Lihua International (LIWA)

Lihua International (LIWA) is a Chinese developer, designer, manufacturer, marketer and distributor of copper rod and copper wire products and copper clad aluminum (CCA) wire. Lihua has developed a proprietary, patented CCA technology which offers users the same levels of electrical conductivity as solid copper wires, while utilizing only 40% as much copper which significantly reduces costs.

Last week the company announced that it expects full-year 2009 revenue of approximately $161.5 million and non-GAAP net income of approximately $25.5 million. This represents year-over-year revenue growth of 223% and net income growth of 118%. For fiscal year 2010 Lihua anticipates year-over-year growth of approximately 35-40% in non-GAAP net income. Using the low end of this guidance we can expect FY 2010 net income of $34.5 million or $1.43 per share, which means the stock is currently trading at a forward P/E of 6.5.

"The Company expects that 2010 growth will be largely the result of continued strong demand in China for recycled copper and copper alternatives such as CCA in the household appliance, consumer white goods and infrastructure markets. In order to better meet this expected growth in demand, Lihua plans to add 10 new proprietary high-speed production lines in 2010, which will increase its annual capacity by nearly 40%. Lihua expects to complete the build-out of six of these new production lines in the first half of 2010, bringing its annual copper magnet and copper fine wire production capacity to 25,000 tons from approximately 18,000 tons at the end of 2009. Lihua expects to launch the remaining four production lines during the second half of 2010, which will bring its CCA fine and magnet wire capacity to 10,000 tons annually, compared with current annual capacity of approximately 7,200 tons. To date, the Company has launched the first two of its six planned copper magnet and copper fine wire production lines. Lihua remains on track to complete the build out of four additional copper wire production lines during the first half of 2010, with four CCA wire production lines planned for the second half of the year."

The Company anticipates funding these capacity increases from existing cash on the balance sheet and operating cash flow generated in 2010. As of September 30 last year, LIWA had $38.5 million cash on its books and generated operating cash flow of $12.5 million in the first nine month of 2009.

I am adding a half position of LIWA to the China Model Portfolio at Friday's close of $9.37. LIWA will report final numbers for 2009 at the end of this months and Q4 numbers will look exceptional. With the pre-announcement for the year we can expect Q4/09 revenue of $51.22 million which is more than the company reported for the full year of 2008 ($50.01 million). My price target for the position is $16.50 based on roughly 11.4x 2010e EPS or a P/E/G ratio of 0.3. This is significantly below the industry average and below the $20 price tag Rodman & Renshaw has on the stock, but I like to be conservative as usual.