The Long Case for Sinoenergy 12 comments
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The Company
Sinoenergy is a Chinese company with three main segments, pressure containers, CNG storage and transportation and CNG retail filling stations. Pressure container business is low margin construction of metal tanks to hold and transport pressurized materials such as compressed natural gas. CNG storage and transportation includes vehicle conversion kits, CNG transport trailers, and turnkey design and construction of CNG retail filling stations. Finally, the CNG retail filling stations leverage the other two segments to build and operate company-held compressed natural gas filling stations.
Based in Shandong province, China, SNEN has a little less than 400 employees. Their current fully diluted share base is about 35MM. The company first began operating in Shangdong in 1956 as Qingdao General Machinery Factory.
The Business
In the recent past, SNEN has maintained a healthy business as a provider of pressurized containers and turnkey CNG station solutions. In the 4th quarter of 2006 the company reported revenue of 2.6MM and net income of 1.1MM based only on these two segments. Full year 2006 net income amounted to $3.4MM.
The company changed strategy in 2007 and secured financing to build out a network of 30 company owned retail CNG filling stations. At the same time the company restructured their pressure container business to focus on higher margin products associated with CNG, biodiesel, and LPG. This resulted in lower revenue and net income in the first quarter of 2007 as CNG station design and construction were all but suspended in order to support company-owned station construction.
Retail CNG Stations
Although SNEN's other business lines can probably support 16MM revenue and eight to ten cents per share in net income annually on an on-going basis, the real future of this company is in the retail sale of compressed natural gas. The economics are compelling. Consider the case of Wuhan, the target city for SNEN's first retail CNG filling stations.
There are 5000 buses and 20000 taxis in the city of Wuhan. Although only several hundred currently run on CNG, the local government has signed a JV with a company to convert vehicles. According to SNEN management up to 300 buses per day can be converted under this joint venture agreement, meaning the entire fleet of buses could be converted in about a quarter.
Each bus travels about 200 km in a typical day, consuming about $40.66 in gasoline. The same bus would consume only $23.75 per day in CNG to do the same work. That's a 41.5% cost savings. A typical taxi might travel twice as far and consume $20.65 in gasoline daily. Switched to CNG, that fuel cost drops to $12. So it's not hard to imagine why people would want to convert as soon as possible.
How much CNG retail business would Wuhan's bus/taxi fleet support? Consider that at typical bus would consume 65 to 80 m3 of CNG daily and a typical taxi would consume 25 to 30 m3 per day. If there are 5k buses and 20k taxis that amounts to 825k m3 per day. Each of SNEN's stations will dispense about 10k m3 per day under typical operating conditions so the existing fleet in Wuhan could support more than 80 stations. That's just one city...and that doesn't even consider what demand there might from non-commercial passenger vehicles.
From the retailer's perspective, the economics are also very attractive. According to SNEN, a given station will produce 300k in annual net income and 1.3MM in annual revenues. That's over 20% net margin which is good by any standard. More importantly, SNEN have 30 stations financed and under development that are scheduled to be operational by the beginning of 2008. If they perform per company guidance that will amount to 9MM in annual net income or 25.7 cent per fully diluted share (based on May 07 fully diluted share base of 35MM per Laby Wu, CFO).
Long Term Prospects
Long term, SNEN plan to open 70 stations over the next 3 years. 30 are already funded and will be complete by the end of 2007. 40 more need to be financed to the tune of 800k per station.
The company also signed a gas supply contract recently to supply up to 200MM m3 of gas daily. The supply agreement commences in 2009 upon completion of a gas pipeline to that location. SNEN plans to build a compression 'mother station' at a cost of $5MM that will generate $60MM in annual revenue and net income in the range of $10MM to SNEN's 60% owned subsidiary Hubei Gather.
So, long term, the company is looking at another 40*300k + 60%*10MM = 18MM in annual net income. This for a total capital expenditure of about 37MM which will probably be financed through equity. That probably amounts to 11MM shares of dilution, conservatively.
Boone Times
T. Boone Pickens recently made headlines by making the rounds through CNBC and the Wall Street Journal after visiting China to investigate compressed natural gas as a fuel for transportation. It seems he is going to make an investment in the CNG retail business through one of his funds.
From The Wall Street Journal: "Natural gas is cheaper and better for transportation," he told reporters in Beijing.
Mr. Pickens's group says the world has six million autos that run on natural gas, but such vehicles remain a tiny share in most markets, including China, where they are limited to a small number of buses and taxis. Beijing has pledged to put several thousand buses powered by natural gas on the road ahead of the 2008 Olympics in an effort to cut air pollution. Other cities in China are converting their taxi and bus fleets to run on natural gas."
Say what you want about Pickens, but he knows a thing or two about making money in the energy markets. And he represents a source of well-financed capital. The article never mentions what company he talked with, but it serves notice that CNG in China is an industry that has government support and has piqued the interest of some big time finance.
