Sutor Tech Group (NASDAQ:SUTR)

Rodman and Renshaw on SUTR                       5/9/2011

F3Q11 Results More or Less In-line with Expectations; Maintain Rating and PT

Sutor Technology Group (“Sutor”, Ticker: SUTR, Market Outperform) reported mixed F3Q11 results that as a whole were in-line with our expectation. Total revenue in the quarter was $101.4 million, slightly below our estimate of $103.7 million. Gross profit came in at $8.6 million, also a bit shy of our estimate of $9.3 million. Operating income, however, was helped by lower than expected operating expenses and reached $5.6 million, almost in-line with our expectation of $5.7 million. Actual interest and tax expenses were also below our expectations, resulting in net income of $3.5 million, actually above our estimate of $2.8 million. As a result, diluted EPS for the quarter was $0.09, beating our estimate by couple pennies.

As of March 31, the company had cash, cash equivalents, and restricted cash of $75.0 million as well as $133.2 million of working capital. Stockholders’ equity stood at $187.6 million.

Our Take

Cost under control We are by and large satisfied with the quarterly performance and are especially encouraged by the company’s expense management discipline. Gross margin of 8.5%, while not as impressive as the 9.5% figure reported in F2Q11, was nevertheless decent and higher than a year ago. Changes in product mix and reduced lower margin steel trading business revenue were the major reasons for the improvement. Looking forward, we expect Sutor’s gross margin will hover around 9% for the next several quarters. SG&A, which looked to be near a breakout in F2Q11 mostly because of higher international shipping costs, were now under control. To reduce shipping cost, the company wisely adopted a FOB (Free on Board) method in F3Q11 rather than continuing with the CIF (Cost, Insurance and Freight) method that it used in the previous quarter. We are heartened by such a nimble move. As a whole, considering China is entering into a more inflationary environment that could prove supportive for Sutor’s product prices, and the company has been focusing on maximizing the utilization of its production capacity, we continue to take a constructive view on the Sutor’s margin outlook.

New cold-rolling facility to come on-line in C1H12 As Sutor has been running at more than 100% capacity of its existing cold-rolling production line, we eagerly await the development of its new 500,000 metric tons cold-rolling plant, which the company expects to start operation in the first half of calendar year 2012. The new facility should alleviate Sutor’s capacity constraint and provide a new push for its revenue and profit growth. It could also broaden the company’s product offerings and enhance margins.

Risks

Major risks to our rating and price target include both domestic and international macroeconomic risks, steel price volatility, highly fragmented and competitive industry, revenue and customer concentration, as well as country and political risks related to operating and investing in China.


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 SUTR                  2/12/2011

Below Expectation F2Q11, Lowering PT to $5 

Sutor Technology Group (“Sutor”, Ticker: SUTR, Market Outperform) announced F2Q11 results that were mostly below our expectations. Total revenue decreased 13.7% YoY to $99.4 million, lower than our estimate of $111.7 million and Street consensus of $110.5 million. Despite the significant decline in revenue, gross profit grew 9.6% YoY to $9.5 million with a gross margin of 9.5%, beating our respective estimates of $9.1 million and 8.1%. Net income decreased by 27.2% YoY to $2.9 million, or $0.07 per diluted share, below our respective estimates of $3.4 million and $0.08 as well as Street consensus of $3.6 million and $0.09.

F2Q11 Highlights and Discussions 

Revenue decrease largely due to reduced steel trading business The significant drop in revenue was primarily due to reduced trading business at Sutor’s subsidiary Ningbo Zhehua Heavy Steel Pipe Manufacturing Co. (“Ningbo Zhehua”). During F2Q11, revenue from Ningbo Zhehua decreased by $10.2 million YoY to $8.4 million from $18.6 million a year ago. In addition, lower production volume of PPGI products also contributed to lower revenue. We believe it is management’s intention to reduce the revenue contribution from trading business as it carries lower margins and to focus on production of higher-margin products. Management expects the trading volume to remain low for the remainder of 2011. An encouraging sign of revenue recovery is that Sutor received approximately 10,000 tons of sales orders from aboard in January, almost the same amount received in the entire F3Q10. 

Significant gross margin expansion as a result of favorable product mix shift Gross margin expanded 200bps YoY and 120bps sequentially to 9.5% in F2Q11. The improvement was mostly due to product mix shift to higher-margin products. During the quarter, Sutor significantly reduced trading revenue which carried lower margins and increased production of higher-margin products. Management expects the gross margin will stay around 9% for the remaining quarters of 2011. We are encouraged by this improvement because Sutor’s gross margin had not been above 8.3% since the beginning of CY2009. 

Escalating expenses diminishing net profit Selling expenses rose 89.8% YoY to $2.0 million mainly due to sharply increased international shipping costs, which reached $1.2 million compared to $0.08 million last year. We believe that the shipping expenses could go even higher during the next quarters since international sales orders soared in January. G&A expenses increased 44.3% YoY to $1.7 million from $1.2 million a year ago. The opening of two new offices in Ningbo and Shanghai, attending international trade shows, and increased allowance for bad debt resulted in spike in G&A expenses. We expect G&A as a percentage of revenue will be lower during the rest of 2011 quarters as we believe some expense items such as opening new offices should not be repetitive in the remaining year. Interest expenses reached $2.3 million, compared to $1.3 million last year. The increase was mostly due to the higher cost of discounting bank acceptance notes.


