ShengdaTech Q1 2007 Earnings Call Transcript

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ShengdaTech, Inc. (SGAT.OB)
Q1 2007 Earnings Call
May 7, 2007 9:00 am ET

Executives

Leslie Richardson - Financial Writer, CCG Elite Investor Relations
Xiangzhi Chen - President & CEO
Anhui Guo - CFO
Crocker Coulson - President of CCG Elite
Mabel Zhang - CCG Elite Investor Relations

Analysts

Dan Lee - Roth Capital
Alex Harbin - Toll Cross Securities
Michael Coleman - Sterne, Agee & Leach
Joe Hai - Private Investor

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the ShengdaTech First Quarter Earnings Conference Call. My name Jina and I will be coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session toward the end of today's conference (Operator Instructions).

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Leslie Richardson. You may proceed ma'am.

Leslie Richardson

Good morning ladies and gentlemen and good evening to those of you joining us from China. I am Leslie Richardson from CCG Elite, the Company's Investor Relations Firm. Welcome to ShengdaTech’s first quarter 2007 conference call.

With us today are Xiangzhi Chen, ShengdaTech's Chief Executive Officer and Anhui Guo, the Chief Financial Officer joining us from China. Also joining with us is Crocker Coulson, President of CCG Elite, the Company's Investor Relations firm. CCG Elite’s Mabel Zhang will be providing translation for your questions and answers.

I would like to remind our listeners that in this call, management’s prepared remarks contain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements in response to your questions. Therefore the company claims the protection of the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Act of 1995.

Actual results may differ from those discussed today due to various risks including, but not limited to such factors as unanticipated changes in product demand, especially in the tire and PVC industry, pricing and demand trends for the Company's chemical products, the ability to attract new customers, ability to increase its products applications and other information detailed from time-to-time in the company's filings and future filings with the United States Securities and Exchange Commission. Accordingly, although the company believes that the expectations reflected in such forward-looking statements are reasonable, there could be no assurance that such expectations will be proved to be correct.

In addition, any projection as to company's future performance represents management estimates as of today May 7, 2007. ShengdaTech assumes no obligation to update these projections in the future as the market conditions change. For those of you unable to listen to the entire call at this time, a recording will be available via webcast for 90 days. The webcast link is available in the press release we issued earlier today.

And now, I’ll turn the call over to Crocker Coulson, who will provide management discussion section on behalf of ShengdaTech's Chairman and CEO, Mr. Xiangzhi Chen.

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Crocker Coulson

Thanks a lot, Leslie. Welcome everybody and thanks for joining ShengdaTech’s first quarter 2007 conference call. We are very happy to report that we started off 2007 with continued strength in the companies NPCC business, as the new Shaanxi factory in Xianyang is running in a 100% of capacity and our regional factory in Shandong is running slightly above the designed full capacity.

Demand for our chemical products remains very solid with a stable contribution to profitability and cash flows during the quarter. Revenue for the first quarter of 2007 was $22.2 million, up 36% from revenue in the first quarter of 2006.

Gross profit increased 69% during the first quarter to $7 million. Gross margins continue to expand due to the higher contribution of our NPCC products and our strong cost advantage at our new Xianyang facility, coming in at 31% of revenues compared to 25% in the first quarter of 2006.

Net income grew by 55% to $5.4 million, over the first quarter of 2006. Net income in the first quarter of 2007 was impacted by the end of the tax holiday on the original NPCC factory, which resulted in an effective tax rate of 16.5% on income generated from that facility.

Fully diluted earnings per share for the first quarter of 2007 was $0.10 compared to $0.08 in the first quarter of 2006. Over that same period, diluted shares increased from $45.1 million to $54.1 million, as a result of the equity offering we completed in March of 2006.

Our results for the first quarter reaffirmed our continued strength in the NPCC market, as our current customers remained committed to our products and we continue to generate interest from new customers for new applications.

ShengdaTech continues to be the dominant supplier of NPCC to China’s tire and PVC industries, and we expect both these markets to continue to grow to the continued robust growth of China’s automobile and building sectors and wider recognition of the benefits from using our NPCC as an advanced functional filler.

Q1 results also benefited from strong growth in other markets, including adhesives and latex. Our analysis shows that the market size for these two segments alone, is about 110, 000 metric tons for 2007. We expect adhesives and latex would generate about 10,000 metric tons of sales for 2007 for ShengdaTech, capturing about 9% of the market this year.

