Ossen Innovation Co (NASDAQ:OSN)

First Quarter 2012 Financial Results

• Revenue was $22.3 million in the first quarter of 2012, down 29.8% from $31.7 million in the same period a year ago
• Gross profit decreased by $6.5 million to $2.6 million, a 71.9% year-over-year decline. Consolidated gross margin fell from 28.7% to 11.5%.
• Net income attributable to controlling interest fell 95.4% to $0.3 million in the first quarter of 2012 from $5.9 million in the year-ago period. Earnings per share were $0.01 versus $0.29 a year ago.

"We are seeing encouraging signs regarding demand for our products," stated Dr. Liang Tang, Chairman of Ossen Innovation. "Since April, we have seen a measured increase in the number of projects requesting bids. The pent up demand for steel wires has been fueled by several quarters of dormant activities and the PRC government's recognition that these infrastructure investments are crucial to China's long-term economic vitality. We expect steady improvement in our financial results and a stronger second half of this year."

Fourth Quarter 2011 Results

• Revenue was $26.8 million in the fourth quarter of 2011, down 4.1% from $27.9 million in the same period a year ago
• Net income attributable to controlling interest fell 98% to $0.1 million in the fourth quarter of 2011 from $3.0 million in the fourth quarter of 2010. Earnings per share were $0.00 for the fourth quarter of 2011 versus $0.15 for the fourth quarter of 2010.

"The past couple of months have been challenging," stated Dr. Liang Tang, Chairman of Ossen Innovation. "After the July railway accident in Wenzhou, many high-speed railway related projects have been halted, including those already in the middle of construction. In addition, the tightened credit environment in China, as well as the funding difficulties faced by the Ministry of Railways (MOR), has both impacted our business and our clients' business. There have been signs of improvement in the past months, especially aid from the central government to the MOR. In the near term, our business growth will be adversely affected for the reasons mentioned. Nevertheless, we remain confident and optimistic about the medium to long term market outlook."

2012 Outlook

Management expects the following:

• Suspended MOR projects will gradually resume construction during the year when supporting funds are provided, as promised by central government.
• Customer demand will remain solid for Ossen's products, especially rare earth coated products, in the medium and long terms.
• Addition of the 30,000 ton production lines for rare earth coated products will be postponed to the end of 2012 as a result of current adverse industry conditions. Such expansion, however, remains a key element of the Company's strategic growth plan.

SHANGHAI, January 31, 2012 /PRNewswire-Asia-FirstCall/ --Ossen Innovation Co., Ltd. ("Ossen" or the "Company") (NASDAQ: OSN), a China-based manufacturer of an array of plain surface, rare earth and zinc coated pre-stressed steel materials, today announced that the Company has received a letter from the NASDAQ Stock Market dated January 27, 2012 advising the Company that the closing bid price of the Company's stock on NASDAQ has been at $1.00 per share or greater for the last 10 consecutive business days. Accordingly, the Company has regained compliance with the minimum bid price requirement for continued listing on the NASDAQ Global Market.

Third Quarter 2011 Results

• Revenue was $31.1 million in the third quarter of 2011, up slightly from $30.9 million in the corresponding period a year ago
• Net income attributable to controlling interest fell 56% to $2.0 million in the third quarter of 2011 from $4.5 million in the year-ago period. Earnings per share were $0.10 versus $0.30 a year ago, reflecting lower profits and an increase of 5 million shares outstanding year-over-year as a result of the December 2010 IPO.

"The past couple of months have been challenging," stated Dr. Liang Tang, Chairman of Ossen Innovation. "After the July railway accident in Wenzhou, almost all of the high-speed railway related projects have been halted, including those already in the middle of construction. In addition, the tightened credit environment in China as well as the funding difficulties faced by Ministry of Railways (MOR) have both impacted our business and our clients' business. There have been signs of improvement these weeks, however, especially after the aid from central government to MOR. In the near term, our business growth would be adversely affected for the reasons mentioned and we expect that financial results of 2011 will be lower than our original guidance. But we remain confident and optimistic about the medium to long term market outlook."

A second round of On-the-Ground Due Diligence Indicates Ongoing Weakness in OSN�s Business Due to Deteriorating Economic Conditions in the PRC.

A Geo investigator recently visited OSN�s subsidiary, Ossen Jiujiang, located in Jiujiang City and talked to two employees of that facility directly and another through a third party.
See our update.

