Dutton Associates Report (Not rated) 2-Feb-07 08:24 am Fushi International Inc. announced today that it has closed a US$60 million financing with Citadel Equity Fund Ltd. (Citadel). In this hybrid debt financing, Citadel purchased (1) US$40 million of Fushi's Guaranteed Senior Secured Floating Rate Notes due 2012 and (2) $20 million of Fushi's 3.0% Senior Secured Convertible Notes due 2012 at an initial conversion price of US$7.00 per share. Citadel was granted certain corporate governance rights over the Company and its subsidiaries, which include the right to designate up to certain number of Fushi's board of directors, right of first refusal with respect to any financing sought by the Company and right to approve the Company's annual business plan and budget.
Based on the prevailing LIBOR of 5.36%, the Company will pay a rate of LIBOR plus 7.0% or 12.36% on its US$40 million Guaranteed Senior Secured Floating Rate Notes. This, along with the 3% interest rate on the $20 million Secured Convertible Notes, represents an annual interest burden of $5.54 million, which is quite substantial compared to its $14.74 million of income from operation for the nine months ended September 30, 2006. Nevertheless, we believe the new financing will have a positive impact on driving the Company's revenue and earnings ahead. It is because the Company's sales and capacity expansion has been restrained by lack of sufficient working capital. The Company's bimetallic copper wire products are actually in strong demand from various industries. In 2006, Fushi produced approximately 10,000 to 11,000 tons of bimetallic copper wires and it can basically sell whatever amount it can produce. Fushi enjoyed a gross margin of between 36-44% for the first three quarters ended September 30, 2007. As long as Fushi can increase sales, the interest rate burden would not be a problem. Besides, with the additional $60 million on hand, Fushi may be able to acquire some smaller companies to expand its operation.
Recently, copper prices seem to have found support near the $5,500 per ton level, after falling from its peak near $8,800 in May last year. Latest figures indicated that China's copper imports increased sharply in December 2006, suggesting demand is picking up again and inventory adjustment is near its end. Selected US stockers have begun to turn bullish on copper prices. We believe copper prices could be on their way for a recovery and bode well for sentiment for Fushi. With the additional $60 million cash on hand, the Company will probably release an expansion plan to drive sales during a road show in the US scheduled in February. We are waiting for additional data to revise our volume sales and price assumptions for 2007 and 2008. We reiterate our Strong Speculative Buy rating on the stock.
Sentiment : Buy
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