China Precision Steel: This Rollercoaster Will Climb Big Hills

The wild ride for China Precision Steel (CPSL) stock seems to have no end. Gains of over 100% preceed losses of equal magnitude (in dollars not percentage, thankfully!) with amazing regularity. This volatility has led to many investors asking questions about the business at CPSL. These concerns are misplaced, however as throughout this rollercoaster share ride, investors seem to be overlooking one key element of the CPSL story: gross profit continues to grow with regularity.

Looking back over the last two years, CPSL has had more volatility than Lou Pinella on steroids. This volatility has come in terms of both revenue and net income, and, combined with a large retail investor base, has directly resulted in incredible share volatility. Obscured by the volatility has been steady growth in manufacturing capacity and gross profit: numbers that should translate into higher net income now that the costs associated with going public are behind the company.

Slice up CPSL's net income into 6 month segments and quickly the murkiness of their results crystalizes into a clearer story of growth; a story that should translate into higher share prices over time. Witness these 6 month trailing gross profit figures: Dec. 2007 - $11.7M, June 2007 - $8.0M, Dec. 2006 - $7.1M. These numbers clearly demonstrate the steady growth of the core business underlying the results at CPSL.

Having just concluded another solid quarter on the operating side, CPSL is poised to continue its growth in gross profits. More importantly, year over year results should improve dramatically as the company moves beyond the costs associated with its reverse merger. Additionally, with the company's prescient buildup in inventory prior to the recent steel price hikes, CPSL is positioned to continue if not build on its impressive operating leverage.

Don't miss the forest for the trees. CPSL's core business is continually growing. The company is executing on its vision of becoming the leader in Specialty Cold Rolled Steel in China. Its balance sheet is strong and the P/E is reasonable for the best positioned steel company in the fastest growing market in the world. Yes, the shares have been a rollercoaster but rest assured: this coaster is powered by a strong engine and will climb the big hills.

Disclosure: Author has a long position in CPSL and is a "non-executive director" for China Precision Steel.

Comments

[Joe Schmoe]

This article represents the whole truth when it comes to CPSL. I will continue to add to my position at these levels due to the tremendous potential of this company. I can easily see shares going for 15 to 20 within the year.

2008 Jun 16 09:02 AM

[thedivot]

Make sure you are comfortable with your investment. CPSL was named in a Barron's article about dubious auditors - here's the link.

online.barrons.com/art...

You might want to do some research on companies who use the same PR firm - CCG Elite with Crocker Coulson - as there have been stories about his recurring link with Chinese companies who have had accounting problems.

The numbers look good but are the numbers right?

2008 Jun 16 10:59 AM

[The Real Expert]

thedivot, do you really think that CPSL is the only Chinese company with auditing issues?? The entire Chinese securities market is highly corrupt, much more so than the US markets. Auditing in China effectively is near non-existent. I know a gentleman who spent over 15 years in China working for a major US multinational company and he refuses to invest in China after seeing how much corruption exists with corporate accounting and investments.

2008 Jun 16 08:05 PM

[Investor mach249]

Im the new kid on the block, looking for some solidarity in investing. As long as the stocks keep gaining in value, I can't go wrong can I?

Any chance the Chinese government will nationalize and I will lose my total investment?

As long as we buy low and sell high, we can go wrong can we?

2008 Jun 16 11:08 PM

[Investor mach249]

That is to say " we can't go wrong, can we?"

2008 Jun 16 11:09 PM

[Udongo]

How insulated is CPSL from the climate change related blues- high energy costs, slow down in investment in capital projects, energy intensive industry and pollution?

2008 Jun 17 08:09 AM

[MonHo]

For my disclosure, I'm long on this stock. Can any one tell me any investment stock of any kind any price is risk free. So challange your risk tolerance and live with it.

For risk(minus the street noise)/reward, I am in the camp of this article. Let me add one more thing. Capacity utilization, as I understand it, is at only 50%. So add this to the margin.

Another consideration is IPO (the smart money,i.e. institutional investers) price when CPSL was out. They paid $10 and change per share. So, I think smarter money is anything below $10 with its current potential.

I'll be laughing all the way to the next big and better things from the CPSL reward.

2008 Jun 22 10:50 AM

[MonHo]

P.S.

I use to subscribe to Barron's and it profited me nothing. So my take on Barron's article for big boys club; not small investors like me.

2008 Jun 22 10:53 AM

[j2j008]

I was first impressed by the company's F/S. But it may be highly inflated. Check the insider transaction and you will find the management sold large amount of shares at low price. does this make sense if they expect the price would go up?

2008 Jul 07 12:22 AM