During the solar panel manufacturing process, an energy-conducting metallic paste is applied directly onto solar wafers. The fragile wafer often breaks in the process, driving up production costs. APNT has developed spray-on solar inks that eliminate the problem of breakage, providing significant cost-saving potential. Among the other benefits of APNT’s technology:

• With traditional methods, solar wafers need to be thick enough to withstand the pressure of the application equipment. APNT’s non-contact technology enables manufacturers to create a thinner wafer, which substantially reduces production costs.

• Non-contact machines can print several wafers in a single pass, while conventional machines can only process one wafer per pass. Additionally, with non-contact methods, several layers of ink can be printed simultaneously without having to dry each layer between steps.

• Non-contact methods are extremely precise, only placing inks when and where needed. In contrast, conventional machines produce added waste, leaving paste on the printing components.

“Collectively, these changes in processes translate into dramatic material cost savings close to 44%, or overall solar cell cost savings potentially exceeding 27%,” writes Mr. Novak. The implementation of APNT’s technology could bring solar much closer to reaching the industry’s “$1 per watt” goal, which represents cost-competitiveness with conventional energy sources. APNT has already signed its first solar ink licensing agreement with Sichuan Anxian Yinhe Construction and Chemical Group Co., Ltd. (YHCC), a construction, manufacturing and chemical company with a 46-year operating history and $330 million in 2010 sales. Under the terms of the license, APNT will receive an upfront payment of $2.0 million and an ongoing royalty of 3% on sales of solar inks and pastes by YHCC.

Solar ink technology represents only one element in APNT’s massive IP portfolio. The Company has 300 patents (150 issued and 150 pending) in the areas of nanomaterials, nanosensors, inks and more. Having built its business providing research services to high-profile clients such as the National Institutes of Health and the U.S. military, APNT is just beginning to commercialize its technology in such high-growth sectors as renewable energy, consumer goods, and more. To learn why RedChip analysts consider the stock a great buy at current prices, read RedChip Research’s recently published research report on APNT. You can also see and hear directly from APNT’s CEO, Doug Baker, by watching the Company’s presentation from our November conference at the Harvard Club in New York.

Disclosure: The subject security is a client of RedChip Companies, Inc. RedChip Companies, Inc., employees and affiliates may have positions and affect transactions in the securities or options of the issuers mentioned herein. For full financial disclosures for all RedChip clients, please visit http://www.redchip.com/disclosures.asp?src=rcv.

Given the benchmark status of the Russell indexes, including the Russell 2000 and Microcap indexes, it’s easy to understand why investors so eagerly anticipate the reconstitution. Approximately $4 trillion in assets are currently benchmarked to Russell indexes, more than all other U.S. equity indexes combined. Jim Polisson, managing director of Russell’s global ETF business, recently noted that $84 billion in assets are tied to exchange-traded funds (ETFs) that use Russell indexes.

A preliminary list of additions and deletions for the 2011 Russell indexes was posted June 10 and updated June 17. A total of 186 companies were added to this year’s Russell 3000, which includes both the Russell 1000, the 1000 largest public companies in the U.S., and the Russell 2000, the benchmark small-cap index. The largest number of additions for these indexes comes from the healthcare, financial services and technology sectors. China stocks account for a smaller percentage of this year’s Russell indexes compared to previous years, as the recent selloff in the sector has pulled down the market cap of many U.S.-listed Chinese companies. Despite a challenging market environment, several Chinese companies joined the Russell indexes this year, including Funtalk China Holdings Ltd. (NASDAQ: FTLK) and Renren Inc. (NYSE: RENN), known as the “Chinese Facebook.”

