General Steel Acquires Again

By Travis Johnson, Stock Gumshoe, September 4, 2008

General Steel (GSI), which I wrote about in detail for my July “Idea of the Month”, is continuing on its established path — it has made another acquisition, again in cooperation with the acquiree.

This time, GSI has announced that it entered into a letter of intent to buy Yantai Steel Pipe, yet another specialty steel company.

Yantai appears, like many of its ilk, to also have somewhat complex relationships with a few companies — they already have one joint venture with Baosteel, one of the huge Chinese steel companies.

GSI stock is taking yet another beating today, down close to 10% — and we haven’t seen the financial terms of this deal yet, but this is more of what we should be expecting from General Steel Holdings. They are building through acquisition, and their stated goal is to consolidate the small, state-owned, inefficient firms of the Chinese steel industry. There are plenty of targets, and GSI has a decent currency in their US listed shares, so this will likely continue for some time.

I don’t know much about the specifics of this plan, but I do know that I like the idea of this acquisition — Yantai specializes in pipe, and they will be building a new hot-rolled seamless pipe facility. The market for this should continue to be extremely strong in China, as demand for new pipelines and infrastructure, particularly for water, gas, and oil, ought to remain quite robust far into the future, even if the economy cools a bit.

As I’ve said before, the market continues to hate these small Chinese firms — we can lump in any of the small cap ongoing concerns here, whether it be GSI, American Oriental Bioengineering, Hanfeng Evergreen, China Fire and Security, or any of a dozen others. Most China stocks are suffering, it’s true, but if you’re Chinese and your market cap is under a billion dollars right now it looks like many US investors consider you virtually untouchable. I expect this to be a buying opportunity for the best, profitable firms that are in attractive long term niches, but there certainly remains a lot of risk in a market sector that is at the bottom of the barrel.

full disclosure: I have a calendar call option spread on American Oriental Biongineering, I own Hanfeng Evergreen shares, and I have an order in for call ...

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