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Longhai Steel Undervalued and Outpacing its Higher-Priced Peers

The global steel industry experienced a slowdown for several years before ramping upward again in 2009.  According to the World Steel Association, global crude steel production in 2011 reached 1,527 megatonnes for the full year, a 6.8% increase compared to 2010.  A huge, but concentrated industry, a few majors, such as ArcelorMittal (NYSE:MT) and US Steel (NYSE:X) have been providing the lion’s share of steel to the automakers like Ford (NYSE:F) and Toyota Motor Corp. (NYSE:TM) for years.  The sheer magnitude of the $430 billion steel industry, however, leaves incredible upside for relatively ignored companies, such as Longhai Steel Inc. (OTCBB:LGHS), a China-based producer of high-quality steel wire.

Longhai’s 200,000 square meter facility is located in Xingtai City, right in the heart of the steel production district in Hebei Province, China.  Its steel wire is sold domestically and used primarily in the construction industry as the steel is processed into screws, nails, wire mesh for concrete and fencing.  Business is booming for Longhai with record production and sales reported in the fourth quarter of 2011.  During the quarter, the company’s steel wire output was 293,862 Metric Tons, an increase of 23% from the year prior quarter.  Steel wire sales for the quarter increased by 30% to 335,229 Metric Tons in Q4 2011 as compared to Q4 2010.

Longhai Steel is a component of the vertically integrated Longhai Steel Group, which offers them significant advantages over competitors.  For starters, the steel billet that gets processed by Longhai Steel into steel wire comes from across the street at its parent company.  This translates to virtually no shipping costs for LGHS that competitors must shoulder as an expense.  Additionally, the steel is literally still steaming from the extreme heat of processing by Longhai Steel Group when it is delivered to LGHS, translating to lower manufacturing costs and less energy use as a result of not having to heat the steel as much as normally would be required.

LGHS has just opened a second, state-of-the-art production line next door to its original facility that, once fully ramped, will boost its production by an additional 67 percent.  This new line will also open the door to additional clientele as it has the ability to produce alloy steel, cold forging steel, welding rods and steel strands for applications such as wire rope and steel belted radial tires.  LGHS is again a beneficiary of being part of the Longhai Steel Group who is leasing the facility to LGHS for a minimal monthly payment.  Plans for a third production line, targeted for 2013, are already in the works.

Longhai posts the type of numbers that are rarely – if ever – produced by an OTC listed company.  Final figures from 2011, which will reflect sales increases from the fourth quarter, have not been released to date, but trailing twelve month (ttm) figures will make most OTC investors’ jaws drop.  As of Q3 2011, ttm revenue tallied a whopping $555.31 million for LGHS.  Net income equaled $9.32 million.  Diluted Earnings Per Share for the ttm is a stellar $0.93.  If those numbers aren’t impressive enough…the company has NO DEBT.

Taking a moment to separate the wheat from the chaff, Longhai outstrips plenty of its big board competitors.  China Gerui Advanced Metals (NASDAQ:CHOP) has a ttm revenue that equals $315.98 million.  Sutor Technology Group Ltd.’s (NASDAQ:SUTR) ttm revenue rings in at $459.95 million.  Industry giant General Steel Holdings, Inc. (NYSE:GSI) has a ttm revenue of $2.15 billion, but its massive debt load taints the picture for GSI.

A very commonly used analysis of industry peers is the P/E ratio.  Juxtaposing companies via this metric show CHOP, SUTR and GSI to have P/E ratios of 4.23:1, 3.29:1 and 61.11:1, respectively, as compared to LGHS’s tiny ratio of 1.08:1.  By that standard, the company is clearly undervalued.

By virtually all standard measures, LGHS should be a stalwart in relation to peers.  Take a look at a few of these other stats:

The sales increases in Q4 will further bolster Longhai’s balance sheet.  Factoring in a second line running full bore and the company could reach $1 billion in revenue in 2012.  With a miniscule number of outstanding shares (10 million), LGHS is only commanding a $10 million market cap; a ridiculously low amount for a company of its capacities.  It’s a head-scratcher to see a company with a net income that nearly equals their market cap.  It may be ignored at the moment, but a company such as Longhai Steel Inc. will not fly under the radar forever when it is approaching billion-dollar revenue figures, carrying no debt and a price tag of only $1 per share.  Frankly, it’s a bit amazing that it has for this long.

To learn more about Longhai Steel, please see the following resources:

Company Website

Investor Presentation

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