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  • Has Financial Blogging Put a Black Cloud Over Lihua (LIWA ) 0 comments
    Apr 18, 2010 9:15 PM | about stocks: LIWA
     
    Seeking Alpha, the largest stock market blog, receives over 3000 contributing articles a day, but runs only about 250 articles a day. Focusing on opinion and analysis, rather than news, Seeking Alpha is written primarily by investors who describe their personal approach to stock picking and portfolio management, instead of those by journalists. This fact makes Seeking Alpha a testament and example of the influence of financial blogging.
    The influence of blog articles can been seen by looking at Lihua (NASDAQ:LIWA) and articles by Chimin Sang,   published by Seeking Alpha. On October 19, 2009, Sang wrote an article on apparent negative accounting issues. Seeking Alpha published it the following morning and LIWA saw a 100% increase in daily volume and a 15% decrease in price. Again Sang wrote on November, 8, 2009 another article with negative accounting issues and again the stock reacted to the published blog by seeing a 100% increase in daily volume the following trading day with a 8% intraday price fluctuation. In addition to the stock movement, there has been much debate among the financial bulletin boards and Twitter on the opinions formulated by individuals from these articles.
                    Although investor blogging is a great way for small and midcap stocks to receive market awareness and provide news and insight on a company or sector, it should be taken with a grain of salt. In the case with Lihua (LIWA), it can be seen from the 10K issued March 31, 2010. That Sang made some wrong assumptions from the previous two quarters 10Qs. They are as follows:
    1.       Dramatic Increase of Unit Sale Price of CCA
    In fact this chart was published in the article to show the increase

      
    CCA wire sales
      2007 2008 2009 1H
    CCA Revenue 32,676,834 50,006,057 42,490,559
    CCA Sales 4,065 5,966 2,959
    CCA Unit price per ton 8,039 8,382 14,360

    THE CCA NUMBERS HAVE COPPER WIRE INCLUDED, BUT NOT DISCLOSED
     
    A quick call to Lihua or the auditing accounting firm would have clarified this. Lihua as stated in the March 31, 2010, 10K is transitioning it’s product mix to copper and CCA wire products. Unfortunately the accounting firm in the two 10Q reports issued before the 10K grouped all the wire copper and CCA in one category “CCA wire” and the excess copper rods from smeltering as “refined copper”.
            Lihua has corrected this reporting and in the 10k Lihua now has three categories.
    a.       CCA wire
    b.      Copper wire
    c.       Refined copper
    Therefore with the proper clarifications and disclosures Lihua experienced some margin compression in sales of CCA wire since it sold:
                     6081 tons for 41.1 million = sales price of 6758
                   
     
    2.       Dramatic Reduction of Account Receivable Days and Account Payable Days
            This is answered from the 10K on page 39 below is an excerpt:
            “Our Days Sales Outstanding (DSO) has improved from 36 days to 26 days in 2009 because of the change in our product mix. In 2008, we produced 5,966 tons of CCA wire, which was the only product during that year. In the first quarter of 2009, we commenced operations of our smelter/extrusion production line that manufactures recycled copper rod. In 2009, we produced 15,353 tons of CCA and copper wire and 9,630 tons of copper rods, but during the same period of 2008 we only produced 5,966 tons of CCA wire. As CCA is an emerging product in China, Lihua extends credit terms to some of its larger customers. However, pure copper products, such as our copper rod and copper wire, are in such high demand that we don’t have to extend credit terms, which is the primary reason our overall DSO has improved”
     
    3.       Discrepancies in 2008 Purchase Amount from Fushi Copperweld
     
            Again this discrepancy was created from the reporting error of combination of the two categories into one called “CCA WIRE”. There was an assumption all the raw materials where CCA and did not include copper
     
    4.       Significant Difference of CCA Unit Sale Price between Lihua and Fushi
     
            Again this discrepancy was created from the reporting error of combination of the two categories into one called “CCA WIRE”. The copper wire sales were not included in assumption, thus skewing the figures if one assumed total CCA wire.
     
    In conclusion:
                    Lihua is in fact more a copper company and CCA. All the reporting errors seem to be corrected. It is typical for new IPO to have some growing pains in investor relations, and this is what Lihua had here. Also, the planned increased capacity in 2010 and 2011, from the 10k is nearly all copper. The forecasted income per share after the recent secondary is 1.20+ for 2010 and 175+ in 2011.
     


    Disclosure: Long Liwa
    Stocks: LIWA
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