Ah, good ‘ol Robert Hsu — it looks like he recommended a stock on August 19 to his subscribers, a coal company in China at about $11, it shot up to $16 (thanks in no small part to that recommendation, I’d water), and then it collapsed over a couple weeks to the current price, under eight bucks.
I always thought Hsu had a bit of the technical/IBD/momentum chaser in him, generally recommending stocks that are running up — but if so, he’s either abandoned that sentiment, or has fallen in like with this stock, because he apparently did not want to sell it after it fell by almost 50%, but instead wants to buy it … and now, instead of a double, he thinks you’ll get a quadruple in the shares.
Not that I generally disagree with this — if a stock that you like for fundamental reasons falls by 50% and that fall looks overdone, it may well be a fine time to invest … but I haven’t seen this kind of behavior from Hsu before. At least, not in the teaser ads he puts out (I have not, of course, ever subscribed to China Strategy or Asia Edge, so I don’t know exactly how he communicates his ideas).
The stock is one that I wrote up for the Irregulars in a Friday File several weeks ago, shortly after Hsu had started teasing the stock the first time around — but most of you won’t have seen that (there are, tragically, only a small percentage of dedicated readers who have joined that select group of my favorite people). If you remember, this was pitched at the time as a way to profit from that massive traffic jam of coal trucks heading from Inner Mongolia to Beijing.
So let’s see how he’s pitching it now, and in so doing we’ll try to figure out why the stock is bouncing around like a superball … or more accurately, I suppose, like a superball thrown against the ceiling.
Here’s how he pitches this “revision” to his recommendation:
“Our top China stock just got cut in half, and I couldn’t be happier.
“In fact, I predicted it would happen!
“I told my subscribers back on September 2nd that early private investors in China’s top publicly-traded coal-consolidator would sell as soon as the lockup period expired on their restricted shares.
“They did, and an outstanding stock dropped from $16 to $8 last week.Are you getting our free Daily Update
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“Now that the weak hands have sold their restricted stock, you have been given an incredible gift: A stock that was set to double in the next 6 months is now set to quadruple.
“But this opportunity won’t last for long. New buyers are quietly accumulating shares. They share my belief that this stock is going to $32 and beyond, thanks to its unique position—the only non-state-owned company that will get to buy cheap coal mines at fire-sale prices mandated by the Chinese government.
“Read on and you’ll see why the 30% three-day profits we recently captured are just the beginning, and a return to its old high of $46.50 is easily within reach.”
That’s all well and good — and as I said, I don’t have access to exactly what he wrote to subscribers … though all the evidence pointed to the fact that he recommended the stock to his subscribers, and actively pitched it to new subscribers, two weeks before that. If he then recommended that they sell after the quick bounce-back, well, I’m impressed … if not, then, as I said, he’s being more of a long-term-value no-stop-loss fundamental guy than I thought (not that there’s anything wrong with that).
But really, for our purposes we just want to know what Hsu thinks will happen from here — he tells us that this pick will “quadruple your money in six months” and, well, I can’t think of anything that I’d be willing to promise would climb like that. So what is it?
Here’s the basic info from the new ad:
“Like many early investors in China, I have owned Baidu, CNOOC, Ctrip, and all the great China stocks that have made fortunes for my subscribers and other early investors in China.
“But I know that the big profits from those well-known stocks are over. The next wave of big profits from investing in China will come from stocks that aren’t so obvious, or big.
“They’ll be found on dusty back roads like the one I was on in Henan.
“The company I was investigating that day is a coal producer. But while it does some mining of raw coal, it derives most of its revenues as a coal processor. While other companies focus on the dangerous and costly mining, it processes the coal into coke, washed coal and coal byproducts.
“Those products have higher margins than raw coal mining, and as China grows, this company will grow right along with it.”
Hsu talks about the entrepreneur behind the company, a man he apparently talked with extensively on a trip to China, and tells us that his goals are pretty impressive:
“Here’s his strategy—and ours—for doubling our money in the next 6 months, and making life-changing profits in the next 5 years:
“1. buy 22 small coal mines at dirt-cheap prices over the next 7 months
“2. fund those mine purchases out of existing cash flow, thanks to a new coking facility that will quadruple annual production
“3. process all that new coal in the same new coking plant
“4. watch earnings quadruple—and that’s a conservative estimate”
The big growth jump, and the collapse earlier this year, are largely related to the Chinese coal consolidation program, whereby the government is essentially shutting down small, dirty and dangerous coal mines and forcing them to be bought out by a select few consolidators — many of which are state-owned, but a few of which are, like this idea, private companies.
