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Longwei: Strong Growth, Appears Undervalued
8 October 2009 Rick Telfur
Longwei Petroleum Investment Holding Ltd. (LPIH) may not be the most well-known fuel middleman here, but its presence in one of the world’s largest economies is rapidly growing.
Longwei Petroleum Investment Holding Ltd. (
LPIH.OB: 1.85
+22.52%), which purchases diesel, gasoline, fuel oil and kerosene from various suppliers at competitive prices and resells them to other wholesalers, is trading at just $1.50 with forecasted 2011
earnings per share of 80 cents and a trailing 12-month earnings per share of 30 cents, making it appealing to value investors.
Business Overview
Longwei operates as a licensed intermediary that earns a profit by purchasing fuels at competitive prices and selling them to other wholesalers. In addition, they earn revenues by acting as a purchasing agent where they charge an agency fee to wholesalers who do not have a license to purchase directly from refineries.
The license that enables Longwei to operate in the highly profitable business as an intermediary is known as a Finish Oil Wholesale license, which is granted by the Chinese government, has no expiration date, and is extremely difficult to obtain. The company also owns a Dangerous Chemical Products businesses license that allows them to handle gasoline and diesel fuels.
Currently, Longwei has 14 storage tanks that allows them to store 50,000 metric tons of fuels in addition to their own rail system to transport products to consumers. The company is planning to expand with an additional 70,000 metric tons of storage capacity near Gujiao City and hopes to complete the project by May 2010, according to their latest
10-Q <NOBR style="COLOR: darkgreen; FONT-SIZE: 100%; FONT-WEIGHT: normal" id=itxt_nobr_3_0>filing
</NOBR> with the SEC.
A Look Under the Hood
Last quarter, Longwei saw revenues that increased 53.1% to $49.72 million due to greater purchases by power supply companies due to the continued growth in the Shanxi Province. Despite the higher revenues, gross profit margins slid from 30.3% to 19.5% after the company locked in fuel prices when diesel prices decreased, but the company expects improvement.
Meanwhile, Longwei saw its net income increase 31.6% to $6.66 million, or $0.09 per share, due primarily to higher revenues. The company’s balance sheet also remains strong with $9.62 million in cash and equivalents, no long-term
debt, and a current ratio of 17.59x. Finally, the company’s net book value stands at approximately $1.44 per share.
Looking Forward
Management expects growth in fiscal 2009 to remain strong due to continued growth in the Chinese economy, improved wealth among its citizens, and increasing storage capacity for its products. The National Development and Reform
Commission is also expected to increase fuel prices by 4-5%, which will help the company improve its gross margins.
Given the company’s substantial double-digit growth rates and single-digit price-earnings multiple, many investors believe that this stock is significantly undervalued. On a price-earnings to growth basis, some believe that the stock should be trading at closer to 20x its trailing earnings, or $6.00 per share. So at just $1.65, it could represent a compelling bargain…
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