We have a three-part growth strategy to continue to grow our high margin NPCC business, with the goal of becoming the dominant supplier of NPCC in China and eventually on a global basis.

First, we are leveraging the product superiority and cost efficiencies from our breakthrough membrane diffusion manufacturing process, to expand our market share in our service segments. I am pleased to report that we continue to expand our share and remain sold out, on the 60,000 metric tons of capacity we added in Xi'an in late 2006.

And we are on-track to bring the next 40,000 metric tons of NPCC capacity online in June of 2007, which should be fully scaled-up by November of this year. And we plan to add an additional 60,000 metric tons of NPCC capacity by the end of 2007.

Once at full utilization and at current pricing, this additional 100,000 metric tons of net NPCC capacity more than doubles our production capability and is equivalent to approximately $37 million in potential additional revenues to ShengdaTech.

As we’ve been building our business and leadership position in the NPCC market, we’ve taken careful consideration to our pricing policy. During the first quarter of 2007, our average selling price for NPCC remained at $460 per metric ton or $380 per metric ton, after the 17% value-added tax or VAT.

Due to our efficient use of energy and raw materials and our proximity to high grade, low cost supply of limestone, our new NPCC facility is able to generate gross margins of up to 44%, compared to gross margins from our regional facility, which are close to the 35% on average.

In order to continue to consolidate our market share, we plan to begin adjusting our NPCC average selling prices in the second quarter. Given the strong cost efficiencies in our new Xi'an facility, we have the ability to offer lower price to our customers, without comprising our blended gross margin.

Second, ShengdaTech is actively working to expand the range of applications for NPCC in our existing markets and opened up new markets through close collaboration with potential customers. Even as we to see increasing orders from our current customers, we are constantly working to expand the applications of NPCC, by deepening our penetration in the current markets and widening the applications to new markets.

Currently we see attractive opportunities to widener our application in plastics to include polyethylene and polypropylene, both are very popular plastics used in common everyday items. And demand in China for plastic additives has been growing at 13.7%, over the past decade, according to the Asia Market Information & Development Company, a market research firm that recovers this industry.

We’ll continue to work on developing new NPCC applications, at our new research and development center, which opened in March of this year. In the following two years we may add new applications in area such as papermaking, automobile paint, silicon adhesive and pharmaceuticals.

The third part of our growth strategy is to develop overseas markets for NPCC. While we believe that there is more than ample demand in China to support our growth over the next several yeas, overseas markets can provide another avenue for expansion and maybe able to support higher margins in the future.

During the first quarter we made progress in securing orders from customers, in both East and South Asian countries. And expect to start preliminary sales to Singapore, Thailand and South Korea, at the end of the second quarter. While this relationships are still in their initial stages, we feel these is a significant step in expanding our geographic presence outside of China and building our reputation as an internationally competitive company.

Now I’d like to touch briefly on our chemical business, which is our legacy business and a consistent source of cash for the company. We continue to see solid demand for our chemical products, with sales of liquid ammonia, showing the strongest growth in the first quarter from a year ago. Overall the trend for average selling prices of our chemicals remains steady. Although in the short-term we may experience slight fluctuations.

In April we made a modest investment of $420,000 to install some new state-of-the-art equipment that will prove the energy efficiency and reduce the use of raw materials in the preliminary production for our coal-based products.

To accomplish this, we shut down production for 15 days, which will have a one-time impact on the revenues generated from the chemical segment in the second quarter. However, we expect the use of the new equipment will prove our profitability and competitiveness in this segment going forward.

Now, it’s my pleasure to turn the call over to Leslie Richardson, who is going to discuss the first quarter financials in greater detail. I’ll then have some closing remarks on behalf of Mr. Chen, when she is done. And then we’re going to open up the call to your questions.

Leslie Richardson

Our revenues for the first quarter of 2007 increased to $22.2 million, up 36% from $16.3 million in the same quarter 2006. Revenue for the first quarter declined 4.3% from $23.2 million in the fourth quarter of 2006, due to a combination of eight less shipping days for the NPCC, as a result of NPCC factory closure for the Chinese New Year in February and fluctuation of exchange rate.

On a revenue per day comparison, we generated $15,255 more per day or 6.1% more than we did on daily basis in the fourth quarter 2006. Our product mix for the first quarter remain the same as in the fourth quarter 2006, with the chemical segment generating 59.5% of revenue and the NPCC segment generating the balance of 40.5% of revenue.

