General Steel Holdings (NYSE:GSI)

Rodman and Renshaw on GSI         8/17/2011

10-Q Not Filed in Time; Putting Rating Under Review

10-Q Not Filed In Time

General Steel Holdings (“General Steel”, Ticker: GSI) did not file its 2Q11 Form 10-Q with the SEC before the deadline. As an accelerated filer, General Steel was initially obligated to file its Form 10-Q within 40 days after the end of its fiscal quarter. On August 10, the company submitted a notification of late filing to the SEC, which would give it an additional 5 days to file its quarterly report. That moved the filing deadline to August 15. As of today, the company still has not filed its 10-Q. In the morning of August 15, General Steel did issue a press release and hold a conference call announcing and discussing its 2Q11 financial performance. The press release included various financial result figures, but was without detailed financial statements. Management indicated during the conference call and subsequent discussions that the company’s new auditor, PWC Zhong Tian, which commenced service for the company for the first time during the quarter, had some disagreements with the company on the accounting treatment of various financial statement items. We believe this was the major reason for the filing delay.

Rating Under Review

We are putting General Steel’s rating under review from our previous rating of Market Outperform based on uncertainties related to the 10-Q delay. We hope the company will resolve this issue in an expedited manner, and we shall revisit our rating once the company successfully completes its quarterly filing.

Company Description

Headquartered in Beijing, General Steel Holdings, Inc. is a non-state owned steel enterprise in China. Originally founded in 1989 as one of China’s first non-government owned steel companies, the company now owns diversified steel holdings in the country, and serves various industries that include infrastructure construction, real estate, energy transport, and agricultural equipment. The company’s main products include rebar, hot-rolled carbon and silicon steel sheets, double spiral-weld pipes, and high speed wire. The company has controlling interest in four steel-related subsidiaries: General Steel (China), Baotou Steel – General Steel Special Steel Pipe Joint Venture, Shaanxi Longmen Iron and Steel, and Maoming Hengda Steel.

Risks

Major risks to the company include macroeconomic risk, commodity price and raw material risks, market oversupply of low-end steel products, concentrated customer base, execution risk, especially related to acquisitions, 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).

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.

Second Quarter 2011 Results

• Revenue increased approximately 100% year-over-year to approximately $1billion in the second quarter of 2011, from $502 million in the second quarter of 2010.
• Net loss attributable to the Company was approximately $(1.5) million, or $(0.03) per diluted share based on 55.2 million weighted average shares outstanding, compared with a net loss of $(2.1) million, or $(0.04) per diluted share based on 52.1 million weighted average shares outstanding in the second quarter of 2010.

"The second quarter of 2011 was one in which we had a number of milestone achievements, including our first-ever quarter of over $1 billion in revenue, significant expansion of our crude steel production capacity and ongoing efficiency improvements, all of which position the Company well for continued success going forward," said General Steel Chairman and Chief Executive Officer Mr. Henry Yu. "Although our bottom line was negative primarily due to commencement of the operation of new equipment at Longmen Joint Venture and increased operating expenses associated with the overall expansion of our business, we view these as strategic investments that will bear significant fruit over the long-term. As the operating efficiency of this equipment continues to improve and we continue executing on our initiatives to improve raw material sourcing and energy efficiency, we are confident in the Company's ability to improve margins and generate sustainable profitability going forward."

"Demand in China for construction-grade steel was strong throughout the second quarter, and has remained solid into the early part of the third quarter. In addition to continued investment in infrastructure and transportation, the government has made the construction of low-income housing a high priority, with the goal of building 10 million state-subsidized housing units this year. As the largest rebar provider in the Shaanxi region, with annual capacity of seven million metric tons of crude steel, we believe these initiatives will support stable demand for our products, and enable GSI to increase our share in these and other end markets." Mr. Yu concluded.

