China Precision Steel (CPSL – Nasdaq)
Dear Bottarelli Research Member,
The market has given us some very mixed signals this week, and that’s why I believe that the Fed will lower rates once again next Wednesday. If this move happens, it’ll give an added boost to many of our small-cap holdings – and that’s why I remain so bullish on the entire small-cap commodity sector. My own inner circle – plus many experts which I have great respect for – all agree that we’re on the verge of one of the biggest commodity bull markets we’ve ever witnessed. That’s why we’re carefully positioned in some of the best small-cap commodity plays on the planet. In fact, I’m so bullish, I’ll be adding yet another play this week which will take full advantage of the rapid steel expansion in the Pacific Rim.
This week’s new pick is centered around the Chinese steel industry. As I’m sure you know, China’s entire region is in a major building boom right now, and this $9.50 company is quickly emerging as one of the lowest cost producers of cold-rolled steel in all of mainland China. (Cold-rolled steel is a niche sector in steel processing, as you’ll see below.)
This company has two mills operating right now, but their newest mill is only using 40% of its total capacity. They plan on hitting 50% capacity by the end of 2007 and 100% capacity by early 2009. They’re also on track to open a new mill in early 2008, further strengthening their dominant position for ultra-thin precision steel in China.
What really gets me excited are their plans to also expand operations into the Guangdong Province and the Northeastern region of China (where there’s a very high concentration of steel-dependent industries like automotive manufacturers). Add it all up, and we have a true small-cap commodity play emerging in the high-growth Chinese steel market.
Plus, with China hosting the Olympics in 2008, steel will surely be needed. And with the massive infrastructure demands in Macau’s gambling region, you know that this emerging steel company is perfectly positioned to capture tremendous share price appreciation.
Strong tailwinds like that should be enough to get the hair raised on your arm, but when you also consider that this company is the lowest cost producer of cold-rolled steel across all of their international counterparts, I think you get the big picture. For only $9.50 per share, this company has a very bright future, so we definitely want to add them to our small-cap ledger now. The company is called China Precision Steel (CPSL – NASDAQ). It’s just coming off its highs, putting them right at our buy target under $9.50 per share. Add it now!
UPDATES
Minera Andes (MNEAF.OB): The drill results at their San Jose operation in Southern Argentina were extremely valuable. These tests showed another deposit of gold and silver, prompting them to continue to drill and find even more. I really love this company, and with drill results like this, I think they’ll soon get acquisition interest from a major producer. Hold.
Energy Trusts: Canetic Resources Trust (CNE – NYSE), Provident Energy Trust (PVX – NYSE) & Advantage Energy Income Fund (AAV – NYSE): It was brought to my attention from a reader that I had a “hold” rating on these three. But with oil hitting $92 a barrel amid talks of even more shortages, I would be adding to all three of these trusts at current levels. Like one Bottarelli Research Small Cap reader said, “Getting 14% off my money beats the pants off any CD, or other investment vehicle I’m aware of, and I stand the chance of stock appreciation as well. Thanks so much Mark.”
Echelon Corporation (ELON – NASDAQ): They just released earnings that came in-line with guidance, setting the table for strong returns in 2008. The stock has dipped on this move, but I consider this a great buying opportunity. In fact, if you did not get into ELON on our original buy alert, I’d take advantage here and buy ELON on this dip. Energy conservation is now a major priority across the globe, and that means ELON’s future looks extremely bright. ELON is still a company we all need to be positioned in, so continue to hold/add to your position at these levels.
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Yellowcake Mining (YCKM.OB): These guys are on the move! They just received the permits to begin installation of six wells to monitor groundwater. Upon completion, pump tests will be performed and drilling/installation activities are scheduled for spring 2008. Let’s sit back and give them time to grow. Hold.
