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 Tracking 1219 U.S. listed China Stocks and Counting...
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 General Steel Holdings (NYSE:GSI)

Zack Buckley Visits China

General Steel (GSI) is the only Chinese integrated steel producer to be listed on the US New York Stock Exchange, GSI's capacity grew from 250,000 tons to 6.3 mmt within four years (2006-2010).GSI went from one factory to four facilities with top line sales increasing from over one million US dollars to nearly two billion us dollars at the end of last year. I visited their factory in Shaanxi and was impressed with the operations. They have strong insider ownership of 40% and a recent market cap of 165 million.

Questions:

What is the background of the company?

General Steel Holdings, Inc., (NYSE: GSI), headquartered in Beijing, China, operates a diverse portfolio of Chinese steel companies. With 6.3 million metric tons of aggregate production capacity, its companies serve various industries and produce a variety of steel products including rebar, hot-rolled carbon and silicon sheet, high-speed wire and spiral-weld pipe. General Steel Holdings, Inc. has steel operations in Shaanxi and Guangdong provinces, Inner Mongolia Autonomous Region and Tianjin municipal.

It is our vision to be one of the largest and most profitable non-government steel companies in China. Our strategy is to act as a merger and acquisition platform within the domestic steel space. We aim to aggressively growing through mergers, joint ventures, and acquisitions targeting state-owned steel enterprises and non-government steel companies with outstanding potential. We are the only player in the market that is pursuing roll-up as the cornerstone of business growing.

Can you explain your product?

We presently own controlling interests in four steel-related subsidiaries:

  • General Steel (China) Co., Ltd.;
  • Baotou Steel - General Steel Special Steel Pipe Joint Venture Co., Ltd.;
  • Shaanxi Longmen Iron and Steel Co., Ltd.; and
  • Maoming Hengda Steel Group Limited.

General Steel (China) Co., Ltd.

General Steel (China) started operations in 1988. Daqiuzhuang Metal's core business is manufacturing high quality hot-rolled carbon and silicon steel sheets mainly used in the production of small agricultural vehicles and other specialty markets.

Baotou Steel - General Steel Special Steel Pipe Joint Venture Co., Ltd.

Baotou Steel Joint Venture has four production lines capable of producing 100,000 metric tons of double spiral-weld pipes used mainly in the energy sector primarily to transport oil and steam. These pipes have a diameter ranging from 219mm to 1240mm, a wall thickness ranging from 6mm to 13mm, and a length ranging from 6m to 12m. Presently, Baotou Steel Pipe Joint Venture sells its products using an internal sales force to customers in the Inner Mongolia Autonomous Region and the northwest region of China.

Shaanxi Longmen Iron and Steel Co., Ltd.

Longmen Joint Venture's products are categorized within the steel industry as "longs" (referencing their shape). Rebar is generally considered a regional product because its weight and dimension make it ill-suited for cost-effective long-haul ground transportation. By our estimates, the provincial market demand for rebar is six to eight million metric tons per year. Slightly more than half of this demand radiates from Xi'an, the capital of Shaanxi province, located 180km from the Longmen Joint Venture's main steel production site. Currently, we estimate we have an approximate 72% share of the Xi'an market for rebar.

Maoming Hengda Steel Group Limited

Maoming's core business is the production of high-speed wire and rebar products used in the construction industry. Located on 140 hectares (approximately 346 acres) in Maoming city, Guangdong province, the facility has two production lines capable of producing 1.8 million metric tons of 5.5mm to 16mm diameter high-speed wire and 12mm to 38mm diameter rebar annually.

To take advantage of stronger market demand in Shaanxi, we relocated the two production lines from the Maoming facility to the Longmen Joint Venture.The Company intends to install a new 400,000 metric ton capacity rebar line to operate in the Maoming facility.

What are your competitive advantages? What do you think of your competitors?

For our largest steel facility, Shaanxi Longmen Iron and Steel Co which contributes more than 90% of our total revenue, we have no major competitors within 250 kilometers in our regional market.

What capital do you anticipate having to raise in the future?

As a merger and acquisition platform, our fund raising will be coordinated with our future possible acquisitions.

What is currently going on in the industry?

Steel is a grossly fragmented industry in China dominated in large part by mom-and-pop operators with inefficient equipment and capacity. There are between 800 and 1000 steel players in China.

The Central Government realized in 2004 that this was not a sustainable framework from which to build a sustainable base for long-term national development.At that time, they initiated a government-led industry consolidation effort with the stated goal of bringing 70% of national output under the roofs of the top ten producers. Presently, in 2010, the top ten producers account for just 49% of national output. In September of 2009, the central government published an industry target to eliminate 80 million metric tons of inefficient capacity from the steel industry by the end of 2011. Along with this target, the government added new steel making operational and environmental restrictions and tasked ten government agencies with enforcing these measures. In 2010, the government issued revised steel industry guidelines which further strengthen measures to minimize old and inefficient capacity. We believe the government's action this year demonstrates increased resolve to bring about industry consolidation. We see the pace of industry consolidation quickening in the coming years.

What is the direction of the company in the next 5 years?

It is our vision to be one of the largest and most profitable non-government steel companies in China. Our strategy, is to act as a merger and acquisition platform within the domestic steel space. We are targeting to grow our consolidated capacity between 10-16 million tons in the next 5 years with ability to achieve higher profitability and wider product mix.

Can you explain your customers?

We sell our products primarily to distributors, typically collecting payment from these distributors in advance. Our marketing efforts are mainly directed toward those customers who have exacting requirements for on-time delivery, customer support and product quality. We believe that our enhanced product quality, delivery capabilities and our emphasis on customer support and product planning are critical factors in our ability to serve this segment of the market.

Can you explain your suppliers?

The primary raw materials we use for steel production are iron ore, coke, hot-rolled steel coil and steel billets. Daqiuzhuang Metal and Baotou Steel Pipe Joint Venture use hot-rolled steel coil as their main raw material. Longmen Joint Venture uses iron ore and coke as its main raw materials. Maoming uses steel billets as its main raw material. Iron ore is the main raw material used to produce hot-rolled steel coil and steel billets. As a result, the prices of iron ore and coke are the primary raw material cost drivers for our products.

At Longmen Joint Venture, approximately 90% of production costs are raw materials, with iron ore being the largest component.

According to the China Iron and Steel Association, approximately, 60% of the China domestic steel industry demand for iron ore must be filled by imports. At Longmen Joint Venture, we purchase iron ore from four primary sources: the Mulonggou mine (owned by the Joint Venture), the Daxigou mine (owned by our Joint Venture partner), surrounding local mines and from abroad. The Daxigou mine has 300 million metric tons of proven iron ore reserves. According to the terms of our Joint Venture agreement with the strategic partner, we have first rights of refusal for sales from the mine and for its development. We presently purchase all of the production from this mine.

Coke

Coke, produced from metallurgical coal (also known as coking coal), is our second most consumed raw material, after iron ore. It requires approximately 550kg to 600kg of coke to make one metric ton of pig-iron.

Our Longmen Joint Venture facility is located in the center of China's coal belt. We source all coke used at Longmen Joint Venture from the town in which Longmen Joint Venture is located. This ensures dependable supply and minimum transportation costs.