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Sunday, December 3, 2017

Can HUAAN Ride on Steel Uptrend Wave?

Sino Hua-An International Bhd (HUAAN) was the superstar for over since late Aug 2017 until early Nov 2017, where the share price has shoot up almost 9 times from 4 cents to 35 cents, upon the released of 2 consecutive stunning quarterly reports. 

However, the share price has fallen from the top to 23 cents as of 10th Dec 17, dipped about 34%. What is going on for HUAAN?

By right, it’s share price should be on uptrend or at least maintaining, instead of dipped all the way down to 23 cents. The management and major shareholders seem like did not take any action, to buy or sell any shares officially. Since it has no institutional investor under top 30 shareholders, it doesn’t seems like they are selling it as well. Is HUAAN purely involving speculation play?

There’s a few reasons the investors are guessing in the market, which might be the reasons it’s share price cannot grow.
1.       It’s a China based company listed in Malaysia. Hence, it might be another similar scam like other red chips under KLSE.
2.       It’s a company which is affected listed issuer pursuant to Paragraph 8.03A of MMLR of Bursa.
3.       It’s profits most probably cannot sustain in upcoming quarters, due to something is wrong.
4.       It’s just a speculation counter.
5.       Bear market is threatening the share price.
6.       Others.

From what I thought, it presents a golden opportunity for retail investors to invest amidst the retreating share price of 20+ cents. Yes, it has shot up almost 6 times from the beginning, it sounds scaring. However, the one who calculate the FY2017 EPS will be getting around 7 cents, which is only about PER 3.x! Come on, got such a fat chicken running on the street for a normal person like us to slaughter? We should think that definitely something goes wrong!

I would like to share what I understand about HUAAN and its near-term prospects.

Firstly, the largest shareholder is not any Chinese, but a local royal member - Y.A.M. Tunku Naquiyuddin Ibni Tuanku Ja’afar, the executive chairman of HUAAN holding about 29.39% for many years. He is the original largest shareholder from Antah Holding Bhd during 2006 before the Chinese took over. The other major shareholders are Liu Guo Dong from China, the China boss holding 15.86% and Zhu Qing Hua from China, 9.09%. Total 3 of them holding 54.34%. Hence, it’s not totally Chinese from mainland controlled company, but the Malaysian boss. If you refer to the 6 times board meetings under FY16, most of them attended the meeting except Liu has missed one. The remunerations they are getting also very reasonable, and the share quantity remains the same since 2007 without the sign of abusing.

Secondly, HUAAN has consecutively makes profits over the past 2 QRs, which is qualify to uplift from Paragraph 8.03. That is why you can see HUAAN tries to release the QR as early as possible (current QR released by 30-Oct-17) as they want to resolve this issue. And finally, they have submitted an application for the upliftment from being classified as listed issuer pursuant to Paragraph 8.03A on 8-Nov-2017. The outcome should be able to announce within this month.

Thirdly, let’s get to know it’s business and how it makes money.

The operations business is 100% operating in China, where the group is producing and sales of metallurgical coke under 100% owned subsidiary – Linyi Yehua Coking Co Ltd located in Shen Quan Zhuang Industrial Park, Luo Zhuang district, Linyi City, Shandong Province with a build-up area of 319,014 sqm. They also have a coal storage area located nearby with 85,454 sqm. Both lands’ tenure remain 29 and 50 years respectively. They have about 1,500 employees at peak time, but I’m not sure how many left for now. For the products, metallurgical coke contributes 80% and the rests are from its by-products namely coal gas, tar, ammonia sulfate, crude benzene, coal slime and middling.

For how the metallurgical coke being produced, you may refer to the product flowchart below.

Metallurgical coke production flowchart

Unfortunately, HUAAN is not exporting any of its products overseas but purely sell it under its own city. HUAAN is also buying the raw material, low sulphur bituminious coal from local market as well. Hence, in order to examine HUAAN prospects for the higher coke price, the one has to examine the coke and coal market price under Shandong Province. Unfortunately, one has to know that steel and coke industry is a cyclical sector. HUAAN share price has been depressed badly for many years due to the steel cyclical downturn and price war. I can see the price is started to pick up from those product market web sites recently. The closing Linyi's coke price on 1-Dec-17 was RMB3,220.

The local management also took the effort to understand the progress of the plant at China, where they have paid a visit to the site on mid of Nov 17 to make sure the plant is operating as usual.

Mgmt's visits to Linyi Yehua Plant

So what’s the near future prospects for HUAAN?

For now, HUAAN has resume the operation of 3 coke ovens with total production capacity of 900,000 tones since 9 months ago. If the demand is growing, they can further boost up the productions with the 2 vacant coke ovens which assumed to have additional 600,000 tones.

The one can see HUAAN is expanding its inventory to almost double from previous to current QR. Hence, the debtors also shooting up tremendously since it’s resumption of production. If you see the latest QR, there’s a drawdown of RM25m short term bank loan. Although the QR did not explain where the money spent for, but from the cash flow statement you can noticed it went for inventory and new plant/equipment. I foresee the loan and inventory will be continued to increase in the next QR, if the demand is increasing.

2 things for sure and as mentioned in the latest quarterly report as well, Chinese Government has instituted stricter environmental regulation to deal with pollution concerns in the country by shutting down many illegal factories that failed to comply with the environment protection policies. On top of that, China’s Central Bank governor forecasts that the economy could grow at a rate of 7% for the second half of the year. Hence, it continues to create local demand over supply gradually on steel and coke.

What about currency exchange? For this case, we will have to look at RMB to MYR. Up to today, MYR has appreciated over RMB for 3%, not as worse as USD. So I assumed it does not have much impact as RMB will be growing strong with 7% GDP under FY17.

Another factor which will help HUAAN to widen its margin, which are the local coke and coal market prices that bound by the demand and supply. With the coke price gradual recovery over the past 1 week and also the high potential of uplifting from Paragraph 8.03A, I’m confident that HUAAN may able to stabilize its share price upon the release of upcoming QR. Assuming the share price can stands firm conservatively at PER 5 upon upcoming QR, then the share price will be 35 cents.

Everything looks fine, except the share price fluctuation. Dropping 1 cent of its share price is equivalent to losing about 4-5% of your investment. High risk high return or high risk run away? It's bull or bear market now?

Note: This post is not recommendation of buy or sell of a company shares, but only personal opinion.

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