John L. Faessel
The Baby That Went Out
with the Bathwater
Why the time is NOW to take China
Carbon (CHGI) Private AHEAD of its Multi-Billion $$ Opportunity in China
China Carbon Graphite Group, Inc.
some rare market opportunities have handsomely profited investors as deep
values in China have motivated numerous companies’ management to go private.
While accounting scandals have tainted many good Chinese companies with the
stench of the bad, when it comes to the worthy companies ‘inside’ management
knows what they operate, knows what the values are, and knows what the outlook
going forward is.
mouth-watering intrinsic values of some of these companies have incited a
buying frenzy by inside management and private equity players. Meanwhile, 29
Chinese domiciled / USA listed companies have gone private over the last 18 months.
The Opportunity for
China Carbon Graphite
OK so let’s define exactly how nuclear
grade or Isostatic carbon graphite will change (CHGI) beginning in 2013 and why
the time is NOW to take the company PRIVATE and wait till the nuclear graphite
profits start taking off.
Definition: Isostatic carbon graphite is
used as a moderator or reflector within nuclear reactors to slow down neutrons
and make them more efficient in producing fission in the fuel.
Here’s Why to Go Long (CHGI) to $1
or higher in a take-private deal
central government will invest 450 billion RMB (US $66 billion) in nuclear
power plants by 2020 post-Fukushima
China has 14
nuclear power reactors in commercial operation, 25 under construction, and 50
planned to start construction. Each plant uses up to 10,000 tons of graphite in
nuclear plant uses up to 14,000 tons of graphite per year
100% of Nuclear
Graphite used in China is imported; China is encouraging domestically produced
nuclear graphite, and the company is one of the government-selected Nuclear
requires 99.9999% purity with larger size; the company is the industry leader
with such capability
expects to start Nuclear Graphite production in 2013 and generate 2,000 MT that
year, 4,000 MT in 2014
price of nuclear graphite is 5x that of fine grain graphite, approximate RMB
100,000-200,000/MT (US $15,000 – $30,000/MT)
Gross margin of
nuclear graphite is nearly 50%
Sales market for
nuclear graphite $175,180,000 per year now—triples in size as 27 new nuclear
plants come on line
currently only one potential competitor in this sector, which is Fangda Carbon
Value Metrics that are
nothing but EXCEPTIONAL
Price to Sales 0.34
Price to Book 0.32
Book Value of $2.10 a share
2012 @EBITDA of $8.78 million…and market cap of
2012 Revenues of @$55 million with a market cap
of $17.45 million
5.5 RE ratio on LAST 12 months earnings per
2 X PE ratio on the 12 months earnings per share
14 cents a share EPS going forward 12
months…with a 72 cent stock price
Enterprise value of $62.4 is million vs. public
value of $17.45 million…
a believer that ‘shortly’ a management led effort will take (CHGI) private at
$1.00 or more for the 14.8 million shares that are not under management
control. (CHGI) is just off its multi-year lows and I’m expecting a lot more
And the source of
funds for management to utilize?
to the proposition is that the massive state-owned China Development Bank is
providing more than $1 billion in financing to help Chinese companies
leave the U.S. stock market. The China Development Bank is explicitly
tasked with meeting policy goals of the Chinese government and is also tasked
with supporting the development of China's interests overseas.
More on the backdrop
companies listed in the USA are going private in increasing numbers, making some
premier China stocks available once-in-a-lifetime “cheap” as their share prices
have plummeted due to accounting scandals that have pulled good companies down with
Three very recent
8/14/2012 in a $3.1 billion
buyout deal, an
investment consortium of U.S. and Chinese private equity funds made an offer of
$27 for each ADR of Focus Media (FMCN); just prior to the offer the
stock was $18. A total of 19 Chinese companies delisted from American exchanges
during the first half of 2012. At least 16 more companies are in the process of
attempting to delist.
Thursday (9/27/2012), Medtronic (NYSE:MDT) and KH, (NYSE:KH) announced that
they have entered into a merger whereby Medtronic will acquire Kanghui. The
agreement calls for Medtronic to pay approximately $816 million in cash or $30.75 per
ADS. Both stocks hit 52-week highs on the news.
last Thursday (9/27/2012), China Nuokang Bio-Pharma (NKBP) accepted a
of $5.80 for each ADS. The shares hit a low of $2.25 earlier this year at the
depths of the ‘sell China’ crisis.
More Particulars re (CHGI)
Carbon Graphite Inc. (CHGI) is one of China’s leading wholesale
suppliers of fine grain and high purity graphite, and the top overall producer
of the nation’s carbon and graphite products. They are now the prime supplier
of nuclear grade electrode graphite to China’s 14 operational nuclear
Notable is that China has another 25 nuclear plants under
and 50 more are being planned. Sales for (CHGI) look to mushroom as these new
plants come on stream and margins should likewise increase.
has restricted its
and has included it in its list of strategic materials (along with rare earths,
vanadium, titanium, etc.) The European Union and the USA have also listed it as
a critical material, even though 80% of it is mined in China.
plus is that some of the nuclear graphite that supplies the Chinese market
comes from Japan and as you may know the two countries are nose to nose in a
serious and very contentious harangue over some Japanese islands that China is
now claiming. So it’s very possible that China will now purchase more
‘homegrown’ nuclear graphite rather that importing it from Japan.
The Bloomberg Chinese Reverse Mergers Index of 82 companies
lost 52% of its market value from June 2011 through July 16, 2012.
2007, China’s Ministry of Science &
Technology has granted China Carbon Graphite Inc. the “National Hi-Tech Enterprise” status, a
distinction awarded to hi-tech companies at the forefront of their fields and
year one nuclear plant uses 500 tons of nuclear grade electrode graphite.
Margins for the nuclear grade are 50% vs. margins of 12% for low grade
has about $45 million in debt at interest rates of about 5% and a big chunk
($14.8 million) of debt has just rolled over at about the same low rates for
another two years.
Once again: Go Long (CHGI) to $1 or higher in a
I am long (CHGI) – I have bought shares the open market and have no affiliation
with the company.