Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  
TRANSCRIPT SPONSOR
ChinaDirect Logo

China Direct, Inc., (OTCPK:CHND)

Q1 2007 Earnings Call

May 9, 2007 4:30 pm ET

Executives

Alan Sheinwald - Hayden Communications International

Marc Siegel - President

David Stein - COO

James Wang - Chairman

Jenny Liu - VP of Finance

Analysts

William Oakland - Oakland Association

Collins McMahon - AMR Capital

Kevin Raidy - H4 Capital

Gary Wistenbalm - Gilford Securities

Presentation

Operator

Good evening, my name is Lenny and I will be your conference operator today. At this time, I'd like to welcome everyone to the China Direct Incorporation 2007 First Quarter Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remark, there will be a question-and-answer period.

(Operator Instructions) Thank you. It is now my pleasure to turn the call over to your host, Mr. Alan Sheinwald of Hayden Communication International. Sir, you may begin your conference.

Alan Sheinwald

Thank you, operator, and thank you everyone for joining us today for the China Direct 2007 First Quarter Conference Call. First, I would like to give a background of China Direct. China Direct maintains active majority stakes in diversified portfolio at Chinese companies, as well as, offering consulting services for both private and publicly traded Chinese entities. China Direct provides a platform to develop and nurture these entities as they expand their businesses globally. As a direct link to China, China Direct serves as a vehicle to allow investors to directly participate in the rapid growth of the Chinese economy in a diversified and balanced way.

For information about China Direct, please visit www.cdii.net. Our call today will be hosted by Mr. Marc Siegel, President; and Mr. David Stein, Chief Operating Officer of China Direct. Additionally James Wang, Chairman and Jenny Liu, VP of finance of China Direct will be available during the Q&A session.

Following management's discussion, there will be a formal question-and-answer session open to participants on the call. If anyone participating on the call this afternoon does not have a copy of the earnings release, please contact our office at 914-669-0222.

Before we get started, I am going to review the company's Safe Harbor Statement. Statements in the conference call that are not descriptions of historical facts are forward-looking statements relating to future events. Any such all forward-looking statement are made in reliance upon the Safe Harbor provisions of the Private Securities Litigations Reform Act of 1995.

Certain statements made in the course of this conference call that state China Direct's managements intentions, hopes, calls, beliefs, expectations, suggestions, plans, outlook or predictions of the future are forward-looking statements. These forward-looking statements are subject to risks and uncertainties and actual results may differ materially. When used on this call, the words anticipate, could, enable, estimate, intend, expect, belief, potential, will, should, project, plan and similar expressions, as they relate to China Direct or any of its subsidiaries are intended to identify said forward-looking statements.

Investors are cautioned that all forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially from those anticipated by China Direct at this time.

Except for these that are required by applicable security laws, China Direct undertakes no obligations to update or publicly revise any of the forward-looking statements that you may hear today. Please refer to our annual reports on Form 10-K, our quarterly reports on Form 10-Q or periodic reports filed on Form 8-K, which are filed with the SEC and are available at the SEC's website at www.sec.gov for a full discussion of the risks and other factors that may impact any estimates that you may hear today.

Gentlemen, I want to congratulate you on your tremendous revenue and income growth. I look forward to a great second quarter and a strong 2007. At this time, I would like to turn the call over to Marc Siegel, President of China Direct.

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.

To sponsor a Seeking Alpha transcript click here.

Marc Siegel

Thank you, Alan. I want to thank everyone for joining us this afternoon. We, at China Direct are proud to report our strong numbers for the first quarter of 2007. Our total revenues for the three months ended March 31, 2007 were approximately $41 million. We recorded net income of approximately $1.9 million.

Let me remind you, if I can, that China Direct is a US based corporation, doing the majority of our business in China. We have achieved significant milestones over the last 90 days of 2007.

Number one, our assets have increased to $30.6 million in the first quarter of 2007. That’s up from $20.8 million at December 31, 2006. Of that $30.6 million, $19.3 million are associated with our subsidiaries in China. The remaining money is with our parent company here in the US.