And he says that a summer accident in an illegal mine (a big one, it killed 47 miners) caused a crackdown that was the main reason for this stock’s collapse:
“In June, just after I left China to return to the U.S., an illegal mine in Pingdingshan had a horrible accident, killing 47 miners. To show their concern over the disaster, all mines in the area were shut down for a safety inspection.
“Thanks to the company’s strong political connections, it has only reduced operations, not shut them down entirely. But their earnings are going to be affected, depending on how long the shutdown goes on.
“The announcement about the effects of the shutdown drove the stock price of our company down to ridiculous levels—less than $15 a share.”
And of course, like any good copywriter worth his salt, this one has found a way to make the situation urgent — here’s the P.S.:
“P.S. The mining ban I told you about above is going to be lifted in days, not weeks. The smartest investment move you can make this year is to grab your share of the profits in this locked-in winner now, before the full potential of this company is known.”
Hurry Hurry Hurry! Or not … this was, of course, also a “Flash Alert” and urgent buy back when it spiked down to $11 and Hsu first wrote about it, so it would be reasonable to conclude that these shares are not terribly predictable, particularly in the short term. Though really, if it’s going to $32 or $46.50 are you all that worried about whether you catch it at $7 or $9?
So now I should tell you the name of the stock, right? This must still be …
SinoCoking Coal (SCOK)
The most recent news from the company came at their presentation at an investment conference last week, which you can listen to here if you like. It’s not terribly exciting, but they do run down some of the company history. At the same time, the company’s registration for resale of some of the shares initially sold to venture investors
They have indeed paid for two mines in the consolidation process, though it sounds like they’re waiting for the government approval of the actual transfer of control. The main goal of the company seems to be to increase their vertical integration — using acquisitions of new mines under the mine consolidation plan to help feed their coking and processing, which they think will reduce their input costs.
So they plan to acquire 10 mines by the end of 2011 (they’re not being ambitious enough to shoot for the 22 that Hsu says they can acquire, and from those comments it sounds like the process will take longer than the original government plan, which would have had the mines all consolidated by next Spring) — and they said in their presentation that they think each mine they acquire can contribute per-share annual earnings of 15 cents, so that means by 2012 they should have another $1.50 in per-share earnings. Their current earnings are forecast at about 80 cents per share in the preliminary results they announced last month … that’s less than the 96 cents estimated by analysts. Those same analysts — and there are only two of them — estimate an average of 84 cents per share next fiscal year, which began a few months ago … but do be careful, there are only two analysts, which probably means that they’re from companies who helped SCOK raise money last Winter.
So there’s certainly some attractive valuation potential for a stock that trades at under eight dollars, though clearly investors are pricing in a lot of uncertainty and risk for many factors, including the lack of information about the company, the strong hand of the founder, the fact that it was one of those dreaded “reverse mergers” (though it’s Nasdaq-listed now), and, of course, the great uncertainty about the pacing and pricing of the consolidation process.
The funding strategy sounds good — they aim to first use their cash flow to pay for these mine acquisitions (many of which will probably be quite small), then stretch payment if possible, then, as a last resort, they will borrow from the bank.
The company does have a big new coking facility online for more processing capacity (which will cost about $70 million), expected to be available to delivery coal next June, so as long as demand for coking, washed and processed coal remains high (much of that goes to the steel industry) they should be able to significantly increase their revenue by 2012.
So there you have it — Hsu thinks this one will quadruple, it appears, and that would still be well below the (rabidly enthusiastic) price it hit after its heralded IPO back in February, when investors apparently thought the mine consolidation plan would mean instant easy profits. I’m inclined to be a bit optimistic about this, now that I’ve heard the presentation and gotten some more detais (like that 15 cents/mine earnings accretion, which could possibly have earnings more than doubling by 2012ish), but I wouldn’t blame you for being a bit nervous about this one — it’s been a wild ride (a ride I haven’t been on, to be clear, I don’t own these shares and, per my restrictions, can’t trade in them for at least three days now even if I want to).
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