What happens when you get a stock that has no coverage, mostly retail investors, and great earnings with some uncertainty? Well, you get stocks like $LIWA, and $CCME, and $NEP (when it was in the 4’s and 5’s).
When coverage begins, and analysts start due diligence on a company you usually notice a trend. The float gets smaller, the retail investor base gets smaller, and the stock upside grows. This is, in a nutshell, how great companies are made and bad companies are exposed. This is why $CCME is starting to explode. Some people refer to these stocks as “pump and dumps” because of the volatility, but they are no more pump and dumps than Apple from $190-$215, and back to $190, now at $225 again. There are too many new traders on Twitter that just don’t get it, and that is why 95% of all retail traders always lose money. That is also why people make up fake Twitter names just to bash us… they don’t get it.. they see me buy $NEP at $4, the stock runs to $11.50, and they end up buying it at the top. ..and they get mad at people like me.. Their fault, not ours.
Most of the companies I buy are undiscovered, until they are discovered. $LIWA is full of retail investors, and therefore the volatility is nuts. People read one article, and they go nuts and start dumping shares. $FUQI crashed today on a serious accounting error. The first thing I see on Twitter are certain people automatically associating $FUQI with the rest of China, as if Madeoff and Enron were from Mars.
Here’s the bottom line. $LIWA has very little coverage for the moment. One analyst wrote a report on it and gave it a $20 target. Here is a link to that report. These guys spent the time to visit the company, kick the tires, go through the books … and it’s all there. That said, I am not a “full BULL” on $LIWA as I am $CCME. I like $CCME for four reasons; Good business, Good Auditors, Good Cash position, and Good Growth. Notice GOOD AUDITORS. $NEP is going through a transition now, and they will hire a good firm – because they are simply a good company. Many of these Chinese companies got caught with their pants down on minor to major accounting issues, and now we’ll see the good companies will rise to the occasion.
I will go full BULL on $LIWA once I clarify some issues regarding their SEC filings — but I am still trading the stock because I like the company, the management, and the long term potential. I also like the growth with the ten additional production lines. by “full BULL” I mean I’m not betting the house on $LIWA, and I usually don’t do this anyways.
So we have ONE analyst covering $LIWA now with a “DOUBLE” target, around $20. We have earnings around the corner, with clear guidance that we’ll beat. We have possibly two press releases, one saying when earnings are coming, and one with earnings. We then have our conference call, where I’ll have many questions. the stock is sitting at $8.08 because of $FUQI and another stupid article from Chimin Sang. Remember this is the guy who said to buy $GAME at and after the IPO!! He has made many mistakes in the past, yet people tend to believe the stuff he writes. He said to short $LIWA when it was $8 and it went to $14. He has been wrong on more than one occasion, he’s a guy with a blog and a computer. Don’t let people like him scare you — do the research, find the holes, and mitigate your risk accordingly.
We also have Rodman throwing a $20 target on pre-annouced and FY 2010 guidance below. With Rodman you have to take it with a grain of salt, normally. They are bullish on any stock they are involved with – however their track record lately on China has been very good.
So what am I doing with $LIWA? What I always do. Buy it when everyone is scared, and sell it when everyone is bullish. I set buy limits, you’ve all seen them, and I tell people when I sell. I sold my entire position at $10 – twice – in the last month, and starting scaling in my position over the last 3-4 days. Anyone selling their stock at $8 should stick to a real job, that’s about all I can say. With $LIWA I sell 80% of my position on the runs and keep 20% due to the insane volatility. The volatility will subside as less retail investors buy into it. Remember $LIWA is a raging bull, it’s not an easy stock to trade, certainly not easy to hold. It makes you very queezy…. It’s a real company though, with real earnings, and a real management team.
Reiterate Outperform and $20 Target on Pre-Announcement and FY 2010 Guidance
Today, March 2, 2010, Lihua International announced preliminary FY 2009 results, that came in above our estimates, and offered FY 2010 guidance. The company expects FY 2009 revenues of approximately $161.5mm, gross profit of $36mm and non-GAAP net income of $25.5mm (non-GAAP net income excludes ~$9mm in non-cash charges related to changes in fair value of warrants), which corresponds to Y/Y growth of 223%, 114% and 118%, respectively. We were expecting the company to report revenues of $155.7mm, gross profit of $35.1mm and net income of $23.3mm. The strong Y/Y growth was driven by the introduction of scrap copper recycling and cleaning facility, which expanded the company’s product lines to include copper wire and copper rod, capacity expansion undertaken in Q3 FY 2009 and a growing domestic demand for Lihua’s CCA and copper products, resulting in an ~50% increase in the company’s customer base.
In addition to providing preliminary FY 2009 results, the company offered FY 2010 guidance, stating that it expect gross profit to grow 30 – 35% and non-GAAP net income to grow 35 – 40% Y/Y. Based on the preliminary FY 2009 results, this translates to approximately $48mm in gross profit and $35mm in net income, somewhat below our estimates. However, we believe that these numbers are very conservative and hence, we are making only slight tweaks to our prior estimates. During FY 2010, the company plans to add 10 new high-speed production lines, which should increase total capacity by about 40% to 35,000 tons. Six of these lines are expected to be completed in the first half of FY 2009, raising total copper wire production capacity to 25,000 tons, in line with its current total copper refinery capacity. This should also result in the gross margin expansion, since the company should be able to process its entire copper rod into wire, without having to sell the excess rod to smaller copper wire manufacturers for further processing. The other four lines are expected to be completed by year-end and should increase the total CCA wire capacity to 10,000 tons from the current capacity of 7,200 tons. The company plans to fund these capex plans with current cash on hand and operating cash flow.
Reiterating Market Outperform Rating and $20 Price Target
We are reiterating our Market Outperform rating and a twelve to eighteen months Price Target of $20 at this time. At today’s intraday price of $8.96 the stock is trading at 6.7x FY 10 and 4.8x FY 11 on a P/E basis, significantly below the peer group averages of 18x and 12.1x, respectively. On the EV/EBITDA bases, Lihua is trading at 4.2x and 3x for FY 10 and FY 11, based on our estimates, which represents a significant discount to peer group multiples of 7.6x and 5.8x. Our peer group consists of profitable Chinese companies operating in the industrial sector, as well as US and international companies operating in copper smelting and wire businesses (excluding outliers from the peer group average calculation).