We've increased our staff secondly, from five to twenty employees over the last 5 months within the parent company. We now have an accounting staff of six professionals within the organization, including two CPAs. The third milestone is we formed our independent board all with strong accounting backgrounds who act on our auditing and our compensation committee. In addition, we appointed a new in-house counsel to strengthen our internal controls and oversee our SOX compliance initiative.

Fourth, during the quarter, we formed three additional joint ventures in China. They are CDI Magnesium, Big Tree Toy Group and CDI Wanda. Please, let me briefly review our subsidiaries and the new joint ventures.

Our first acquisition was almost completed in November of 2006; the name of the company is Lang Chemical. They were distributor of industrial grade chemicals. They work with such household names as BASF, Lucite International and Celanese. We own 51% of Lang Chemical.

During the first quarter of this year, Lang contributed over $12.4 million of revenue to China Direct. Lang also provided net income of $171,235, which represents our 51% ownership interest. This was the first full quarter of contribution for Lang and we expect continued growth as we work with the management team and provide additional working capital for expansion.

In the last week of December, we completed our second significant acquisition. We acquired 51% of Chang Magnesium. They are both the manufacturer and an exporter of magnesium. We acquired Chang for $2.5 million of working capital.

Again, this was the first quarter in which China Direct has reported results from Chang Magnesium. During the first quarter, Chang Magnesium generated revenues of $14.4 million and contributed $432,903 in net income. That net income is adjusted for our 51% ownership interest.

We believe, we will continue to experience both revenues and earnings growth throughout 2007, by working with the Chang Management team and providing them with working capital, operational and financial support.

On February 12, we acquired 51% of CDI Wanda Alternative Energy Company. Wanda is engaged in the alternative energy and recycling industry. The company develops environmentally safe recycling technologies.

Wanda has developed a proprietary recycling process that transforms waste rubber tires into distillate fuels, such as diesel, gasoline and fuel oil. Our consolidated statements of operations include the operations of Wanda for the period of February 12, 2007 through March 31, 2007. February 12, was our date of acquisition.

For the Wanda reporting period, they generated revenues of $2 million from the sale of their environmentally safe recycling technology, and they contributed $69,560 to our net income, again adjusted for our 51% ownership interest.

Also in the first quarter in January, we established our offices in China. We have our wholly-owned subsidiary called CDI Shanghai Management, which is based in Shanghai.

We currently employ eight professionals in our China office. Their job is to oversee the business and financial performance of our Chinese subsidiaries, as well as our consulting clients.

In addition, CDI Shanghai is the marketing branch for our services of both China Direct Consulting and CDI China. We've also acquired 60% of Big Tree Toy located in Shantou City in February of this year as well. Big Tree operates in the toy industry and the relative entertainment industry on a worldwide basis. They are a major exporter and distributor of toys, again on a worldwide basis. China is, if you don't know, one of the world's largest manufacturer and exporter of toys. It manufactures approximately 75% of the world's toys.

Big Tree itself offers 180,000 different products in the toy industry, including plastic toys, stuff toys, electronic toys and ceramic toys. We have not received any revenues or earnings from Big Tree. We expect them to contribute to our financials in the second quarter.

In February of 2007, we also acquired 60% of CDI Magnesium, which dub tails with Chang Magnesium Company. CDI operates a recently completed magnesium plant to process and manufacture magnesium alloy.

If you don't know, magnesium alloy is sold in the automobile, electronics and the computer industries. We expect all of our newly formed joint ventures to add to our numbers in 2007 and beyond.

CDI Wanda and CDI Shanghai Management have contributed to our financial performance in the first quarter of this year. Lang and Chang we received our full numbers from them in the first quarter for the first time.

We expect Big Tree and CDI Magnesium to contribute to our financial performance in the second quarter of this year. We look forward to providing a comprehensive update in August, following the filing of our second quarter results.