Valuation
The company has guided to 9MM-10MM operating income in 2007. The share purchase agreement they signed in february placed half a million shares in escrow that are subject to pro-rated forfeiture if the company doesn't achieve 2007 net income per fully diluted share of at least 35.3 cents. Depending on how FDEPS is calculated, I doubt they'll make that number. They certainly won't make it if 10MM operating income is achieved and they use the true fully-converted, fully-exercised diluted share base of 35MM.
Using an average fully diluted share count of 30MM, FDEPS are likely to be 30 to 33 cents per share. At that point, 30 stations will be built, a third of them that have contributed no revenue will be poised to contribute a full quarter's revenue. A 12x multiple is ridiculously low for a company with SNEN's fundamentals, but that would mean a share price of $3.60 to $3.96. That works out to a total return of >40%.
Medium Term Model
Date Cashflow
7/21/2007 2.45
28-Apr-08 -3.6
IRR 64.56%
Total 46.94%
Long term, the company will generate 21MM in annual net income from 70 CNG stations, 6MM from Hubei Gather, and ~4MM from their other business segments. On a share base of 46MM, that works out to 67 cents a share.
Long Term Model
Date Cashflow
7/21/2007 2.45
31-Mar-10 -8.04
IRR 55.39%
Total 228.16%
Disclosure: Author is long SNEN
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This article has 12 comments:
I was doing some dd after reading your article on SNEN and came across this video of Boone Pickens talking about CNG growth in China. I'm sure it's the one you were referring to in your article, and I thought your readers might be interested in it.
www.cnbc.com/id/198242...
Anyway, thanks for uncovering this one. I'm still looking at it, but it looks interesting so far!
John
Although your question was directed to the author, I thought I'd jump in.
You asked: "what do you think about SNEN compared with CHNG, which is already profitable?" which implies that SNEN is not profitable. In fact, SNEN made .24/share in 2006, and CHNG made .23/sare.
SNEN is now trading at a trailing PE of 9
CHNG is trading at a trailing PE of 29
Hope this helps,
My impression with SNEN is that they are to a degree winding down their outsourced construction business to build their own filling stations, which means you can't really rely on those estimates as meaning too much. Also, with 29mil shares vs. 14mil last year, the correct P/E looks like its closer to 20.
Container & conversion kit business aren't contemplated in the (long term) model. Any contribution from these segments >0 will add to results. Recent history indicates results from these segments is >0.
2) Also ownership in a Chinese auto company.
3) The land value. You can find more info on this in past post but it is something that puts SNEN at a huge advantage.
4) SNEN has the cash they need to build the first 30 stations already.
5) Management
QINGDAO, China, Oct. 9 /Xinhua-PRNewswire-Fir... -- Sinoenergy Corporation (OTC Bulletin Board: SNEN), ("Sinoenergy"), a manufacturer of compressed natural gas (CNG) vehicle and gas station equipment and a designer, developer and operator of CNG filling stations in China, is pleased to announce today that its first two CNG filling stations are now open and have begun distributing compressed natural gas to vehicles as of September 30, 2007.
The two stations are located on Changfeng Street and on Baibuting Street of Wuhan City, Hubei Province. Each station has four filling outlets and both are open 24 hours a day, seven days a week. The company has staffed each station with 12 to 14 employees to handle daily operations.
Within the city of Wuhan there are currently 20 CNG filling stations, one central station and a large scale compressed natural gas plant, all of which are in the design and engineering phase. Sinoenergy expects to open these 20 stations over the next six months with a target of 30 CNG filling stations becoming operational by the end of 2008. That number is expected to expand to 50 operational CNG filling stations by the end of 2009.
Wuhan City is the capital of Hubei Province. As the largest city in central China, it has a population of approximately 9,100,000 people (2006), 6,300 buses and 20,000 taxis. Wuhan currently has 4,900 CNG-burning vehicles with a target of transforming 2,500 taxis and buses into CNG-burning vehicles by end of 2007. At least 20 to 30 CNG filling stations will be required to fill those 7,400 CNG-burning vehicles. At this point in time there are less than 10 operational CNG filling stations.
"We are very pleased to have reached this point and we are proud of the achievements of our dedicated team," said Mr. Bo Huang, CEO of Sinoenergy Corporation. "We are now focusing on rapidly expanding our CNG filling station network in Central and South East China. Based on our current plan, we expect to become the largest CNG filling station owner/operator in mainland China by the year 2009."
More reason to love Sinoenergy long term
QINGDAO, China, Nov. 6 /Xinhua-PRNewswire-Fir... -- Sinoenergy Corporation (OTC Bulletin Board: SNEN - News), ("Sinoenergy" or the "Company"), a manufacturer of compressed natural gas (CNG) vehicle equipment and CNG station equipment as well as an operator of CNG stations in China, announced today that Sinogas, a wholly-owned subsidiary of Sinoenergy, has received two significant orders from two natural gas transport companies for 90 natural gas transport trailers. The company also indicated that it can now successfully purchase large seamless steel bottles, a key component to manufacture all transport trailers, from Chinese providers.