As a follow-up to our investor alert on June 22, 2011 where we disclosed that we were taking a position in OSN at $2.63...

...our initial on-the-ground due diligence on the company was encouraging. Our investigator was able to confirm that the employee headcount, production volumes, and pricing of products are as reported in the company's SEC filings.

Furthermore:

1. GeoTeam independent OTGDD by our in-house private investigators indicates that OSN is running a substantial revenue generating operation.

2. OSN management takes the position that it will not require capital from equity markets to fund 2011 and 2012 growth. This could help drive P/E expansion.

3. OSN story is a unique scenario that we believe has value when considering positive and negative factors.

4. OSN will report financial results on a quarterly basis even though as a foreign filer it is not required to do so.

5. OSN should not be priced to fail.

6. The GeoTeam will continue to monitor the OSN story and offer suggestions to management that will ultimately be needed to help restore market confidence in their stock. The GeoTeam highly recommends that management follows these suggestions.

7. There is upside to our valuation scenarios if OSN follows our suggestions.

To see the full report, please go here.

Highlights:

• Revenue increased 16% to $117.5 million
• Net income increased 83% to $14.6 million, with EPS of $0.73 based on 20 million shares outstanding
• FY 2011 Guidance: Revenue of $138.5-$144.6 million, represents 18%-23% YOY growth, Net Income of $18.0-$18.8 million, represents 22%-28% YOY growth, with EPS of $0.90-$0.94 based on 20 million shares outstanding

Management will host a conference call to discuss results at 11:00 am ET on Friday, June 24th

"2010 was a key inflection point for Ossen." stated Dr. Liang Tang, Chairman of Ossen Innovation. "We dramatically increased production of our coated products, which positively impacted our growth, margins and profitability. As the Chinese government continues to push forward on multiple high profile bridge projects around the country, demand for our products remain strong. We believe that once we complete our new coated products capacity expansion, we will further solidify our position as a market leader."

We believe that our cash reserves, together with expected cash flow from operations and short-term loans, are sufficient to allow us to continue to operate for the next 12 months. In December 2010, we issued 5 million shares in the form of American Depositary Receipts. The $20.3 million of net proceeds from this offering are being used to fund the capacity expansion of our rare earth coated PC products. We currently estimate that the entire cost of this expansion will be approximately $22 million. We intend to fund the remaining $1.7 million of construction costs, as well as any unanticipated costs that may arise in relation to our expansion, from short-term bank loans or cash from operations.

Historically, we sold a significant portion of our products to international customers. In 2008, we collected approximately half of the revenues generated by international sales by letter of credit, enabling us to convert our accounts receivable into cash more quickly, prepay our suppliers and reduce the amount of funds that we needed to finance our working capital requirements. However, at the end of 2008, as a result of the global economic crisis and in anticipation of the anti-dumping measures ultimately imposed by the U.S. and the European Union, we had to exit some of these international markets entirely and turn to the domestic PRC customers, which generally pay approximately 60-90 days after receiving the materials at the construction site. These longer payment terms have negatively impacted our short-term liquidity. Although we have been able to maintain adequate working capital primarily through short-term borrowing, any failure by our customers to settle outstanding accounts receivable in the future could materially and adversely affect our cash flow, financial condition and results of operations.

While the GeoTeam awaits the 20F for OSN (in order to release our full report), here is a refresher of the important points of our due diligence, originally released on May 23, 2011.

If your portfolio exposure to the ChinaHybrid space is less than 20%, something we have been preaching as a consideration for some time now, then it should suffer minimal collateral damage as events play out. If you are short names that, combined with on-the-ground due diligence, embody the characteristics of foul play such as mismatching SAIC/SAT/SEC filings, stupid capital raises, acquisition transactions that do not make sense and misrepresentations of land use rights, then you will make money from this phase. Creating a small portfolio of short positions in suspect or even illiquid stocks, even at these prices, should work overtime as many will slowly fade away as China Education Alliance (NYSE:CEU) has been doing. (Source: "The RTO field of dreams" http://blog.geoinvesting.com/?p=1017)

We will be publishing our DD findings on OSN shortly.

Initial entry point: "May try some Ossen Innovation Co (NASDAQ:OSN) $2.63. Good guidance and has been beaten up."

Summary of conclusions (based on PRC filing data we have obtained).

