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  • Company analysis – WSP Holdings 0 comments
    Dec 27, 2010 4:55 PM | about stocks: WH
     COMPANY INTRODUCTION
    WSP Holdings, located in Wuxi, China, develops and manufactures seamless Oil Country Tubular Goods (OCTG), including seamless casing, tubing and drill pipes used for on-shore and off-shore oil and gas exploration, drilling and extraction, and other pipes and connectors.  Founded as WSP China in 1999, the Company offers a wide range of API and non-API seamless OCTG products, including products that are used in extreme drilling and extraction conditions. The Company's products are used in China's major oilfields and are exported to oil producing regions throughout the world.
    In the company’s presentation in Sep, it highlighted below points as investment advantages:-
     
    •       Demand for sophisticated Oil Country Tubular Goods (OCTG) products used in extreme conditions is accelerating, as easy-to-reach oil and gas fields are depleted
    •        Strong demand for high-end OCTG in China’s oilfields
    •       A recognized brand serving top-tier customers worldwide
    •       Key supplier to China’s major oilfields, including CNPC and SINOPEC, with dominant share of high-end, non-API market
    •      Capacity expansion and vertical integration positions WSP for a rebound in worldwide oil and gas industry
    •      Attractive valuation, relative to industry peers

    MANAGEMENT STRATEGY
    The company announced its third quarter result recently. WSP got loss for all the past three quarters, which dismayed investors who are annoyed by management’s strategy of fast expansion and burning money.  
    Indeed, this Chinese company’s a series of actions show a typical Chinese management style of growing bigger with a global vision.  WSP is not only confined in China domestic market, but to set up facilities in other countries, such as Thailand and Houston, USA. From the expansion plan chart below, WSP is established in China and expanding gradually to global market while acquiring product certifications from domestic and international oil and gas companies allow for an increase of direct sales.  I appreciate it a lot.  
     
    However, the company is kind of mired in huge loss after expanding intensively within the last two years while global economy went south.  I don’t believe the company is expanding blindly, but it just got bad luck with a global recession background.  In the third quarter statement, the management realized this and said “Management periodically evaluates and revises its capital expenditures plan based on the prevailing economic conditions and future expectations. Management has also taken steps to slow down and eliminate certain expansion plans in view of the current capital conditions.
     
     
     
    With the economy is slowly back on track, the company expects to have a bright 2011 while they are not optimistic on 4th quarter outlook.
     
    THIRD QUARTER RESULT HIGHLIGHT AND CONCERN POINTS
    1.     
                  Positive and slightly improved revenue at $137.
     
    2.       Gross profit loss is even bigger at -$0.26, which is due to huge expense cost.
     
    The company said, “Operating expenses in the third quarter of 2010 were $31.6 million, up 151.5% from $12.5 million in the third quarter of 2009.  Selling and marketing expenses were $7.4 million, up from $2.2 million in the third quarter of 2009 primarily due to higher sales commission and sales activity levels associated with increased sales volume. General and administrative expenses were $22.9 million, up 107.4% from $11.1 million in the third quarter of 2009, primarily due to an increase in allowance for doubtful accounts of $9.3 million. “
     
    3.       From the above information, I am shocked that this company burned $9.3 million as the main reason for 3rd quarter loss without explaining in detail what this big amount for.  This is certainly a big negative sign for this company.
     
    4.       The company is able to secure several deals in South America and Africa, but the selling & marketing expenses are sky high.
     
     
     
    POSITIVE SIGNS
    Global economy is improving, and oil price is expected to be up.
    The company secured several deals in S. America and Africa.
    Several new facilities are going to put in production at the end of 2010 and their positive effect on profit generation should be shown out in early 2011.
    1.       Houston OCTG Group, Inc. ("Houston Group")
    Houston Group commenced trial production of its new threading line with 120,000 tonnes of annual production capacity in July 2010 while the construction of its new heat treatment line with 100,000 tonnes of annual production capacity is expected to be completed by the end of 2010.
    2.       Bazhou Seamless Oil Pipes Company Limited ("Bazhou Seamless")
    The Company commenced trial production of two of its three new threading lines at Bazhou Seamless in October 2010 while the remaining new threading line is expected to begin production in November 2010. Each of the three new threading lines has an annual production capacity of 100,000 tonnes. The construction of a heat treatment line with 200,000 tonnes of annual production capacity at Bazhou Seamless was completed inOctober 2010 while another hot-rolling line with an annual production capacity of 500,000 tonnes is expected to be completed in the first half of 2011.
    3.       WSP Pipe Company Limited ("WSP Pipe")
    WSP Pipe, the Company's wholly-owned subsidiary in the Thai-Chinese Rayong Industrial Zone, Thailand, is currently building an OCTG pipe manufacturing and sales facility. The construction of the first of two hot-rolling production lines with a combined production capacity of 200,000 tonnes per year is expected to be completed by the end of 2010 while the second hot-rolling production line is expected to be completed in the first quarter of 2011. 
     
    Disclosure:  Since I have some shares in this company, I would like to give it a chance by holding the stock at least till 3rd quarter, 2011.


    Disclosure: I am long WH.
    Stocks: WH
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