China Growth Stocks

[tenenbaum]

LIWA - update from GH ... at least this appears to have been a fairly thorough site visit that the company was not given a great deal of time to prepare for.

"Summary: Given the current environment surrounding the US-listed China space we felt that it was imperative to share, in detail, our recent diligence efforts. Going forward we intend to conduct incremental and ongoing diligence with all of our companies and to communicate that in a more direct and factual based manner, akin to a standard diligence report rather than the technical writing style of traditional equity research. Our efforts will be focused on helping investors get a better understanding of the day to day operations at the facilities of the companies that we are currently covering in order to help investors to sift through rumor and innuendo and to be able to focus on the fundamentals of a business. We conducted a 24-hour site visit on March 10, 2011; having given the company less than 24 hours prior notice. The following summary is a description of what we saw, who we spoke with and how we have trued up production capacity. Additionally, we wanted to highlight the fact that LIWA filed its 10-K without any glitches or delays on March 14, eliminated all material weaknesses from its annual report and became SOX compliant. Given the current valuation of only 3.3x FY2011 on a cash adjusted P/E basis (LIWA has ~$3.00 in net cash as of year-end 2010) and 2.4x FY2011 on an EV/EBITDA basis and a number of near-term catalysts to drive share price, LIWA remains our top pick in the US-listed China space.

Highlights

In order to verify LIWA’s stated copper smelting capacity and utilization rates from both an input and output basis, we spent 24 hours at its facility observing operations as well as following its delivery trucks to clients’ facilities in order to verify customer and tonnage shipped. We arrived at LIWA’s facility in the morning on March 10, 2011, giving the company less than 24 hours notice prior to our arrival. During our time at Lihua’s facility, we witnessed the delivery and unloading of copper scrap, the pressing and bundling of scrap into rectangular blocks, loading of these blocks into the smelter, the actual smelting process and the extraction of melted copper into either rod or anode form. Being there for 24 hours allowed us to observe the whole operating cycle and to time the process in order to be able to true up Lihua’s daily smelting capacity, which can be extrapolated into an annual capacity. We have also followed three of Lihua’s trucks to the customers' facilities to verify the deliveries. Additionally, we approached and spoke with Lihua’s workers, truck drivers and people unloading trucks at customers' facilities.

We believe the recent pullback in share price offers an excellent entry point. Lihua’s share price has declined about 20% from the recent highs of ~$11.90 during the last week, while the company reported strong Q4 and FY2010 results, filed its 10-K without any glitches or delays, eliminated all material weaknesses from its annual report and became SOX compliant. In addition, during the last few weeks the company hosted a number of investor meetings and facility tours at its Danyang facility, all of which went very well (to our knowledge). We believe that the recent pullback in share price was attributable to the growing negative sentiment towards the overall US-listed China space, as well as the recent macroeconomic events and nothing related to company specific business or fundamentals. At yesterday’s closing price of $9.46, the stock is trading at only 3.3x FY2011 cash adjusted P/E basis (LIWA has ~$3.00 in net cash as of year-end 2010) and 2.4x FY2011 EV/EBITDA basis.

Several near-term catalysts should create value for investors.

· Awarding of the license for import of 100k MT of scrap copper in Q2 2011.

· Auditor upgrade to a Big 4 firm in Q2 or early Q3.

· Additional sell-side coverage.

· Doubling existing copper smelting capacity to 100k MT in 2H 2011.

· Announcement of further capex plans following the installation of the two new smelters.

Reiterate Buy and $20 price target. Our $20 price target is predicated on 10.3x FY2011 P/E and 6.4x EV/EBITDA multiples. In our opinion a target price of $20 is justified by Lihua’s impressive margins and profitability, strong operating cash flows, positive demand trends for copper consumption and pricing and the robust capital expenditure plans that are expected to double existing capacity by Q3 2011. Lihua also has a solid balance sheet with a net cash level of $88MM, (or almost $3 per share), a current ratio of 5.6x, a cash conversion cycle of under 40 days and has generated ttm ROE and ROA of 35% and 29%."

https://ghsecurities.bluematrix.com/docs/pdf/30725391-b672-4028-a78f-a6778264d5cd.pdf?co=Ghsecurities&id=[e-mail]&source=mail