Rino Intl (PINK:RINO)

Rodman & Renshaw on RINO                               12/31/2010

RINO: Terminating Coverage 

Termination of Coverage: Effective immediately, we are discontinuing research coverage of RINO to better allocate resources within our coverage universe. Effective upon the termination of coverage any of our prior financial projections on this stock should not be relied upon. Our last rating on RINO was Under Review.

Company Description

RINO International Corporation is a Chinese company engaged in designing, manufacturing, installing and operating wastewater treatment and flue gas desulphurization equipment for use in China’s iron and steel industry, and anti-oxidation products and equipment designed for use in the manufacture of hot rolled steel plate products. The Company currently has three principal product lines: (1) Lamella Inclined Tube Settler Waste Water Treatment System, (2) Circulating, Fluidized Bed, Flue Gas Desulphurization System and (3) High Temperature Anti-Oxidation System for Hot Rolled Steel. The Company's sole business activities are acting as a holding company of its direct and indirect subsidiaries, Innomind Group Limited, RINO Investment (Dalian) Co., Ltd. (RINO Investment), Dalian RINO Heavy Industries Co., Ltd. (RINO Heavy Industries) and Dalian Innomind Environment Engineering Co., Ltd. (Dalian Innomind).

Recent Financial Updates 

According to RINO’s most recent filings with SEC, the company’s financial statements (both annual and quarterly results) for the periods of FY08, FY09, and the first three quarters of FY10 should no longer be relied upon.

Delisting From NASDAQ 

On November 29, 2010, RINO’s common stock was delisted from NASDAQ Stock Market due to the company’s failure to respond to NASDAQ staff’s request for additional information regarding the allegations by a research report. The company admitted that it had not actually entered into two contracts it previously claimed it had. RINO has been notified by SEC that it is conducting a formal investigation regarding the company’s financial statements and its compliance with Foreign Corrupt Practices Act for the period of January 1, 2008 ~ present.

Valuation 

On November 16, 2010, we put our rating on RINO under review due to management’s inability to respond to various negative allegations that had surfaced. We also removed our financial projections for 2010 and 2011.

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.

Global Hunter on RINO

We are lowering our FY2010 and FY2011 revenue estimates and margin assumptions due to the increasing competition in the FGD market and recent power shortages experienced by the steel mills in China. We now expect RINO to report FY2010 revenues and non-GAAP EPS of $215MM and $1.49, compared to our prior estimates of $226.8MM and $1.77, respectively. We have also lowered our FY2011 estimates to $241.4MM in revenue and $1.66 in EPS. We believe that future growth for the company will be largely predicated on diversifying into other high growth environmental industries in China – sludge and DeNOx, but do not expect to see significant top line growth or margin expansion until the new Changxing Island facility becomes operational in 2H 2011. Shares have appreciated by ~50% since our initiation; given the likelihood of lower than expected top line growth and margin contraction, we feel this is an appropriate time to reduce our rating from Buy to Neutral

Increasing competition in the FGD segment. Following our discussions with the company and a number of steel mills, we believe that the longer term demand in the FGD market remains strong; however, following the recent mandates issued by the central government requiring coal-fired sinters and other similar facilities to install desulphurization equipment and limit CO2 emissions, the competition in this industry have increased significantly. There have been a number of new players emerging in the last few years and their product offerings have been expanding and maturing as well, which ultimately leads to increased competition and lower profit margins for all the players in the industry, including RINO.

Power cuts in China may reduce demand for FGD systems in the near term. In order to reach efficiency targets outlined in the 11th Five Year Plan, a number of local governments have been restricting power supply to steel mills since September. Limited power supply forces some steel makers to shut down furnaces which, coupled with the closures of obsolete plants, may reduce the number of new FGD projects in the near term, forcing environmental remediation companies like Rino to compete more fiercely for the existing projects.

