When it comes to the perception of public companies, image is extremely
important. Specifically, stocks that are considered "penny stocks"
usually show characteristics of being startups with stories. Their
chances of success and bringing in lasting returns for their investors
are minimal at best. It is never good to generalize but there is
a reason China Vesting tracks over 500 companies and of those we follow
less than a dozen are considered "penny stocks". Of the companies
that China Vesting does monitor most are listed on the Nasdaq or NYSE AMEX.
This is exactly why when we first started researching China America Holdings
(CAAH) it felt like a complete waste of time. Based on the April
20th closing price of $0.04 per share the expectation levels for the company
were kept very low.
China America Holdings is in the business of selling and distributing
assorted liquid coolants which are utilized in a variety of applications,
primarily as refrigerants in air conditioning systems for automobiles,
residential and commercial air conditioning systems, refrigerators, fire
extinguishing agents and assorted aerosol sprays. The liquid coolant
business may not seem like a very attractive industry. However, according
to the State Information Center of China, the Chinese air-conditioning
market is predicted to reach a sales volume of 25 million with a 10% rise
year on year for the 2010 air-conditioning year. China also became
the world's largest auto market last year, when total vehicle sales jumped
45 percent over 2008 to 13.6 million units.
The increased use of air conditioning in China coupled with the boom
in car ownership can explain China America's revenue growth in the past
two years. In 2007, China America produced $16.29 million in revenue.
For the year ended 2008, revenue increased 113% to $34.968 million.
Effective September 7, 2009, the company changed its fiscal year end from
December 31 to September 30. However, for the sake comparison we'll
utilize the calendar year numbers. Thus, during the calendar year
2009 China America reported revenue of $33.948 million.
On April 15, the company announced that its 56% owned China based subsidiary
Shanghai AoHong Chemical Co., Ltd. ("Shanghai Aohong") has begun test run
production at its newly constructed chemical production facility in Tianjin.
The newly constructed facility is located in Tianjin, approximately 70
miles north of Beijing. The facility is expected to produce approximately
8,000 tons of a mixture of refrigerant chemicals per year, virtually doubling
Shanghai Aohong's total annual capacity. At today's prices, management
estimates the facility is capable of generating annual revenue of approximately
U.S. $22 million. What impact this new facility has on the 2010 results
is still unknown at this point.
What China Vesting does know is that as of February 12, 2010 China America
has 159,810,792 shares of common stock issued and outstanding. Based
on the April 20th closing price of $0.04 per share the current market capitalization
is just $6.392 million. China America suffers from "penny stock"
syndrome whereby the stock is too low to attract investors. From
China Vesting's perspective we believe that the company is undervalued
and if CAAH focused on improving its image (ever heard of a reverse stock
split) the stock should outperform.
Unlike most stocks that trade at the $0.04 levels, CAAH does not need
cash to continue operating its business. As of December 31, 2009
the company had $2,326,153 in cash and $994,559 in restricted cash which
totals $3,320,712. Accounts receivable stood at $2,597,670 while
inventory levels were $2,123,835. Total current assets were
$8,664,776 while total assets including property and equipment were $15,255,739
or $0.095 per share.
On the liabilities side the big item is the $4,120,244 note payable
which is not a difficult debt to service considering the company's cash
on hand. The total current liabilities are $6,674,000 which equates
to net assets being $8,581,739 or $0.053 per share. This means that
China America's assets are worth 34% more than the public market value
of the company without factoring in the business which generates over $30
million dollars a year in business. Currently, the only problem is
that CAAH does not make a lot of money but it also doesn't lose a lot of
money.
For the past three years China America has produced revenue of $16.29
million (2007), $34.968 million (2008) and $33.948 million (2009) respectively.
Net income during the same period has been a loss of $1.119 million (2007),
loss of $561k (2008), and a loss of $633k (2009). It seems like in
the past three years the company has just not been able to get over the
hump. What seems to be the problem?
The gross profit margins in the past three years were 16.37% (2007),
8.33% (2008) and 9.24% (2009). At least the company has gross profits
and is not in the business of selling things for less than they can produce
them. The question to ask is what the impact from the new Tianjin
facility means to the bottom line. We would hope that the newly constructed
chemical production facility would be able to produce some profits to the
bottom line.
In a press release dated April 15th the company states:
The facility is expected to produce approximately 8,000
tons of a mixture of refrigerant chemicals per year, virtually doubling
Shanghai Aohong's total annual capacity. At today's prices, management
estimates the facility is capable of generating annual revenue of approximately
U.S. $22 million.
China America currently has three business segments:
- Distribution of bulk quantities of liquid coolants directly to customers
who in turn resell the product. For three months ended December 31,
2009 this segment represented 44% of revenues.
- Sales of liquid coolants which had been purchased in bulk and repackaged
into smaller qualities for resale. For three months ended December 31,
2009 this segment represented 50% of revenues.
- Custom mixing of various raw materials in accordance with customer
specifications into a new product. For three months ended December 31,
2009 this segment represented 6% of revenues.
If the current capacity is $11 million and it doubled to $22 million
we can assume that revenues in 2010 should be the 2009 figure of $33.948
million + the $11 million in additional revenue. That would mean
2010 revenue of $44.948 million representing growth of 32.4%. However,
the biggest question remains if the company will report a net profit.
It is important to keep things in perspective, CAAH's total company value
is currently just $6.392 million. There is no profit (P) to the Price
to Earnings Ratio (P/E) equation yet but that is also why China America's
assets are worth 34% more than the public market value of the company.
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It is going to be very interesting to see what becomes of China America's
financials this year. With revenues in the $30-$40 million dollar
range, if the company could squeeze out a net profit margin of just 5%
the market would potentially value the company at 8-12 times earnings or
even higher based on growth. That would equate to a market capitalization
of $15-$24 million or $0.09-$0.15 per share. Which brings us to the
next point...If China America wants to attract serious investors they are
going to have to reverse split the stock.
159,810,792 shares of common stock issued and outstanding is just way
too much. Reversing the shares 10 for 1 would cut the share count
down to 15.98 million and the stock price to the $0.40 levels. However,
if CAAH could produce a profit for 2010 then in our opinion the shares
would move significantly higher. Addressing how the company looks
is an important first step for the company but this moves lock step with
generating profits.
China Vesting looks at CAAH and sees a $6.392 million company with net
assets of $8,581,739 or $0.053 per share. The company has a
total cash position of $3,320,712 and does not appear to need funding to
keep its doors open. Owning shares of China America is similar to
holding a call option on a $33.948 million business operation that has
stated publicly that they will be able to double one of their business
segments. Based on the April 20th closing price of $0.04 per share,
we believe this $6.392 million dollar company is undervalued. It is for
this reason that China Vesting has taken the unusual step of adding a "penny
stock" to our China Dragon Undervalued Index.