This compares with the product mix from our same period a year ago in which 75% of the revenue was generated from our chemical segment and 25% of the revenue generated from the NPCC segment. NPCC revenues were $9 million for the first quarter 2007, up 140% from the first quarter 2006 of $3.7 million. The sizable increase in year-over-year revenue is due to the contribution of our new Xianyang NPCC facility.

Both NPCC factories operated at slightly above designed capacity during the quarter. NPCC for the production of tires and PVC remains the largest contributor to revenue at 48.9% and 34.9% of total NPCC revenue, respectively.

The percent of NPCC revenue contributed by the use of NPCC in printing ink, pulp and rubber products including latex and adhesives was 16.2% in the first quarter 2007. Chemical revenue for the Q1, 2007 were $13.2 million, up 5.1% from $12.6 million in the first quarter 2006. The increase in chemical revenue is mainly attributed to the strong year-over-year growth in liquid ammonia of 97.6%.

Liquid ammonia generated 34.1% of total chemical revenue at $4.5 million, compared to $2.3 million, or 17.2% of total chemical revenue, in Q1, 2006. Revenue from ammonium bicarbonate represented 28.7% of total chemical revenue, while melamine and methanol represented 16.5% and 20.7% of total chemical revenue, respectively.

For the quarter gross profit increased to $7 million, up 69.4% from $4.1 million in the period prior. Gross margin for the quarter was 31.4%, compared to 25.3% in the same quarter a year ago. Gross margin was favorably impacted by the increased contribution of NPCC during the first quarter 2007 compared to the first quarter 2006.

Our selling expenses for the quarter were $484,840, or 2.2% of revenue, compared to $23,590 or 1.4% of revenue in the first quarter 2006. The increase in selling expenses is due to the increased sales effort to develop new customers and applications for NPCC.

General and administrative expenses were $472,091 or 2.1% of revenue, compared to $539,919 or 3.3% of revenue in the same period a year ago. We are pleased with our ability to control our G&A, despite the added cost of being a public company.

Operating income for the first quarter 2007 was $6 million at 79.8% from $3.3 million in the same period a year ago. Operating margin was 27.1%, compared to 20.5% in the first quarter 2006. The increase in operating margin is the result of improved gross margin and reduced operating expense.

Our net income for the quarter was $5.4 million or 54.8% from net income of $3.5 million in the first quarter 2006 and down 12.1% from net income of $6.1 million in the previous quarter. Net income in this quarter include tax provision of $678,763 due to the end of the tax holiday, as of December 31st, 2006, our net income generated from the original NPCC factory.

Fully diluted earnings per share for the first quarter 2007 were $0.10 compared to fully diluted earnings per share of $0.08 in the first quarter 2006 and $0.11 in the fourth quarter 2006.

Now, turning to the balance sheet. As of March 31, 2007 ShengdaTech had $38.8 million in cash and cash equivalents, no long-term debt and $39.6 million of working capital. Net cash provided by operations as of March 31st, 2007 was $4.3 million and CapEx during the quarter was $4.3 million, which includes advance to suppliers of $3.5 million for deposits on new equipment for the additional 40,000 metric tons of capacity.

Our daily sales outstanding remained relatively unchanged at 21 from the fourth quarter. We are able to maintain a low day sales outstanding due to our policy to only accept new orders from customers, once their previous orders has been paid in full. Shareholders' equity stood at $63.1 million, up from shareholders' equity of $57.1 million, as of December 31st 2006.

We feel confident that our strong balance sheet provides us with the flexibility to continue to invest in growing our NPC business through a combination of existing cash resources, cash from operations and bank debt.

We are currently negotiating to obtain a bank facility for our planned working capital needs, as we expand our NPC customer base that focus on high quality customers across multiple industry sectors. As for outlook for the rest of 2007, we remained very confident there is sufficient demand to absorb our planned capacity for 2007.

As mentioned, we are on track to bring on another 40,000 metric tons of NPC capacity, which is expected to start contributing to revenues by June 2007. And we have an additional 60,000 metric tons capacity that is also scheduled to come online by the end of the year 2007.

Now, I will turn the call back to Crocker Coulson, who will provide final remarks before he open up the call for questions-and-answers.

Crocker Coulson

Thanks a lot Leslie. So, as you can tell from our remarks, ShengdaTech’s business is currently firing on all cylinders with the company positioned very well to build a dominant share in a dynamic and fast growing market for NPCC.

