China Gengsheng Minerals (NYSE AMEX:CHGS)

Rodman and Renshaw on CHGS                              8/15/2011

Maintaining Market Perform Rating after Mixed 2Q11 Results

Mixed 2Q11 Results

China Gengsheng Minerals (“Gengsheng”, Ticker: CHGS, Market Perform) reported its 2Q11 earnings results that beat our top-line expectation but missed our bottom-line estimate. Revenue in the quarter reached $20.4 million, up 36.3% YoY and beat our estimate of $18.0 million. Gross profit increased 8.5% YoY to $5.3 million, above our estimate of $4.8 million. Gross margin in the quarter was 26.1%, slightly below our estimate of 26.6%. Operating expenses in the quarter reached $4.5 million, above our estimate of $3.6 million. Operating income came in at $0.8 million, below our estimate of $1.2 million. The company also incurred larger than expected finance costs of $1.6 million in the quarter. As a result, Gengsheng had a net quarterly loss of $247,000, or $0.01 loss per diluted share, below our respective estimates of a net income gain of $0.7 million and $0.02 EPS.

Highlights and Discussions

Segment revenue breakdown Gengsheng delivered slightly stronger than expected 2Q11 sales performance across all of its business segments. Refractories sales reached $12.5 million, above our expectation of $11.1 million. Fracture proppant revenue came in at $5.9 million, better than our estimate of $5.4 million. Functional ceramics generated $0.5 million of revenue, a touch higher than our estimate of $0.4 million. The newest fine precision abrasives business finally delivered a stronger than expected quarterly performance, registering $1.5 million of sales in Q2, beating our expectation of $1.1 million. After a disappointing Q1, we had lowered our expectation for Gengsheng’s top-line performance in the upcoming quarters. We view the Q2 top-line results as more of a relief than a significant upside surprise. Looking forward to the rest of the year, we expect the company will deliver decent but unspectacular top-line results, with the growth of the fracture proppant and fine precision abrasives franchises being the most significant indicator for the company’s long term potential.

Watching the expenses In light of China’s increasingly inflationary environment, the company’s slightly below-expectation gross margin in Q2 did not strike us as a major surprise. The moderately higher than expected operating expenses were also not necessarily alarming, in our view. Our major concern resides in the significant increase of finance costs, and more specifically, increase in bills discounting charges, in the quarter. Based on our understanding, this bills discounting charge is effectively another form of interest expenses associated with bank acceptance that some Chinese corporate borrowers need to pay in order to receive funding. While we acknowledge Gengsheng’s capital need for its capacity expansion efforts, as illustrated by the company’s $8.3 million net cash outflow from investing activities during the quarter, the magnitude of these finance costs really was the difference between a profitable quarter and an unprofitable one. Thus we would certainly like to see the company better manage this expense item going forward.

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).

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Rodman & Renshaw, LLC reserves the right to monitor and review the content of all e-mail communications sent and/or received by its employees.

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 SIPC.
Member FINRA.

REF:011707RR-MN

Rodman and Renshaw on CHGS                 7/7/2011

New CFO Hire to Strengthen Management Team

New CFO announced China Gengsheng Minerals, Inc. (“Gengsheng”, Ticker: CHGS, Market Perform) announced this morning the appointment of Mr. Ningfang Liang as its new Chief Financial Officer, effective immediately. The company’s interim CFO, Mr. Hongfeng Jin, has been appointed as Gengsheng’s Financial Controller. According to the company press release, Mr. Liang has over 15 years of finance and accounting experience, including over six years at U.S. public companies where he managed SEC reporting, internal control, GAAP compliance, internal auditing, financial analysis and management reporting activities. Before joining Gengsheng, Mr. Liang served as Finance Manager at White Mountains Re Ltd. He also previously held senior finance and accounting positions at AIG, Celgene, and China Construction Bank. Mr. Liang is a licensed CPA in the states of New Jersey and Illinois, and holds a bachelor’s degree in finance from Shanghai University of Finance and Economics, and an MBA from the University of Illinois Urbana-Champaign.

Our take We are certainly encouraged by this announcement as the company, which hasn’t had a permanent CFO for quite some time, really has an urgent need for an “official” CFO. Based on our knowledge, Mr. Jin, who served as the company’s interim CFO, is more of a controller in the first place and lacks English language skills. The appointment of Mr. Liang, who primarily resides in New Jersey and is commonly known as Frank, should strengthen Gengsheng’s management team and improve its corporate communication with the investment community. We are particularly hopeful that Mr. Liang will be able to better manage Street expectation with regard to the company’s financial performance. While residing in New Jersey will no doubt make it easier for Mr. Liang to communicate with U.S. investors, we encourage him to also spend considerable time in Gongyi, China, where Gengsheng is located, as we believe it will allow him to better understand and manage the company’s financial operations.

