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China Advanced Construction Materials; An Attractive Laggard

China Advanced Construction Materials Group, Inc. (NASDAQ: CADC) is primarily engaged in the business of producing ready mix concrete supplied to construction companies in China. CADC's product portfolio consists of ready-mix concrete, customized mechanical refining concrete and other concrete related products. The company also provides third party production management services, chemical engineering and ready-mix consulting services through its technical services business segment (6 percent of revenue). CADC's concrete mix is used in the construction of many Chinese subways, Olympic stadiums, high-speed rail stations and airports.

CADC released its Q3 2014 results on May 15, 2014. Revenue declined 3 percent year-on-year to $7 million due to continuing cyclical slowdown in China. However, the low demand scenario and increased competition has reduced the average selling price causing revenue to decline. The volume of concrete mix sold still increased by 4 percent in Q3 2014 against Q3 2013.

Gross margins from concrete sales were down to 1 percent from 9 percent last year. The manufacturing services and technical services segments posted gross losses due to high cost of production and low sales volume. Net loss for the quarter was $5 million compared to $8.8 million only because of lesser losses from asset disposals of $0.3 million as against $3.6 million last year.

The guidance for full year 2014 (ending June 2014) is negative with estimated revenue of $45 million, which is 40 percent lower than 2013 revenue. The company will continue to dispose loss-making assets and reduce operating costs. Net loss is expected to be $20 million, while the net loss in 2013 was $24 million.

The company has a good mix of assets, with plants and equipment owned by CADC worth $14 million and the inventory worth $40 million. Cash on hand is $6 million and the deficit in the past two years has caused the leverage to cross 1x.

Nonetheless, the project pipeline remains weak despite R&D expenses going up by 80 percent in the current quarter. Whether this is sign of cyclical reversal in the Chinese infrastructure sector is yet to be confirmed. CADC is known for its strong IP portfolio for its special eco friendly concrete mix.

The stock price movement closely follows Chinese economic growth. CADC traded in the range of $60-$100 in 2009-2010 and then has halved its price every year after that due to the onset of the cyclical slowdown in China. The 52-week trading range is $2.65 to $9.24. The stock price fell below $4 after its Q3 2014 results and poor guidance for 2014. EPS improved to $3.39 in Q3 2014 from $5.91 in Q3 2013. However, this was not enough to boost investor sentiment.


The company plans to continue cutting costs. This could help EPS for the current campaign, and due to the weak guidance, an improved EPS could see the company rally significantly this time round.

Since the majority of its customers execute projects through the public private partnership route, increased government investment will be crucial for infrastructure growth and CADC's revival.

The company's weak guidance coupled with recent poor results has pushed the stock price to the point where any positive developments going forward could make it a gem.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.