Our expansion plan at our Xi'an facility is on track and generating strong advantages for us in terms of both product quality, consistency and versatility, while providing us a very solid cost advantage, this is contributing to improving margins and giving us the flexibility to consolidate market share.

We are also on track with our capacity expansion plans in the next phase as cost is expected to begin contributing to revenues next quarter. While, we have a huge market opportunity here domestically in China, we are also now beginning to penetrate adjacent Asian markets.

Longer-term, we are very excited about the progress, we are making and working with new customers to develop new applications for NPCC that can also benefit from the cost and performance, this advanced functional filler is already delivering in our existing markets.

During 2007, we plan to continue to invest in resources for our R&D projects and our sales organization, as we become a true market leader both domestically and eventually internationally.

On that note, I am also pleased to announce that our application to list our shares on the NASDAQ Stock Exchange has been approved, as we have put into place all the resources including an independent board and strengthening new management team to insure our long-term success and build liquidity and value in our stock.

We would like to close by thanking our shareholders for your support in the last several quarters, and assure you that we are committed to having an open dialogue with investors. ShengdaTech plans to meet with some of you on the upcoming Roth, China tour later this month, and we also plan to organize visits to meet in person with you as investors during the month of June.

We are now going to open up the call to any questions you may have for Mr. Chen and Miss Guo and Mable Zhang will be providing translation. Thanks a lot.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question is from the line of Dan Lee with Roth Capital Partners. You may proceed.

Dan Lee - Roth Capital

Yes, hi good quarter. Can you first go over the gross margins for the NPCC and the chemical business?

Anhui Guo

Okay. Okay Dan, the answer from Ms. Guo, the CFO of the company, the gross margin for NPCC was about 43% and gross margin for chemical products was about 25% average. The gross margin was 31% after first quarter 2007.

Dan Lee - Roth Capital

Okay. Thank you. Now given that the Xi'an plant has been fully utilized since the beginning of the year, can you talk little bit about the pent-up demand from your existing and new customers? I mean where you are going to see a big quick ramp-up in June, when the plant comes online? I’m talking about the new 40,000 metric ton capacity coming online in June?

Anhui Guo

Okay. So the answer from Ms. Guo and the company’s expansion plan based on the through research on the current market demand. So, that’s her answer.

Dan Lee - Roth Capital

Okay. So maybe can I ask one more time, how quickly they expect capacity to ramp up when we add that new 40,000 metric tons? How many months it will take, what the ramp up will look like?

Anhui Guo

Okay. So Ms. Guo say based on the research on the current market demand the management expects the new 40,000 metric ton facility in Xi’an which will finish in June will be able to reach at a full capacity in November.

Dan Lee - Roth Capital

Okay.

Crocker Coulson

And Daniel maybe on the question of gross margin, I can just expand just a little bit. We mention that we do have some very strong cost efficiencies at the new Xi’an facility and those are primarily due to both the cost and efficiency of raw materials and our cost on the limestone is a 14% lower, electricity 7% lower and consumption of anthracite 8% lower, soft coal 45% lower. So when you add those up given that 80% of our total cost in NPPC is raw materials that as you can see is translated into a strong margin advantage.

Dan Lee - Roth Capital

Okay. Now going forward are we going to expect the gross margin for NPCC to stay relatively steady? The efficiency will be offset somewhat similar by lowering of the prices or maybe you want to capture the market share?

Anhui Guo

That’s right. Ms. Guo said yes, to both your questions.

Dan Lee - Roth Capital

Okay. So, there will be a kind of trade off. Okay…

Crocker Coulson

And just to make you clear, that the price reductions in general are going to be very modest in nature whereas, I think you can see that we have a very strong cost advantage at Xi’an.

Dan Lee - Roth Capital

Okay. Can we expect some slight improvement in the margins from NPCC products?

Anhui Guo

Okay. So, Ms Guo’s answer is, the improvement of the gross margin is based on the competitive expansion and the raw material’s price. So as you know the company is planning on expanding its capacity later this year and also in Xi’an facility the company does have some sort of advantage of the raw material price.

Dan Lee - Roth Capital

Okay, great. Now regarding the operating expenses, it seems like the operating expenses have improved significantly, sequentially to less than $1 million. Now, are we going to see a similar type of operating expenses for the next couple of quarters, or are they going to bounce back?

