Befut Global Inc (OTC:BFTI)

The decrease in gross profit margin was primarily attributable to the decreases in margins of our specialty (in particular, petrochemical) cable and traditional cable products, which were by 4% and 3%, respectively, as compared to the same period in 2010. We lowered our selling prices of those cable products in an effort to develop new customers for more market shares. The gross profit margin of each category of our products for the three months ended December 31, 2011 was approximately 33% for specialty cable, 15% for traditional cable and 10% for switch appliances, as compared to gross profit margins of approximately 37% for specialty cable, 18% for traditional cable and 6% for switch appliances for three months ended December 31, 2010.

Fiscal 2011 Year End Results

Recent Development

On February 25, 2011, Dalian Befut sold its entire 86.6% equity interest in Befut Marine, a company engaged in the marketing and production of marine cables for Dalian Befut, to Mr. Fansheng Li, a noncontrolling shareholder of Befut Marine, for RMB 17,320,000 (approximately $2.67 million) in cash. As part of the transaction, the applicable certifications required for producing marine cables that were held by Befut Marine were transferred to WFOE. Dalian Befut, as the captive manufacturer for WFOE, will manufacture marine cable for the Company in accordance with the Manufacturing Agreement. As a result, the Company has determined that Dalian Befut’s sale of its entire equity interest in Befut Marine does not have any material adverse effect on the Company’s operation, business and financial position.

We intend to use our available funds as working capital and to expand and develop our current business operations. We believe that our available funds will provide us with sufficient capital for at least the next twelve months; however, to the extent we expand our operations or make acquisitions, we may require additional funding, which may include debt and/or equity financing. There can be no assurance that any additional financing will be available on terms acceptable to us, if at all. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.

GeoTeam Note: The current liquidity statement slightly diverges from those made in previous liquidity sections of filings.

• Omits references to the use of debt
• Expanded verbiage to include the possibility of considering acquisitions. (Although 2010 10K did mention that acquisitions are part of the company's overall strategy).

From December 2010 10Q

Our management believes that we have sufficient cash, along with projected cash to be generated from operations, and access to short-term bank loans to support our current operations for the next twelve months. We believe our cash position is strong and sufficient to meet our anticipated working capital needs. However, if events or circumstances occur and we do not meet our budgeted operating plan, we may be required to seek additional capital and/or reduce certain discretionary spending, which could have a material adverse effect on our ability to achieve our business objectives. Notwithstanding the foregoing, we may seek additional financing, which may include debt and/or equity financing. There can be no assurance that any additional financing will be available on acceptable terms, if at all. Any equity financing may result in dilution to existing stockholders and any debt financing may include restrictive covenants.

Outlook:

Our management team believes that we will experience annual sales growth of over 70% in our fiscal year ending June 30, 2011

From Press Release:

Mr. Hongbo Cao, Chairman and CEO, commented, "Our focus on developing the most advanced products in the cable and wire industry combined with our reputation for quality and extensive sales network across China is proving to be a winning formula for the Company.  For the second quarter of fiscal 2011 revenue grew 109% to $14.9 million and net income increased 93% to $1.9 million.  We experienced increased demand across all of our product lines and our customer base now includes some of the largest conglomerates in China.  Additionally, we benefited from our recent decision to relocate our production facilities to Dalian's Changxing Island Harbor Industrial Zone, which currently has a total production capacity of 2,400 km of cable per year—three times the amount of cable we were able to produce at our old manufacturing facility.  We plan to further increase our production capacity to approximately 4,000 km of cable in the coming years to accommodate the growing demand for our products."

Mr. Cao continued, "In July 2010, we acquired Dalian Yuansheng Technology Co., Ltd., which enables us to develop and manufacture carbon fiber composite cable and other specialty cable for upgrading China's power grid.  As compared to pure metal cable, carbon fiber composite cable is lighter, has better electrical conductivity and can better withstand increased external pressure caused by natural disasters.  As a result, we plan to make carbon fiber cable a key focus for the Company over the next few years.  

"As we look ahead, we see substantial opportunities to grow our business.  Key elements of our growth strategy include new product introductions, entering new markets, broadening of our customer base and further expansion of our manufacturing facilities.  These initiatives are currently underway.  We are particularly excited about new products in our pipeline, such as specialty cables for wind and solar applications.  We are also conducting R&D with the National Nuclear Industry Research Institute to develop technology that will boost the overall technical level of nuclear cables used in China."

The increase in sales was primarily due to three factors:

(i) significantly increased demand for our traditional cables and specialty cables from new and existing customers as compared to the demand for such products in three months ended September 30, 2009, (ii) the increase of our annual production capacity after we relocated our production facilities to our Phase I Changxing Facility in Dalian’s Changxing Island Harbor Industrial Zone at the end of 2009, and (iii) increased prices of many of our cable products due to an increase in the average price of copper, our primary raw material, in the quarter ended September 30, 2010, which we passed on to our customers

Fiscal year ended June 30, 2010 compared to the fiscal year ended June 30, 2009

• Our sales for the fiscal year ended June 30, 2010 were $31,258,662, an increase of $11,949,723, or 61.9%, as compared to the fiscal year ended June 30, 2009.
  
• Net income for the fiscal year ended June 30, 2010 was $4,512,176, an increase of $2,252,763, or 99.7%, as compared to net income of $2,259,413 for the fiscal year ended June 30, 2009.
  
• EPS of $0.15 vs $0.07.

GeoTeam® Note:

• After Subtracting government subsidy income and applying a 25.05 tax rate, adjusted full year EPS comparison would have been $0.12 vs. $0.07. Most of the subsidy income was recorded prior to the respective fourth quarters.
  
• Adjusted fourth quarter EPS was $0.06 vs. $0.02. 
  