On June 16, 2011, General Steel Holdings, Inc. (the “Company”), Maoming Hengda Steel Co., Ltd. (“Maoming”), a subsidiary of the Company, and Tianjin Qiu Gang Investment Co. Ltd. entered into a Debt Repayment Agreement (the “Agreement”) with Guangzhou Hengda Industrial Group Ltd. (“Guangzhou Hengda”), a corporation formed under the laws of the People’s Republic of China, and its sole shareholder Ms. Ding Yumei whereby the Company issued 974,571 shares of its common stock (the “Shares”) to Ms. Ding Yumei, the designee and sole shareholder of Guangzhou Hengda, to partially repay the outstanding balance owed to Guangzhou Hengda. The Company issued the Shares at a price of $5.00 per share thereby reducing the amount owed by $4,872,855.

BEIJING, June 1, 2011 /PRNewswire-Asia/ -- General Steel Holdings, Inc. ("General Steel" or "the Company") (NYSE: GSI), one of China's leading non-state-owned producers of steel products and aggregators of domestic steel companies, today announced that its Board of Directors has authorized an increase of one million (1,000,000) shares of its common stock which may be purchased under the Company's share repurchase program (the "Program") launched in December 2010, bringing the total authorized shares of Company common stock available for purchase under the Program to two million (2,000,000).

The newly authorized repurchases may be made from time to time in the open market or in privately negotiated transactions in accordance with applicable federal securities laws.  General Steel plans to fund the increase of repurchases from its available cash balance. The newly authorized shares available for repurchase do not have an expiration date, and the timing of the repurchases and the exact number of shares of common stock to be purchased will be determined by the management of the Company, in their discretion, and will depend upon market conditions and other factors.

The Company also announced that it has completed the repurchase of the initial one million shares of its common stock authorized under the Program as of May 31, 2011.

"Repurchasing shares is part of General Steel's continued commitment to enhancing shareholder return on equity. Given the continued progress of our business with expanded capacity and improved operational efficiency, we believe that our stock is undervalued and represents a compelling buying opportunity for both our Company and our shareholders," said General Steel's Chairman and Chief Executive Officer Henry Yu. "We have made meaningful operational and financial improvements, with four consecutive quarters of margin improvement and two consecutive quarters of profitability, along with significant top-line growth. In addition, our recent strategic alliance with the Shaanxi Coal and Shaanxi Steel has positioned the Company well for sustainable, profitable growth through capacity expansion, efficiency improvements and beneficial raw material purchasing terms. We have a clear and achievable growth strategy for 2011 that we have effectively carried out to date. Based on our accomplishments thus far and our outlook for the remainder of 2011, we believe that the repurchase of our shares represents a prudent investment and effective use of capital."

For the first quarter of 2011, General Steel increased its revenue by 57% year-over-year to $710.5 million. Net income attributable to the Company for the first quarter of 2011 was $2.6 million, or $0.05 per diluted share, compared with a net loss of $(5.5) million, or $(0.11) per diluted share in the first quarter of 2010.

Rodman and Renshaw on GSI               6/1/2011

Another 1 million-share Buyback

General Steel Holdings (“General Steel”, Ticker: GSI, Market Outperform) announced today that it will buy back an additional 1 million shares of its common stock on top of the 1 million shares that it has recently bought back. The repurchase plan for this second 1 million-share batch does not have an expiration date.

Our Take

We are encouraged by this shareholder-friendly announcement as we believe it suggests the management is sensitive to the share price movement and is trying to be proactive. The shares of General Steel are currently trading at approximately 4x its 2011 earnings. Buying back shares at this valuation level makes sense for the company, in our opinion. With $292.3 million of cash and restricted cash at the end of March, General Steel certainly has sufficient funds to conduct this buyback. The company announced the first 1 million-share repurchase plan in December 2010 and has already completed the buyback. This leads us to believe that the second 1-million phase could also take place in a fairly timely fashion, especially when considering the share price of General Steel is now actually lower than it was before the buyback first started last December. That being said, we also view this plan as more of a defensive measure by the company in an environment of multiple compression for small-cap Chinese RTO companies. The repurchase plan will provide some support to the share price but is not likely to result in significant share price appreciation, in our opinion.

