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.

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.

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.

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.
                                     

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.

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.

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.