Atticvs Research

Three Compelling Chinese Stocks

GSI Balance Sheet - yes this does need investor attention. In the note I assumed the company would issue 6 million new shares, being 4 million in H2 2009 (ave 2m for 2009 EPS calcs) and a further 2m in early 2010. The EPS numbers I cited were inclusive of new issuances.

Separately, GSI had a number of large credit facilities maturing in Q2 - by now these have already been rolled-over and we must await issuance of June 30'09 10Q to learn of the new maturity dates. Credit has been easing in China so let's see what the company says in August.

GSI did a $60m shelf filing in January 2009. Since that time the Chinese steel industry has experienced an upturn that has been stronger and swifter than almost all commentators expected. Steel prices in China have now, Jul 27, risen about 25% since April this year. It is becoming clear that profitability in Q3 will be very substantially higher than brokers had estimated, and I now believe they will be higher than I had estimated in my own note. The point about this being as follows: Bearing in mind that GSI's profitability will stem from the $216million investment that GSI completed in Q1 2009 (i.e. already paid for), and bearing in mind that customers pay GSI partially in advance for purchases, GSI will generate much stronger positive cash-flows each quarter than Net Income. And since we are now pretty sure that GSI will generate strong profits during the remainder of 2009 - unless steel prices crash, which is unlikely in the face of the huge stimulus program - then we can take some assurances that GSI will also generate strong positive cashflow during 2009. This, allied to the issuance of say 6 million new shares I mentioned above, ought to alleviate the liquidity tightness evident on GSI's Q1'09 Balance Sheet. Do also recall that even after the issuance of 6m new shares GSI should earn somewhere between 1.00 to $1.50 per share next year, or possibly more.

In essence I do agree that investors need to keep an eye on GSI's Balance Sheet. However, I also now believe that the earnings estimates used in the Seeking Alpha note were conservative, possibly too conservative, and that GSI will generate both strong profits and stronger cashflows during Q3 and Q4 2009 that will alleviate Balance Sheet gearing and ratio concerns.

Bottom line is that existing Balance Sheet concerns are already over-reflected in GSI's stock price, very much so.

Three Compelling Chinese Stocks

CHLN, yes agreed about recent selling price per Sq M being lower than I used in the note. I based the $850 per SqM on company expectations for JunJing 11 phase 2 as stated in 10Q; company expects to sell 112.556 SqM for total of $94.1 million = about $836 / Sq M, I used $850 considering riverside views etc. I agree with all the sentiments you expressed about CHLN & Xi'an, very positive situation.