ShengdaTech: Undervalued Chinese Chemical Manufacturer

ShengdaTech (SDTH) is engaged in the business of manufacturing, marketing and selling a variety of nano-precipitated calcium carbonate ("NPCC") products and coal-based chemicals for use in various applications.

The Company converts limestone into NPCC using its proprietary technology. The unique chemical and physical attributes make NPCC a valuable ingredient in tires, paints, polyvinyl chloride ("PVC") building materials and other products. NPCC enhances the durability of many products by increased strength, heat resistance, and dimension stabilization.

The Company is also engaged in the manufacture and sale of coal-based chemical products namely ammonium bicarbonate, liquid ammonia, melamine and methanol. The Company markets and sells its coal-based products mainly for chemical fertilizers and raw materials in the production of organic and inorganic chemical products, including formaldehyde and pesticides.

Fundamental Evaluation:

SDTH had a very strong first year reporting as a publicly traded company, posting some impressive earnings. For FY 2006 they posted revenues of $72.6m with a 28% gross margin and minimal operating costs at just $3.9m SGA, leaving them with net income of $17.5m on the year. SDTH's financial condition is quite impressive as well. Currently, they're sitting on $34.6m in cash with an outstanding current ratio of 4.38; 2 is optimal, 4.38 is very nice to see. On top of that, SDTH is currently subject to zero long term debt, so their financial condition is very healthy and looks more that set to move forward with growth.

Industry Comparison:

SDTH looks very undervalued when comparing them to the industry averages. SDTH is trading at just 15.17x earnings, compared to the Chemical Manufacturing average of 31.8x, so we could expect SDTH's price action to continue its bullish trend as it attracts more investors, especially since it's currently holding a very low forward PE of just 9.53x earnings. The price to sales ratio is slightly above the industry's, with SDTH at 3.83x and the industry average at 2.5x. But the P/S ratio is usually not so significant. I like to see it below, but with SDTH's PE ratios so undervalued, it's not of much importance. As I said before, the current ratio of 4.38 is very attractive compared to the average 2.6.

2007 Guidance:

SDTH reported very strong fiscal '07 guidance on Friday, which gave way to a very bullish technical breakout on heavy trading and leads me to further analysis of the company.

The report is as follows:

For fiscal year 2007, ShengdaTech expects to generate revenue of $96 - $98 million, up 32.2% to 35.0% from $72.6 million in 2006. The Company expects net income to increase approximately 31.2% to 36.9% to $23.0 - $24.4 million for earnings per share of $0.43 to $0.45. The Company also expects margins to improve throughout the rest of the year as its higher margin NPCC segment contributes a greater percentage of overall revenue.

We are very pleased with the progress we have made to date and expect continued growth going forward,'' commented Mr. Xiangzhi Chen, CEO of ShengdaTech. ''We continue to operate at full capacity in both of our factories and will have an additional 40,000 metric tons of NPCC capacity in Xi'an City online this month. We also expect to increase NPCC capacity by an additional 60,000 metric tons by the end of 2007.

Technical Analysis

SDTH had a very bullish breakout last Friday after the release of their fiscal '07 guidance sent the price up to as high 33% at one point. Although the closure of the day formed an extended upper shadow with some bearish implications, the breakout was solid from the ascending triangle neckline, which signifies the likely possibility of a bullish continuation in price, especially when considering the fundamentals in conjunction with technicals. I have still yet to fill a position, but will look to buy in today's session as I think the bullish trend will continue here.

SDTH 1-yr chart

Disclosure: none

Comments

[iddjjs:]

Excellent article and analysis! SDTH is one of those hidden gems that will be picked up sooner or later. As the matter of fact, the volume of past three sessions shows that SDTH has caught a lot of attention since that pre-announcement (I myself being one and have since bought several thousand shares of it and counting!). I agree that with the low PE comparing to peer, especially the extremely low PEG of only 0.27 (1 being fairly priced, the small the better), SDTH has a significant room for further price appreciation. $8 ~ $10 would be an easy reach from here.

2007 Jun 21 03:31 AM

[richardalla...:]

I just bought some the other day at 5.62. This is a very compelling story. What price did you get in at?Breaking out as we speak also!

2007 Jul 02 11:12 AM