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 & Renshaw on SUTR

F1Q11 Results Mixed

Sutor Technology Group (“Sutor”, Ticker: SUTR, Market Outperform) reported mixed F1Q11 results. Total revenue was $101.9 million, significantly below our estimate of $131.0 million and Street consensus of $132.0 million. The below-expectation top line performance was largely due to a lower than expected production volume of PPGI as well as decreases in steel pipe trading operations. Helped by better than expected margins, however, gross profit for the quarter was $8.4 million, slightly below our estimate of $9.8 million. Net income was $3.4 million, in-line with our expectation, but slightly below the $3.7 million Street consensus. Diluted EPS for the quarter was $0.08, also in-line with our estimate, but one penny shy of the Street consensus. At the end of September, the company had cash and cash equivalent of $17.1 million as well as $45.1 million of restricted cash and $107.5 million of working capital.

Our Take 

We believe Sutor reported a respectable quarterly performance with the miss in revenue being buffered by improvements in gross margin and SG&A. Actual gross margin during the quarter was 8.4%, almost a whole percentage point higher than our estimate of 7.5%. A greater focus on advanced PPGI products with higher margins but requiring more sophisticated processing procedures and production time was a major reason for the improvement in gross margin but the decline in production volume. SG&A during F1Q11 were $3.0 million, below our estimate of $4.2 million. Net margin during F1Q11 was 3.3%, representing a 60bps improvement from F4Q10, also 70bps higher than our estimate. With the company’s focus on maximizing the utilization of its production capacity as well as searching for potential downstream acquisition targets, we take a constructive view on the company’s margin outlook in the near to medium term future. We also expect the company will continue to adjust its product mix in order to adapt to China's increasingly inflationary environment.

Maintaining Market Outperform Rating and $6 Price Target 

In light of the F1Q11 results, we have tweaked our financial model and projections. For fiscal year 2011, we now expect the company will realize revenue, gross profit, and net income of $454.4 million, $37.2 million, and $14.3 million, respectively. This also translates to a diluted EPS of $0.35 for F2011. We are maintaining our Market Outperform/Speculative Risk rating on the shares of Sutor and our price target of $6. The price target is based on Sutor shares trading at 15x our CY2011 EPS estimate of $0.40.

Risks 

Major risks include macroeconomic risk, steel price volatility, highly fragmented and competitive industry, revenue and customer concentration, as well as country and political risks related to operating in China.


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 & Renshaw on Sutor

4Q FY10: SUTR announced its 4Q FY10 (ended on June 30, 2010) revenue and net income of $125.3 MM and $3.4 MM, with a fully diluted EPS of $0.08. Top-line for the quarter grew by 14.1% Y-o-Y from $109.8 MM in 4Q FY09 helped by demand from China and abroad. 

 Full Year FY10: On a full year basis, SUTR generated total revenue and net income of $478.7 MM and $11.3 MM, with diluted EPS of $0.29. This compares to FY09’s results of $429.8 MM, $18.7 MM, and $0.49, respectively. Top-line growth reached 11.4%, primarily driven by a 27.1% increase in sales volume. Total shipment volume for FY10 was 746K tons, compared to 587K tons in FY09. By product mix, HDG (Hot Dip Galvanized Steel) contributed the largest portion of total sales, accounting for 48%, compared to 17% from PPGI (Pre-Painted Galvanized Steel), 12% from Cold Rolled Steel, 13% from Welded Steel Pipe, 8% from Acid Pickled Steel, and 2% from other steel products. 

 Export Sales Remain Robust: For FY10, export sales contributed $53.7 MM in revenue or ~11.2% of total, representing 18.3% Y-o-Y growth. This compares to $45.4 MM or 10.6% of total in FY09. This indicates continued penetration of SUTR’s higher-end products in overseas market. Management expects international sales to continue to grow in FY11 at a 12%~ 15% growth rate. 

Margin Pressure May Persist: We remain cautious on SUTR’s gross margin for the remainder of 2010 given the mixed signals from China’s soft-landing policy and production cuts in steel industry. In our view, steel makers’ production cuts could potentially affect the growth of the company’s processed volume, with COGS remaining at a relatively high level in the near-term. 

FY11 Estimates: Now we are projecting revenue and net income of $131.0 MM and $3.6 MM, with diluted EPS of $0.09 for 1Q FY11. For full year FY11, our estimates are $543.0 MM, $15.6 MM, and $0.39, respectively. Our full year revenue projection is based on our assumption of 820K tons of total shipment volume and ASP of $662 per ton. 

 Valuation: At current levels SUTR is trading at P/E multiples of ~5.2x, and ~4.3x to our CY2010 and CY2011 earnings estimates. On EV/EBITDA basis, the company is trading at ~5.5x and ~4.8x to our CY2010 and CY2011 forecasts. These multiples are below industry averages for similar players in the US and China. We believe SUTR should be trading at a minimum in line with industry averages given the growth opportunity associated with it. We are comfortable maintaining a $7.00 price target for SUTR. 

Investment Risks: (1) Revenue Concentration (2) Highly Fragmented and Competitive Industry (3) Steel Price Volatility (4) Change in government regulation Liquidity. 

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.