Anhui Guo

Okay. We believe -- the management believes the current operating expenses reflect some sort of normal level of their business. However, the CapEx, the CapEx trend of 2007 is still under the discussion of the audit committee of the company, so they do not have solid competition over this.

Dan Lee - Roth Capital

Okay, okay great. Thank you very much. Great quarter.

Anhui Guo

Thank you.

Operator

Your next question is from the line of Alex Harbin with Toll Crossing Securities. You may proceed.

Alex Harbin - Toll Cross Securities

Hi congratulations on a great quarter.

Crocker Coulson

Thanks a lot.

Alex Harbin - Toll Cross Securities

I had a few questions. I know you guys were talking about targeting polyethylene and new plastic businesses. I’m wondering, I’ve read that NPCC could be a fortifying additive in milk and soya milk given the burgeoning market for milk in China that’s growing very quickly. Is this a market that you guys are going to be targeting going forward?

Anhui Guo

No, the company doesn’t have a branch into this market at this time.

Alex Harbin - Toll Cross Securities

Okay. Then I’m wondering also what the expected CapEx on the two plants together will be in total. And how much of that has already been spent?

Anhui Guo

So, as company has already publicly released their SEC filings for their 40,000 metric tons plant. The CapEx is about $9.6 million, for the 60,000 metric tons plant is about $38.5 million.

Alex Harbin - Toll Cross Securities

And how much of the $9.6 or the $38.5 has been spent already?

Crocker Coulson

Well we said in the prepared remarks that we had CapEx in Q1 of $4.3 million, which $3.5 of that was a deposit for new equipment for the 40,000 metric tons of capacity.

Alex Harbin - Toll Cross Securities

Okay. And there hasn't been before this quarter any other CapEx on that plan?

Crocker Coulson

That's good clarification. Mao

Mable Zhang

Yes.

Crocker Coulson

It was clarified if they had any other expenses in the prior quarters for this 40,000.

Mable Zhang

Okay.

Anhui Guo

Okay. Its mainly the per CapEx was mainly on this 40,000 net account we spend.

Alex Harbin - Toll Cross Securities

Okay. But there hasn’t like that $4.3 million is the entire CapEx its been spent so far? There wasn’t anything in the fourth quarter of last year or anything like that?

Anhui Guo

They are saying, there is 40,000 net accounts per the -- is the mainly pays for this CapEx investment.

Alex Harbin - Toll Cross Securities

Okay. I guess another question that would arise from that is why is there such a big difference in the per ton CapEx of these two plants. I mean 40,000 is $9.6 and then 60,000 is $38.5, where’s the big difference?

Anhui Guo

Okay, so to answer your question the 60,000 metric tons plant, actually the company need to build out the factory, the new facility and also need to purchase and install the equipments, so that’s why it’s a little bit higher.

Alex Harbin - Toll Cross Securities

Okay. And on the one that’s 40,000 they are just putting in new equipment into already existing factory?

Anhui Guo

Yes, that’s correct. The 40,000 metric tons plant already has a factory buildup and the company only needs to install equipments.

Alex Harbin - Toll Cross Securities

Okay. And then my last question would be you said that you were approved for listing on NASDAQ. Just wondering if you were given a timeline on when that would start and if you put out a specific press release to that effect.

Crocker Coulson

So, on a preliminary basis, we believe that the company will begin the trade on NASDAQ on March 21.

Alex Harbin - Toll Cross Securities

Okay.

Crocker Coulson

I am sorry, May 21, and we’re also planning on doing a market open ceremony, however, probably that’s not going to take place until early June and we’re still working with the NASDAQ to secure the date there.

Alex Harbin - Toll Cross Securities

And will you put out a press release specifically saying that you’ve been listed, because it wasn’t in the quarterly press release.

Crocker Coulson

We did put out -- I believe to make sure we double-check it when we went out there. If it hasn’t gone out already then it will be a new press release today.

Alex Harbin - Toll Cross Securities

Okay. Great. That’s it, thanks.

Operator

(Operator Instructions) And your next question is from the line of Michael Coleman of Sterne Agee. You may proceed sir.

Michael Coleman - Sterne, Agee & Leach

…NASDAQ listing

Crocker Coulson

I am sorry, can you repeat the question you got, cutoff.

Michael Coleman - Sterne, Agee & Leach

Well, it’s okay. I said good morning and congratulation on your NASDAQ listing.