"The two orders will greatly enhance our trailer sales volume and our ability to manufacture our own trailer storage cylinders. This will also reduce trailer manufacturing costs, thereby leading to increased profitability, while at the same time adding to our competitive presence in the marketplace," Mr. Bo Huang, CEO of Sinoenergy, said. "In addition, this order will significantly add to both our sales revenue and operating income during the fourth quarter," Mr. Bo Huang said.
The two orders from Wuhan Green Energy Transport Co. Ltd. and Xuancheng Anjie Natural Gas Transport Co. Ltd. on October 15 and November 1, respectively, are considered a significant breakthrough in the production and sale of CNG equipment. Pursuant to the terms of agreements, Sinoenergy will supply 40 gas transportation trailers to Wuhan Green Energy Transport and 50 to Xuancheng Anjie Natural Gas Transport. The agreements call for 45 trailers to be delivered during the fourth quarter of 2007 and the remaining 45 to be delivered during the first quarter of 2008.
With the sales volume of trailers in Sinogas fluctuating between 20 to 25 CNG transport trailers during each of the past five quarters, these recent orders represent a substantial increase in overall demand. Furthermore, with the core material of the CNG trailer now being manufactured domestically, in cooperation with domestic steel and iron companies, Sinoenergy can now realize a 20% reduction in the manufacturing costs.
About Sinoenergy:
Sinoenergy is a manufacturer of compressed natural gas (CNG) vehicle and gas station equipment as well as an operator of CNG filling stations in China. In addition to its CNG related products, the Company also manufactures a wide variety of pressure containers for use in different industries, including the design and manufacture of various types of pressure containers in the petroleum and chemical industries, the metallurgy and electricity generation industries and the food and brewery industries.
Clarifies Mistaken Change to Trading Symbol
BEIJING, Nov. 26 /Xinhua-PRNewswire-Fir... -- Sinoenergy Corporation (OTC Bulletin Board: SNEN), a manufacturer of compressed natural gas (CNG) vehicle and gas station equipment and a designer, developer and operator of CNG filling stations in China, has announced that the Company expects to benefit from the recent increase in natural gas retail prices for vehicle users.
On November 8, 2007, the National Development and Reform Commission in China raised ex-factory natural gas prices for industrial users. However, this price increase does not apply to the wholesale price for CNG for vehicles use, fertilizer manufacture use or residential use. Moreover, the NDRC reiterated that since CNG-powered vehicles have a positive impact on the urban environment, they should have priority in using natural gas.
To encourage the use of CNG-powered vehicles, the National Development and Reform Commission in China recently requested that provincial municipalities increased local CNG retail prices so that they fall between 60% and 75% of the local price for 90 octane gasoline. The adjusted price shall not less than 75% of the price movement of 90 octane gasoline finally. Sinoenergy believes that this policy will improve the profitability for CNG filling station operators and therefore encourage greater investment in the sector.
As a result of the new policies, Hubei province's municipal government recently raised the retail price for CNG to vehicle users from 40 cents to 45 cents per cubic meter in Hubei province, while at the same time allowing major cities the flexibility to adjust the retail price of CNG used for vehicles in order to promote CNG supply and encourage the use of CNG-powered vehicles in local markets. Wuhan, the capital of Hubei province, where Sinoenergy has two CNG filling stations in operation, implemented this policy on November 19th. The two stations now are selling CNG to vehicles at 45 cent per cubic meter. Sinoenergy's management estimates that the increase in the retail price could increase the annualized net income of CNG filling stations. To a CNG filling station selling 10,000 cubic meters of CNG per day, it is expected to add net income of $73,000 per year.
'We are pleased to see the Chinese government's strong support for CNG vehicles. As a result of these policies, our purchase price for CNG currently remains unchanged, while we have benefited from increasing retail prices at which we sell CNG to vehicle users,' said Mr. Bo Huang, CEO of Sinoenergy Corporation. 'We believe the raising retail price for vehicles will aid in encouraging the development of a CNG filling station network throughout mainland China. And we remain confident that our business model will support improving revenues and profitability as Sinoenergy's new stations comes on line.'
The price at which Sinoenergy purchases and sells CNG are both subject to price controls.
Trading Symbol Corrected
The Company also reported that its trading symbol had been mistakenly changed from SNEN to SNENE for two days this week due to a clerical error by NASDAQ. As previously reported and disclosed in an 8-K filing, Sinoenergy changed its fiscal year to end on Sept 30th and therefore is required to report its audited financial results for the period ended September 30th, 2007 by December 31, 2007. The Company was not delinquent in its filing obligations and NASDAQ has subsequently corrected its error in changing the trading symbol.