While the Russell 2000 specific reconstitution list has not yet been published, based on market-cap metrics of the Russell 3000 changes, below are a few notable additions to the 2011 index:

Hyperdynamics Corp. (NYSE Amex: HDY): HDY is an independent oil and gas company conducting offshore exploration in the Republic of New Guinea in West Africa. The company has signed drilling, equipment and services contracts in preparation for the drilling of its first exploration well, which is expected to commence during the fourth quarter of 2011. With the rapid development of emerging nations such as China, global demand for oil and gas is expected to outpace supply over the next few years, creating a tremendous need for the resources of HDY and other U.S.-based oil and gas companies such as Cross Border Resources, Inc. (OTC QX: XBOR), which owns 31,000 net acres within the resource-rich Permian Basin; and Sentry Petroleum Ltd. (OTC BB: SPLM), which recently began drilling for coal seam gas at its ATP 862 permit in Queensland, Australia.

Kronos Worldwide Inc. (NYSE: KRO): Similar to China Chemical Corp. (OTC BB: CHCC), KRO manufactures chemicals that are used in a wide variety of industrial and consumer applications. KRO’s primary products are titanium dioxide pigments, which the company markets in North America and Europe. Titanium dioxide is used to add whiteness and opacity to products such as paint and plastics. Prices for titanium dioxide are rebounding from the global recession due to rising demand for cars and other consumer goods, positioning KRO for continued sales growth and improved profitability.

ZAGG Inc. (NASDAQ: ZAGG): ZAGG, a high-growth stock first discovered by RedChip in mid-2008, manufactures protective coverings, audio accessories and power solutions for consumer electronics and handheld devices. Its products are sold in Best Buy (NYSE: BBY) stores, and ZAGG also has an exclusive distribution deal with Logitech International (NASDAQ: LOGI) for the ZAGGmate, an iPad case with a built-in keyboard. For the first quarter of 2011, ZAGG grew revenues 207% year-over-year to $27 million on strong sales of the ZAGGmate. Net income increased 312% to $3.3 million.

These three companies represent just a handful of the exciting additions to the Russell indexes this year. Companies that join the Russell indexes can benefit from increased visibility to investors as well as passive investment from funds that track the various benchmark indices. With nearly 60% of institutional funds benchmarked to Russell indexes, expect heavy trading activity after the final changes for the year are announced this Friday.

Disclosure: XBOR, SPLM and CHCC are clients of RedChip Companies, Inc. RedChip Companies, Inc., employees and affiliates may have positions and affect transactions in the securities or options of the issuers mentioned herein. For full financial disclosures for all RedChip clients, please visit http://www.redchip.com/disclosures.asp?src=rcv.

Energy efficiency has long been considered the “low-hanging fruit” of the clean-tech movement, and private businesses are just beginning to discover its value. In addition to providing environmental benefits, implementing energy-saving measures and technology can help businesses lower their operating costs and improve profitability over the long term—an attractive value proposition in these budget-conscious times, especially given rising energy prices. A recent CNN Money article outlined the dramatic cost savings generated by energy efficiency improvements at a number of Fortune 500 companies. The most striking example is Dow Chemical (NYSE: DOW), which invested $2 billion in energy efficiency improvements between 1994 and 2009. This investment resulted in cost savings of $9.4 billion over the 15-year period, for a total ROI of $7.4 billion.

U.S. energy service companies (ESCOs) thrived during the 2008-09 recession due to strong business from local and state governments, schools, and hospitals, which received federal stimulus money for energy efficiency projects. These institutions are expected to drive ESCO market growth in the years ahead due to government incentives and “lead by example” programs at the state and local levels. Below are some reasons why investors should consider adding ESCOs to their portfolios:

Robust market growth projected through 2020: According to a 2010 study by the Lawrence Berkeley National Laboratory, U.S. spending on energy efficiency services is expected to increase from $18 billion in 2008 to $37 billion by 2020 under a low-growth scenario, or $80 billion under a high-growth scenario.

Huge untapped opportunity: A 2009 McKinsey & Company report estimates that $130 billion worth of energy-saving opportunities go unrealized in the U.S. each year.

Federal support for energy efficiency projects: President Obama’s Better Buildings Initiative, unveiled in February, aims to achieve a 20% energy efficiency improvement in U.S. commercial buildings by 2020. The initiative will provide tax incentives, grants to state and local governments, and financing opportunities for energy-saving projects.

