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China Ceramics, Hard as stone

Below the history and my assessment of Chine Ceramics, CCCL. I am an investor of China Ceramics and have a substantial position in this stock: I am planning to further increase my position in CCCL.

The history

During 2007-2009, China Ceramics, CCCL was formed out of 2 producers of ceramic tiles in China:
Hengda, owned by Huan Jia Dong, the current CEO of CCCL
Hengdali, owned by Wong Kunf Tok., the current biggest shareholder in CCCL

Together with a group of US investors, incl Paul Kelly and David Knott, the production facilities from Hengda and Hendali were combined into China Ceramics. The previous owners were mainly paid in shares in the new entity.
The joined company got a capital injection from, mostly US, investors and used the proceedings to upgrade the production capacity
from 38mlj m2 of tiles in 2009
to 86mlj m2 in 2013. an 126% increase in capacity.

Currently they are producing approx 52mlj m2 of tiles at almost full capacity.
The main product is wall tiles for the construction industry.
Their customers are for more than 80'% in the tier 2/3 cities in China. Those cities are still expanding and not much effected by the Chinese construction boom/bust. The Chinese government has promised 36mlj new houses/units in the coming years. CCCL is focusing on that market segment.
The 37% increased production capacity per the end of 2011 was almost fully utilized, despite the construction crisis in the tier 1 city.


So one would expect that this stock has a fair valuation. All signs point that way:
-Heavy involvement of US investors in the setup, strategy and growth of this Chinese operation
-126% growth in 3 years
.very profitable business
-all accounts (incl 2011) signed off by Grant Thorton
-predominantly US based directors. A former partner of PWC is heading the audit committee. Paul Kelly, a US investor, is chairman of the board.

-A growth company with diluted earnings of $2.37/share over 2011 and forecast over $3 /share for 2012/2013.
-equity per share of over 9 dollar
-A stockprice of almost 8 dollar at the end of 2010
-A management incentive plan, granting options at $7.65/share. A lot of incentive to get the price over the $7.65.
-US investors have 2.740.000 warrants with an exercise price of $7.65
-A very conservative forward PE if 6 for this type of growth would value the company at almost $18/share

So, different forms of valuation would price this stock at $7.65, $9 and $18/share.

And what can you buy this stock for? Below 4 dollar per share. This price at the end of March 2012 indicates a discount between 47% and 78%.

Who are the current investors?





CCCL investors per
dec 31, 2011
  shares x1000
Wong Kung Tok Hendali founder and Chinese investor 4083
Directors and officers   2050
David Knott US investor 1259
James Dunning US investor 1101
Alan Hassenfeld US investor 1101
Gregory Smith US investor 1101
Clean Harbor Asset mng US investor 1089
Surmound Investment US investor 1074
Paul Kelly US investor 728
Huang Jia Dong Hengda fouder and ceo of CCCL 450
Hen Man Edmund cfo 358
Su Wei Feng legal counsel 200
Chen Yan Davis US investor and director 110
Su Pei Zhi sales director 100
William Stulginsky US investor and director 65
Ding Wei Dong director 40
Shares outstanding per Jan 2, 2012   20430
Options for staff and directors, exercise price of $7.65 1130
Total   21560
Not included    
warrants to purchase shares for 7.65 before Oct 2012. 2774

Why is the stock so cheap?

The shares were originally issued for $10/share. Since the end of 2010 the price gradually decreased from 9 dollar until approx 3 dollar. This decline was driven by the bad reputation of Chinese stock as well as legal disputes between some of the major owners regarding board seats.
Meantime, the lawsuits from the group of US investors has been withdrawn and short attackers have not found any reason for damage the reputation of the company.
Since January 2012, the stockprice has begun its gradual increase from $2.76 to over $4.00. And after this increase, you still buy a stock with a bookvalue over 9 dollar/share and a forward PE of below 1.50 for below $4/share
I personally assume that $18/share, a forward PE of only 6, is a fair price, Under that assumption there is an upside of 350%. So an investment of 10.000 dollar can potentially increase to 45.000 dollar.

The risks?

I invite all readers to read the 2011 accounts of CCCL as filed at the SEC. You will find all above facts and a fair listing of risks related to this stock.

A limitation for investors is the low market cap of $70mlj and an avg daily turnover of $164.000. This makes it complicated to create or sell bigger positions without effecting the share price. Approx 67% of the current shares are owned by above listed long term investors. The comfort is that these investors are committed to this project since 2009.

The writer has a position in CCCL and expresses his personal opinion regarding this stock. The writer does not encourage the readers to buy this stock but explain his reasoning for him taking a position in this stock. We recommend you to your own research and counsel your investment adviser.

Disclosure: I am long CCCL.