Golden Green Enterprises Limited (CHOP) Comment

“While the overall steel industry has recently experienced a period of excess supply, there is an increasing shortage in China of the high-end, high- value thin steel sheets and galvanized steel products that we produce,” said Mr. Mingwang Lu, Chairman and Chief Executive Officer. “We were able to continue to leverage our position as the largest manufacturer of high precision, ultra-thin cold rolled narrow strip steel products in China to win additional market share. We were also able to increase our gross and operating margins thanks to a business model which we believe is cost efficient and scalable as well as our continuing focus on more profitable, higher value-added products.”

Mr. Lu added, “Our sales growth reflects our ability to successfully align our business toward markets that are driven by the growth of China’s middle class, who are the ultimate end-users of most of our products. Unlike the crude steel industry, whose demand is largely driven by the capital investment cycle, the use of our products is much more related to consumer spending and overall GDP growth in China. This is because the largest component of our revenues comes from food and industrial packaging manufacturers, with the balance coming from manufacturers of construction materials, electrical appliances and telecommunications equipment.”

In other words, CHOP is a play on the growing middle class in China.  As the CEO stated on the quarterly conference call the company’s only limitation is one of capacity which is staged to increase in second half 2010.

Here is a great message board post that sums up the potential:

way to show what a great investment chop is. I will split chop into two divisions.

Presently, division one which is the present division that is making money, is turning down business and if it does nothing else this division will generate year in and year out at least a dollar plus five cents a share. That is 42 million Net Income and up, going forward..

Where in the hell could you get a 20% return on your money today, a 5 dollar investment. Chop division one will go up in stock price we all have to be patient.

Based on a do nothing approach this division is worth today at least 10 bucks a share, minimum.

Ok, now we look at the new plant to be built and we will call this division two which will be funded by just the cash on hand and the secondary offering cash in division one. Even with this cash coming out of division one it is still worth at least ten bucks a share. Note division one will have the cash offering of 21 million and the additional allotment of 3.6 million on 720k shares and the 21 million net income to be earned from 7/1 to 12/31/09 and the 42 million net income next year 2010 totalling 88 million cash on hand to go to division two. But division two only needs 58 million so division one can keep the other 30 million for working capital. That is why divsion one in my estimation is still worth 10 bucks a share minimum.

Now, onto division two which will generate at least 55 to 60 million a year net income as opposed to division one. Why you say?

Well, both will generate about 200 million a year on metric ton capacity of 500 million. But division two will have machinery that will be manufacturing 75% of its revenue at a higher margin than division one. I would say around ten percent more, per the CC dialogue stating chrome producing products are at a ten percent higher margin. Therefore, 75% times 200 million is 150 millin at a ten percent higher margin which will result in a additional 15 million to the bottom line. Add another 2 to 3 million to net income for efficiencies stemming from running two divisions splitting a lot of shared costs, duplication costs, etc. etc. and we could see 60 million net income from division two, (42 million, plus 15 million plus 3 million).

Now here is the beauty, division two also gets the benefit of the 90 million of cash from the warrant and unit exercise on a fully diluted share basis of 19 million shares.

@#$%, 90 million in cash and 60 million net income results in 150 million sitting in division two after a complete full year of operation speaking of course on a pro-forma basis.

Results mind boggling, 150 million in cash and a division two doing 3.16 EPS ……yes over three dollars a share in net income.

Now to simplify it bring the two divisions together and we have around 225 million in cash, now don’t forget division one makes 42 million net income a year too.

Both divisions together will make 102 million a year and their combined eps will be 1.75 a year.

What would you say the value of a company with 225 million in cash no long term debt and tops 31 million in short term debt after aplication of restricted cash against short term debt 75 million and making 1.75 a share.

Shall we say Chop divisions one and two together are worth at least 21 dollars a share with a multiple of 10 plus cash of 3.50 a share all the way up to a top valuation of 30 dollars with a multiple of 15 plus cash.

Note, also that the 225 million will most likely buy a few of the small companies in this fragmented sector. No true leader in this sector right now , and I am talking domestically of course. they will be all cash deals and net income accretive immediately upon purchase.

All in all this is a great investment for the wise and long term investor.

Disclosure:  LONG CHOP