China Gerui Advanced (NASDAQ:CHOP)

Rodman and Renshaw on CHOP                          5/11/2011

Maintain Outperform Rating Despite a Slightly Below-Expectation 1Q11 Performance

1Q11 Results Slightly Below Expectations

China Gerui Advanced Materials Group (“Gerui”, Ticker: CHOP, Market Outperform) reported 1Q11 results that slightly missed our expectations. Revenue for the quarter increased 1.4% YoY to $62.7 million, a touch shy of our $63.5 million estimate. Average selling price increased 4.5% YoY to $909 per ton in 1Q11; however this was partially offset by a 3.0% YoY decrease in sales volume to approximately 69,000 tons in the quarter. Gross profit decreased 3.8% YoY to $18.0 million, representing a gross margin of 28.7%, below our respective estimates of $19.4 million and 30.5%. It should be noted that the pressure on gross profit and margin was partially attributable to costs incurred from the testing process for the company’s new chromium plating facility. This should be a one-time expense item and we expect Gerui’s gross margin will bounce back next quarter. SG&A as a percentage of revenue was 3.5%, below our estimate of 3.8%. Adding back the one-time $5.7 million expense item related to the warrant exercise, non-GAAP net income in 1Q11 was $9.7 million, or $0.20 per diluted share, below our respective estimates of $11.4 million and $0.22 EPS.

As of March 31, the company had $210.1 million in unrestricted cash and $83.1 million in restricted cash with no long-term debt. Working capital stood at $133.1 million and shareholder’s equity was $239.7 million. Accounts receivable was $3.8 million.

Updated 2011 Guidance

Gerui provided an updated 2011 guidance. Management continued to expect $330-$345 million of revenue and $115-$120 million of gross profit for the year. However the updated $65-$70 million net income and $1.10-$1.15 diluted EPS expectations were down $5 million and $0.10 from their respective figures provided by management a month ago.

Maintaining Market Outperform Rating and $11 Price Target

We have tweaked our model to reflect the updated 1Q11 financials and revised outlook. For 2Q11, we now estimate revenue, gross profit, and non-GAAP net income will reach $84.9 million, $28.0 million, and $17.0 million, respectively. The respective figures for full year 2011 are: $339.4 million, $114.1 million, and $69.1. We are reiterating our Market Outperforming rating on the shares of Gerui as well as our $11 price target. Our price target of $11 is based on Gerui shares trading at 9x our 2011 EPS estimate of $1.22, representing a PEG ratio of 0.4.

Risks

Major Risks include macroeconomic risk, steel price volatility, competition, customer concentration, and execution risks, as well as country and political 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).

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Rodman and Renshaw on CHOP                            4/8/2011

4Q10 Review; Share Buyback and Removal of Warrant Overhang Positive; Increasing PT to $11

Q4 Results mostly in-line with our expectations

China Gerui Advanced Materials Group (“Gerui”, Ticker: CHOP, Market Outperform) reported 4Q10 results that were by and large in-line with our expectations. Total revenue increased 15.6% YoY to $66.1 million, above our estimate of $64.3 million. During the quarter, the company sold 75,551 tons of products at an average selling price of $875 per ton. Gross profit increased 15.4% YoY to $19.6 million, slightly higher than our estimate of $19.3 million; however actual gross margin of 29.7% was a touch shy of our expectation of 30.0%. Operating expenses continued to be weighed by new hires and training in anticipation of the expanded capacity. As a result, net income for the quarter was $11.3 million, missing our expectation by $1 million. And diluted EPS for 4Q10 was $0.23, one penny shy of our $0.24 estimate.

At the end of 2010, Gerui had $119.5 million of unrestricted cash and an additional $66.5 million of restricted cash, against zero long-term debt.

New 2011 guidance

For 2011, Gerui now expects to realize $330-$345 million of revenue, $115-$120 million of gross profit, and $70-$75 million of net income, translating to diluted EPS between $1.20 and $1.25. We believe this guidance is achievable, as we expect the company will start normal production of its two new cold-rolled, wide-strip steel lines with 150,000 tons of annual capacity in 2Q11, after the successful production launch of its chromium plate line last month. We also anticipate some margin expansion as the new wide-strip and chromium plated products could bring in higher gross margins (somewhere between 35-40%) than the existing thin-strip products that typically offer gross margins of around 30%.

$10 million share buyback plan announced

In conjunction with the earnings release, the company announced a share repurchase plan to buy back up to $10 million of its common stock. While no details were provided regarding the specific timing and amount, we believe the announcement should serve as a positive signal indicating management’s confidence in the company as well as expressing their view on the current share price. In addition, with the ample cash on hand (especially after the recent warrant conversion) and strong capability to generate operating cash, we believe the company has sufficient ammunition to announce further buybacks in the future if needed.