Utility providers offering energy-saving incentives: It costs approximately seven times as much to produce a kilowatt-hour of electricity as it does to save a kilowatt-hour. To lower operating costs, utility providers are offering rebates to customers for the purchase and installation of energy-efficient products and systems. From 2004 through 2009, customer-funded energy efficiency spending increased from $1.7 billion to $4.4 billion, representing a compound annual growth rate (CAGR) of 21.3%. Spending is expected to increase at a CAGR of 16.1% between 2010 and 2015.

Among U.S.-listed ESCOs, Blue Earth, Inc. (OTC BB: BBLU) stands out for its high growth potential and relatively low profile. The Company offers energy efficiency services as well as refrigeration, lighting and HVAC (heating, ventilation and air conditioning) technology, with a focus on commercial and residential customers. BBLU only began trading on the OTC Bulletin Board in October and has, much like the subsector it operates in, largely flown underneath the radar.

BBLU is currently focused on ramping up its market presence through strategic acquisitions. The Company’s management team has extensive M&A experience, having previously completed 34 acquisitions in 4 years. The team completed BBLU’s first acquisition in January and subsequently expanded the new subsidiary into several states. More recently, BBLU signed an agreement for a second acquisition: Xnergy, a profitable California-based ESCO whose clients include Abbott Laboratories (NYSE: ABT), Boston Scientific (NYSE: BSX), Johnson & Johnson (NYSE: JNJ), Pfizer (NYSE: PFE), Cox Communications, and the U.S. Navy. Xnergy has a $500 million project pipeline and is expected to more than double revenues from $18 million in 2010 to over $36 million in 2012. These acquisitions give BBLU access to an established customer base and position the Company for rapid growth in the second half of 2011 and beyond.

Management’s history of successfully executing roll-ups bodes well for BBLU, which is just starting to implement its growth strategy. The projected increase in domestic energy efficiency spending and the strong recent performance of energy efficiency stocks provide additional reasons to invest in this early-stage clean-tech play.

Disclosure: The subject security is a client of RedChip Companies, Inc. RedChip Companies, Inc., employees and affiliates may maintain positions and affect transactions in the securities or options of the issuers mentioned herein. For full financial disclosures for all RedChip clients, please visit http://www.redchip.com/disclosures.asp?src=rcv.

Are LEXG Investors “One Flew Over the Cuckoo’s Nest”?

By Dave Gentry, President of RedChip Companies, Inc.

The American thinker and writer Tom Wolfe wrote a book called the Electric Kool-Aid Acid Test in 1968 describing the counterculture fascination with hallucinogenic drugs à la “acid” in the 1960s. The LSD culture was led by Dr. Timothy Leary, the Harvard psychologist; Ken Kesey, author of One Flew Over the Cuckoo’s Nest and the founder of the Merry Pranksters, the group of acid heads who gained notoriety for their antics on the Merry Pranksters tour bus; and of course the Grateful Dead, one of the greatest rock bands of all time. The Grateful Dead became legendary and quickly built a cult following by playing in rented warehouses in Palo Alto, California, where their followers would fill pools with LSD mixed with Kool-Aid: hence, the title of Tom Wolfe’s book (See http://obie1.homesite.net/deadcd/acid_test_files.htm). The “Acid Test” was what Ken Kesey called the experience of tripping on LSD on his ranch in the Redwoods of California.

The Pranksters’ destination was “Furthur,” and a sign on the back of the bus warned, “Caution: Weird Load.” Investors associated with the Lithium Exploration Group (OTC BB: LEXG), a $0 revenue micro-cap stock, recently spent $4.5 million for a massive promotional piece, a slick 12-page pamphlet mailed to millions of investors that caused thousands of them to suck up the LEXG Kool-Aid by the gallons. You might say the stock went “Furthur,” shooting up during a five-week period between March 18 and May 24 from $1.50 to $10.00, allegedly almost putting the broker-dealer, Wilson Davis, out of business on a short margin call.  