Torrent Energy (TREN.OB): TREN just announced that they’ve secured preliminary approval of a much-anticipated water disposal permit for their coal-bed methane natural gas project in Coos Bay, Oregon. This is the first such permit in the state of Oregon, which now allows TREN to move from an exploration company to a commercial producer. The final permit is scheduled to be completed and issued to Torrent Energy in early November, following a 40-day public comment period. Therefore, the time to own this gem is now!
With that, here’s Bryan with the full details on China Precision Steel (CPSL – NASDAQ).Have a great week!
Sincerely,
“We are creating a dominant position in China for ultra-thin precision steel.”
- Dr. Wo Hing Li, Chairman and CEO of China Precision Steel
With Quarterly Earnings Growth of 5,627%,
Who are We to Argue?
In last week’s small-cap alert, Mark brought you Terra Nostra Resources (TNRO.OB), a company posting quarterly revenue growth of 2,743%. At the time, I called it “one of the most rapidly-growing small-cap picks I’ve ever encountered.”
Well, guess what? Not one week later, Mark has uncovered a new small-cap pick with EVEN BETTER growth statistics!Sound impossible? It’s not. Here are the full details…
Founded in 2002 and headquartered in Sheung Wan, Hong Kong, China Precision Steel (CPSL – NASDAQ) is a precision steel processing company that produces and sells cold-rolled steel products throughout Southeast Asia and Africa. CPSL primarily sells their steel products domestically in China, but they’ve recently began exporting to Nigeria, Thailand, the Philippines and Indonesia.
As Mark mentioned above, China Precision Steel currently operates two production mills which use patented technology to produce ultra-thin and high-strength precision steel strips that range from a thickness of 7.5 mm to 0.03 mm. If you don’t know how thin that is, their smallest steel products are as thin as a third of a human hair!
One of CPSL’s mills has an annual production capacity of 115,000 metric tons. Their second mill, which just began production at the end of 2006, has an annual production capacity of 150,000 metric tons. Since this second mill is still very new, it’s only operating at 40% capacity, but CPSL expects this mill to be operating at full capacity by the end of 2009. In addition, China Precision Steel intends to begin construction of a third mill in 2008 with a capacity of 150,000 metric tons. This means that by early 2009, CPSL could realistically double their current steel production, creating the catalyst for continued share price appreciation.
It’s easy to see why China Precision Steel is expanding at such a rapid rate. After all, China is the largest steel producing country in the world. And in the same region, Japan is the second largest steel producing country in the world. As a result, demand for precision steel has been growing 20% annually for the past five years – with the strongest demand coming in the Pacific Rim.
Now, although China is a net exporter of crude steel, it is a net importer of high-value precision and ultra-thin steel. That’s why China Precision Steel is in such a great position. You see, China’s manufacturers are forced to import millions of tons of cold-rolled steel from Japan, Korea, the European Union, and the United States. These imports currently represent the 85% to 90% of China’s cold-rolled steel market, leaving domestic companies to represent less than 15% of this market segment. That’s a huge competitive strength for China Precision Steel.
China Precision Steel is the only company in the world that manufactures ultra-thin steel with a width of 1400 mm. And since CPS is China’s only domestic company with the ability to produce sheets within these specific parameters, they can sell these steel products for 10% less than any of their international competitors. Not only that, but since they’re domestic, they also offer shorter delivery times and custom specifications! Because of these competitive advantages, I feel CPSL will soon begin capturing a larger chunk of the 85% to 90% steel market that’s currently being imported. And that’s a huge opportunity!
Width is an important differentiation factor in steel because certain products – such as washers and automobiles – require materials within a certain minimum width. Although materials with a smaller width could be used for these applications through jointing, this increases production cost. Therefore, wider products are more flexible and cost efficient which further reduces the end user’s overall cost.
And that’s the thing: Since very few domestic companies have the technology and experience to provide high quality cold-rolled steel, CPS has now established relationships with China’s major steel companies such as Baosteel, POSCO, and JFE. This will continue to drive demand for China Precision Steel’s products for quite a long time.
