General Steel Holdings: Building an Impenetrable Future

Considering how the emerging markets were treated in November, it's not a surprise that I received several emails asking if I still regarded General Steel Holdings (GSI) as a long term investment since my support of it on November 6, 2007. My response is a resounding yes. When our globally interconnected markets swoon, it is important to consider your equities as a function of the new paradigm – this is an external view. It is also important to review if those equities still represent the spirit of why you originally chose them – study anew the internals.

The US might be entering a recession. Europe's economy might be slowing. No one knows for certain, although an opinion and a few bucks will certainly get you the average Joe's opinion. And while I believe in international diversification to hedge against regional bouts of underperformance, in many cases it is illogical to interpret low R^2 plays – viewed from within any regional market – as being nearly completely decoupled from the global environment. Something that studying international relations taught me is that the more interconnected we become as a collection of nations, the more likely it is that sympathetic propagations of similar sentiment will pervade financial networks. While an ailing US or Europe might not give the world the flu, those other billions of investing compatriots are likely to need some chicken soup.

So we look for companies that have prospects for strong growth. We endeavor to support trends, such as infrastructure growth in developing countries. We search for core plays – companies that produce hard, raw goods or services that satiate those nations' thirst for foundation. And we target countries whose governments will stop at (almost) nothing to ensure that their country is continually making progress for all to see. Construction? Steel? China! A trifecta!

I originally invested in GSI because of its intention to build a portfolio of steel production companies into a conglomerate independent from government control. Because while ordinarily we might enjoy the security of government backed companies if they function as monopolies, in China there's a growing duopoly at play between monopolistic, state-controlled companies, and independent names whose progress the government watches, almost nurtures, in hopes that said companies become large entities under their own power – another cog in the "Miracle of China", ca. 2007. Made in China: Pure Western Business Growth.

By evaluating GSI, we recognize the following:

1) GSI is still the same acquisitive boutique Beijing steel company it was in early November, operating largely in central, northeast, and northwest China;

2) GSI still manufactures rebar, hot-rolled carbon and silicon sheets, and spiral-weld pipe;

2) GSI is profitable, earning $0.34/share concluded September 30th;

3) At the end of nine months, GSI's net sales did increase 420%, gross profit did increase 692%, gross margins were pushed from 4.7% to 7.1%, and net income did grow by an astounding 1900%;

4) GSI's joint ventures with Longmen and Baotou Steel Pipe are now fully accretive; and,

5) GSI now trades at a forward P/E of between 5.5 and 10, depending on your estimates of next year's earnings. (I believe GSI will earn between $1.25 - $1.50/share next year.)

What is new at GSI in the last few weeks?

1) On November 19th, GSI appointed Mr. Chris Wang as an independent member to its board of directors.

That's it. No management shakeup. No canceled orders. No government intervention. No unraveled ventures. Why, then, is GSI off $3.30 (27.16%) from its November high of $12.80/share? There is no substantive reason. Of course, emerging markets are hot and China's hot: Bubble talk and shorting go hand-in-hand on account of this. Subprime intimidates folks. Short squeezes lead to off-loading rallies that too frequently burn. General Steel Holdings has been sold by speculators for the same reason it was bought by them: it is a lightly covered, small market cap company whose float makes large price swings virtually guaranteed. But they've got it wrong: GSI is an infrastructure play of high regard, and it's building its future with steel.

Sources:

• CBS MarketWatch
• Google Finance
• Yahoo! Finance

Disclosure: Author is long General Steel Holdings

Comments

[Max Petrisek:]

Good article. I would include CPSL in the same catagory.

2007 Dec 01 04:14 AM

[Flight23:]

Any new comments or insights on this now that it continues to plummet?

2008 Jan 09 11:01 PM

[jangles:]

This is amazing. Good news yesterday, and GSI continues to fall. Hope earnings come in better than expected.

2008 Jan 15 10:56 AM

[Mark S.:]

Looks like a double bottom is forming. Will hit and hopefully keep going past $11.50 by the end of June.

2008 Jun 12 03:13 PM

[Bruce Pile:]

Well, it's late June and the stock has drifted down to $9. I've been following this strange case of undervaluation since I found it as GSHO.OB and couldn't disregard it like I normally do all bulletin board cases. But they list now on the AMEX, and once the thrashing of the China market is over, this may be a good buy.

2008 Jun 16 08:08 PM