I would like to turn the call over now to David Stein, our Chief Operating Officer, to discuss our financial results in more detail. David?

David Stein

Thank you, Marc. The revenues for our first quarter of '07 increased to $30.6 million, as compared to approximately $206,000 for the same period in 2006. That’s an increase of over $30.4 million.

During the first quarter, our consulting division generated revenues of $2.1 million, while Lang Chemical contributed revenues of $12.4 million, Chang Magnesium contributed revenues of $14.4 million, and CDI Wanda, lastly, contributed revenues of $2 million again since the date of acquisition.

For the first quarter of '07, we reported net income of $1.87 million, as compared to net income of approximately $156,000 for the first quarter of '06. That’s an increase of over 1000%.

For the first quarter earnings per share were $0.14 per share, compared to $0.02 per share for the same period of '06. On a fully diluted basis, the earnings per share for the first quarter were $0.12 per share, compared to a penny for the same period of '06.

The increase for the first quarter of '07 primarily is attributable to $432,903 from Chang Magnesium, a $171,235 from Lang Chemical. We got roughly $70,000 from CDI Wanda, and again we got $1.1 million from China Direct Consulting.

Our total assets as of March 31 '07 increased to $30.6 million. It's an increase from over $20.8 million at December 31 '06. Of these assets, approximately $19.3 million were related to our subsidiaries in China, while the remainder related to our parent company here in the United States.

As of March 31 '07, the shareholder equity was $8.37 million, as compared to $5.9 million at December 31 '06. At March 31 '07, the cash and cash equivalents was $5.4 million and working capital was $9.7 million, as compared to cash and cash equivalents of $3 million and working capital of $6.8 million at December 31, 2006.

At this time, I would like to give the call back over to Marc, so he could have closing comments.

Marc Siegel

Thanks David. For the first five weeks since the second quarter, we see continued growth from Lang, Chang and CDI Wanda. We are looking forward to begin reporting contributions from our recent acquisitions during the following quarters.

In addition, we continue to evaluate additional acquisition candidates for this year and beyond. Dr. Wang and I are traveling to China on Saturday to meet with the management teams of our operating companies within China currently under our ownership, as well as to meet with certain companies we've identified as possible acquisition candidates this year and in 2008.

Our business model is being very well received in China. For this reason, we believe that we can continue to make acquisitions of companies that can contribute significantly to our top and bottom lines.

We continue to target Chinese companies generating under $100 million in annual revenues, which we believe will offer the greatest opportunity for growth for our company.

Previously, we provided guidance to the street of a $100 million in annual sales and $5 million in net profit for the full year 2007. We did that on our 2006 year end conference call.

Today, we are raising our 2007 year guidance to a $120 million in annual revenues and approximately $6 million in net income. We did not see any seasonality in our business model. We are pleased with our results so far in our first nine months as a public company, and as we continue to expand and mature, we believe that we could do better.

In our first year, we are maintaining, what I would consider a very conservative posture. In the U.S. and China, we have increased our workforce from five professionals to 20 professionals, including as I mentioned earlier, 2 in-house CPAs. As a result of that, we have the ability now to not only supervise, monitor and support our existing businesses, but we also have the infrastructure in place to scale up business modeled for this year and to add next year as well.

We are continuing our search for a bilingual CFO, and we have also added, as I mentioned earlier, our three new independent members to our board, who again have proven financial and accounting backgrounds.

As we mentioned in our call of 2006 year end, we intend to apply for listing on the American Stock Exchange sometime in the second quarter of 2007. We have already picked out our specialist and we believe that this step will further our goal of increasing visibility of our investment opportunity and add value for our existing share holders.

Our first quarter results show our proven ability to buy significant assets in China at very low valuations. We believe that our financial performance in the remainder of this year will demonstrate our value add not only in financing and structuring our Chinese subsidiaries, but also in accelerating their revenues and improving their earnings.

We look forward to continue to deliver strong revenues and earnings numbers in the coming quarters. I would like to thank everyone for joining the call this afternoon. This concludes our formal comments and at this time, we would like to respond to any questions. Operator, please start the Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from William Oakland of Oakland Association.

