Interview with Michelle Zhu CFO of CSGJ
· Can you give me some background for the company?
China Shuangji (OTC:CSGJ) is based in Shandong province with 3 plants in operation and 1 new plant in construction, 54 million in sales, and 4.4 million net income in 2009. It became public in the USA in 2008. The company was taken over by the management team in March 2002 (previously a state owned enterprise). Currently we have 1.5 million tons capacity per year, 500,000 tons each for 3 plants. With the completion of the Zhaoyuan facilities, we should have 2.5 million tons of production. The new plant will cause a 79% increase in revenue and 71% increase in net income. Given full 2011 revenues and expected margins, CSGJ has a forward pe of 2.1.
· I see the company is dual listed, how does that affect the shareholders and what percentage does the US listed OTCBB company comprise of the company?
The total shares outstanding is not affected by the dual listing. It is listed on the lowest grade exchange in Germany, which is like the pink sheets. This enables European or other international investors to buy and sell in that time zone, but as I understand it, if it is traded over there, Euroclear will buy or sell an equal number of shares on the OTCBB. Basically, the only shares outstanding are the ones issued by the China Shuangji Cement, Ltd. (CSGJ OTCBB).
· So what will you do with the 3.7 million un-secured non-convertible loan?
We are using the money to acquire the final pieces of equipment and doing the finish work to complete our new 1 million ton capacity plant in Zhaoyuan.
· When will you start production on the new plant?
3-4 months to finish the plant
· When will you reach full capacity?
1st 1-2 months is 60% capacity, after 2-3 months it will be at full capacity
Where do you see the company in 5-10 years? What type of growth do you foresee?
Currently we want to get this plant online. In a year we will upgrade another plant at Longkou. Longer term plans are contingent upon the ability to grow organically. If we see other opportunities to buy at good prices, we will look to do that. We don’t plan to grow at any cost. Mr. Song the Chairman had offers from investors to buy stock at cheap prices, but he rejected them because the shares were priced too low.
· Do you have plans to raise capital in the future?
Right now there are no plans to raise capital, we need to get the plant online and that is what we are focusing on. If at a later date the stock price is at a good price, we might consider raising money, but with the main goal being to increase EPS.
· What are your various segments?
3 operating facilities and 1 under construction
2 in Hainan - a large island/province in the south. Hainan is very fast growing.
The other plant is in Longkou, a 45 minute drive from Zhaoyuan, own 51%. In another 3-4 months, the Zhaoyuan facility will be open.
The 3 operating facilities make 500,000 tons, which is about 20 mm USD. The Zhaoyuan facility will have about a million metric tons, which is about another 40 mm USD in additional sales.
Who are your main competitors?
Cement is localized so it cost money to import it. There are other cement producers in Shandong province, but it is a fragmented industry. The shipping cost adds to the expense. It is not like a computer that is low cost shipping.
The government is behind the facility. Local contractors want to use it. Local cement is always cheaper than anything
How do you know the factory will continue to do well?
Government officials are all friends and the government favors the Chairman, the Chinese government doesn’t want overcapacity in these areas.
Older cement plants pollute more, are less energy efficient, and also the government wants fewer cement plants instead of smaller ones. 5,000 cement plants in china and they want to reduce to 3,000.
· What size is your auditor?
Bernstein and Pinchuk (BP Accountants) is under the BDO alliance, which means they adhere to BDO standards. they have about 40 US- listed Chinese companies. They are well known and respected among almost all investors in the US listed China space. I have never heard an investor say anything bad about them. In this space, they are the cream of crop, without the high price. Their audit prices range 115,000-150,000 including K’s and Q’S (full year). We specifically chose them for the low cost and the high quality. They have offices in Guangzhou and Beijing, with about 40 people on the ground in China. They usually spend 4-6 weeks for the audit with a four person team. They visit all the factories and do inventory counts.
· If you were investing in China, how would you avoid fraud?
Look at the audit firm, look at how the audit team does the audit, the audit teams need to look at the documentation, and make sure that is one of the biggest issues. Documentation is vital in an audit, if there are no supporting documents, you should know that. Companies must have a reputable auditor like Bernstein and Pinchuk.
· If you had to invest in a small cap US listed publicly traded Chinese company other than your own, what would it be?
Disclosure: LONG CSGJ