Significant Upside Potential at Lihua International

Early this morning, Lihua International (LIWA) officially reported Q4 earnings. The results were not much of a surprise after having preannounced on the 6th. The company reported sales growth of 164% for the quarter and 129% for the year. The company reported a whopping $.45 in earnings yet the stock trades sub $12.

The company currently forecasts $53M in net income for 2011 or roughly $1.8 per share. The key though is that the company tends to underestimate earnings on a routine basis and they clearly point out a couple of drivers to higher earnings. First, the projections only forecast one quarter of sales from its new copper recycling facility. Second, the company is not assuming any reduction in costs of goods sold if they receive the importers' license.

Both items will contribute to significant growth in 2012 earnings so the question really remains a mute point on whether 2011 garners more benefits. The importers' license will allow them to source scrap copper from international suppliers at a much cheaper rate basically by cutting out the middle man. Some analysts have placed $10M in benefits to the bottom line from this deal. The earlier production probably won't provide too much upside though a few pennies here and there always contributes to a happier shareholder base.

Although LIWA continues to operate on an exceptional basis the market has largely ignored the progress. Still maintain that the two going private deals could have a huge impact on equity valuations in Chinese small caps and especially in stocks like LIWA. Fushin Copperweld (FSIN) being seen as the closest comparison to LIWA could provide for a significant boost in their stock as investors increasing see downside protection from insiders.

Highlights via LIWA PR:

Fourth Quarter 2010 Financial Highlights
  • Sales increased 164% year-over-year to $135.5 million.
  • Gross profit increased 90% year-over-year to $20.7 million.
  • Net income increased to $9.9 million, or $0.33 per diluted share, compared with $4.2 million, or $0.18per diluted share in the fourth quarter of 2009.
  • Non-GAAP net income(1) was $13.4 million, a 73% increase over $7.7 million in the fourth quarter of 2009.(2)
  • EBITDA increased 88% year-over-year to $18.8 million.(3)
  • Strong balance sheet, with $90.6 million in cash and cash equivalents, or $3.02 per diluted share, as ofDecember 31, 2010, compared with $34.6 million as of December 31, 2009.
  • Cash flow from operations of $2.4 million, compared with cash used in operations of $627,000 in the fourth quarter of 2009.

Lihua is targeting 2011 gross profit of $80.0 million to $82.0 million and non-GAAP net income of $52.0 million to $54.0 million, representing year-over-year growth of 29-32% and 30-35%, respectively. The Company expects that 2011 growth will be largely the result of continued strong demand in China for recycled copper and copper alternatives in the household appliance, consumer white goods and infrastructure markets.
The Company noted that its current 2011 projections assume one quarter of production and sales contribution from its new copper recycling facility, which is currently under construction and due to be completed and commence production by the fourth quarter of 2011, and no favorable impact on cost of goods sold from the importers' license for which the Company has applied. Launching production at its new facility in the timeframe currently anticipated, or receipt of its importers' license from the Chinese government is expected to provide upside to the Company's current gross profit and non-GAAP net income expectations.

Disclosure: Long LIWA. Please review disclaimer page. 


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