Yes, like the Merry Pranksters’ LSD bus tour, the stock movement was fueled by a “Weird Load,” a promotional piece that used the classic sales technique of Association, the use of quotes and research about lithium by well-known investors and financial periodicals, implying weirdly and deceptively that LEXG is around the corner from explosive growth and profits from the sale of lithium. 

(To learn more about the uses and composition of lithium, click here: http://education.jlab.org/itselemental/ele003.html)

Spread liberally and strategically throughout the promo piece were quotes from Bloomberg News, The New York Times, Forbes, The Wall Street Journal, Deutsche Bank, Ford, Nissan, BMW, and Warren Buffett. All mention lithium and/or the use of lithium in electric-powered cars. None of the quotes, of course, said a word about LEXG.

Consider for a moment the remarkable claims made in the promo piece about LEXG:  

“LEXG Will Turn the Energy World on Its Head.”

“LEXG owns properties in regions that contain approximately 22.7% of the world’s known lithium reserves…”   

“And in the LEXG’s brine-based claims, the lion’s share of the work is done by 98 oil and gas drilling rigs… where others pay $2400 a ton to extract lithium…our tiny company pays a mere $1200 a ton…”

FACT: They do not own the properties in Venezuela or Canada; they simply have options to purchase the properties based on a strict payment schedule spread out over, in some cases, three to four years. 

FACT: LEXG does not own, operate, lease or license any oil and gas drilling rigs.

FACT: LEXG has not extracted any lithium, nor will they do so in the near future, if ever.  

FACT: “A qualified person as defined under NI 43-101 has not done sufficient work to classify the historical estimate as current mineral resources or mineral reserves of their ‘lithium’ properties.”  (10Q-March 31, 2011)

In regards to both of their “Lithium” properties in Venezuela and Canada, we find this disclaimer on their website:

The tonnages, grades, and other technical data are taken from historical estimates prior to the implementation of NI 43-101. A qualified person as defined under NI 43-101 has not done sufficient work to classify the historical estimate as current mineral resources or mineral reserves. Lithium Exploration Group is not treating the historical estimates as current mineral resources or mineral reserves as defined in NI 43-101 and the historical estimate should not be relied upon.  

Electric Kool-Aid Lithium Claims Continued

“It’s only a matter of time before the battery-driven demand spike drives the price, and LEXG’s stock, to the heavens permanently.”   

FACT: The stock went from $1.50 to $10.00 and closed yesterday at $2.44.

The word “misleading” does not accurately describe the cornucopia of phantasmagoria the mailer creates around LEXG. On page 9 in the section titled “The Spark That Ignites the Bonfire,” the writer, Elliott Dobbs (if that is actually his name), says, “I can tell you one thing with utter confidence: Everything is positioned perfectly for LEXG.” 

To which I ask:  What about your financials?

Electric Kool-Aid Lithium Test:  Financials

This company was founded five years ago. From May 31, 2006 through March 31, 2011, it has invested $276,200 in “mining expenses.” On its most recent 10-Q, LEXG shows a cash balance of $43,000 for the three months ended March 31, 2011.  From the same 10-Q: 

The Company has been in the exploration stage since its formation on May 31, 2006 and has not yet realized any revenue from its planned operations. It is primarily engaged in the acquisition, exploration, and development of mining properties. Mineral property acquisition and exploration costs are expensed as incurred. (March 31-2011 10Q)

Electric Kool-Aid Lithium Test: A Going Concern

The ability of the Company to emerge from the exploration stage is dependent upon, among other things, obtaining additional financing to continue operations, explore and develop the mineral properties and the discovery, development and sale of ore reserves.

In response to these problems, management intends to raise additional funds through public or private placement offerings.

These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.  (March 31-2011 10Q)

Electric Kool-Aid Lithium: Management Compensation

The Company recently granted 2.3 million shares of stock to its directors, which consist of the president, the chief mining engineer and one other individual. At the time of issuance the stock was trading at roughly $7.00, so they granted themselves $14 million in compensation. This is a company that has spent a total of $256,000 in the past five years on mining expenses, a company that is years away from extracting anything from the ground.  