Maintaining Market Outperform and $4 Price Target

We are maintaining our Market Outperform/Speculative Risk rating and $4 price target on the shares of General Steel. Our $4 price target is based on the shares trading at 8x our updated 2011 EPS estimate of $0.46.

Risks

Major risks include macroeconomic risk, commodity price and raw material risks, market oversupply of low-end steel products, concentrated customer base, execution risk, especially related to acquisitions, 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).

Member FINRA.
Member SIPC.

On May 17, 2011, General Steel Holdings, Inc. is giving a presentation at the Piper Jaffray 8th Annual China Conference being held at Le Parker Meridien Hotel, New York, New York.

Rodman and Renshaw on GSI                                      5/12/2011

1Q11 Results Review: Second Profitable Quarter in a Row

1Q11 Results

For the second consecutive quarter, General Steel Holdings (“General Steel”, Ticker: GSI, Market Outperform) reported a quarterly profit. Revenue in 1Q11 reached $710.5 million, up 57% YoY and blew away our estimate of $487.0 million. Gross profit increased 394% YoY to $28.3 million, representing a gross margin of 4.0%. With a $13.8 million of operating income, General Steel has achieved a complete turnaround from an operating loss of $6.4 million for the same period last year. Net income attributable to the company in 1Q11 was $2.6 million, or $0.05 per diluted share, while below our estimate of $4.8 million (or $0.09 EPS), was clearly better than its respective figure of a loss of $5.5 million (or $0.11 loss per share) a year ago.

Financial Condition

As of March 31, 2011, the company had cash and restricted cash of $292.3 million and stockholders’ equity of $102.7 million. Total liabilities stood at $1.9 billion, which included $556.8 million of short-term notes payable related to bank lines of credit and $507.4 million of short-term loans.

Adjusting Estimates and Maintaining Market Outperform and $5 Price Target

We have adjusted our estimates to reflect the 1Q11 financial results. We now estimate revenue, gross profit, and net income for 2Q11 will reach $824.5 million, $35.0 million, $6.6 million (or $0.12 EPS). For full year 2011, we expect the respective figures will be: $3.3 billion, $138.6 million, $25.2 million (or $0.46 EPS). We are maintaining our Market Outperform/Speculative Risk rating and $4 price target on the shares of General Steel. Our $4 price target is based on the shares trading at 8x our updated 2011 EPS estimate of $0.46.

Risks

Major risks include macroeconomic risk, commodity price and raw material risks, market oversupply of low-end steel products, concentrated customer base, execution risk, especially related to acquisitions, as well as country and political risks related to operating and investing 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.

First Quarter Results:

• Revenue increased 57% year-over-year to $710.5 million, from $453.0 million in the first quarter of 2010.
• First quarter 2011 production volume totaled 1.2 million metric tons, compared with 1.0 million metric tons in the first quarter of 2010.
• Gross profit totaled $28.3 million, or 4.0% of total revenue, up from $5.7 million, or 1.3% of total revenue in the first quarter of 2010.
• Operating income for the quarter was $13.8 million, compared with an operating loss of $(6.4) million in the first quarter of 2010.
• Net income attributable to the Company was $2.6 million, or $0.05 per diluted share based on 54.8 million weighted average shares outstanding, compared with a net loss of $(5.5) million, or $(0.11) per diluted share based on 51.7 million weighted average shares outstanding in the first quarter of 2010.
• As of March 31, 2011, the Company had cash and restricted cash of $292.3 million and total stockholders' equity of $102.7 million.

GeoTeam® Note: 2011 First quarter analyst EPS estimates were $0.09.