Crocker Coulson

Thanks a lot. We really appreciate that. There is still a lot of work.

Michael Coleman - Sterne, Agee & Leach

Yeah. Great. I wanted to go over this. Just a quick clarification, Crocker on the ASP and NPCC. You’ve precept 460 on a metric ton and then 380, and there is 17% value-added tax. So, I just want to make sure I understand this. I can see from 460 down to 380 is about 17% but 380 up to 460 is over 20%. So, why isn’t the 380 more or like 393, is the question. So, 393 up to 460 would be a 17%. Explain for me what the dynamic there is?

Crocker Coulson

Okay. Mable, do you want to ask the score about the calculation on the VAT price, net of VAT price because is it exactly 17% because there is more or like a 20%, below 22%, 23%?

Mable Zhang

Sir, I just want to clarify the question what was -- is about the cut back for the two plants?

Michael Coleman - Sterne, Agee & Leach

No, no, this is about the pricing per ton on NPCC.

Mable Zhang

Okay.

Michael Coleman - Sterne, Agee & Leach

…with and without the value-added tax because the calculation is little.

Anhui Guo

Okay. So, the answer to your question, the value-added tax is some sort of part of Chinese government to impose at 70% of the tax. So, for example you’ve -- the company's NPCC product is priced into $450 per ton then you can multiple $450 by 1.70% to get the final price?

Crocker Coulson

Yeah, so to answer your question, maybe, we can get more detail offline. I think basically there was a little bit of rounding that the company use. And to make it clear, there is a dispersion of pricing depending on the specific-end market and application. So there is some variance there and so this is kind of averaging over the period.

And I guess, the takeaway as we saw, very stable pricing in the first quarter on NPCC, but the company -- I anticipate there maybe some fairly modest price reductions in order to consolidate share in certain markets.

Michael Coleman - Sterne, Agee & Leach

Okay. And what's the assumed exchange rate with that that they use to calculate that?

Crocker Coulson

So Mable when we’re calculating the price of NPCC per ton, what exchange rate of dollars to RMB that we are using?

Anhui Guo

Okay. The company use average exchange rate of our quarter so, for the first quarter 2007, the company used the 7.76%.

Michael Coleman - Sterne, Agee & Leach

Okay. Thank you. Okay. And one thing I did want to clarify, if you could ask Mr. Chen or Ms. Guo as to the amount of the land in Xi’an in move. How much land have they secured total in the move measurement? What I am trying to do is, I want to know what the move measurement is, and I will then covert it to acres?

Anhui Guo

500 move.

Michael Coleman - Sterne, Agee & Leach

500. Okay. So, that’s just over 80 acres, is that? I am using 0.1647 conversion. Mable?

Mable Zhang

Yes.

Michael Coleman - Sterne, Agee & Leach

Okay. I want to ask another question, I would let that go.

Mable Zhang

Okay.

Michael Coleman - Sterne, Agee & Leach

Okay. So, you’ve talked a lot about new applications coming in the second half of '07 and I was wondering if you could just perhaps illustrate, which application will dominate the new shipments in the second half of '07. So you’ve talked about a lot of different applications because you just picked one application you will do more of in terms of the overall new shipments in the second half of '07?

Anhui Guo

Okay. You mean, both new and existing applications?

Michael Coleman - Sterne, Agee & Leach

I am talking about the new applications and you talked a lot about in the K and so forth about new shipments and new applications in the second half of '07. And could you just illustrate one application that will dominate those new shipments in the second half of '07?

Anhui Guo

Okay.

Michael Coleman - Sterne, Agee & Leach

Thank you.

Anhui Guo

Michael, so to answer your question, as you know the company is currently is dominant in the market of tire and PVC. So the company expects this trend to continue in the second half of 2007. However, the company wants to enhance its market share in the adhesives sector in the second half of 2007.

Michael Coleman - Sterne, Agee & Leach

Okay. So I am hearing that adhesives is the mover in the second half of '07 in terms of the new products. And what -- how would you characterize the adhesives gross margin relative to the overall average of the NPCC product?

Anhui Guo

Michael, also the gross margin of the adhesives products should be inline with average gross margin level of NPCC products. However, the company thinks that what's more important is the company can tap into the new segment, new market of adhesive products.

Michael Coleman - Sterne, Agee & Leach

Okay. So, the adhesives and sealings, I maybe incorrect here, but I was under the impression that it actually had a better gross margin then perhaps PVC. Is that correct?

