Why China? Why Longwei Petroleum (OTCBB: LPIH)?
By: Dave Gentry, President of Redchip Companies and CEO
China small-cap stocks have been decimated along with everything else. But even before the market turmoil of the last two months, China small-cap stocks were generally illiquid and undervalued. Most of the small-cap companies going public in the U.S. are manufacturers. The policies implemented during the Cultural Revolution (1963-1983) set the country back at least 30 years in terms of developing new technologies. The revolution put in place a great turning inward and an eschewing of all things not Chinese — factors which when combined with a rigid communist ideology did little to encourage creativity and innovation.
Where China dominates and will continue to dominate for many years hence is in the manufacturing sector. Their endless supply of cheap labor unbridled by unions or an equivalent of the Environmental Protection Agency (EPA) will continue to give them a huge advantage over their competitors. Despite a worldwide recession, China will continue to manufacturer two-thirds of the world’s shoes and a large percentage of its auto parts. Most analysts agree that China’s economy will grow at 8% in 2009, down about 2% over 2008, but still robust.
I predict that liquidity will come back into China’s small-cap stocks in the near-term. As small-cap investors flee from underperforming U.S companies, they will find that U.S.-listed China manufacturing and energy-related companies will continue to show strong earnings and revenue growth, creating attractive opportunities for patient retail and institutional investors.
And what about China companies listed in the U.S. selling their products into the Chinese market? One I like is Longwei Petroleum, a fuel distributor in the Shanxi province of China. (And, yes, I am paid to like the Company. See full disclosure.) I visited Longwei (OTCBB: LPIH) six months ago. In business since 1995, Longwei is one of the few companies in the Shanxi province that holds a Level I license, which allows them to purchase fuel at a discount directly from the refineries. Longwei sells their fuel products to large gas stations and power plants in the Shanxi province. This highly efficient distributorship has turned Longwei into a virtual cash machine. The Company reported revenue of $142 million in FY08, up 51% over FY07. Net income was $20.7M in FY08, up 68% over FY07.
Though the price of crude oil is at levels not witnessed since 2005-2006, prices are expected to increase to $100 a barrel in late 2009. Longwei reported first quarter net income of $5.5M with revenue of $44.5M. Net margins remained strong at 11%.
Demand for petroleum will remain relatively strong in China due to continued economic growth even amid the current world economic climate. China has the largest petroleum consumption growth rate, currently at over 30%, and they import 50% of their crude oil. Experts at China National Petroleum Corporation believe that the demand for petroleum in China will be 0.268 billion tons in 2010 and 0.305 billion tons in 2020.
Shan Xi Province is one of the largest energy providers and transport cities in China. Last year, the highway freight volume was ranged number-five in the entire country. Shan Xi has 4,692 gas stations, about 4 million cars, and each gas station serves an average of 600 cars, keeping demand for coal, electricity, gas, and oil high.
At $1.50, LPIH is a buy.
What other Chinese companies do you recomend?
Two interesting companies we are following are Worldwide Energy & Manufacturing (OTCBB: WEMU) and Perfect International Ltd. (OTCBB: PFGY). Both operate in the solar energy industry, which is expected to see growth in 2009, and both show strong revenue growth on solar sales. WEMU is a U.S.-based engineering firm with manufacturing facilities and subsidiaries operating in China. (As always, please read our disclosures and conduct due diligence accordingly.)