"Based on our increased capacity, we entered 2011 with strong revenue growth in what is typically a slow quarter for construction activity. We are also making important gains to our bottom line and are well positioned to continue the trend of profitable growth, as we make additional progress toward increasing capacity, production efficiency and cost structure at Longmen JV," said General Steel Chairman and Chief Executive Officer Mr. Henry Yu. "The new production equipment at Longmen JV, which has been operational since the beginning of the year, has contributed to significant improvements in operating expenses and reductions of energy consumption per ton of steel produced. These improvements contributed to a healthy margin expansion, with our first quarter gross margin of 4.0% which was well ahead of the same quarter last year."

Rodman and Renshaw on GSI                                               3/17/2011

In-Line 4Q10 Results; Maintaining Rating and Price Target

General Steel Holdings (“General Steel”, Ticker: GSI, Market Outperform) announced 4Q10 results that were by and large in-line with our expectations. Total revenue increased 6% YoY to $478.6 million, a touch shy of our estimate of $481.4 million. Gross profit grew 223% YoY to $43.2 million, representing a gross margin of 9.0%, easily beating our respective estimates of $19.3 million and 4.0%. The company generated a quarterly profit for the first time in over a year, turning in a net income of $2.2 million, a bit higher than our estimate of $1.5 million. Diluted EPS during the quarter was $0.04, beating our estimate by a penny.

For full year 2010, General Steel realized $1.9 billion of revenue, $71.9 million of gross profit, $19.0 million of operating income, as well as a net loss of $7.7 million or $(0.14) per diluted share. As of December 31, 2010, the company had cash and restricted cash of $263.1 million. Total liabilities stood at $1.6 billion, which included $480.2 million of short-term notes payable related to bank lines of credit and $489.4 million in short-term loans.

Highlights and Discussions

Increasing average selling price and Shaanxi Steel compensation were major contributors to the financial performance During the quarter, the average selling price of rebar increased 23% YoY to RMB3,753, which more than compensated for a slight production volume decrease from 1.1 million MT in 4Q09 to 969,000 MT in 4Q10, and helped the company achieve a respectable top-line performance. Perhaps more significantly, the company received RMB180 million (approximately $27.1 million) of compensation from Shaanxi Steel Group during the quarter, which helped lower COGS and improve gross margin. This compensation was for the loss of production volume and production efficiency at the Longmen Joint Venture during the construction of the blast furnaces by Shaanxi Steel. Without the reimbursement, the gross margin would have decreased to 3.4% from the actual 9.0%. Going forward, management expects to receive some additional compensation from Shaanxi Steel due to such equipment construction, although the exact amounts and timing are unclear at this time.

Share buyback update On December 21, 2010, the company announced a share repurchase program to buy back up to an aggregate of 1,000,000 shares of its common stock. During the 4Q10 earnings conference call, management provided an update indicating that, by the end of December, the company bought back approximately 30% of the intended 1 million shares. As of today, it has bought back a total of 713,660 shares.

Auditor upgrade on track General Steel announced on December 29 that it would change its auditor to PricewaterhouseCoopers Zhong Tian from its current auditor Frazer Frost, effective 2Q11. During the 4Q10 conference call, management indicated this transition was going smoothly and there should be no change to the initially announced timing. In light of the current market sentiment surrounding the small cap China sector, we certainly believe a successful transition to a “Big 4” auditor can significantly enhance the company’s credibility in the U.S.

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.
                                     

Fourth Quarter Highlights:

• Revenue increased 6% year-over-year to $478.6 million in the fourth quarter of 2010, from $452.0 million in the fourth quarter of 2009.
• Gross profit increased by 223% year-over-year to $43.2 million, or 9.0% of revenue, up from $13.4 million, or 3.0% of revenue in the fourth quarter of 2009.
• Operating income for the quarter was $25.7 million, compared with $1.5 million operation income in the fourth quarter of 2009.
• Net income attributable to the Company was $2.2 million, or $0.04 per diluted share based on 54.7 million weighted average shares outstanding, compared with a net loss of $11.1 million, or ($0.26) per diluted share based on 41.9 million weighted average shares outstanding in the fourth quarter of 2009.