In fact, when you combine this export demand with China’s nationwide demand for automobile parts and components, the insatiable demand for specialty steel will not slow down anytime soon. As a prime example of this rapidly growing niche steel segment, look at China’s growth rate from 2000 to 2005 in some of these basic household items:
- Autos: 75% Increase Over 5 Years
- Sedans: 354% Increase Over 5 Years
- Containers: 70% Increase Over 5 Years
- Refrigerators: 133% Increase Over 5 Years
- Air Conditioners: 270% Increase Over 5 Years
China Precision Steel produces the raw materials needed in all of the products listed above. Their steel is also used in things like saw blades, weaving needles, microelectronics, food packaging materials, and packing containers – which are all necessary to support China’s booming economy.
Now remember: Since the precision steel needed to manufacture all of these products has historically been imported from Japan, Korea, the European Union, and the United States, the average quality and standards of China’s high precision steel has always lagged behind the international norm. That’s another reason why China Precision Steel has such a desirable position.
Since specialty precision steel is a relatively new industry in domestic China, CPSL can now offer precision steel that meets international standards. Not only that, but new applications for these steel products are continually being developed. For example, in the automobile industry, thinner sheets of high-strength steel are increasingly being used to reduce a vehicle’s weight without compromising its safety. You better believe that CPSL will gladly support this increasing demand!
Put it all together, and China Precision Steel looks well-positioned to deliver some staggering returns. In fact, on October 16th, CPSL announced their financial results for the year ended June 30th 2007, and this earnings report was an absolute blockbuster.
Year-over-year, their fiscal 2007 revenue increased by 55%. And on a quarterly basis, their earnings growth increased by a whopping 5,627%.
All I can say is, “WOW.” Some additional highlights from this earnings report are noted below:
- Revenue for fiscal 2007 increased 55% to $54.0 million.
- Volume of precision steel sold increased 59% to 67,021 metric tons.
- Gross profit increased 50% year over year to $15.0 million.
- Newly launched export programs in the Philippines and Thailand accounted for 8.6% of revenues in fiscal 2007.
With numbers like that, the stage is set for stellar growth going into 2008 and 2009. In fact, according to China Precision Steel’s Chairman and CEO, Dr. Wo Hing Li, “We are happy to report strong growth in sales and gross profit during our 2007 fiscal year, which was the result of increased production capacity supported by strong demand for our precision steel products. Our new mill is currently operating at a 40% utilization rate and we intend to begin construction of our third mill in early 2008. We were also successful in expanding our market share, as our products are highly competitive with an average cost that is lower than our international competitors. We are creating a dominant position in China for ultra-thin precision steel. Currently we produce over 40 high precision steel products with over 100 specifications and we remain focused on broadening the number of precision steel products. We are also looking to increase our penetration into Guangdong Province where there is a concentration of light industries, and in the Northeastern region of China where there are a number of automotive manufacturing companies.”
With a current market capitalization of only $352 million, it’s very easy to see why quarterly earning growth of 5,627% could dramatically re-rate shares to the upside.
Right now, Wall Street has placed a value on China Precision Steel based on their current annual production capacity of approximately 100,000 tons. But once all of their new equipment is installed and their new production facilities are operating at full strength, CPS’s annual production capacity will increase to 400,000 tons. That’s a 4-to-1 increase over current valuations – clearly illustrating the tremendous upside potential that early shareholders like you and me could soon enjoy.
With everything now perfectly lining up (massive steel demand, low-cost domestic exposure, exploding quarterly revenues, and new plants soon to be fully operational), I think we have discovered yet another diamond in the rough. Therefore, let’s go ahead and add China Precision Steel (CPSL – NASDAQ) as our newest small-cap pick.
PLAY: Buy shares of China Precision Steel (CPSL – NASDAQ) at or below $9.50, good for the week.
Sincerely,
© 2012 CSR Group, LLC. All rights reserved. Published in USA.
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