ShengdaTech: Small particles lead to big growth
ShengdaTech, Inc. (Nasdaq: SDTH)
Taian City, China
http://www.shengdatechinc.com/
52-week low / high: $3.55 / $10.56
Shares Outstanding: 54.10 million
Market Capitalization: $557.18 million
China in the 21st century conjures up another time of go-go markets, our own Gilded Age when steel, coal and capital fused to create the greatest economy in the world. While China’s present boom has something to do with coal and capital, it has as much to do with nanotechnology and university partnerships.
Witness ShengdaTech, Inc. (Nasdaq: SDTH), which is applying 21st century technology to become a new leader in a decidedly old-line business. Shengdatech’s leading product is nano precipitated calcium carbonate (NPCC), made from limestone broken down to particles of ~100 nanometer (nm) in size, smaller than the wavelength of visible light.
NPCC is a key filler used in rubber, plastics, paint, ink and as a coating for paper. NPCC is also a key ingredient in the manufacture of automobile tires and PVC building materials, enhancing their tensile strength and durability. Shengdatech is currently the only supplier of NPCC to China’s burgeoning tire industry, and they’ll buy as much as Shengdatech can make.
What’s more, Shengdatech has developed, with Tsinghua University, a newly patented “membrane dispersion” production process that reduces the cost of producing NPCC particles by 5-7% over its current “ultra high gravity precipitation” process. Membrane dispersion also increases yields and provides more stable product quality.
Shengdatech (originally Zeolite Exploration Company) was created through the reverse acquisition of Faith Bloom Limited, a maker of coal-based chemicals, including ammonium bicarbonate and liquid ammonia (used in nitrogen-based fertilizers and as the raw material of many chemical products), as well as melamine and methanol. These more humdrum products have generated the cash to fund Shengdatech’s push into advanced processing of NPCC.
The company is clearly on to something. Revenues for the third quarter ended Sept. 30 were $27.2 million, up 44.4% from $18.8 million in 2006. For the first nine months, total revenue was $72.0 million, up 45.8% from $49.4 million a year earlier.
The surge in revenues can be traced to the on-lining of additional NPCC production capacity, including two new production lines (40,000 ton capacity) added in July. Total NPCC production capacity is expected to be 190,000 tons once the current phase of construction is completed, an increase of 111% from 90,000 tons at the beginning of 2007.
NPCC production contributed 48.3% of total revenues in the third quarter versus 28.5% in the year-ago period. (Chemicals provided the balance of revenues.) The new product mix is having a great effect on profitability. The company’s gross margins increased to 35.6% in the third quarter 2007 compared with 29.7% a year ago. Net income was up smartly to $7.8 million, 62.7% ahead of the third quarter of 2006 ($4.8 million). Fully diluted earnings per share totaled $0.14, compared with $0.09 in the third quarter 2006.
All this activity has translated into a strong balance sheet. Shengdatech ended the third quarter with $41.1 million in cash and cash equivalents, no long-term debt and $39.0 million in working capital.
Note: ShengdaTech, Inc. (Nasdaq: SDTH) is on the “Watch List” of Growth Report, a subscription investment newsletter from Business Financial Publishing, which also publishes SmallCapInvestor.com. As a Watch List company, ShengdaTech displays many characteristics found in successful stock winners, and is being closely monitored for possible inclusion in the Growth Report portfolio at a later date.
About the Author
Greg Contreras is a freelance writer in New York, with a background in international sales and marketing, and management consulting.
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