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CXDC: Almost Perfect, But Fuzzy.

|Includes:China XD Plastics Company Limited (CXDC)

The article in Chinese has been published here:

Below is a simple translation into English.

CXDC: Almost Perfect, But Fuzzy.

I had not hold any position of the stocks mentioned in this article. I've no plan to do so in the next week.

First, good news (investment highlights)

1. No.2 producer of modified plastics in terms of revenue and capacity, No.1 in terms of CAGR, profitability and number of product patents. "Green new materials".

2. Stable & efficient Management.

3. High entry barriers of capital, technology and qualifications.

4. $100m investment from Morgan Stanley (NYSE:MS) in convertible bond with a strike price of $6.25, at least 40% higher than its current price of $4 to $4.5.

5. The company's founder pledged significant amount of shares in favor of MS to guarantee the company's net profit CAGR>50% from 2011-2016.

6. The company's CPA is KPMG, a big 4.

7. Almost perfect financial performance.

8. Extremely undervalued. 2012/13/14 EPS = $1.8/$2.7/$4.0, its current stock price is only $4-$4.5. 2013PE<2, PB<0.6, PEG<0.04.

Please note that even if its stock price drops to zero, MS's $100m would not be affected, coz it's convertible bond with a coupon rate of >7% p.a. and MS has 2 seats in the board of directors with veto power to ensure the money is properly used & protected.

Now, the bad news (potential traps and risks).

1. Back-door listing via reverse take-over (RTO). With such an excellent financial performance, its IPO could have been made in either in HK or mainland China long ago or even now. With its product all sold domestically, Why RTO in USA, the other side of the earth? We know its international competitors, like LYB, Kumho-Sunny and Bayer have already dominated the overseas markets and have even taken 51% of China's own market share. Now that it has been deeply undervalued for years, if its books are clean, why does it just go private and then list in HK or China?

2. For years until now, average daily trading volume even less than 0.1% of its total shares, no research reports/coverage by any analysts or institutions. Why? Book-cooking, they believe.

3. Investor-unfriendly: no company website; extremely limited information disclosures; no fight-back against or feedback to the short-sellers' attacks; no stock buy-back or bonus, despite of its strong cash flow and profitability, huge cash balance, low debt ratio. If the books are clean, why the company has never done anything to boost the long deeply discounted stock price? If the buyback and bonus needs hard-earned money, then the income tax receipts and bank statements of 2011/2012 cost nothing, is the company willing to and dare the company to provide them?

4. Share holding structure. The founder owns almost 70%. American investors do not like this. Small shareholders' interests may not be taken care by the sole big shareholder.

5. Independent director, Mr Robert L. Brisotti, resigned; change of its CFO and CPA; all for reasons unknown or un-disclosed. Rampant negative comments in the internet from its staff (Baidu/Google the company's name and you'd find it)

6. 2011.04 the company announced to buy back $10m before 2012.06, but it only bought back $0.1m, what a joke. Understandable if it stops buyback after the stock price has been boosted up, but it stopped the buyback even the price was still dropping. Why? Embarrassingly short of money or of credibility?

7. Fantastic excellent financial performance. The company changed its former CPA and used KPMG in 2012. Kingfa (SH600143), Pret (SZ002324) is the No.1 and No.3 domestic player in this sector. LYB, Kumho-Sunny and Bayer are the big international players, whose products are far more reliable than the Chinese players'. Yet, in terms of CAGR, gross profit margin, net margin, operation efficiency, quick ratio, ROE, etc, none of the above players can beat the company, if fact, not even close. China's auto industry's CAGR has slowed down to 8% in 2008-2012, but the company's CAGR is 80%! Jesus Christ, what a miracle! Not surprisingly, its 2012 book will report Non-GAAP EPS=$1.8, 60% up over 2011. Look at the below table to compare with its both domestic and international peers.




on average












Gross margin






Net margin






8. Unable to verify its key assets, sales volume, and profit. Its 2011 annual report shows income tax of RMB117m, with this big tax amount, it should be among the top 100 income tax contributor in Harbin. But we can not find its name in the local tax bureau's official websites. I input its name to inquire on the websites, it returned nothing other than "No result". I inquired the tax bureau via phone, they refused to confirm.

9. 2011.06 the company approved a new manufacturing facility construction plan. The facility includes 5 plants and 1 office building, its total cost is RMB435m. This is a big sum of money, given its total 2009-2011 net profit is RMB589m and 2010 year-end total assets is RMB1bn. The construction is commissioned to Harbin Shengtong Ltd, which legal representative is the company's former employee. The 435m will be paid to Shengtong. Is this a related transaction, what's the relationship between the employee and the company's management, between Shengtong and the company? Why dose not the company construct itself, instead by Shengtong? Are the plants and buildings worth RMB435m?

10. The company's top 3 customers contributed 73% of its sales revenue, way too much concentrated. What if someday it loses just one of them and 25% of revenue is gone?

11. The annual demand for modified plastics for automotive applications is at most only 2.4m tons during 2013-2016 (China produces 20m cars p.a, each car needs 0.1 ton, CAGR=6%), while China's total capacity is at least 4m tons already as of 2013. CXDC, Kingfa and Pret's total capacity is 700k tons in 2013 and is to increase to 1.5m tons in 2014. There's another 3m tons from over 1000 domestic manufacturers and more than 1m tons from the big international players & their subsidiaries/JV in China. China's auto industry already suffers overcapacity, with extremely intensive competition. As we can see car prices have been dropping significantly and continuously, even including those imported luxury cars.

Last, some conclusion. 1-9 are typical symptom of book-cooking companies, while 10-11 are the key risks that the company can do nothing to mitigate in the very near short term.

Since the information about and/or disclosed by the company is very limited, at this moment, I can not confirm it's a scum, nor can I deny it is not.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Stocks: CXDC