China Precision Steel: With Steel Prices Expected To Fall, Avoid This Stock

Back in late February, China Precision Steel (CPSL), a niche precision steel processing company principally engaged in producing and selling high precision cold-rolled steel products, announced it sold $20.8 million of newly issued shares of its common stock. All shares were sold at a price per share of $3.00, significantly below the market price of $9.46 of China Precision common stock at the time.

Last week, a prospectus was filed relating to the resale of up to 8,819,814 shares of China Precision common stock. As a result, the stock fell Thursday by $1.71, or 28.69%, to $4.25 on heavy volume of 1.7 million shares. The problem with the financing is that although it will be put to good use, it is expected to help facilitate the expansion of the company's business and production of a second cold-rolled mill with 150,000 tons of capacity, the dilution will be hard for shareholder's to stomach and the market to absorb because the stock only trades about 292,103 shares a day.

The company has estimated that its revenues for fiscal 2007 and 2008 will be approximately $50.5 million and $62.5 million, respectively, with gross profit of $15.6 million and $20.3 million, respectively. Not bad at all. And while China Precision currently provides steel products to manufacturing companies in just the People's Republic of China, the company is looking to expand as a result of increased production capacity.

However, the new facility may come at a bad time. According to a report issued by UBS analyst Peter Hickson last week, steel prices are expected to fall through next year as inventories rise and exports from China increase. The analyst believes steel-plant expansion in Brazil, India and China will contribute to 5.3% growth in production next year, adding to already high global inventories which will no doubt strain prices. Therefore, investors should steer clear of the stock in the short term as the financing, coupled with uncertainty over steel prices will likely continue to pressure China Precision Steel.

CPSL 1-yr chart:

Comments

[anoption]

please send larger print

[Jonathan Liss, SA Editor]

larger print? The print appears plenty large from my view here. I believe that you have to adjust the 'view' settings on your browser. Hope that helps.