Full-Year 2010 Financial Highlights

• Revenue increased by 13% year-over-year to $1.9 billion, up from $1.7 billion in 2009.
• Production volume for the year totaled 4.0 million metric tons, compared with 3.8 metric tons in 2009.
• Gross profit for the year was $71.9 million, or 3.8% of revenue, compared with $88.6 million, or 5.3% of revenue in 2009. Gross margins were impacted by interruption of production for which General Steel received compensation.
• Operating income totaled $19.0 million, compared with $47.5 million in 2009.
• Net loss attributable to the Company was $7.7 million, or ($0.14) per diluted share, based on 53.1 million weighted average shares outstanding, compared with a net loss of $25.2 million, or $(0.60) per diluted share, based on 41.9 million weighted average shares outstanding in 2009.

"2010 was a year of progress and positioning for General Steel, as we grew revenue in a challenging environment. We commenced several initiatives aimed at expanding our production capacity to capture what we believe will be a considerable increase in demand in 2011," said General Steel Chairman and Chief Executive Officer Mr. Henry Yu. "We made considerable improvements to our bottom-line during the year and we expect to continue to demonstrate financial gains based on our newly expanded capacity, which was not reflected in our fourth quarter results. Now that this construction is complete, along with our upgrades to existing production equipment and improved raw materials procurement, we expect to increase production levels and attain profitability. In addition, our improved raw materials sourcing is designed to insulate us from pricing volatility, providing greater stability and visibility, supporting our overall goal of margin improvement, and creating a platform to support sustainable profitability."

We believe our cash flows from operations (which include customer prepayment and vendor financing), existing cash balances, and credit facilities will be adequate to finance our working capital requirements, fund capital expenditures, make required debt and interest payments, pay taxes, and support our operating strategies.

On March 7, 2011, General Steel Holdings, Inc. is giving a presentation at the Rodman & Renshaw Annual China Investment Conference being held at the Le Royal Meridien Shanghai Hotel in Shanghai, China.

Rodman and Renshaw on  GSI                  1/31/2011

New Test Runs a Positive Development 

General Steel Holdings (“General Steel”, Ticker: GSI, Market Outperform) today announced that it will test run two newly constructed 1,280 cubic meter blast furnaces, two 120 metric ton converters and one 400 square meter sintering machine at its Longmen joint venture in Shaanxi province. The construction of the new equipment is funded by Shaanxi Iron and Steel Group (“Shaanxi Group”), and General Steel is currently in negotiations with Shaanxi Group to enter into a lease agreement. The company expects that the test run period will continue until the lease agreement is finalized.

We view this as a positive development for General Steel on several levels. First of all, the company will expand its annual production capacity by an additional three million metric tons to 9.3 million metric tons, assuming new equipment running at their designed efficiency levels. These new equipment could enhance the company’s overall efficiency and reduce costs, which will likely result in expanded margins. During these test runs, the company will also be able to generate some additional revenue, thus providing modest upsides to its financial performance. Last but not the least, by leasing the equipment, General Steel reduces the need for debt financing or issuing new equity.

We are maintaining Market Outperform/Speculative Risk rating and $4 price target on the shares of General Steel. Our $4 price target is based on our assumption of the shares trading at 8x our 2011 diluted EPS of $0.52. Major risks include macroeconomic risk, commodity price and raw material risks, market oversupply of low-end steel products, concentrated customer base, execution risk, especially related to acquisitions, 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).

Member FINRA.
Member SIPC.