• Revenue guidance inferred from the outlook section of this research note is about $56.0 million.

"We believe we are currently at the beginning of a rapid growth stage. Established in 1996 to produce small-scale traditional cable, Dalian Befut built a factory in Dalian in 2001 to enter the more profitable sector of specialty cables. From 2003 to 2008, our sales grew at an average rate of at least 50% per year. When we reached our full production capacity in 2008, we achieved annual sales of approximately $22 million. To expand our manufacturing capacity and production of specialty cables, in 2006 we commenced construction of our new production facility located approximately 120 km from Dalian on Changxing Island (the “Changxing Island Project”). To maintain our competitiveness, we continue to focus on researching and developing new products, and attracting new large-volume customers. At the beginning of 2010, we completed Phase I of the Changxing Island Project (“Phase I Changxing Facility”), which increased our total annual production capacity from 800 km of cable to 2,400 km of cable as of June 30, 2010. We estimate that the Phase I Changxing Facility may reach its maximum annual capacity of 4,000 km by June 30, 2013, at which time we expect to commence construction of Phase II of the Changxing Island Project to add 45,000 square feet of facilities to further expand our production capacity of specialty cable (“Phase II Changxing Facility”). At June 30, 2010, we believe we have the customer base and the technological, manufacturing and research and development capabilities to take advantage of the growing cable and wire market to produce high levels of sales and profits over the next few years."

Outlook

Our management team believes that we will experience annual sales growth of over 70% in our fiscal year ending June 30, 2011.  Our growth projections are based on several factors, including the following:

• We have invested $5.5 million to purchase approximately150,000 square meters of land (including the land reserved for the construction of the Phase II Changxing Facility) and $14.5 million on the construction of the Phase I Changxing Facility, which has a maximum annual production capacity of 4,000 km. 
  
•  We have invested approximately $9 million in the purchase of 20 sets of new, technologically advanced manufacturing equipment used in the production of various specialty cable. These sets of equipment, in addition to over 50 sets of manufacturing equipment we already own, should meet most of the needs of our development plan to maximize the production capacity of the Phase I Changxing Facility and generate an annual revenue of over $150 million in the next three years.
  
• Among our customer base of more than 500 customers, there are at least 30 “large” customers with average annual specialty cable orders of over $7 million. Prior to fiscal 2010, we had several large customers, but due to our production limitations, we were unable to accept large-volume orders from such customers. Now that the Phase I Changxing Facility is operational, we have a total annual production capacity of 2,400 km of cable and can meet large-volume orders for specialty cable. Since early 2010, we focused our sales strategy on customers with large-volume orders. We estimate that in fiscal 2011, we will accept large-volume orders (more than $700,000 each) from 37 clients, including 11 petro-chemical companies, 16 mining and metallurgical companies, 5 nuclear power plants and 5 shipbuilding companies. These 37 clients are expected to generate sales of approximately $45 million in fiscal 2011, which is expected to represent 80% of our sales. At the same time, we plan to develop at least 10 new “large” customers each year. There are currently more than 100 companies located in northern China with average annual specialty cable requirements of over $7 million.  As most of our competitors are located in southern China, our geographic location provides us with a significant advantage over them with respect to attracting large customers in northern China because of lower transportation costs, regional relationships, and similar cultural backgrounds.
  
• At June 30, 2010, our working capital was approximately $20 million, which we believe to be sufficient to meet the financing needs of our recent developments. In 2009, we secured a $14.6 million long-term loan from China Development Bank Corporation, primarily to finance the Changxing Island Project. To support the high level of growth we expect in fiscal 2011, we intend to consummate a debt and/or equity financing, if we can obtain terms acceptable to us.
  
• We will continue to consider strategic acquisitions of or investments in companies that complement our growth strategies and expand our product offerings. For example, Befut Zhong Xing, acquired in July 2009, contributed approximately 2.7% of our revenues in the year ended June 30, 2010. Dalian Befut’s recently acquired subsidiary, Dalian Yuansheng, is expected to provide Dalian Befut with the conductive carbon fiber raw materials for the production of carbon fiber composite cable products.
  
  

Based on preliminary unaudited results, full year 2010 revenue and net income are expected to be approximately $31.3 million and $4.6 million, respectively.  Additional fiscal 2010 results include:

• Cash and inventory of approximately $2.5 million and $2.5 million;
• Total assets of approximately $67.4 million;
• Total liabilities of approximately $27.2 million; and
• Shareholders’ equity of approximately $39.1 million.

Mr. Hongbo Cao, Chairman and CEO of Befut said, “We are pleased to finish our 2010 fiscal year with what we believe will be record revenue and profit for the Company.  We look forward to building upon this success in fiscal 2011.” 

"We believe we will experience annual sales growth of more than 70% for our next fiscal year ending June 30, 2011."

"Among our more than 200 customers, approximately 30 are considered “large” customers with average annual specialty cable order needs of more than $7 million. Due, in part, to our past limited production capacity, we were not able to accept large-volume orders from these customers. With the recent completion of our new factory, which started operations in early 2010, we now have the ability to produce specialty cables in large volumes. Thus, in the quarter ended March 31, 2010, we began to adjust our sales strategy to focus mainly on accepting large-volume orders. We estimate that in our fiscal year ending June 30, 2011, we will accept large-volume orders (more than $700,000 each) from more than 30 existing and new customers, including petrochemical companies, mining and metallurgical companies, nuclear power plants and shipbuilding companies. We expect these customers to generate sales of about $45 million, which we estimate will account for approximately 80% of our total sales for our fiscal year ended June 30, 2011. We plan to add “large” customers each year as there are currently more than 100 companies located in northern China with average annual specialty cable order needs of more than $7 million."

Key Question: Will net margin improve from current levels of around 10%?