Conclusion 

Welcome to the Electric Kool-Aid Lithium Test and the Merry Pranksters Management Team. Investors who bought the stock at $10.00 may want to see their doctor for a prescription of lithium, a form of which is used to treat depression. 

Meanwhile, a sensible way to invest in companies in the Lithium space is through the Global X Lithium ETF (NYSEArca: LIT), which is composed of companies in the lithium industry engaged in mining, exploration, and lithium-ion battery production.

Disclosure:  The author has no position in the subject security.

One company that taps directly into China’s growth story is China Chemical Corp. (OTC BB: CHCC), a manufacturer of basic chemical compounds used in a broad range of consumer goods. CHCC is the largest supplier of maleic anhydride (MAH) in Shandong Province and is also a major producer of phthalic anhydride (PA). MAH is a component in a wide variety of products including fiberglass, automotive parts, electrical components, bathroom fixtures, adhesives and paint, while PA is used in the production of packaging, film, magnetic tape, tires, pipes, hoses, containers and numerous other products.

CHCC’s location provides the Company with a large regional customer base. Shandong Province, located halfway between Shanghai and Beijing, is one of the nation’s wealthiest provinces and largest manufacturing hubs. Industrial customers in this region are so thirsty for MAH that CHCC can’t meet current demand even while operating at full capacity. The Company regularly has to turn away customers who line up outside its facilities to buy its products.

The Company is now expanding into the production of 1,4-butanediol (BDO), a derivative of MAH. BDO has more than double the gross margin of MAH and is used in the production of automobiles, pharmaceuticals, cosmetics and herbicides. The Company recently began constructing a facility that will produce 50,000 tons of BDO per year upon its anticipated completion in 2012. Management expects the new BDO facility to increase CHCC’s gross margin to 50% and its net income to $80 million in 2013.  

The insatiable global demand for basic chemical compounds, like those manufactured by CHCC, is evidenced by recent record all-time-high trading of peers Innophos Holdings, Inc. (NASDAQ: IPHS) and  TPC Group, Inc. (NASDAQ: TPCG).While U.S.-listed Chinese small-caps still trade at steep discounts to domestic U.S. peers, if CHCC just achieved half the price-to-earnings valuation of IPHS and TPCG it would put its stock at $7.50, representing a 200% gain from current prices.

Disclosure: The subject security is a client of RedChip Companies, Inc. RedChip Companies, Inc., employees and affiliates may have positions and affect transactions in the securities or options of the issuers mentioned herein. For full financial disclosures for all RedChip clients, please visit http://www.redchip.com/disclosures.asp?src=rcv.

China’s packaging industry is the third largest in the world, contributing 2.5% of the country’s GDP. Shiner International is the largest manufacturer of specialty coated films in China in terms of production capacity, with roughly 50% market share in the food safety packaging market, and its products carry the highest certifications for use in the international market by both the FDA and the EEC.

Some of Shiner International’s key investment highlights include:

• $2.50 target price implies potential return of nearly 80% from recent price level
• Sales growth in all product lines in 2010, recovering from the 2009 global recession; the largest recent gains were in coated films, which grew 136% YoY, and anti-counterfeiting films, where sales increased 63%.
• New 500,000 sq. ft. Hainan manufacturing facility completed and fully operational, allowing consolidation of all processes, increased efficiency, improved quality control, and overall cost reductions
• Two new sales offices to be opened in Shanghai and Hong Kong; 14 additional sales offices planned worldwide by the end of 2011
• Developing new state-of-the-art BOPP film to be introduced to market in 2011

In the new report from RedChip Research, which is available by clicking HERE to request a free copy, you can discover:

• How Shiner has attracted some of the biggest names in China’s tobacco, processed foods, and music industries as clients
• Why the Company’s BOPP tobacco film segment is expected to be a major near-term growth driver
• How Shiner’s business model gives it a competitive advantage over major global film makers like ExxonMobil Chemical and Sentosa as it expands internationally
• Telltale signs of an impending vertical acquisition that would significantly
• Full analysis of China’s $81 billion flexible packaging industry
• How Shiner is positioned to benefit from China’s ongoing battle against widespread counterfeiting of consumer goods

The report also delves into a breakdown of Shiner’s business and profitability by product segment, full financial analysis, growth outlook, positioning for acquisitions, and valuation models including relative valuation against three peer groups and comparison with recent M&A transactions in the sector. To receive a free copy of the full 35-page report on Shiner International, Inc. in PDF format, please click HERE. To learn more about Shiner, click HERE.

