Cemeteries and Cement (CGPI, CRJI)
posted by The Traveller on Thursday, July 15, 2010

China Redstone Group (CGPI) is currently trading at $3.70, down 43.94% from its April 14 high at $6.60. The Trading China Tracker Score is 10 (Buy).

China Redstone filed their annual report today, a conference call is scheduled for next Monday morning. The company did handily beat their FY 2010 guidance and posted earnings per share of $1.33 ($0.96 if we use the current share count of 13.5 million) with strong operating cash flow, especially in the fourth quarter.

The company is a cemetery developer in the greater Chongqing area, one of the largest cities in the world. Greater Chongqing is currently growing by half a million residents every year and the business of selling graves (don't want to sound morbid here) should be set for long-term growth with an annual mortality rate of 6.5/1000. Apparently it is also a Chinese belief that purchasing a grave prior to one's death is wishing for a healthier and longer life.

China Redstone, through their operating entity, Chongqing Foguang Tourism Development (about time to strip that 'tourism' off your name, folks) has big plans for the future.
In 2010, we plan to complete the first phase of land acquisition for the Gui Yuan II project and the construction of the cemetery and supporting facilities within the acquired land. We plan to develop 5,000 external tombs and 2,000 internal tombs. After the Gui Yuan II project is completed, our next focus will be the development of the Longqiao Lake project. In 2011, we plan to develop tourism, leisure, entertainment, dining accommodation, transportation and other comprehensive services and facilities. We plan to expand our seedling base in the Longqiao Lake area. Management believes that the funds for such short-term developments can be obtained through the sale of securities or issuance of debt instruments in addition to our retained earnings.

Foguang's projected income is approximately US$12 and US$16 million in 2011 and 2012, respectively, so Foguang expects to have enough funds for its short term development projects. Our long term development includes acquisition and merger with cemeteries locally or in other cities. We plan to acquire Shenzhen Huaqiao Public Cemetery in 2013. The funds needed for this acquisition is approximately US$29.33 million.
CGPI has only a very short history as a public company and there is a lot of work to do for the management, especially regarding internal controls and auditing. Official guidance that was released earlier this year calls for FY 2011 earnings per share of about $1.20, implying net income growth of about 30%. Uplisting to a senior exchange is not currently on the agenda, but the company states they "do not rule out the possibility of applying for listing on the NYSE Alternext or Nasdaq Capital Market or other markets" in the future.

We can not apply very high multiples to a company that is still in the early stages as a public company, but I believe the current valuation at roughly 3x this year's earnings doesn't do China Redstone justice.

China Runji Cement (CRJI) is currently trading at $0.11, down 54.21% for the year and 78.46% from its February 5 high at $0.51. The Trading China Tracker Score is -2 (Sell).

China Runji filed their quarterly report for the third quarter of fiscal 2010 today. With a current market capitalization of $8.66 million, trailing nine months net income of $660,000, operating cash flow of $10.12 million and total stockholder's equity of $26.5 million the stock is currently priced for bankruptcy.

Not everything in today's report looks hopeless. Gross profit increased by 400% over the year ago period on a 12% decrease in revenues, mostly as a result of cost control procedures. However, the big concern is still that huge working capital deficiency of $34.35 million which means all the financial statements had to be prepared on a going concern basis and the company is in dire need of financing. CRJI "anticipates raising funds through an equity or debt offering or with a strategic partner in the coming year," which seems almost impossible to do at the current deeply depressed share price. The company needs to raise funds to proceed with their ambitious plans:
We plan to construct a third production line in late 2010, which will have a daily cement clinker production capacity of 5,000 tons or 1.5 million tons annually. Upon completion, our total cement production capacity will reach 3.6 million tons per year, and cement clinker production will reach 3 million tons per year, controlling 30% of the market share within a 100 miles radius of our production facility.
This stock is a highly risky gamble on CRJI's ability to raise funds in the near future. It is unlikely that the stock will trade up to book value anytime soon, however the regional market position of Runji is strong and the company has the support of the local government.

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2 Comments:

At July 16, 2010 6:15 am , Anonymous AhYap said...

> We can not apply very high multiples to a company that is still in the early stages as a public company, but I believe the current valuation at roughly 3x this year's earnings doesn't do China Redstone justice.

I totally agree with this. Just want to add 2 cents. Other than in the early stage of being a public company, the stock is also very illiquid and fundamentally, the company won't have enough operating cashflow to fund the next 2 years capex, meaning that they are guaranteed to make more fund raising at below PE3! They are going to issue shares to private investor below PE3. Not good for those who buy from the market - eps dilution, almost no volume, no uplist in the near future, big capex ...

 
At July 16, 2010 9:08 am , Blogger The Traveller said...

Redstone will certainly have to raise money in 2011, but for now they have high inventories and about 20% of their market cap in cash. As a property developer they should be able to get debt financing instead of raising funds at such a low P/E.

A short term boost might come from the press release after the close where CGPI announced adjusted EPS of $1.53 and raised 2011 guidance by 20%. This might attract new short term investors and I wouldn't be surprised if the stock traded towards $5 into Monday's conference call.

 

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