1. OSN a real company with revenues in-line SEC filings (SAIC=SAT=SEC for 2008 and 2009).
2. Tax provision for 2008 and 2009 is on par among SAIC/SAT/SEC filings
3. OSN is a profitable company based on SAIC/SAT documents. 2008 SAT/SAIC net income data is in line with SEC filings. 2009 SAIC net income is in line with SEC net income. 2009 SAT net income is ~ 50% less than SEC net income.
4. On the ground DD was positive and confirmed that 2009 SEC revenues were achievable. Further DD is still needed regarding margins, customers and suppliers.
5. Even after considering differences between 2009 SAT and SEC net income numbers and a worst case scenario that 2009 SAT margins were accurate , OSN should not be priced as company to �fail� at this time. Another plausible scenario why our SAT net income figure does not equal SEC number could be due to the deployment of culturally acceptable level of tax avoidance initiatives, as 2009 marked the end of a three year tax holiday for OSN.
6. Our initial worst case �bottom� valuation assumption: $3.50 to $4.50, with a possible expansion of this range if trust can be established. Keep in mind that the 2010 audit, due in June, has yet to be completed as OSN is a foreign filer. Completion of the audit could be viewed positively.

SHANGHAI, May 20, 2011 /PRNewswire-Asia/ -- Ossen Innovation Co., Ltd. ("Ossen" or the "Company") (NASDAQ: OSN), a China-based manufacturer primarily engaged in manufacturing of galvanized pre-stressed steel wires used in the production of bridge cables, today announced that it has signed two contracts to provide proprietary galvanized pre-stressed steel wires for the construction of Maanshan Yangtze River Expressway Bridge and Jiujiang Yangtze River Expressway Bridge. The company will produce and deliver products through 2012.

"As we have signed both contracts, we have stepped closer towards our earnings target for the year," said Dr. Liang Tang, Chairman of Ossen Innovation Co., Ltd. "We are at the beginning of a major boom for bridge construction in China as governments across the country accelerate the connection of major highways and railways. We will continue to leverage our brand recognition and advanced products to win major projects such as these two as we grow our capacity for future growth."  

Preliminary FY 2010:

• Revenue: $117.6m
• Net Profit: $14.9m
• EPS: $0.75

FY 2011 Guidance:

• Revenue: $138.5-$144.6m
• Net Profit: $18-$18.8m
• EPS: $0.90-$0.94

"We continue to secure major bridge projects in China as a result of our established reputation and the quality of our pre-stressed steel materials, including the coated steel wires and strands with Ossen's proprietary rare earth and zinc formula," said Dr. Liang Tang, Chairman of Ossen. "Our 2011 financial forecast reflects our confidence in executing the growth strategy which is supported by growing demand for new bridges in China."

SHANGHAI, March 31, 2011 /PRNewswire-Asia/ -- Ossen Innovation Co., Ltd. announced today that the Audit Committee of the Board of Directors of the Company has approved the engagement of BDO China Li Xin Da Hua CPA Co., Ltd. ("BDO China" or "BDO") as the Company's independent registered accounting firm for the year ended December 31, 2010 and to conduct review engagements on the Company's quarterly financial statement on an ongoing basis thereafter. On the same date, the Board of Directors of the Company terminated the engagement of Sherb & Co., LLP as the independent registered public accounting firm of the Company effective immediately.

Update:

We are considering turning our OSN trade into a short-term core holding if we:

• Determine that the company will upgrade its Auditor from Sherb.
• Verify that SAIC filings are in order (company is an FIE)
• Gain a grip on financing needs.

This morning we took a day trading position in Ossen Innovation Adr (NASDAQ:OSN), a recent IPO. We believe that OSN may rise on the hype that has irrationally swept upon Wall Street over rare earth mineral stocks. While OSN is not a direct play on this hype, investors may be able craft a bullish trading case for OSN.

We manufacture and sell an array of plain surface and rare earth galvanized prestressed steel materials, which we believe is the most comprehensive amongst our competitors in China.

Bullish Case that Some Will try to Rationalize

China restricts the amount of product that domestic rare earth companies can export, leading them to sell more domestically, which can result in better pricing and margins for PRC firms like OSN that use rare earth raw materials.

At $5.40, the stock trades at a P/E of 8.6 using $0.63 trailing EPS. Investors should be aware that OSN had to reduce the size of its offering and offering price a couple of times before its IPO debut at $4.50 on December 21, 2010. Its auditor is also Sherb, a company associated with alleged fraudulent companies such as CEU.