Lowering revenue and profitability assumptions due to increasing competition. As a result of increased competition in the FGD market, we believe that RINO might be unable to achieve its full year revenue guidance of $221MM to $229MM. In addition, heavy competition forces the company to accept projects with lower margin characteristics and targeted returns. We have lowered our revenue estimates for Q3 and full year 2010 from $60.4MM and $226.8MM to $51.7MM and $215MM, respectively. We have also lowered our gross margin assumptions for FGD projects to low 30’s compared to the historical range of 35% - 40%. This translates to Q3 and full year 2010 non-GAAP EPS estimates of $0.31 and $1.49, compared to our previous estimates of $0.48 and $1.77, respectively. In addition, we do not expect the competitive situation in this segment to improve significantly for RINO in 2011, at least not before the new facility is operational and the company is able to offer more ammonia-based DXT systems, which is a newer technology compared to the traditional desulphurization technology and is usually priced about 30%-50% higher. As a result, we are lowering our 2011 revenue and non-GAAP EPS estimates to $241.4MM and $1.66 compared to our prior estimates of $284.9MM and $2.42, respectively.

 
Capacity expansion is on track. In March 2010, RINO acquired 50-year land use rights for a piece of land located at Enterprise District, Lingang Industrial District, Changxing Island, Dalian, from Dalian Municipal Government for capacity expansion purposes. The Changxing Island Project is intended for plant expansion and is expected to increase the company’s manufacturing capacity by approximately 300%, bringing the overall annual production capacity to RMB 5 billion (~$733MM). The company estimates that the whole project should cost about $107MM and it is on track to be completed by September 2011. RINO is currently in the process of preparing the foundation for the manufacturing facilities, as well as constructing administration buildings. Once completed, we expect it would take the company about four years to ramp up the new facility to full capacity, bringing about 25% of new capacity on line every year.

Rodman & Renshaw on RINO

RINO Visit: We visited RINO’s facilities in Dalian on Oct 18, 2010. We met with Mr. Ben Wang, CFO; Mr. Li, Financial Controller; and Ms. Wang IR Manager (internal). Mr. Zou, CEO, was away on business to meet with Shougang Jingtang Steel. We spent the initial part of the day in the company’s current facilities. Work was being carried out on some heavy machinery that basically occupied majority of the factory floor. There was a lot of raw material inventory that occupied the open spaces outside the factory buildings. Some of this raw material, primarily iron and steel, was designated for use in the construction of the new facility coming up in Changxing Island. Please see page 3 for pictures. 

The drive to the Changxing Island facility is about an hour and a half from RINO’s current factory. We were impressed by the size of the new facility coming up. The land owned by RINO here is approximately 233,000 sq. mt. and the manufacturing facility is expected to occupy 110,000 sq. ft. External construction was almost complete on the new office and dormitory buildings. The factory buildings require substantially fortified foundations to support all the heavy equipment and related work was being carried out. Management indicated that they are on track to complete the facility by mid 2011. However, weather may be the wild card here. It is already getting cold and we would be surprised if the same level of construction activity can take place during peak winter. Once this facility is complete, we believe the company should have capacity to sustain growth for the next five years. Overall, we were satisfied with the progress being made on the new facility despite some weather related delays earlier in the year.

Internal Controls Team Growing: We were pleased to see the company continue to remain pro-active on improving their internal controls. We met Mr. Alex Li, RINO’s new Financial Controller who previously worked with PWC for five years. The company has also hired an internal auditor who was previously working with Deloitte (will begin shortly). The company is making a serious effort on their internal controls to meet the streets expectations on this front. We believe these are the initial steps towards potentially moving to a larger auditor. 

3Q10 Expectations: We are maintaining our 3Q10 revenue and Non-GAAP EPS expectations for RINO at $52.0 MM and $0.42. Management expects to report results by mid November. 

Other Takeaways: The street has been aware of management’s effort towards acquiring relevant technology to address emission control opportunities outside of desulfurization. We would not be surprised if such an acquisition is completed by year end. Such a move would allow the company to address opportunities outside of the iron and steel space. Management is also looking at the sludge treatment segment as a good revenue diversification strategy.

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.