China Redstone Group (PINK:CGPI)

Rodman and Renshaw on CGPI                                                    3/04/2011

CGPI – Michael He Installed as Chief Financial Officer

WHAT HAPPENED? 

China Redstone Group (OTCBB: CGPI) announced, yesterday morning, the installment of Michael He as its permanent Chief Financial Officer. Mr. He previously worked with Chisen Electric Corp. (OTCBB: CIEC, Not Rated), a China-based motive battery manufacturer, having served as its Chief Financial Officer and President of its U.S. affiliate, Chisen Technology. During 2006-2008, Mr. He was a senior manager in the consumer electronics global sourcing department at Amazon (NASDAQ: AMZN, Not Rated), focusing on private label sourcing and branding. From 2004-2006, Mr. He was a financial analysis and reporting manager at Global Financial Services Division at Capital One (NYSE:COF, Not Rated), the largest monoline specialty finance / credit card lender in the U.S. 

OUR TAKE 

Redstone’s announcement of a permanent CFO is expected considering that this has been one of the company’s ongoing initiatives, although we found the quick timing of the transition to be a bit surprising. That said, we are optimistic that this bodes well for the level of importance that the company attaches to its financial reporting and investor relations functions. 

We conversed briefly with Mr. He (based in Seattle, WA), and understand that his vision is to further improve upon transparency and disclosures to help investors better understand Redstone’s strategy, as well as the source of its high margins and returns. He acknowledges the lack of publicly-traded comparables in the U.S. as a challenge, and is seeking to provide a more comprehensive overview of the Chongqing death care services industry and the competitive landscape. In addition, he will be working closely with Thornhill Capital and other members of the management team to tighten up internal controls and financial forecasting methodologies. With his experience at Capital One, a company with a highly data-intensive culture, we believe that Mr. He is qualified to take Redstone’s internal controls to the next level, which would be necessary for the eventual auditor upgrade. 

Maintaining Market Outperform Rating and 12-month PT of $8. Our $8 PT applies nearly 5.5x to our FY2011 EPS estimate of $1.48. Our investment rating and 12-month price target are also based on the key potential catalyst that 1) by the end of March 2011, the company is able to provide proof from the Chongqing Civil Administration Bureau that it is current in its cemetery license, as well as 2) some multiple normalization in the U.S.-listed China small-cap space.


Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman and Renshaw on CGPI                                                 2/25/2011

CGPI: January 2011 ASP appreciation a tad above expectations; Maintaining EPS estimates  

China Redstone Group (OTCBB: CGPI), this morning, reported January 2011 sales of 524 plots, representing a 12.1% decrease from the year-ago period. January average selling prices rose 21.8% YoY to $7,202, a touch above the $7,156 we were expecting. This translates to January cemetery revenues of ~$3.8MM, tracking roughly inline with our $10.1MM revenue estimate for F’4Q11 (ending in March 2011). In terms of product mix, 325 (~62.0%) of plots were sold in the $5,000-$7,000 price range, while the remainder was sold for $7,500 per plot. We note the sales mix shift towards more artist plots from last year, which we believe is contributing to the momentum of ASP growth. 

Looking ahead. Moving into February, we expect modestly lower number of plots sold than last month given the Chinese New Year, and flattish sequential (month-over-month) average selling prices. 

Maintaining EPS estimates. We are maintaining our F’4Q11 EPS of $0.34 (vs. $0.25 LY). 

Maintaining Market Outperform Rating and 12-month PT of $8. Our $8 PT applies nearly 5.5x to our FY2011 EPS estimate of $1.48. Our investment rating and 12-month price target are also based on the key potential catalyst that 1) by the end of March 2011, the company is able to provide proof from the Chongqing Civil Administration Bureau that it is current in its cemetery license, as well as 2) some multiple normalization in the U.S.-listed China small-cap space.

Notice Regarding Privacy and Confidentiality: 

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

 Rodman and Renshaw on CGPI                                                  2/18/2011

CGPI: F’3Q11 above expectations; new construction projects bode well for margins 

China Redstone Group (OTCBB: CGPI) reported F’3Q11 (ended on December 31, 2010) EPS of $0.39, which came in 3 pennies above our estimate, driven by a 10-point YoY expansion in the gross margin to 63.2%, while expenses were roughly inline. Previously reported revenues rose 6.0% YoY to $12.1MM, anniversarying the difficult sales comp from the bridge opening last year, and potentially compounded by CGPI’s preference to maintain robust price increases and margin integrity. In FY3Q11, CGPI sold 1,682 plots at an estimated average sales price of ~$7,156 per plot. 