Overall, we think the rare earth play is well overdone, lifting stocks that don't even have anything to do with rare earth but instead are associated with mining or mineral companies. Have fun while it lasts, but this is a classic sign of an impending sector bubble. We do not think this is a sign of an overall stock market top as irrational investor euphoria has not occurred in other market sectors.

Currently, we only plan to trade OSN and will accept a loss hoping for a possible irrational move. In fact, the stock has retraced strong early morning gains. At least, according to SEC documents, the company is solidly profitable and cheap compared to similar plays that have seen parabolic runs over the past few days. We still need to call the company to verify if our assumptions are correct and determine if there is a core bullish case for OSN. Our trade decision was made on the "fly."

Related China stocks that are riding this hype today include.

• China Gengsheng Minerals (NYSE AMEX:CHGS)
• China Armco Metals (NYSE AMEX:CNAM)
• China Gengsheng Minerals (NYSE AMEX:CHGS)
• China Direct Industries (NASDAQ:CDII)

We do not see evidence that these four stocks have anything to do with rare earth minerals. But then again we are not experts in this area. However CDII poor fundamentals support our belief that the stock will retrace its gains after the hype is over.

Rare earth mineral list (source Wikipedia)

Disclosure: Short- CHGS; Long- CHGI, CNAM and related warrants, trading position in OSN.

Ossen Innovation plans for Initial Public Offering. The company had previously merged with a private non-operating shell company.

Company Snapshot:

Sells an array of plain surface and rare earth galvanized prestressed steel materials

Industry Snapshot: (Company Comments)

• Due to the demand for prestressed materials in infrastructure construction and the domestic PRC market, we believe that our industry will grow significantly for at least the next five years. Specifically, we expect the market for premium rare earth products, including rare earth galvanized prestressed steel strands and wires, which are used in the construction of bridges and highways, to grow in the PRC during this period.
  
• Based on the 11th five-year plan for highway and waterway transportation by the Ministry of Transportation of the PRC, the government plans to invest $730 billion in the national highway network from 2009 to 2013, which drives huge demand for prestressed materials.
  
• The Railway Network Plan issued by the Ministry of Railways of the PRC has indicated that $290 billion will be invested in railway construction from 2009 to 2013, which further drives the demands for prestressed materials. From now until 2020, we believe that 200 new bridges will be built on dozens of rivers in the PRC, including the Yangtze River, Yellow River, Songhua River, Jiangxi River, Xiangjiang River, Han River, Minjiang River and Pearl River. The bridge projects will require approximately 6 million tons of rare earth galvanized prestressed materials in the aggregate.
  
• The China National Nuclear Industry Group has estimated that the PRC government will invest approximately $60 billion by 2020 for nuclear power construction, which would require approximately two million tons of prestressed materials. Further, the ongoing building of a large number of rural roads, highways and buildings should continue to generate significant demands for prestressed materials.

Use Of proceeds:

We intend to use the net proceeds from this offering to increase our production capacity from 140,000 tons to 200,000 tons in the months following this offering. Our plan is to construct a new building on empty land located in our Maanshan facility and to install eight new production lines which will be used for the production of an aggregate of approximately 60,000 tons of higher margin coated prestressed materials, including coated wires. The expected cost of this expansion is approximately $25 million. The remainder of the proceeds will be used for working capital and other general corporate purposes

Underwriter:

• Global Hunter Securities
• Knight

Proposed offering price: $4.50 down from original range of $7.00 to $9.00

Post IPO Share Calculation: (Using a 1 to 1 Ordinary to ADS conversion ratio).

• 15,000,000: Pre IPO fully diluted share count
•   5,000,000: Newly issued  shares 
•      750,000: Over-allotments shares 

GeoTeam® best effort calculation of total post IPO ADS count to be used in EPS calculations, assuming full conversions and a Ordinary to ADS conversion ratio of 1 to 1: 20,750,000

Financial Snapshot:

• During the year ended December 31, 2009, we had revenues of approximately $101.1 million as compared to revenues of approximately $82.7 million during year ended December 31, 2008, an increase of approximately $18.3 million, or 22.2%.
  
• Net income totaled approximately $9.7 million for the year ended December 31, 2009, as compared to approximately $4.8 million for the year ended December 31, 2008, an increase of 106%.

Pro Forma Valuaiton: using $4.50 price and new share count

• 2009 EPS (ADR): $0.47
• Traling P/E: 9.58