Fushi International, Inc.: Wired for success?

Shannon Roxborough | Oct 05, 2007 6:20am EDT | Comment

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With a fifth of the world's population and a supercharged economy on pace to surpass Germany and become the world's third largest by the end of 2007, China is booming. Beijing reported that China's $2.8 trillion economy grew just shy of 12% in the second quarter, its fastest clip in 12 years. Investment in public works projects, which account for about 9% of the GDP, shot up an astounding 25.9% in the first half of 2007.

In the 1990s, the country of 1.3 billion began a monumental undertaking: building the tens of thousands of miles of modern roads and highways that today crisscross the nation (rivaling the best in the United States and Europe). Even so, after decades of under-investment, China is still playing catch-up to bring its largely antiquated infrastructure up to snuff. After all, building a global economy requires reliable communications networks, efficient transportation systems, dependable energy sources and clean water.

Today, an unprecedented infrastructure build-out is consuming half of the world's cement, 40% of its steel and 20% of its copper. (Approximately 45% of China's copper is used for carrying electrical current and generating power, and the demand for copper is increasing 20% annually.)

Fushi International, Inc. (Nasdaq: FSIN) is China's largest manufacturer of bimetallic wire. Its principal products are copper-clad aluminum (CCA) wires, which are primarily used for telephone lines, cable TV (CATV) systems, network signal transmission cable, electric railway conductor lines, patch cords for electronic components and other applications. Copper clad aluminum is composite wire used as a substitute for pure copper wire. Consisting of a solid aluminum core metallurgically bonded to a copper sleeve, the product takes advantage of the high conductivity of copper and aluminum's lower cost and lighter weight.

Fushi's top customers are U.S.-based Andrew Corporation (Nasdaq: ANDW), one of the world's leading communication cable manufacturers (Andrew recently signed a deal to upgrade Hong Kong’s Mass Transit Railway Corporation's territory-wide radio network), and several large Chinese wire and cable companies tied into the major infrastructure overhaul.

Company revenues totaled $26.1 million in the second quarter, a year-over-year increase of 42.3%. Revenues were predominantly driven by a 37% increase in the volume of bimetallic product sold. Gross profit increased 18.6% to $9.7 million, compared a year earlier, the third consecutive quarter of gross margin improvement.

"We are pleased to report another quarter of continued growth in our business. We believe that we have laid the foundation to become a domestic and international market leader in the bimetallic industry,” Chairman and CEO Li Fu said. "Our copper clad aluminum products have delivered consistent revenue growth for us. We are well on our way to executing our strategic plan through technological innovation, manufacturing expertise, domestic and international marketing, and branding and strong management."

Mr. Fu added: "While we have in the past been primarily focused on the regular CCA market, we are also leveraging our expertise to tap into significant opportunities in other areas of the market. We believe these new areas can provide us with not only substantial new revenue opportunities, but also with higher margins."

On Sept. 26, Fushi announced a commitment to acquire Fayetteville, Tenn.-based Copperweld Bimetallics, a smaller rival, for $22.5 million in cash. John Ma, an analyst with Roth Capital Research, said the acquisition will help Fushi significantly boost sales and expand its geographic and end-market reach in the United States. According to Ma, Fushi will likely be able to reduce Copperweld's production costs by moving some operations to China. The deal is expected to be completed early in the fourth quarter.

Following the merger announcement, CEO Fu said in a statement, "The combination of our businesses will position Fushi as the global leader in the bimetallic wire industry. This integration creates additional scale in our industry, adds compelling new products to our portfolio, expands our international customer base and builds upon leading bimetallic technology and the highest quality products. While the company's gross margins are anticipated to decline in 2008 year over year, we believe that this transaction represents a compelling opportunity to enhance net income performance for the long run."

The Halter USX China Index (Amex: HXC), which is comprised of top U.S.-listed Chinese companies that do most of their business in China, was expanded to include Fushi International on Oct. 1. (As of that date, the Halter index was up 59.6% so far this year, while the Dow Jones Industrial Average and Nasdaq had risen 11.5% and 11.8%, respectively.)

Established long-term contracts with key players in the development arena, an excellent working relationship with the Chinese government and over 50% domestic market share for copper clad aluminum wire, make Fushi well-positioned to capitalize on China's infrastructure initiative by supplying wire for transportation, communications, utility and industrial uses over the long haul.

While shares have risen above analysts' one-year target price of $14.28, a sell-off is the last thing on Wall Street's mind. In fact, pundits are looking for continued revenue growth for the remainder of this year and throughout 2008. Stanley Ing, an analyst with Dutton Associates, expects EPS will surge 42% to $1.19 in 2007 and rise 31% to $1.56 in 2008. The company's stock, which has soared 107% over the past year, closed at $14.81 on Thursday.