Anhui Guo

Michael, the company says, they didn’t have -- that they ran small releases, so.

Michael Coleman - Sterne, Agee & Leach

Okay.

Anhui Guo

Yeah.

Michael Coleman - Sterne, Agee & Leach

And that’s it for now. I’ll see if there are other questions.

Anhui Guo

Thank you, Michael

Michael Coleman - Sterne, Agee & Leach

Thank you.

Operator

Your next question comes from the line of Joe Hai, a Private Investor. You may proceed.

Joe Hai - Private Investor

Hi. Good morning. Crocker in your opening remarks you mentioned that there was going to be a one-time impact coming up here in the second quarter because of the 15-day shutdown in the factory that is manufacturing the core chemical products. Do you have some kind of estimate in terms of how that’s going to impact revenue?

Crocker Coulson

Joe, may you want to translate that for Ms. Guo, but I’m assuming you can more or less take the revenue days from our chemical business.

Joe Hai - Private Investor

Okay.

Crocker Coulson

In the first quarter and then subtract 15 days, but why don’t you translate that from Ms. Guo, if she has more detailed answer.

Anhui Guo

Yes. What we have suggested, I think you can take Crocker's suggestion to do the cancellation.

Joe Hai - Private Investor

Okay, thanks. And there is some seasonality though in the first quarter, is that correct in terms of that being a lower revenue quarter for you?

Anhui Guo

As, you know, that the fourth quarter we had Chinese New Year, so there was eight days fewer than the previous quarter.

Joe Hai - Private Investor

There were eight days, yes, less in the first quarter than in the fourth quarter.

Anhui Guo

Yes.

Crocker Coulson

Correct.

Joe Hai - Private Investor

If this was a planned shutdown, why didn't you try to time it more in the first quarter than in the second quarter?

Anhui Guo

Okay, so it’s not actually the plan to shutdown; in fact, operation is based on the situation as company’s equipment, so the management believes in the second quarter they do need to do this because the equipment operations in our situation.

Crocker Coulson

Okay, so I get the answer is that the arrival of the new advance equipment couldn’t be precisely timed with the Chinese New Year.

Joe Hai - Private Investor

Okay, I see. So this was due to out fitted with new equipment so they become more efficient going forward?

Crocker Coulson

Yeah, and this is for the coal-based chemical part of the business, not the NPCC part.

Joe Hai - Private Investor

Okay, so in general in the future, what should we expect in terms of kind of, I mean, are we likely to see this kind of shutdowns in the future from the various facilities that are being planed, or is this sort of, just a truly a onetime thing?

Anhui Guo

To answer your question, as you know the company has been treating them as it keeps operating and the full capacity the company to need to stop sometime to install a new equipment do achieve maintenance like 15 equipment. So such a shutdown action probably would take place once a year and actually, it actually takes place every single month for a day or half a day.

But a company has always a priority excluded such part of production capacity from the calculation. So for example, while the company has a relief and the company announced 30 met 30,000 metric tons production capacity, is around 300 production working days per year.

So already, virtually reduced the 65 days because of the shutdown.

Joe Hai - Private Investor

I see. Okay. That’s very helpful, thank you. And I assume that means that the factories when they’re not shutdown are running 24-hours a day, and seven days a week?

Anhui Guo

Okay. To answer your question, it varies, depends on the situation of the equipment running. So, if its running above the -- for example if its running really intensely and then a company may take the half day per month, and if its not, that’s maybe a day in two or three months. So, it depends on the situation of the equipment.

Joe Hai - Private Investor

Okay. Thank you very much.

Anhui Guo

Sure.

Operator

There are no further questions at this time. Does management have any final remarks?

Crocker Coulson

Yes. We’d like to thank everybody for your participation in the call today. As you can tell we’re excited about the first quarter results. And we also look forward to see some of you in person in June when management visits the U.S. and if anybody would like to be included in those visits, feel free to give us a call and we’ll make sure that you are. And so that concludes our call for the first quarter and look-forward to coming back to you later this summer and talking about our second quarter results. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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Comments

[info:]

PR News reported that ShengdaTech has received Nasdaq approval for listing under proposed symbol SDTH. Great news for the company just one day after earnings report. Now Shengdatech will have better visibility to investors and access to capital for expansion. On the other hand, this China stock market wiki page SGAT.OB will no longer be valid. Congrats to the management and shareholders!

2007 May 10 02:42 AM