Development of 7,000 plots slated for completion by FY1Q12. CGPI began developing an additional 7,000 plots, occupying roughly 11 acres (~44,515 sq. m’s), during F’2Q11 (Q ended September 2010). Total capex for these plots approximate $19.6MM, of which $18.2MM has already been paid and recorded as capex at the end of December 2010. These 7,000 plots are slated for completion by FY1Q12 (end of June 2011). Interestingly, because all 7,000 plots were planned for construction in one batch, instead of in smaller batches of 500 plots, construction costs were reduced by ~5%. The completion of these additional plots would bring the total available plots for sale to ~10,500, up from 3,500 currently. As a point of reference, recall that CGPI’s sales target for FY2011 was 7,000 plots; therefore, 10,500 plots would imply over a year’s worth of inventory, even after factoring for a potential acceleration in plots sold next year. Of note, the more desirable location of the new plots (with better views of the lake) implies a better fengshui and higher average retail prices, which should bode well for CGPI’s GM. In addition, the inventory shift towards higher-end artist plots (57% YoY increase in $ terms vs. 20% YoY decline overall), would also suggest that a greater proportion of growth will likely originate from ASP and margin increases rather than the number of plots sold, which we would view as high quality topline growth. 

Guanying Temple to carry $75MM sales potential. Guanying Temple, which began construction in November 2010, is scheduled for grand opening in September 2011. Guanying Temple is anticipated to house ~120k urn slots, and is estimated to command roughly ~$750 per slot. Initial prices will start on the low end, rising over time as the landscaping surrounding the temple improves and as the area more closely resembles a weekend day-trip destination. The building itself is budgeted at ~$3.6MM, of which $1.5MM has been recorded as capex as of year-end CY2010. We note that the actual investment for the project will be more, given the significant landscaping and maintenance needed to increase the attractiveness of the temple's surroundings. Due to the density of the urns within the temple, we believe that this burial option will carry significantly higher margins than the current cemetery plots. 

Refocusing on the cemetery business and leveraging outside vendors to manage certain tourist development aspects. It was noted on the call and the F’3Q11 10-Q that as of December 31, 2010, CGPI has decided to terminate the entertainment boat project in order to focus on its cemetery operations. The vast majority of the $8.7MM cash prepayment is expected to return to the balance sheet by July 2011. [continued on page 2-->]
Notice Regarding Privacy and Confidentiality: .

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman & Renshaw on CGPI              02/14/2011

CGPI – Satisfactory defense to recent credibility concerns; Maintaining MO Rating; $8 PT 
 

We are satisfied with China Redstone Group’s (OTCBB: CGPI) response to its recent share price drop from $4.05 on January 18^th to its current level of $3.00, reflecting concerns raised in a January 19^th GeoInvesting posting. The author questioned the company’s ownership structure, the validity of the cemetery license, and the viability of the longer-term tourism aspect of the business model. Redstone then issued a press release on January 26^th, followed by a call on January 28^th, responding in detail to most of the concerns. 

We find the responses to be on the whole satisfactory. While it is difficult to dispel every doubt, Redstone provided ample evidence of the legality of its cemetery business, in our view. According to an article published in the Chongqing Law Review on June 1, 2007, (which followed the initial accusatory Xinhua News report published on May 16, 2007), Chongqing Foguang Tourism Development Co. submitted 23 applications to various government agencies in Chongqing (and have received approval for cemetery development) over three years. The company posted, for public viewing, the most critical approval documents online, which includes the land lease approvals, land use permits, and a map of the location of its cemetery, Guiyuan. In addition, Redstone has agreed to secure a letter from the Chongqing Civil Administration Bureau validating the active status of its license, and post a corporate video showcasing its cemetery by March 2011. 

Careful not to confuse normal business execution risk with fraud allegations. We believe the key risks in the CGPI investment thesis lies in certain execution risks rather than ones of blatant fraud or misrepresentation. These risks include CGPI’s ability to satisfy its license to operate Guiyuan as a tree-burial focused cemetery, its ability to relocate the remaining villagers (10+ households vs. 30+ at the beginning of the project), and whether CGPI can successfully obtain the letter from the Chongqing Civil Administration Bureau confirming the current status of its license, including a clear statement that Foguang is allowed to utilize 491 mu’s, agricultural/timber land or otherwise, for tomb construction. 

