Sancon Resources Recovery (PINK:SRRY)

On September 30, 2011, Sancon Resources Recovery Inc ("Sancon" hereinafter) entered into a Stock Sale and Purchase Agreement (the "Agreement") to transfer its 70% controlled interest in Sancon Resources Recovery (Shanghai) Co., Ltd. and 100% interest of its associated company Crossover Solutions, Inc (a BVI company) (collectively "SanconSH" hereinafter) to Mr. Jack Chen, the Company's Chief Executive Officer and Director.

SanconSH is a domestic Chinese entity that is 100% set up and owned by Mr. Jack Chen, a domestic Chinese resident, it is 70% controlled by Sancon under "Variable Interest Equity" accounting method also known as the VIE structure. On August 25, 2011, the Ministry of Commerce of China ("MOFCOM") promulgated the Provisions of the Ministry of Commerce on the Implementation of Security Review System for Merger and Acquisition of Domestic Enterprises by Foreign Investors ("Provisions"). The Provisions came into effect on September 1, 2011. The Provisions formalize the procedures of the national security review for inbound M&A transactions by foreign investors, explicitly prohibit the use of the VIE structure to circumvent the national security review. In the past, the VIE structure has been widely adopted to avoid China's restrictions on foreign investment in certain industries, but has never been officially endorsed by any government authorities. During the period from June 2010 to June 2011, SanconSH gross and net profit margin decreased dramatically, compounded by its poor performance, the Company has resolved to transfer its entire interest in SanconSH and its associated company for a total of 10,100,000 shares of Sancon.

Under the terms of the Agreement, the purchase price is to be settled upon closing of the transaction by returning to the Company a total of 10,100,000 common shares, representing 44% of the total issued and outstanding shares of Sancon. As of October 31, 2011, a total of 10,100,000 shares of Sancon has been received and to be cancelled by the Company as such the transaction is closed.

"We are pleased with our continued increase in revenue in 2011 second quarter. However, our gross profit and net income has dropped. That is mainly due to the poor performance in our Australia operation and small scale of waste paper business in China," said Jack Chen, Sancon's Chief Executive Officer. "We have recently changed the management in our Australia operation and we are working hard to turn it around in the next quarter. In China, we've installed additional equipments which will triple our daily waste paper processing capacity. By expanding the waste paper business rapidly within a short period, we can negotiate a better pricing and increase our margin."

Plan of Operation
 
During the next twelve months, we expect to take the following steps in connection with the development of our business and the implementation of our plan of operations:
 

• We intend to continue with our marketing strategies to deliver our products in China and provide our waste management service to clients;
• Along with the continued plastic and glass materials products we are now processing, we are also developing to process other materials, such as cardboard, copper and iron.
• During the next twelve months, the Company expects to set up larger network of collection and sales in China.
• During the next twelve months, the Company is planning to acquire other companies running similar business in China.

 
Our aggressive expansion plan will be replied on such capital support.  We cannot assure the successful result of fund raising.  As such, we may not execute our initial business strategy or plan as expected, and furthermore, our competitors may stand in a better position than us, which results in an adverse effect on our business, although we believe that currently, even without such funds, we can still run a healthy business within our already occupied markets.

First Quarter Results:

• Revenue increased 25% to $3.85 million
• Gross profit of $1.37 million, a gross margin of 36%
• Net income for 2011 first quarter was $0.45 million, or $0.02 basic and diluted earnings per share, compared to $0.57 million or $0.03 basic and diluted earnings per share one year ago

"We are pleased with our continued increase in revenue in 2011 first quarter. However, our gross profit and net income has dropped. That is mainly due to the poor performance in our Australia operation and small scale of waste paper business in China," said Jack Chen, Sancon's Chief Executive Officer. "We have recently changed the management in our Australia operation and we are working hard to turn it around in the next quarter. In China, we've installed additional equipments which will triple our daily waste paper processing capacity. By expanding the waste paper business rapidly within a short period, we can negotiate a better pricing and increase our margin."

