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Dr. John L. Faessel is a seasoned and respected Wall Street professional with industry-wide recognition for expertise in market strategy and analysis. He is widely recognized for his insights in public companies. For over 20-years Dr. Faessel’s ON THE MARKET reports have been widely distributed... More
  • China Carbon Graphite Group, Inc. (CHGI) - The Baby That Went Out With The Bathwater 0 comments
    Oct 3, 2012 9:04 AM

    Dr. John L. Faessel

    The Baby That Went Out with the Bathwater

    Why the time is NOW to take China Carbon (OTCPK:CHGI) Private AHEAD of its Multi-Billion $$ Opportunity in China

    China Carbon Graphite Group, Inc. (OTCPK:CHGI)

    Recently some rare market opportunities have handsomely profited investors as deep values in China have motivated numerous companies' management to go private. While accounting scandals have tainted many good Chinese companies with the stench of the bad, when it comes to the worthy companies 'inside' management knows what they operate, knows what the values are, and knows what the outlook going forward is.

    The mouth-watering intrinsic values of some of these companies have incited a buying frenzy by inside management and private equity players. Meanwhile, 29 Chinese domiciled / USA listed companies have gone private over the last 18 months. Read on.

    The Opportunity for China Carbon Graphite

    OK so let's define exactly how nuclear grade or Isostatic carbon graphite will change (OTCPK:CHGI) beginning in 2013 and why the time is NOW to take the company PRIVATE and wait till the nuclear graphite profits start taking off.

    Definition: Isostatic carbon graphite is used as a moderator or reflector within nuclear reactors to slow down neutrons and make them more efficient in producing fission in the fuel.

    Here's Why to Go Long (OTCPK:CHGI) to $1 or higher in a take-private deal

    · The Chinese central government will invest 450 billion RMB (US $66 billion) in nuclear power plants by 2020 post-Fukushima

    · China has 14 nuclear power reactors in commercial operation, 25 under construction, and 50 planned to start construction. Each plant uses up to 10,000 tons of graphite in construction

    · Each OPERATING nuclear plant uses up to 14,000 tons of graphite per year

    · 100% of Nuclear Graphite used in China is imported; China is encouraging domestically produced nuclear graphite, and the company is one of the government-selected Nuclear Graphite producers

    · Nuclear Graphite requires 99.9999% purity with larger size; the company is the industry leader with such capability

    · The company expects to start Nuclear Graphite production in 2013 and generate 2,000 MT that year, 4,000 MT in 2014

    · The average price of nuclear graphite is 5x that of fine grain graphite, approximate RMB 100,000-200,000/MT (US $15,000 - $30,000/MT)

    · Gross margin of nuclear graphite is nearly 50%

    · Sales market for nuclear graphite $175,180,000 per year now-triples in size as 27 new nuclear plants come on line

    · There is currently only one potential competitor in this sector, which is Fangda Carbon

    Value Metrics that are nothing but EXCEPTIONAL

    · Price to Sales 0.34

    · Price to Book 0.32

    · Book Value of $2.10 a share

    · 2012 @EBITDA of $8.78 million…and market cap of $17.45 million

    · 2012 Revenues of @$55 million with a market cap of $17.45 million

    · 5.5 RE ratio on LAST 12 months earnings per share

    · 2 X PE ratio on the 12 months earnings per share

    · 14 cents a share EPS going forward 12 months…with a 72 cent stock price

    · Enterprise value of $62.4 is million vs. public value of $17.45 million…

    I'm a believer that 'shortly' a management led effort will take (OTCPK:CHGI) private at $1.00 or more for the 14.8 million shares that are not under management control. (OTCPK:CHGI) is just off its multi-year lows and I'm expecting a lot more upside.

    And the source of funds for management to utilize?

    Key to the proposition is that the massive state-owned China Development Bank is providing more than $1 billion in financing to help Chinese companies leave the U.S. stock market. The China Development Bank is explicitly tasked with meeting policy goals of the Chinese government and is also tasked with supporting the development of China's interests overseas.

    More on the backdrop

    Chinese companies listed in the USA are going private in increasing numbers, making some premier China stocks available once-in-a-lifetime "cheap" as their share prices have plummeted due to accounting scandals that have pulled good companies down with the bad.

    Three very recent deals

    On 8/14/2012 in a $3.1 billion buyout deal, an investment consortium of U.S. and Chinese private equity funds made an offer of $27 for each ADR of Focus Media (NASDAQ:FMCN); just prior to the offer the stock was $18. A total of 19 Chinese companies delisted from American exchanges during the first half of 2012. At least 16 more companies are in the process of attempting to delist.

    Last Thursday (9/27/2012), Medtronic (NYSE:MDT) and China Kanghui Holdings (NYSE:KH) announced that they have entered into a merger whereby Medtronic will acquire Kanghui. The agreement calls for Medtronic to pay approximately $816 million in cash or $30.75 per ADS. Both stocks hit 52-week highs on the news.

    Also last Thursday (9/27/2012), China Nuokang Bio-Pharma (NASDAQ:NKBP) accepted a go-private offer of $5.80 for each ADS. The shares hit a low of $2.25 earlier this year at the depths of the 'sell China' crisis.

    More Particulars re (OTCPK:CHGI)

    China Carbon Graphite Inc. (OTCPK:CHGI) is one of China's leading wholesale suppliers of fine grain and high purity graphite, and the top overall producer of the nation's carbon and graphite products. They are now the prime supplier of nuclear grade electrode graphite to China's 14 operational nuclear plants. Notable is that China has another 25 nuclear plants under construction and 50 more are being planned. Sales for (OTCPK:CHGI) look to mushroom as these new plants come on stream and margins should likewise increase.

    China has restricted its graphite supply and has included it in its list of strategic materials (along with rare earths, vanadium, titanium, etc.) The European Union and the USA have also listed it as a critical material, even though 80% of it is mined in China.

    Another plus is that some of the nuclear graphite that supplies the Chinese market comes from Japan and as you may know the two countries are nose to nose in a serious and very contentious harangue over some Japanese islands that China is now claiming. So it's very possible that China will now purchase more 'homegrown' nuclear graphite rather that importing it from Japan.

    Notable: The Bloomberg Chinese Reverse Mergers Index of 82 companies lost 52% of its market value from June 2011 through July 16, 2012.

    Since 2007, China's Ministry of Science & Technology has granted China Carbon Graphite Inc. the "National Hi-Tech Enterprise" status, a distinction awarded to hi-tech companies at the forefront of their fields and industries.

    Each year one nuclear plant uses 500 tons of nuclear grade electrode graphite. Margins for the nuclear grade are 50% vs. margins of 12% for low grade graphite.

    (OTCPK:CHGI) has about $45 million in debt at interest rates of about 5% and a big chunk ($14.8 million) of debt has just rolled over at about the same low rates for another two years.

    Once again: Go Long (OTCPK:CHGI) to $1 or higher in a take-private deal.

    Disclosure: I am long (OTCPK:CHGI) - I have bought shares the open market and have no affiliation with the company.

    Disclosure: I am long OTCPK:CHGI.

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