Raising EPS estimates on back of higher than expected price increases YTD. FY’11 YTD average selling price per plot of $6,958 is trending significantly above Redstone’s $5,250-$6,250 guidance for FY 2011. With three quarters of revenues in the bag and no signs of a slowdown in price appreciation near-term, we are raising our F’3Q11 and 2011EPS estimates to $0.36 and $1.45, respectively, from $0.35 and $1.40 previously. Our 2012 EPS estimate remains at $1.73 for now. 

Maintaining Market Outperform Rating and $8 PT. We are maintaining our 12-month price target of $8, which applies 5.5x to our 2011 EPS estimate of $1.45. Our price target is based on our expectation that 1) by March 31, 2011, the company will provide proof from the local government authorities in Chongqing that it is current in its cemetery license 2) and some multiple normalization in the Chinese RTO space. We believe that these concerns have always been in the minds of investors who have been close to the story. Having these doubts raised in a public forum has given the company an opportunity to openly prove its legality. While this leads to stock price volatility near-term, we believe that longer-term, the company’s active attempts to resolve these doubts will win over more believers than disbelievers.


Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.

Rodman & Renshaw on China Redstone

We are initiating coverage on China Redstone Group (OTCBB: CGPI, $50.0MM mkt cap) with a Market Outperform Rating and a 12-month Price Target of $8. 

Investment Thesis 

The company is a cemetery operator in Chongqing city, owns 722k m² of land, and has rights to purchase an additional 1,144k m² at a locked-in price of ~$45/m² with no expiration date. With a simple business model, generally inelastic demand, an oligopolistic market structure sustained by the difficulty of receiving land approvals, and ability to control the amount of inventory to develop and sell based on pricing trends, we believe that Redstone should enjoy long-term visibility into sales and net income growth. An aging population and mandatory cremations in urban areas further support demand for Redstone’s products. Meanwhile, Redstone plans to diversify its product options to include tower tombs (which house urns) and underground burial sites, which will position the company as the first in Chongqing to offer choice to families. We are expecting completion of a monastery by mid-2012, which will likely house ~120,000 urns. Based on our rough calculations, this project carries a 9.6x return on investment. In addition to organic growth, Redstone is seeking roll-up opportunities on a selective basis, such as its planned $29.3MM acquisition of Shenzhen Huaqiao Cemetery in 2013. Finally, after meeting with the management team in September, we have developed confidence in their knowledge of the Chongqing cemetery market and their demonstrated capability to execute upon their dual-track organic and roll-up growth strategy. Note that management has already successfully sold 20,000 cemetery plots across its Guiyuan I (sold out) and Guiyuan II cemeteries. 

Market Outperform Rating and 12-month Price Target of $8. At $4.00, we believe China Redstone remains significantly undervalued. CGPI shares are currently trading at 2.9x our FY2011 EPS estimate of $1.40. By our very rough back-of-the-envelope calculations, the combination of 200k plots (~$6,500 ASP) and 200k-400k urn depositories (~$4,000 ASP) would imply a total long-term revenue opportunity of $2.5BN[1]. We believe that the low multiple being assigned to such a visible earnings stream reflects: 1) the difficulty U.S. investors have in visualizing the concept that a botanical garden-equivalent park built around a cemetery can bring traffic and spending power, 2) a lack of publicly-traded comparable companies; and finally, 3) the credibility overhang from the recent barrage of negative press on small-cap Chinese companies. Recall that the company stated on its 2Q10 earnings conference call that they do not intend to raise equity capital at the current depressed levels. We believe that the management has the capability to deliver on the promise given its almost negligible level of existing debt ($2MM) and the tangibility of its $42MM net asset base (i.e., land), which can be collateralized for additional loans. 

[1] Not discounted for time value of money, and assuming zero appreciation in ASPs.

Notice Regarding Privacy and Confidentiality:

This material has been prepared for informational purposes only. While it is based on information generally available to the public from sources we believe to be reliable, no representation is made that the subject information is accurate or complete. Past performance is not a guarantee nor does it necessarily serve as an indicator of future results. Price and availability are subject to change without notice. Additional information is available upon request.

Since Rodman & Renshaw, LLC is not a tax advisor, transactions requiring tax consideration should be reviewed carefully with your tax advisor. Similarly, Rodman & Renshaw, LLC is not a law firm and provides no legal opinions or legal advice.

Rodman & Renshaw, LLC may make a market in the securities being discussed.

Rodman & Renshaw, LLC and/or its officers or employees may have positions in any of the securities of this (these) issuer(s).

Member FINRA.
Member SIPC.