William Oakland - Oakland Association

Yes when I multiply four times your first quarter results, I get more than what you are guiding, I assume that you’ve said you expect continued (NOL), so I would believe that you are extremely conservative in your guidance for this year and probably will raise it as we go along, is that true?

Marc Siegel

This is Marc Siegel. The answer to your question is yes. We are taking a very conservative posture as we’ve acquired a lot of companies very quickly, and as we see the second quarter results, we will revise our numbers accordingly.

William Oakland - Oakland Association

Okay. Thank you.

Operator

The next question comes from Collins [McMahon] of AMR Capital.

Collins McMahon - AMR Capital

Hi, thanks for taking my call. This is a question for Marc, I guess, just wonder if you can provide some color on your current cash situation and then second, if you could just provide a little of color also on what you see going forward as the primary challenges in the first half of '07? Thanks a lot.

Marc Siegel

Collins, let me have David give you the cash numbers, and then I will go over what I believe to be the challenges for the first half of 2007. Okay?

Collins McMahon - AMR Capital

Great.

David Stein

Just to repeat at March 31, '07, we're showing cash and cash equivalents of $5.4 million. As well, we're showing positive cash flow during the quarter, $1.8 million. Let me pull it over to Marc again.

Collins McMahon - AMR Capital

Sorry, just on that positive cash flow, do you have any guidance on that going forward or is do you have any sort of -- is there any transparency on how you see that playing out in '07?

Marc Siegel

On the cash flow?

Collins McMahon - AMR Capital

That's right.

Marc Siegel

We have not put out any formal guidance on our cash flow for the year. However, if you would like to call back offline, we could talk to you later.

Collins McMahon - AMR Capital

Thanks guys.

Marc Siegel

Let me just tell you about the challenges for 2007. We've been working very, very hard, integrating the six new companies into our company, as well as, trying to access many of the companies that are not performing well and the Chinese companies to become consulting clients of ours. So, we foresee our biggest challenge is putting in the new internal controls that are necessary for our AMEX listing, as well as guiding the street in a conservative manner without being too aggressive on the growth that we've been managing right now.

Collins McMahon - AMR Capital

Okay, great.

Marc Siegel

Thank you.

Operator

Your next question is coming from Kevin Raidy of H4 Capital.

Kevin Raidy - H4 Capital

Hi guys. I wonder if you could talk a little bit about what the pipeline of potential further acquisitions looks like, what kind of companies you are looking at, what size, and then, kind of, if you could give us some sense of how big the combined revenue base could be, let’s say on a run rate of 12 months out, what’s the way you see the pipeline developing?

Marc Siegel

Kevin, its Marc, good to hear you. Let me turn it over to James as he runs our China operations for June.

James Wang

Hi, Marc. Thank you. Basically, rather now we are looking into three candidates to acquire one using a logistic business. We bought $30 million to $35 million in revenue last year. One company it's in oil [refinery] business. We did a business of about $25 million last year. We look at another company, its in ore mining business. We probably did about $15 million last year. So, we believe if we can make a correct transaction times for us we probably can make this kind of acquisition later this year. So, I would say, if we can make these three acquisitions for next 12 months, we are looking at $200 million to $300 million in annual revenues.

Kevin Raidy - H4 Capital

And what kind of multiples -- that was helpful, thank you. What kind of multiples are you looking to pay for these companies? You've clearly been able to buy these first set of companies on what looks to me to be very good terms. What kind of multiples are you looking to pay now for these next few?

James Wang

Usually, we are using net tangible assets, basically if at one time of the net tangible assets. Mostly, usually we tend to add up about a one to two times the annual income. So, if you are talking about additional income, and depending upon the industry, usually we do not want to pay more than one-time net tangible assets. Sometimes it could be two times earnings growth, sometimes it could be 1.5 times earnings.

Kevin Raidy - H4 Capital

Okay, thanks.