BEIJING, December 29, 2010 -- General Steel Holdings, Inc. today announced that the Company will appoint PricewaterhouseCoopers Zhong Tian CPAs Limited Company as its independent registered public accounting firm, replacing Frazer Frost, LLP. Upon the change of auditors, PwC will provide services beginning in the second fiscal quarter of 2011 and will serve as the Company’s independent registered public accounting firm for the fiscal year ending December 31, 2011.  The Company’s consideration to change its auditor was not due to any disagreement between the Company and Frazer Frost on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures.

Rodman & Renshaw on GSI                                   12/31/2010

Auditor Upgrade a Timely Development 

General Steel Holdings Inc. (“General Steel”, Ticker: GSI, Market Outperform) today announced that it will upgrade its auditor to PricewaterhouseCoopers Zhong Tian CPAs (“PwC”) from the current auditor Frazer Frost LLP (“Frazer Frost”). PwC will officially start to provide the service in F2Q11 (June 2011 quarter) and will serve as the company’s independent registered public accounting firm for FY2011.

We view this as a timely and positive development in light of the controversies that the company's current auditor, Frazer Frost, has been involved in. The decision to upgrade to a Big 4 auditor showcases management’s commitment to improve its internal control and financial reporting as well as to establish a high standard of financial transparency. In addition, on December 21, the company announced a share repurchase program to buy back up to an aggregate of 1,000,000 shares of its common stock. While it was an open-ended announcement without the exact repurchase amount or timing, it was nevertheless a positive development, indicating the company's shareholder friendly stance.

We are maintaining our existing Market Outperform/Speculative Risk rating and $4 price target on the shares of General Steel. Our $4 price target is based on our assumption of the shares trading at 8x our 2011 diluted EPS of $0.52.

Major risks to our rating and price target include macroeconomic risk, commodity price and raw material risks, market oversupply of low-end steel products, concentrated customer base, execution risk, especially related to acquisitions, 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).

Member FINRA.
Member SIPC.

On November 30, 2010, General Steel Holdings, Inc. is presenting at the Goldman Sachs Sixth Annual Global Steel Conference being held at the Goldman Sachs Conference Center in New York, New York.

Rodman & Renshaw on GSI 

Overview: GSI announced 3Q10 revenue of $460.3 MM and net loss of ($2.3 MM), with a fully diluted EPS of ($0.04). This compares to our expectations of $523.2 MM in revenue, $2.0 MM in net profit and $0.04 net earnings per share. 3Q10 revenue declined by 5.1% Y-o-Y from $484.8 MM in 3Q09, and 8.25% sequentially from $501.7 MM in 2Q10. Shipment volume during this quarter was 940,561 tons, down 9.2% Y-o-Y from 3Q09’s 1.0 MM tons, while monthly ASP of rebar recovered from 4,000 RMB in July to 4,350 RMB in September.  

Margin Improvement Aided By Higher Production Efficiency: The company eliminated some less efficient furnaces in Longmen facility during the quarter, driving gross margin higher to 3.4% compared to last quarter’s 1.47%. ASP of rebar recovered nicely from 4,000 RMB in July to 4,350 RMB in September. For raw material costs, coke and iron ore prices were maintained at RMB 1,700~1,800 and RMB 1,200~1,250 levels. Management expects rebar selling price and raw material cost to remain relatively stable at current level for the remainder of 2010.  

Near-Term Focus On Profitability: Management stated that the company is currently focused on improving profitability, including securing high quality, lower cost raw materials through the newly established Tianwu JV. During the quarter, Tianwu JV has secured 138,000 tons of iron ore for the remainder of 2010 from Minera Santa Fe in Chile. GSI expects that 30%~50% of its total iron-ore use (2~3 MM tons) will be potentially sourced through Tianwu JV.  

2.4 MM Tons of Additional Capacity: During the earnings call, management indicated that GSI is in discussion with Shaanxi Iron & Steel Group to co-develop two new blast furnaces with 2 MM tons of capacity. Additionally the Maoming facility is potentially bringing in a new production line with 400,000 tons/year of capacity. We have not yet included this new capacity in our model for FY10 and FY11, but will revise our numbers accordingly when we obtain more visibility.  