SHANGHAI, CHINA--(Marketwire - April 11, 2011) -  Sancon Resources Recovery, Inc. announced today that it has entered into an acquisition agreement with a profitable Beijing environmental services company.

On March 25, 2011, Sancon signed a letter of intent with Beijing JDY Environmental Recycling Co., Ltd. (or "Beijing JDY"), under which Sancon's majority owned subsidiary Sancon Shanghai will acquire 51% equity of Beijing JDY. Sancon management believes this acquisition will contribute over US$15M revenue annually with healthy future growth projections

GeoTeam Note: Fourth Quarter 2010 vs. 2009 EPS was $0.01 vs. $0.02

Plan of Operation
 
During the next twelve months, we expect to take the following steps in connection with the development of our business and the implementation of our plan of operations:
 

• We intend to continue with our marketing strategies to deliver our products in China and provide our waste management service to clients;
• Along with the continued plastic and glass materials products we are now processing, we are also developing to process other materials, such as cardboard, copper and iron.
• During the next twelve months, the Company expects to set up larger network of collection and sales in China.
• During the next twelve months, the Company is planning to acquire other companies running similar business in China.

 
Our aggressive expansion plan will be replied on such capital support.  We cannot assure the successful result of fund raising.  As such, we may not execute our initial business strategy or plan as expected, and furthermore, our competitors may stand in a better position than us, which results in an adverse effect on our business, although we believe that currently, even without such funds, we can still run a healthy business within our already occupied markets.

Management believes there are no known trends, events, or uncertainties that could, or reasonably be expected to, adversely affect the Company’s liquidity in the short and long terms, or its net sales, revenues, or income from continuing operations. However the management observed increased competition in the material trading business has resulted in decrease margin in these businesses.

• Revenue for the three months period ended September 30, 2010 were $3,354,608 representing $542,691 or 19% increase compared to the sales of $2,811,917 in the same period of 2009.

• Net income for the three months period ended September 30, 2010 was $546,288, compared to $504,012 for the three months period ended September 30, 2009, an increase of $42,276 or 8%.

Results of Operations -- Comparison between the three months ended June 30, 2010 and the same periods in 2009

Revenue of $3.07 million in the 2010 second quarter, representing $324,127 or 12% increase compared to $2.74 million in the 2009 Second quarter.

Net income for 2010 was $0.537 million, or $0.02 basic and diluted earnings per share, compared to $0.535 million or $0.02 basic and diluted earnings per share .

"The revenue and gross profit from our existing business continues to increase in 2010 second quarter. We are still seeking and selecting consolidation opportunities that will complement our existing business in the waste and environmental services space," said Jack Chen, Sancon's Chief Executive Officer. "Our new waste paper and cardboards collection business has started in June 2010. We believe the new business will provide additional growth to our business forward. We will be updating our shareholders on our expansion progress throughout the year."

Placed on GeoSpecial on the radar list

Due to the massive environmental reforms mandated in China, the GeoTeam® is keeping a close vigil on environmentally friendly Chinese companies. That is why we are taking a look at Sancon Resources Recovery, a stock we have owned in the past that never panned out for us. Sancon specializes in the collection and recovery of industrial and commercial solid wastes that it recycles into products materials re-used by customers in China to make a wide variety of new products including outdoor furniture, construction materials, building materials, road surface, and various new products.

When we stumbled upon SRRY we observed a company that was unable to break out of an EPS threshold of $0.02 on a consistent basis.  2009 continued this trend. 

To be fair, it's important to note that SRRY is a still a small firm and that before the recession SSRY put up some impressive 2008 growth statistics.  