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 CHOP

3Q10 Results Slightly Below Expectations 

China Gerui Advanced Materials Group (“Gerui”, Ticker: CHOP, Market Outperform) reported 3Q10 results that slightly missed our top and bottom line projections. Total revenue increased 4.4% YoY to $61.9 million, but below our estimate of $64.8 million and Street consensus of $64.0 million. Gross profit grew 2.3% YoY to $18.6 million, representing a gross margin of 30.0%, slightly below our respective estimates of $19.6 million and 30.2%. SG&A as a percentage of revenue was 3.4%, above our estimate of 2.9%, largely due to increases in additional salary and training expenses from hiring new employees in anticipation of the opening of the new production facility. Net income increased 5.6% YoY to $12.1 million, a touch shy of our estimate of $12.4 million, but higher than Street consensus of $11.9 million. Diluted EPS for the quarter was $0.25, in-line with our estimate, higher than Street consensus of $0.24. At the end of the quarter, the company had $110.7 million in cash and $73.1 million in restricted cash with no long-term debt. Accounts receivable was $4.2 million, down $0.6 million from the end of last year. 

Our Take 

We believe Gerui’s 3Q10 results as a whole were more or less within the range of our expectations. Demand for the company’s high-precision cold-rolled steel remained robust, however the company’s revenue and profit growth continued to be constrained by its capacity bottleneck, as it has been operating near full capacity for over a year. Average selling price during the quarter was slightly higher than 2Q10, but noticeably lower than 3Q09, mirroring that of the general raw steel pricing trend. There was an important development regarding the company’s capacity expansion, however. Due to severe flood in Henan earlier this summer, construction for the company’s two new cold-rolled wide strip lines were delayed. The company now expects completion date in 1Q11 instead of 4Q10. On the bright side, Gerui’s chromium-coating line will come online in Q4 as previously scheduled. 

Adjusting Estimates 

We are adjusting our model in light of the quarterly results and revised outlook. Since the two wide strip lines will not be completed until next year, for 4Q10, we now expect the company will realize $64.3 million of revenue, $19.3 million of gross profit, and $12.3 million of net income. We expect sales volume for the quarter will be more or less in line with the past quarter. Due to the launch of the new chromium plating line, we estimate ASP will increase slightly from the Q3 level. Looking forward to 2011, we expect the wide strip line will start to contribute the company’s top and bottom lines as early as in Q1, and by Q4, we expect Gerui’s phase II expansion will start to generate revenue. For the whole year, we now estimate revenue, gross profit, and net income will reach $324.3 million, $98.7 million, and $63.3 million, respectively.

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.

Rodman & Renshaw initiating coverage of China Gerui Advanced Materials Group Ltd. (“Gerui”, Ticker: CHOP) with a Market Outperform/Speculative Risk rating and a price target of $10. Based in Zhengzhou, China, the company is the largest manufacturer of high-precision and high-strength cold-rolled narrow strip steel products in China, with customers in diverse industries ranging from food packaging to construction materials, telecommunication equipment, and electrical appliances.

We believe Gerui enjoys a favorable market position, in spite of the overall sluggish Chinese steel market. The company operates in the high-end precision strip segment, in which the Chinese demand, driven by large addressable and fast growing end-markets, still far exceeds supply. With limited domestic competition due to high entry barriers, Gerui’s business enjoys significant competitive advantages over foreign imports as the company can offer lower prices coupled with comparable product quality and faster local services. Gerui is also very much of a steel processor and not a steel maker. With a “cost plus” pricing strategy, it effectively passes through most of the steel price fluctuations to its customers, allowing the company to maintain margins during periods of market volatility. 

 With a solid track record and an experienced management, the company is poised to achieve significant growth in the near future. Gerui has been operating near full capacity since the beginning of last year and has one of the most efficient operations in the Chinese steel industry. After the recent two rounds of capital financing, the company is in the process of doubling its strip steel production capacity within one and half years and expanding its margin-improving chromium-plating capability. With such capacity increases, we expect the company will realize $357.5 million of revenue and $70.5 million of net income in 2011, up 37% and 42% from 2010, respectively. 

 Compelling valuation The shares of Gerui are currently trading at 5.5x and 4.6x our respective 2010 and 2011 EPS estimates, below its respective peer averages of 11.9x and 9.1x. This in our view represents an attractive valuation for this company. We believe Gerui, as the national leader in its market segment and with a favorable market environment, should command a forward P/E multiple that is at least in-line with its steel company comparables. Our 12-month price target of $10 is thus based on Gerui shares trading at 9x our 2011 EPS estimate of $1.15, representing a PEG ratio of 0.5. 

 Risks Major risks include macroeconomic risk, steel price volatility, competition, customer concentration, and execution risks, as well as country and political risks related to operating in China.