James Wang

Thank you.

Operator

Your next question comes from [Gary Wistenbalm] of Gilford Securities.

Gary Wistenbalm - Gilford Securities

Hello, Marc and James. Great numbers by the way. Fantastic and congratulations. As I look at your, as you report here and results, you had mentioned, Marc that you are planning to go on the AMEX this quarter. Do you have any, in first place any guidelines as to how long that might take? Do you actually qualify now, what's needed to get on the AMEX, is my first part of the question?

Marc Siegel

Hi, Gary how are you?

Gary Wistenbalm - Gilford Securities

I am doing great. Thank you.

Marc Siegel

We have already picked out our specialist for the AMEX. We've already started our application process. We put the boarding in place this quarter to be able to qualify. We need an independent board, as well as we need $15 million in public float or $50 million in public market value. We qualify for the public float part as of today's closing price. So, we plan to apply as soon as we have the final board completion, and we put in the beginning of our stocks compliance. We plan to apply at the end of June or the first week of July. We think it will take about six weeks after my meetings with them.

Gary Wistenbalm - Gilford Securities

And you mentioned you are going over to China now to take a look at some additional companies. So kind of I think the companies that James was talking about as candidate, the logistics [deal] underlining.

Marc Siegel

Yes

Gary Wistenbalm - Gilford Securities

Right. Let me ask you, in terms enhancing shareholder value on the companies you own. Is there any thought to at a certain level spinning off any of these companies, looking at the mining, the Magnesium, and things like that, any opportunities there, how do you enhance shareholder value in that case?

Marc Siegel

It's a great question. Our model is kind of a hybrid. And the industry is hopefully going to recognize it sooner than later. We are kind of like a venture capital fund, in that we look for venture capital like returns on our initial investments.

But we are also kind of like a private equity fund, in that we stage our money in very slowly, so that we leverage our money and we look to buy companies that are capital constrained. And we look to then monetize those investments.

The third thing, we are if you can see it this way, it's like a mutual fund. Because we do have liquidity and we trade it on a daily basis. So, you can get into that whenever you want.

The whole plan of China Direct is to take companies that may not or should not be public on their own initially. Monetize those companies who are down the road, after they have been seasoned on Wall Street, we have given them the training wheels if you will, to learn how to be public companies.

Then when there is no longer any synergy between China Direct and one of those corporate clients, and there is some interest in that company, we'll seek to monetize that company in a number of different fashions, whether that be a registered spin-off to our existing clients, a dividend, an outright sale or an IPO. We don't really have any affinity to any of those. What we have affinity to, is creating the best value for our shareholders from our initial investments and our efforts in the company.

Gary Wistenbalm - Gilford Securities

Marc my last part to the question is, in looking at this company in terms of valuation and what research might say, have you talked to institutions or potential research companies? What kind of valuation are they giving you, what are they saying to you with regarding your model and where they think the stock might be here 6 to 12 months to 18 months out?

Marc Siegel

My answer to you is, we have spoken to some people that want to do research on our company. I can't tell what their thoughts are at the present time till their report comes out. But I'll tell you that the universal statement has been the following. Well let's see what we could do after we report your first quarter numbers.

Gary Wistenbalm - Gilford Securities

Yeah. We might be early. Thank you very much. I appreciate it.

Marc Siegel

Thank you.

Operator

(Operator Instructions). There appear to be no more questions at this present time. So, I'd like to turn the floor over Mr. Marc Siegel, President of China Direct.

Marc Siegel

I want to thank you all for being on the call again today. And please feel free to call myself or my management team anytime to get any information that you would like. Visit the website please at www.cdii.net. Thank you all again. Operator?

Operator

Yes, sir. This concludes today’s China Direct Incorporation Conference Call. You may now disconnect.

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.

To sponsor a Seeking Alpha transcript click here.

Copyright policy: All transcripts on this site are the copyright of 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.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: China Direct Q1 2007 Earnings Call Transcript
This Transcript
All Transcripts