Sancon Resources Recovery (PINK:SRRY)

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.