^aNon-GAAP EPS Figures exclude certain non-operating gains and losses as well as certain non-cash items. Non-GAAP information should not be viewed in isolation or as a substitute for reported, or GAAP information . For a more complete explanation of the company's definition of non-GAAP please refer to its financial press releases. The GeoTeam® non-GAAP figures may, from time to time, differ from company supplied figures.The GeoTeam® non-GAAP figures apply a 25% and 36% tax rate for Chinese and United States companies respectively.

2009 has seen decreases in revenues in all of its divisions, but SRRY has maintained profitability. Recent commentary could indicate that business may soon rebound:

SRRY 2009 Third Qquarter's Ffiling Cocommentary:

"Regarding material handling business: Looking forward, Sancon will continue to generate better results in the fourth quarter of 2009."

"Regarding the material recycling business:  Results have suffered mainly because we are still suffering for the global economic crisis in Australia. But things are getting better now."

"Regarding the waste service business: Third quarter 2009 Sales in the waste service business decreased, but experienced a sequential improvement from the second quarter of 2009."

 SRRY Second Quarter Ccommentary: Source: Business Wire (May 19, 2009)

"While we expect our margins and profitability to return to customary levels in the second quarter, we believe that our joint venture with Close The Loop as well as other initiatives to be announced shortly positions us for growth during the latter part of the year and into 2010.”

The GeoTeam needs to understand SRRY business direction. 

In 2008 the company's revenues were derived from three sources: 

Material Recycling refers to the activities of collecting and processing of waste materials, then selling them to customers in China. The plant is located in Australia.

Material Trade refers the activities of buying and selling of materials with operations located in Hong Kong.

Waste management Service refers the activities of providing waste management service with operations located in Shanghai China.

We observed that Sancon's main revenues and margin contribution have come from its waste services division.

From this comparison we can see that the driver of growth has been the Waste services division. It seems obvious that the company should focus on this area of its operations.  An interview with the company is required in order to gain clarity on Sancon's growth plan.  Will it lead to a meaningful break out of its current EPS range and an acceleration of EPS growth?

SRRY is certainly in the right industry:

"The Chinese Government is emphasizing environmental policies & projects for all sectors and entities. On August 2008, China's top legislature passed a law to promote circular economy that went into force on January 1, 2009. The aim of the law is to boost sustainable development through energy saving and reduction of pollutant discharges. At present China's environmental industry is highly fragmented and at its infancy stage."

"As China gains global manufacturing dominance and experienced the effects of the current economic crisis , Chinese manufacturers are increasingly turning to recycled materials to lower costs, resulting tremendous demand for recycled materials import."

We will issue an update if warranted.

“In spite of the difficult and uncertain economic environment globally, our growth continues unabated. This is a testament to the fast growing Chinese waste management market, which underpins our economic performance. We are very pleased to achieve the sixth consecutive quarter of profitability and achieving year on year growth at the same time,” said Jack Chen, Sancon’s Chief Executive Officer. “We have recently been selected to participate numerous government sponsored Green initiatives and we are awarded additional license to process electronic waste in China.” Mr. Chen continued, “In Australia, we sponsored new Biofuel Technology which received substantial government grant in recognition of the green efforts. We believe these strategic initiatives position us favorably to capitalize on our growth momentum into 2010 and beyond."

Source: Business Wire (August 17, 2009)

“Due to the decline of the Australia dollar and slower economic activity in the country, the quantity of waste materials we processed and sold was significantly lower in Australia than in the year-earlier period, which offset growth in China. We are encouraged that demand in China remains strong, helped by the Chinese Government emphasizing environmental policies and projects for all sectors and entities. Chinese waste management market is one of the fastest growing markets in the world. It is estimated to be $35 billion by 2010,” said Jack Chen, Sancon’s Chief Executive Officer.

While we expect our margins and profitability to return to customary levels in the second quarter, we believe that our joint venture with Close The Loop as well as other initiatives to be announced shortly positions us for growth during the latter part of the year and into 2010.”

Source: Business Wire (May 19, 2009)