Maintaining rating We are maintaining our Market Perform rating on the shares of Gengsheng.

Risks Major risks to our rating include the company’s heavy dependence on the steel industry, refractory market demand risk, intense industry competition, capital raising uncertainty, business execution risk, fluctuation of raw material prices, environmental liability risk, as well as political and regulatory risks related to operating in China.

Notice Regarding Privacy and Confidentiality:

Rodman & Renshaw, LLC reserves the right to monitor and review the content of all e-mail communications sent and/or received by its employees.

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.

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 SIPC.
Member FINRA.

Rodman and Renshaw on CHGS                                 3/25/2011

Revising Rating to Market Perform after Share Price Exceeded PT

We are downgrading the shares of China Gengsheng Minerals (“Gengsheng”, Ticker: CHGS) from our previous rating of Market Outperform to Market Perform after the share price exceeded our $2.80 price target. Since August 11, 2010, when we assigned a price target of $2.80, the share price of Gengsheng has appreciated by more than 130% and reached beyond our price target. At the current valuation, the company is trading at 9.6x our 2011 diluted EPS estimate of $0.33. While we continue to believe the company represents a long term growth story, in the near term we believe the shares are fully valued.

Rare Earth Hype Unrealistic

The share price of Gengsheng has had a volatile ride over the past half a year, largely because of hype related to China’s rare earth policy changes. In our opinion, Gengsheng’s current business operation possesses little relation to the rare earth industry, despite the word “Minerals” in the company’s corporate name. In this regard, we believe any current CHGS price appreciation based on the rare earth talk is unsustainable.

4Q10 Outlook

The company is scheduled to release its 4Q10 and full year 2010 results on Thursday, March 31, 2011. Management will also hold a conference call at 8:00am EST on March 31. To participate in the call, please dial (877) 407-9205 in the U.S. and Canada, or (201) 689-8054 internationally.

For 4Q10, we expect the company will generate $19.2 million of revenue, with the monolithic refractory segment contributing $11.9 million, fracture proppants contributing $5.2 million, and fine precision abrasives adding $1.8 million. We estimate non-GAAP net income will reach $1.2 million, or $0.05 per diluted share, during the quarter. For full year 2011, we expect revenue will reach $88.9 million, gross profit will be $28.6 million, and non-GAAP net income will be $8.1 million, or $0.33 diluted EPS. Considering China’s current inflationary environment and potential company year-end write-downs, we believe the risks are to the downside with regard to our estimates.

Risks

Major risks to our rating and price target include the company’s heavy dependence on the steel industry, refractory market demand risk, intense industry competition, capital raising uncertainty, business execution risk, fluctuation of raw material prices, environmental liability risk, as well as political and regulatory risks related to operating in China.

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 CHGS          2/01/2011

A $10 MM Full Service Contract 

China Gengsheng Minerals (“Gengsheng”, Ticker: CHGS, Market Outperform) today announced that it has signed with Fushun New Steel Corporation (“Fushun”) a two-year full-service refractories supply contract worth of approximately $10 million. Shipments under the contract have begun since January 2011 and are expected to continue through December 2012. Under the contract, Gengsheng will provide refractory materials as well as installation and on-site support services including maintenance, repair, and replacement.

Gengsheng’s full service program is an important revenue contributor and margin driver for the company. Such a program typically lasts one to two years, and helps generate stable and recurring revenue streams and contributes to higher margins than simple product sales. Gengsheng’s full service programs contributed about 52% of the total refractory revenue in the first nine months of 2010. The company currently serves nine clients with full service programs. Relatively few refractory makers in China are capable of providing such full service programs to large steel plants. As steel producers become larger as a result of the ongoing industry consolidation, Gengsheng is in a more advantageous position than smaller competitors aiming to serve these clients, largely due its experience and reputation. We expect the company will continue to win full service contracts in 2011.

We are maintaining our Market Outperform rating and $2.80 price target on the shares of Gengsheng. The $2.80 price target is based on the shares trading at 8.5x our 2011 diluted EPS estimate of $0.33. Major risks to our rating and price target include the company’s heavy dependence on the steel industry, refractory market demand risk, intense industry competition, capital raising uncertainty, business execution risk, fluctuation of raw material prices, environmental liability risk, as well as political and regulatory risks related to operating in China.


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.