Disclosure: The subject security is a client of RedChip Companies, Inc. RedChip Companies, Inc., employees and affiliates may have positions and affect transactions in the securities or options of the issuers mentioned herein. For full financial disclosures for all RedChip clients, please visit http://www.redchip.com/disclosures.asp?src=rcv.

Food that causes people to fall ill is never acceptable and should not be taken lightly, but in some cases it isn’t practical or wise for the government to police the entire food industry. Rather than risk a contamination scandal, food producers in China are increasingly taking a proactive approach to product safety that includes the use of protective packaging. With its nascent food safety laws, China is among the world’s fastest-growing markets for this type of packaging. China’s total packaging market is the largest in the world, and food packaging accounts for 50% of demand.

Chinese demand for certain packaging products, including flexible plastics, is expected to grow by more than 20% over the next 5 years. This should create numerous opportunities for Shiner International, Inc. (NasdaqCM: BEST), China’s largest manufacturer of coated films. Shiner offers flexible packaging for a wide variety of consumer goods applications and has captured roughly 50% of China’s coated film market. Coated packaging films help prevent spoilage by sealing out moisture and bacteria.

Shiner offers customer-tailored solutions as well as “one-stop shopping” in the form of R&D, color printing and packaging services. Few other packaging firms in China have such a broad range of capabilities, which has helped Shiner attract the nation’s top food producers as clients. Shiner’s 50+ customers include Shineway, one of China’s largest meat processing companies; Tingyi, the nation’s largest instant noodle manufacturer; and Want Want, a leading biscuit company.

The Company’s anti-counterfeit packaging business is also growing; Shiner counts music giants Sony Music and Warner Music among its clients. The PRC government is seeking to reduce counterfeiting, as legitimate businesses yield more tax dollars than those operating on the black market.  As standards improve in China, Shiner’s business grows.

BEST currently trades at a forward P/E of just over 6x, while peers such as Fuwei Films Co., Ltd. (NasdaqGM: FFHL), Silgan Holdings, Inc. (NasdaqGS: SLGN), and Sonoco Products Co. (NYSE: SON) trade at an average of 18x. BEST could trade in the $2.50 range, representing a potential upside of 150%.

Although 70% of Shiner’s customers are located in China, the Company’s total customer base stretches across 20 countries. Shiner plans to open 14 new sales offices around the world in 2011, which will strengthen its international presence and allow the Company to better serve its global client base. As an emerging player on the global packaging scene, Shiner stands to benefit from tightening food safety regulations in China and beyond.

Disclosure: The subject security is a client of RedChip Companies, Inc. RedChip Companies, Inc., employees and affiliates may have positions and affect transactions in the securities or options of the issuers mentioned herein. For full financial disclosures for all RedChip clients, please visit http://www.redchip.com/disclosures.asp?src=rcv.

One of the key characteristics of a great long-term investment is an underlying business with an “economic moat” – something inherent in the company’s core product or service that makes it highly profitable, gives it a permanent edge over and protects it against existing and would-be competitors.  Warren Buffett calls it a “durable competitive advantage,” and it’s a crucial factor the legendary investor looks for when evaluating a company.

One company that shows signs of being a business with the type of durable competitive advantage that the Oracle of Omaha so firmly espouses is China Chemical Corp. (OTC QB: CHCC), a rising player in China’s specialty chemicals industry.  Yet it remains undiscovered by the market, largely because the opportunity to invest in the company has only been available to U.S. investors since this past October.  The Company is in full SEC reporting compliance, and in November, just weeks after the stock began trading, management had already applied for a NASDAQ listing, for which the company meets all of the requirements.