4Q10 & FY11 Estimates: For 4Q10 we are maintaining our estimates for revenue and net income at $481.4 MM and $1.5 MM, with diluted EPS of $0.03. This implies a full year revenue, net loss, and diluted EPS of $1.9 BB, ($8.4 MM), and ($0.16), respectively. For FY11, our estimates are $2.0 BB, $28.7 MM, and $0.52, respectively. 

Valuation: Based on our projections, GSI is currently trading at a P/E multiple of ~5.1x to our FY11 earnings estimates while on EV/EBITDA basis, it is trading at ~18.3x and ~7.7x to our FY10 and FY11 forecasts. At our $4.00 price target, GSI would trade at a forward FY11 P/E multiple of ~13.4x and EV/EBITDA multiple of ~9.9x, compared to the industry averages of ~20.7x P/E and ~6.8x in EV/EBITDA.

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.

Highlights from the Third Quarter of 2010:

Revenues

• Total revenues for the third quarter of 2010 decreased 5.0% to $460.3 million from $484.8 million in the third quarter of 2009.

• The decrease in total revenues was predominantly due to changes in the operating model at the Company's subsidiary, General Steel (China) Co., Ltd., and only executing processing contracts at another of General Steel's subsidiaries, Maoming Hengda Steel Company, Ltd., which generated less sales revenue.

• Income from operations increased to $6.0 million for the third quarter 2010 from a loss of $6.3 million in the second quarter of 2010 and a loss of $6.4 million in the first quarter of 2010. The increase in income from operations was primarily due to the improvement of gross margin.

• Net loss attributable to General Steel for the third quarter of 2010 was $2.3 million compared to a net income of $10.4 million in the third quarter of 2009.
    
• Basic and diluted losses per share for the third quarter of 2010 were $0.04 compared to basic earnings per share of $0.23 and diluted earnings per share of $0.22 in the third quarter of 2009.

"We witnessed continued strong demand for our steel products and a subsequent gross margin improvement for our business, despite a challenging market," said General Steel Chairman and Chief Executive Officer Henry Yu. "This quarter we focused on cost-saving measures to improve profitability that included cutting production of less efficient blast furnaces at our Longmen Joint Venture. At the same time, this quarter we announced the successful formation of a new joint venture with Tianjin Materials and Equipment Group. This newly formed joint venture will give us more flexibility and better quality in our supply of raw materials, something especially important in an industry experiencing volatile raw material costs. We believe that in addition to improving our gross margin, this joint venture is aligned with our strategy of increasing profitability and delivering long-term shareholder value."

GeoTeam® Note:  The loss for the quarter was mainly due to an increase in interest expense to $10.2 million.

 Net loss attributable to General Steel Holdings, Inc. for the second quarter of 2010 was $2.1 million compared to a net loss of $31.8 million in the second quarter of 2009. Net loss attributable to General Steel Holdings, Inc. for the first half of 2010 was $7.6 million compared to net loss of $24.5 million in the first half of 2009.

    Basic and diluted losses per share for the second quarter of 2010 were $0.041 compared to basic and diluted losses per share of $0.80 in the second quarter of 2009. Basic and diluted losses per share for the first half of 2010 were $0.15 compared to basic and diluted losses per share of $0.64 in the first half of 2009

"Demand continues to be robust," said General Steel's Chairman and Chief Executive Officer Henry Yu. "Located in central China, our largest subsidiary, Longmen Joint Venture, is relatively insulated from the slowdown in the real estate industry and allows us to continue benefiting from infrastructure development projects in western China. In fact, this year alone, there are over 235 construction and infrastructure projects scheduled to begin in Shaanxi province, including nine new railways, one new airport, the expansion of the Xi'an airport, two new ring subway systems and four new dams. These projects will take place over many years and drive our growth in the quarters and years to come. In the meantime, the industry continues to experience ups and downs as average selling prices and key input costs for iron ore and coking coal continue to fluctuate. Regardless, our focus is to continue vetting high-quality acquisition targets while putting an equal effort on controlling our costs and increasing profitability. The fundamentals of our business remain strong and I'm confident in our ability to deliver long-term shareholder value."

