Keyuan Petrochemicals (PINK:KEYP)

Rodman and Renshaw on KEYP                    4/01/2011

KEYP: Rating Under Review

Company Announcement: KEYP announced today a delay in the filing of Form 10-K Annual Report, rescheduling of earnings call and a commencement of an independent investigation undertaken by the company’s audit committee into certain cash transactions and recorded sales. The audit committee has engaged Pillsbury Winthrop Shaw Pittman LLP as its independent legal counsel. Pillsbury Winthrop Shaw Pittman LLP will be responsible for retaining an independent accounting firm to assist it in the investigation. The filing of the Form 10-K will be delayed until the investigation is concluded. Consequently, management requested and was granted a trading halt from NASDAQ.

Management Comments: While KEYP management was not able to provide any further details at this time regarding the specific issues being investigated, we were assured that it is aware of the urgency of the matter and is fully cooperating with the audit committee to address the raised concerns. No specific timeline for the investigation and anticipated filing of the annual report could be provided as the pace of the inquiry will be determined by the audit committee. Management has also reiterated that it will pay its first quarterly dividend of $0.09 per share to the shareholders of record as of March 1, 2011 with the distribution occurring on April 15, 2011.

Rating Under Review: In light of today’s announcement and a halt in KEYP trading, we are placing our Market Outperform/Speculative Risk rating and $7 price target under review pending the resolution of the aforementioned issues and filing of the Form 10-K for FY10. We will continue to monitor company’s progress in addressing these issues and adjust our rating accordingly.

Company Description

Keyuan Petrochemicals, Inc. is a China based company that focuses on supplying primary and intermediate petrochemicals that serve as a base material for the production of many downstream petrochemical products used in construction, agriculture, automotive sector, consumer goods packaging and other applications. The company owns and operates a 550,000 MT petrochemical processing facility located in Qingshi Chemical Park in Ningbo, Zhejiang Province, PRC used primarily for the production of BTX aromatics, propylene, styrene, liquid petroleum gas (LPG), and methyl tertiary butyl ether (MTBE) and other petrochemical products. Patented multiple ethylene propylene (MEP) processing technology commercialized by Keyuan enables it to generate higher yields while using lower grade feedstock. Keyuan Petrochemicals is incorporated in Nevada and is listed on NASDAQ Global Market under the ticker symbol KEYP.

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 KEYP                          2/10/2011

Initiating Coverage with a Market Outperform rating and $7 Price Target 

Investment Thesis 

We are initiating coverage on Keyuan Petrochemicals, Inc (KEYP) with a Market Outperform/Speculative Risk rating and a price target of $7. Keyuan is an emerging provider of primary and intermediate petrochemicals utilized in the production of resins, plastics, chemical fiber, coatings, paints and pesticides for automotive, consumer, real estate and agricultural end markets. A relative newcomer to the petrochemical industry, the company is quickly establishing itself as a major player in the sector through aggressive capacity expansion and commercialization of proprietary patented technology that enables cost-effective production of aromatics from cheaper and more readily available heavy oil instead of traditionally used naphtha. Trading at 9x FY10 fully diluted earnings the stock is relatively inexpensive given the company’s strong revenue growth and projected capacity expansion to over 1 million MT by the end of 2012. Overall, we believe Keyuan stands to benefit from the long-term economic growth in China which will fuel the demand for a variety of primary and intermediate petrochemicals.

Management guides for strong revenue growth in both FY10 and FY11, expecting revenues and net income of approximately $550 million and $36.3 million, respectively, on 660,000 MT sales in FY10 and revenues of $650.5 million on projected sales of 740,000 MT in FY11. We forecast revenues and adjusted net income of $550.1 million and $35.2 million (after preferred dividends) for FY10 and $654.1 million and $35.6 million in FY11, respectively, which translates to fully diluted adjusted EPS of $0.59 (including the effect of consumption tax rebate) in FY10 and $0.52 in FY11. We view the stock’s present valuation as attractive and recommend investors accumulate positions at current level.

Valuation 

We initiate on Keyuan with a Market Outperform/Speculative Risk rating and target price of $7, implying a 37% upside to the current price. Keyuan is currently trading at 9x our FY10 fully diluted EPS estimate of $0.59 (including the effect of consumption tax rebate) and 10x our FY11 fully diluted EPS estimate of $0.52. These multiples are below the current FY10 and FY11 industry averages of 18x and 14x for the U.S.- listed petrochemical companies and 26x and 19x for the Asia-listed petrochemical peer group. On EV/EBITDA basis, the stock is currently valued at 6.3x our FY11 forecasts. We believe the current valuation does not fully reflect the company’s technological advantages, rapid historical and projected revenue growth, increasing capacity and strong demand for its products. Our price target of $7 is based on the shares attaining a relatively conservative P/E level of 13x our FY11 fully diluted EPS estimate and 8x FY11 EV/EBITDA multiple.

Risks 

(1) Fluctuating feedstock prices (2) Effect of tighter monetary policies on major end markets (3) Execution risk (4) Liquidity (5) Dilution to existing shareholders.


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.