Longwei and China Green
posted by The Traveller on Sunday, July 25, 2010
Longwei Petroleum (LPH) is currently trading at $2.22, down 17.78% for the year and down 28.39% from its April 13 high at $3.10. The Trading China Tracker Score is 8 (Buy).
Longwei has finally uplisted to Nyse Amex last week. On July 9 the company announced 11-month data for their FY 2010 ended June 30 and reaffirmed that full year performance will exceed its earlier guidance of $40.3 million adjusted net income. If we assume a performance for June 2010 similar to April and May, Longwei should report full year net income of about $44 million and EPS of $0.39. FY 2011 guidance currently stands at $73 million net income with growth expected to be 66% from FY 2010 numbers.
We have to keep in mind that the fully diluted share count, according to the latest investor presentation, stands at 112.2 million. In this presentation the company uses a lower share count to reach their FY 2011 EPS guidance of $0.71 - to be on the safe side here I am calculating only with $0.65 EPS for $73 million net income. Though I wouldn't be surprised if Longwei revises those numbers upwards by about 10% with their next earnings report.
Using the $0.65, LPH is currently trading with a P/E ratio of 3.4, which is ridiculously low for an Amex stock. One reason might be the complicated capital structure with preferred stock (12.5 million shares) and warrants (13.5 million shares with $2.255 conversion price) leading to an unreasonably high share count and plenty of sellers holding down the stock price. On Wednesday 1.45 million shares were traded, the highest volume since March, but the stock was up a measly 6% for the day and has retreated since to pre-uplisting levels.
It would be a good advice for the company to bring down the share count to a reasonable level in the 15-25 million range. As long as this doesn't happen I don't see the stock trading at multiples according to its growth. However, with 66% projected EPS growth for the current fiscal year and a booming industry (diesel and gasoline distribution), Longwei should trade at much higher levels. My 12-month target for the stock would be $4, based on 6x 2011e EPS of $0.65, with significant upside from a possible simplified capital structure.
China Green Agriculture (CGA) is currently trading at $11.19, down 23.88% for the year and down 33.20% from its March 9 high at $16.75. The Trading China Tracker Score is 4 (Hold).
CGA filed a huge $200m shelf on Friday after the close. The company has already diluted shareholders by 44.66% in the past 12 months and currently 26,848,259 shares are outstanding. It is unclear why this shelf offering has been filed, the company should have plenty of cash on its books as it reported $58.2 million cash and cash equivalents with the last quarterly filing and paid only a portion ($8.8 million) of the recent Guafeng acquisition in cash.
The acquisition price for Guafeng seems cheap at just 2.7x 2011 projected net income, however there is a chain of potential problems attached to this endeavour. Guafeng's estimated 2011 performance is $88.4 million in revenue and $10.6 million in net profit after tax for a net margin of 12%. China Green reported 9-months revenues and net income of $35.9 million and $15.3 million for a net margin of 42.6%. Common sense says that integrating a company much bigger than itself bears significant risks, especially when both businesses are not entirely compatible. But what might turn out to be an even bigger problem is that all of CGA's margins will collapse in FY 2011. The combined company should have net margins in the 20-25% range, down from 42.6% for old CGA.
Of the four analysts following China Green Agriculture, three give the stock a NEUTRAL rating and only Roth Capital still has a BUY on it with a $15.50 target. Brean Murray adjusted their models for CGA after the acquisition, now predicting a 24% net margin for 2011 and EPS of $1.42, leaving FY 2010 EPS estimates unchanged at $0.91. This means the stock is currently trading with a 2010e P/E-ratio of 12.3, which is much higher than most of its China small cap peers. Given the integration risks and possible dilution risk from the shelf offering I would avoid CGA and focus on much better opportunities in the beaten-down China space.