Other U.S.-listed peers in the specialty chemicals business, including TPC Group (NasdaqCM: TPCG), Innophos Holdings (NasdaqGS: IPHS), Aceto Corporation (NasdaqGS: ACET), and ShengdaTech (NasdaqGS: SDTH), trade at an average trailing P/E of 21x.  At a similar trailing P/E, which discounts the Company’s tremendous expected near-term growth, CHCC would trade in the $9.00 range, conservatively putting its potential return in excess of 130% from its recent price of $3.80.

To watch an exclusive interview with China Chemical’s VP of Finance, click here.

China Chemical is by far the largest supplier of maleic anhydride (MAH) in Shandong Province, with 60,000 tons of annual production capacity, and is also a major producer of phthalic anhydride (PA), of which it can produce 50,000 tons per year.  Both chemicals are key inputs in the production of a broad range of consumer goods components, including PVC pipes, packaging, film, tires, and hoses (all made from PA), as well as fiberglass-reinforced plastics, electrical components, dashboards, and bumpers (all made from MAH and its derivatives).

While macroeconomic trends have been and will continue to be very favorable for China Chemical, the Company’s true “economic moat” is based in its local geographic market, which is largely limited to Shandong Province.  Shandong is an ideal competitive environment for CHCC for several reasons:

•    Proximity to raw materials – Unlike its competitors, who use oil-based or natural gas-based raw materials, CHCC uses benzene, a coal-based commodity, to produce its chemicals.  Not only does it cost less than oil and natural gas, but it is also plentiful in Shandong, China’s 5th largest coal producer, giving CHCC a significant long-term cost advantage.
•    Regulatory limitations on new entrants – Land is an increasingly scarce and important resource in China, and “new chemical industry” land is highly limited by law in an effort to reduce potential pollution and accidents.  Essentially, the government uses land rights as a tool to strongly discourage new industry entrants.
•    Proximity to clients – As one of China’s wealthiest provinces, Shandong has a large number of factories, which translates to strong industrial demand for MAH and PA – so strong, in fact, that the Company can’t meet existing demand even while operating at full capacity.  In addition, customers all collect their purchases directly from the Company’s plant, eliminating delivery costs for China Chemical.

In comparison, CHCC’s three largest competitors outside Shandong Province are close either to clients in wealthy areas or to raw materials, but not both.  As a result, they must incur significant transportation costs to either bring in raw materials from distant provinces or to ship the finished chemicals to faraway consumers.

China Chemical has grown its net income from $5.6 million in 2008 to $10 million in 2009, and 2010 net income, which will be reported in March, is expected to come in at $16.3 million, up more than 60%.  Management forecasts that CHCC’s new 30,000-ton MAH plant, which came online in December 2010 and doubled the firm’s MAH capacity, will boost net income by as much as 70%, putting expected 2011 net income in the range of $25 million to $28 million.  Construction of a new plant for 1,4 Butanediol (BDO), a high-value MAH derivative, has begun and is expected to be completed by the end of 2012.  As a result, gross margin will nearly double to 50% and net income is expected to grow to $80 million in 2013.

According to Riedel Research’s pre-listing analysis of CHCC, chemical companies in China currently trade at a median P/E of 57x. Adjusting for several overvalued outliers, the report gave a fair P/E in the 15-18x range.  According to the analyst, “at the proposed price of $4 per share we believe the shares could go up 3x to 4x before being fully valued in the near-term,” creating an implied target price range of $12-$16.  Now is the time to capitalize on this investment opportunity, before the market catches wind of its tremendous growth potential.

Disclosure: The subject security is a client of RedChip Companies, Inc. RedChip Companies, Inc., employees and affiliates may have positions and affect transactions in the securities or options of the issuers mentioned herein. For full financial disclosures for all RedChip clients, please visit http://www.redchip.com/disclosures.asp?src=rcv.

