Due Diligence with Equicap (OTC BB:EQPI) and Sino Gas (OTC BB:SGAS)

As GeoTeam members may have gathered, we are actively seeking companies that are selling under book that may offer hidden value. The returns from these plays have been nothing short of amazing.  China Agritech Inc (NASDAQ:CAGC), Orient Paper Inc (OTC BB:OPAI) and China Gengsheng Minerals (OTC BB:CHGS) are examples of stocks that we mentioned at opportune times.

We constantly stress that investors need to approach these plays with caution. Sometimes, all the due diligence won’t uncover some of the problems that exist behind closed doors.  Furthermore, we unfortunately don’t have the time to interview 50 companies in a timely fashion.  But we are willing to take an immediate chance based on a risk/reward basis, especially if the companies are profitable.  One of the biggest unknowns is the likelihood that these firms will partake in dilutive events in order to rectify liquidity situations—situations that are often the cause for discounted stock prices.  As always, we are eager to receive investor input while performing our due diligence so we can all profit quicker.

Our “book value” list has grown to near 50 stocks, all of which we are tracking. Two that we have added to our portfolios are Equicap Inc (OTC BB:EQPI) and Sino Gas Intl. Holdings (OTC BB:SGAS).  We are coding both of these stocks as special situation plays.

Equicap Due Diligence

Equicap’s book value per share is $0.44.  The GeoTeam is seeking input from investors on this stock.  On the surface EQPI seems to benefit from the stimulus plan.  An interview is needed to confirm this assumption.

Equicap manufactures and distributes gears and gearboxes mainly used in or together with diesel engines for industrial and agricultural machinery, fork lifts, excavators, construction equipment, tractors, pumps and other machinery.  The Company also had served the auto industry but recently sold this business to focus on its core more substantial industrial and agricultural segment.

From a net income perspective, the Company’s position is not overly attractive.  However, a more thorough inspection of its filings reveals that a good deal of the losses was the result of one time non-cash charges and legal expenses:

Fiscal Year 2009 vs. 2008 Financial Snapshot

Equicap Stats

As far as we can tell the financial statements are clean.

• No long term debt
• Current ratio is 2.3:1
• Cash per share is $0.14
• In 2009 The company turned cash flow positive: $1.7 million
• At June 30, 2009, Equicap had working capital of $6,202,353 and believes that it has sufficient operating capital for its current operations.

For a final analysis, investors would need to at a minimum consider the following:

• Even after adding back unusual charges, Equicap is still losing money.  Furthermore, 2009 losses exceed 2008 losses. We ultimately need to ascertain if the company will turn a profit.
• It seems that the Company has not issued a news release since August 2008.
• In 2008, for the gear segment, two customers accounted for 86% of sales.
• “As the demand for gear and gearbox products has grown in China, the competition within that market has also grown and has become severe.  There are many local manufacturers making gears and gearboxes, and most of them are willing to compete for customers and market share through low pricing. There are also many global manufacturers interested in the large Chinese market who are entering the market and selling gear and gearbox products having better quality and design.”  (Source, 2009 10K)

• The company had some legal issues with certain investors.  In July 2009, it settled these issues through buying back stock from these investors.
• 2007 and 2008 financial targets were not reached.
• Short term bank loans: $2 million.
• Need to determine capital needs.
  

The GeoTeam is requesting an interview.

Sino Gas Due Diligence

Sino Gas’s book value per share is $1.90. (Fully diluted Book value: $1.68, taking into account about 9 million shares from dilutive instruments that have exercise prices starting at prices above $3).  The GeoTeam is seeking input from investors on this stock as well. 

Sino Gas is a leading developer of natural gas distribution systems in small and medium sized cities in China, as well as a distributor of natural gas to residential, commercial and industrial customers in China.

We have been tracking SGAS for a while and is a stock that has been on a tear over last few days, moving about 75% to the upside since October 8, 2009.

We haven’t really delved into the story but thought savvy investors might want to take a closer look at it.  Per press releases and SEC filings, the company is profitable and seems bullish about being able to resume growth during the recovery from the global recession.

“The Chinese government has adopted new policies to address the slowdown of the real estate market, such as reducing stamp duties and transactions fees, lowering interest rates, and loosening bank lending policies. The Chinese government has also decided to inject stimulus package to boost the overall economy, including allocation of funds for mass housing projects. We have seen signs of recovery of the real estate market in China in recent months.”  (Source: 2009 June 10Q)

Sino Gas Stats

• Current Ratio is less than 1
• Account payables are higher than its accounts receivable and cash positions.
• As of  the most recent quarter net margins are noticeably thin at 6%
  

The GeoTeam will request an interview and provide more details if warranted.

Disclosure: Long EQPI, SGAS