General Steel Holdings near-term growth to be impacted by China's tightening measures

Excerpt from Rodman & Renshaw report:

Expect Modest Y-o-Y Volume Growth in Longmen; ASP Weaker: We expect GSI’s 2Q10 performance to be impacted by China’s tightening policies that were executed over the quarter. We are still expecting shipment volume from Longmen JV in 2Q10 to grow modestly at ~5% Y-o-Y to ~886,000 tons, helped by the company’s presence in western China, where GDP growth is outpacing the national average. Longmen facility is estimated to account for ~95% of total shipment volume during the quarter. ASP should be expected to be weaker due to overall slowdown in construction activity. We expect average ASP for GSI in 2Q10 to be ~RMB 4,250 (ranging from ~RMB 4,500 to ~RMB 4,000 between April and June).

Margin Pressure Remains: Historically 2Q and 3Q have been stronger quarters for GSI due to a ramp in quarterly shipment volume and stronger price environment. However, tightening driven slowdown in demand for infrastructure and construction steel should impact margins and profitability (at least in 2Q10).

Model Adjustments: We are revising our financial projections to better reflect current demand environment. We are now projecting 2Q10 revenue and gross profit of $498.3 MM and $10.0 MM, with US GAAP net loss of ($6.4 MM), compared to our prior estimates of $483.8 MM, $26.6 MM, and positive net income of $7.5 MM. For full year FY10, we expect the company to deliver revenue and net loss of $1.96 BB and ($8.5 MM), with US GAAP EPS of ($0.16). We are also introducing our estimate for FY11. We now project a revenue and net income and EPS of $2.02 BB, $29.7 MM, and $0.55, respectively based on US GAAP.

Consolidation Remains Key To Story: At a policy level China continues to target elimination of backward steel capacity through consolidation but the pace of executing this mandate has been much slower than our expectations. We believe concerns around employment losses and impact on provincial revenue generation via taxes on this large industry have been difficult issues to overcome. In relation to GSI, we believe it is becoming increasingly important for management to execute on its M&A strategy as it positions itself as a consolidator. We believe that entities that survive the industry consolidation should benefit from being able to deliver on profitability more consistently compared to the current volatility in earnings. 

Lowering Price Target: We are lowering our price target on GSI from $5.00 to $4.00 driven by the above adjustments. We maintain our Market Outperform rating on GSI driven by substantial infrastructure work being carried out in Western China that should support the company’s growth. We believe that growth in 2010 will primarily be organic. Based upon our new projections, GSI is currently trading at a P/E multiple of ~5.4x to our FY11 earnings estimates while on EV/EBITDA basis, it is trading at ~7.2x and ~3.3x to our FY10 and FY11 forecasts. At our new $4.00 price target, GSI would trade at a forward FY11 P/E multiple of ~7.3x and EV/EBITDA multiple of ~4x, compared to the industry averages of ~11x P/E and ~5.5x in EV/EBITDA.

 

Added to the GeoSpecial list on December 10, 2009 @ $5.06

    Catalyst: Appeared that EPS was on the turnaround. 
    Peak performance: Reached a high of $5.84 on December 23, 2009
    Current Price: $3.00 

    Current road block: Missed EPS estimates on more than one occasion; Analyst estimates have come down; 2011 growth is forecasted to be negative.

    Removed from the  GeoSpecial list.

1:25PM Please see new GeoTeam articles.  "Capitalizing on China's Stimulus Plan - Part I" and "Companies That May Benefit from China's Stimulus".