Investors reacted strongly to the news, bidding up the prices of Chinese rare earth stocks on the possibility that the commodities may become harder to obtain outside of China in the coming year. China GengSheng Minerals, Inc. (NYSE Amex: CHGS) was one of the biggest winners in this week’s rare-earth stock frenzy. Shares of CHGS spiked following the announcement, jumping 153% within the first few minutes of trading Thursday to an all-time high of $6.74. It wasn’t just a single fluke trade, either. Volume surpassed the 30-day average in the first five minutes of trading, and by the end of the day over 24 million shares had changed hands, more than 40 times the daily average. While these numbers are astounding, there’s one small problem: China GengSheng doesn’t actually deal in rare earths.

China GengSheng manufactures a variety of mineral-based industrial products, including monolithic refractories, fracture proppants, industrial ceramics, and fine precision abrasives. The Company uses bauxite and magnesia (neither of which is a rare earth) as two of the primary ingredients in its products. CHGS does not offer rare earth products or technology, and it has no recent news that would justify such a drastic price run-up. Its most recent press release was issued on December 21, in which the Company announced that it had received $5.4 million in fracture proppant orders. According to the Wall Street Journal, the Company has no explanation for the abnormal trading. A Rodman & Renshaw analyst quoted in the article attributes the gains to market rumors that CHGS is a rare-earth play.

It is our opinion that the irrational exuberance over CHGS is groundless, particularly in light of the Company’s less-than-stellar performance in recent quarters. Earlier this year, RedChip analysts issued a Sell rating on CHGS stock based on concerns over the Company’s future growth prospects and weak first quarter performance. The Company’s second quarter financial results, characterized by poor accounts receivable collection, high debt load, and wasteful capital expenditures, did nothing to change our outlook or rating. Given China GengSheng’s discouraging financial performance and lack of exposure to rare earth minerals, investors seeking to gain on China’s rare earth policy would do better to look elsewhere.

To read RedChip’s 2010 research updates on China GengSheng, click here for the 1Q10 update and here for the 2Q10 update.

Disclosure: The author has no position in any of the companies mentioned in this post.

Located in Zibo in Shandong province, China Chemical is a manufacturer of phthalic anhydride (PA) and maleic anhydride (MAH). These chemicals are processed from a coal-based feedstock which is abundant in Shandong and bordering Shanxi province. CHCC has three PA production lines and two MAH lines, the second of which just finished testing and has come online within the last few weeks. MAH is used in the manufacture of unsaturated polyester resins (UPR), and chopped glass fibers are added to produce fiberglass-reinforced plastics, which are used in a wide range of applications such as recreational boats, bathroom fixtures, automobiles, tanks and pipes.

RedChip’s Director of Research, Matt Kantrowitz, recently traveled to China and visited China Chemical Corp. (OTCQB: CHCC) to observe their operations firsthand. The following are some photographs and notes from his visit:

Every day, trucks pull up to the facilities and wait to purchase PA powder, MAH powder, and MAH liquid. In fact, while I was there, a truck was loading sacks of PA and several others were waiting for MAH, which is sold in the afternoon.

CHCC just brought 30,000 tons of additional MAH capacity online in the last few weeks. You can see both of the Company’s 30,000-ton MAH-producing units in the photograph above.

This vacant area of land on the Company’s property will one day hold a 50,000-ton BDO facility. Butanediol, or BDO, is a valuable chemical intermediate made from MAH and used in the production of high-performance polymers, solvents and fine chemicals. Because of its industrial value and the high demand in China, margins for BDO are expected to be roughly double those of MAH.

China Chemical is ideally positioned for growth from almost every perspective. China’s chemical industry is expected to grow at a 12.9% CAGR through 2012 and surpass the U.S. chemical industry in size by 2015. The local market for PA, MAH, and BDO in Shandong Province and the surrounding areas is vibrant and severely undersupplied.  Finally, CHCC just brought 30,000 tons of MAH capacity online and is beginning construction of a 50,000-ton BDO facility, both of which will immediately be able to sell as much of the two chemicals as they can produce. Now that’s a compelling growth story.

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