that’s already been created offshore and making it. So we are excited about that.

It's going to provide us with revenue growth, strong margins. We have proprietary technology which is going to keep us as a low cost manufacture with a highest quality product, which is right were you want to be and we are significantly expanding our capacity, and that’s going extremely well, very smoothly no major glitches or delays. And we've got some really exciting market opportunities besides tires and PVC plastics and things like cosmetics and aerospace et cetera.

Cash flow is great, we expect that to continue out of the chemical business to help us fund the NPCC growth we talked about. And we've got a very solid management team with a real strong track record of successfully executing strategies. So, with that, I think we've got about a minute or so sorry, happy to take some questions.

Question-and-Answer Session

Unidentified Audience Member

[Question Inaudible]

Rick Dean

Gerry can you address that one.

Gerry Pascale

Yes I can. On the cash flow side, it's for the year.

Rick Dean

Sure.

Gerry Pascale

Yeah, it's for the year.

Rick Dean

That was year-to-date through September, right? It was about 10 and for the full year it's run about 13.

Gerry Pascale

That’s on the chemical side.

Unidentified Audience Member

[Question Inaudible]

Rick Dean

The latest numbers that we have Jeff are up around, I think 480 was the last number 480, 485.

Gerry Pascale

That was the end of Q3, that we reported that. It's about 40 millions in net hours 17% value-added tax. So part of the issue is that’s higher than our historical average. We are tracking it to see if this is actually existing trend. We are trying to be relatively conservative with the numbers.

Unidentified Audience Member

Closer to, well?

Gerry Pascale

The historical numbers are closer to 430 to 450. Yeah from what we've seen and we will have an update on it. We have not released our Q4 finance. So once we've created those we'll have an update on that. Kind out where we are going.

Rick Dean

Yeah, I should note too that we showed on that slide I believe a tax rate of about 15%. And all the production that comes out of this new facility we have a two year tax holiday and then our tax rate is 50% of the normal rate for the next three year. So yes.

Unidentified Audience Member

[Question Inaudible]

Rick Dean

No, its all company owned facility. Yeah, chemical and NPCC, they really are very separate businesses, separate facilities et cetera, et cetera.

Unidentified Audience Member

[Question Inaudible]

Rick Dean

We might have.

Unidentified Audience Member

[Question Inaudible]

Gerry Pascale

About $15 million for the facility that we put up of 60,000 metric tons.

Unidentified Audience Member

[Question Inaudible]

Gerry Pascale

Oh, R&D, yeah.

Unidentified Audience Member

[Question Inaudible]

Gerry Pascale

Yeah.

Rick Dean

Yeah, what are we spending on R&D?

Gerry Pascale

Yeah I can pull that for you, it's relatively low, it's not...

Unidentified Audience Member

[Question Inaudible]

Rick Dean

Relative to our competitors we are investing very heavily, but it's not a huge number relative to what you see over in the United States for example, yeah.

Gerry Pascale

It's a joint program?

Rick Dean

Yeah.

Gerry Pascale

And I can walk you through it.

Rick Dean

Okay. Well thanks very much. I appreciate it.

TRANSCRIPT SPONSOR Vanguard Equity Research Corp ("VERC") is an independent equity research firm specializing in providing high-quality, objective equity research for micro and small-cap companies. Our analysts are MBA’s and CFA’s with vast experience in the equity research arena. Our continuing year-long program of research coverage allows less visible companies to gain a thorough, independent analysis of their competitive position, along with independently developed earnings and valuation models that otherwise would not be available to interested investors and institutions. Research is prepaid by our clients and distributed free to investors through a massive network of investor contacts and financial data and information providers. For more information about our services or to review reports on current covered companies, please visit www.vanguarderc.com. Read all investor conference presentation transcripts here. To sponsor an investor conference presentation transcript please contact us.

Copyright policy: All transcripts on this site are copyright Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.