Company
China Direct Inc.
431 Fairway Drive
Suite 200
Deerfield Beach, FL 33441
Phone: (561) 989-9171
Fax: (561) 989-9206
www.cdii.net
Contact
Epoch Financial Group Inc.
Todd Atenhan
Phone: (404) 806-1393
E-mail: tatenhan@epochfinancial.com
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Share Data
Symbol: (NASDAQ:CDS)
52-Week Price Range: $6.75 - 7.43
Shares Outstanding: 23.04 million
Market Cap: $160.37 million
Balance Sheet Data
(as of March 31, 2008)
Total Assets: $108.70 million
Total Current Liabilities: $49.36 million
Shareholders’ Equity: $59.34 million
Book Value per Share: $2.208
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Olympic Games were widely considered the coming-out party for the world’s most populous nation. Though for many investors, China has already been garnering a lot of attention over the past few years. Among the world’s top 20 economies, China is growing the fastest, expanding by double digits each of the past five years and counting.
The Shanghai Composite Index, China’s main equity benchmark, surged 97% in 2007 after turning in a robust 130% in 2006. After having been the best-performing index in that time span, it has since cooled off in 2008, but high-growth opportunities remain abundant.
For investors who aren’t sure how to approach the Chinese market, management and advisory services provider China Direct Inc. (NASDAQ: CDS) has developed a model that offers a basket of companies with high-growth potential under one umbrella. The Florida-based company helps private businesses in China access the U.S. capital markets in two different ways: by acquiring majority interests in those businesses or by helping them navigate through the difficult waters of being public on their own. The company currently focuses on three segments in its acquisition strategy, with magnesium being the largest, followed by basic materials, and clean technology.
“In our experience, we found that the leap from being a private company in China to being a public company in the U.S. was just too much for these companies to manage in one fell swoop,” says Marc Siegel, president of China Direct. “The goal of China Direct is simple. We want to help these small and medium-size Chinese businesses grow while at the same time creating venture capitallike returns for our shareholders through a portfolio of actively managed Chinese companies across diverse industries.”
Siegel adds that the challenges for many Chinese businesses looking to go public includes the differences in regulation, culture, time zones, costs to become a public company, assessing capital, and communicating their story to the financial community. These challenges have put China Direct’s services in high demand, and incidentally, make it easier for them to acquire these budding enterprises.
“We have been able to acquire these companies so inexpensively in China because there are few options for a Chinese businessman looking to grow and eventually monetize his company,” Siegel says. “We found that there was a significant arbitrage opportunity if we acquired these companies based on one to two times net asset value and then acclimated the company to U.S. GAAP accounting procedures and disclosure requirements. We could then help the CEOs of these Chinese companies make their business flourish and eventually monetize their investment at a much higher valuation.”
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Siegel founded China Direct in 2005 with current CEO Dr. James Wang. Before China Direct, Siegel was a 20-year veteran of Wall Street, where he garnered experience in investment banking and venture capital. “It’s an ideal combination, the fact that James understands the way to conduct business in China and how the Chinese businessman thinks,” Siegel says. “And because of my background, I understand how Wall Street works. We’re kind of like a Reese’s Peanut Butter Cup, where peanut butter met the chocolate and they made a great combo.”
That combo has helped the company generate exponential revenue and profit growth. In fiscal year 2007, China Direct reported profits of $11.8 million, or 67 cents per share, compared to $169,000, or a penny per share, in fiscal year 2006. Revenue ramped up to $174 million for 2007, compared to only $14 million in 2006. The company’s magnesium segment has been the strongest driver of its growth.
“Last year, we did $174 million in revenue, of which our magnesium segment was responsible for $100 million,” Siegel says. “Magnesium is a metal that is lighter and stronger than aluminum, and the price has more than doubled since our first acquisition in the magnesium space.”
Siegel says that since China Direct acquired its first magnesium play in December 2006, prices have soared from $1,950 per ton to as high as $6,000 per ton in April 2008. The company is also generating revenue from its basic materials division, more than $50 million in 2007, according to Siegel. While the company’s clean technology segment has yet to contribute significant revenues, it expects to see something as soon as the fourth quarter of this year and has high hopes for its proprietary recycling technologies.
China Direct most recently reported record results in the second quarter in which profits tripled from the year before. For the quarter, China Direct reported a net income of $7.5 million, or 26 cents per share, tripling the $2.3 million, or 15 cents per share, from a year ago. Revenue nearly doubled to $76.2 million from $40 million year-over-year.
Magnesium was again the key driver for the first half of 2008, growing nearly 500% in profits year-over-year to $6.7 million from $1.2 million.
“In many ways, we are like a portfolio company for small to mid-size companies in China that is the fastest-growing segment of the Chinese economy,” Siegel says. “We’re a basket of actively managed Chinese companies reporting in U.S. GAAP numbers. Once we finish building and monetize one of our segments, like magnesium for example, and prove that we can create venture capitallike returns within our portfolio, I believe our stock will get a 20 P/E ratio or better.”
For 2008, the company is projecting earnings of $26 million, or more than $1 per share, with revenue of $320 million.
After going public in 2006 through a reverse merger on the OTCBB, China Direct has quickly moved from the AMEX to being listed on the NASDAQ. The company was also recently added onto the Russell 2000 Index.
“I believe that few investors understand the power of our model and strength of our team,” Siegel says. “Our model is unique, difficult to duplicate, and one that people can invest in to have access to the fastest-growing sector of the Chinese economy.”
Though China’s growth has slowed considerably this year, the company still notices many attractive features of the market, such as the favorable relationship of the Chinese currency to the U.S. dollar, as well as the country’s growing middle class.
“We like the fact that their population, primarily their middle class, is the fastest-growing middle class in the world,” Siegel says. “We try to capitalize on that. We feel like we’re really in the driver’s seat because China is so big and such a massive fragmented market. We believe that the sheer size of the middle-class population expansion will continue driving the growth in China for years to come. We really like those metrics.”
Siegel says he believes that China Direct is at the right place at the right time. “We’re fortunate to be in the position we are in today, which is a credit to our whole work force here and in China,” he says. “I would challenge anyone to find a company growing faster than China Direct. I believe we may be the fastest-growing public company on the planet.”
RISKS:
Because the vast majority of China Direct’s subsidiaries and its operations are located in China, the company faces risks associated with doing business there, including risks associated with the transition from the Chinese government business ownership to privatization, operating in a cash-based economy, dealing with inconsistent government policies, unexpected changes in regulatory requirements, export restrictions, tariffs and other trade barriers, differences in technology standards, employment laws and business practices, longer payment cycles and problems in collecting accounts receivable, changes in currency exchange rates and currency exchange controls. These risks could result in significant declines in the company’s revenues and adversely affect its operations.
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