China Precision Steel, Inc. (NasdaqCM: CPSL)

Today’s screen brought China Precision Steel, Inc. (NasdaqCM: CPSL) to my attention.  I admit that I like Chinese penny stocks because of the size of the market they are selling into and their gain history.  We in the West seem to think there is some “mystery” to Chinese stocks and we talk in hushed and reverent tones about them.

The fact is Chinese stocks are no different than any other stock and all we need to do is to apply fundamental and technical analysis to them to know if they are good trades.  No one can control news or investor sentiment however.  One thing that has held down the Chinese sector stocks is concerns over debt issues with the U.S. and other countries and concerns about Chinese Federal money policy going forward.

Those concerns shouldn’t keep you from looking at today’s stock: CPSL.

CPSL, a steel processing company, engages in the manufacture and sale of high precision cold-rolled steel products in the People’s Republic of China.  The company produces and sells precision ultra-thin and high strength cold-rolled steel products with thicknesses ranging from 7.5 mm to 0.03 mm. It also provides heat treatment and cutting of medium and high carbon hot-rolled steel strips. The company’s precision products are primarily used in the manufacture of automobile parts and components, steel roofing, plane friction discs, appliances, food packaging materials, saw blades, textile needles, and microelectronics. It sells its products primarily in the People’s Republic of China, Thailand, Nigeria, and Ethiopia.                                                                                        source: YahooFinance.com

I have read a great deal about the company and here is what I am perceiving.  They are on a growth mode with the addition of two new steel plants in 2010 and are expanding their export market efforts. Mainland China continues to be their#1 market, but this extra capacity will allow them to expand outside China’s borders.

The latest Quarter’s (3/31) financial results had nothing but good news.  Quarter over Quarter revenues increased 293.4%, company sold a record amount of steel, net profit of $2 million vs. a $3.5 million loss last year, etc, etc..

The balance sheet is good, but not great.  Cash of over $13 million, a manageable debt load with decent debt coverage and a strong operating cash flow.  The balance sheet is very clean, actually.

Insiders own almost 42% of the company with about 7% in institutional hands.   No sales or purchases have been reported lately.

Since their fiscal year end is June 30th, I would expect a run up in the shares to the announcement of earnings.  It appears that CPSL will be solidly "in the black", but earnings announcements are dangerous times to be in a stock.  Make sure that you bracket this trade properly in case the earnings "surprise" is negative.

The Annotated Chart:

Bottom Line:  CPSL is a company that is headed in the right direction.  They have weathered a downturn in their business; they have come out of that stronger imo; they are ramping up production; opening up new markets, etc...

Here is what I am looking at for entry/exit points

Last Close:              $1.34

Buy Opinion:          $1.30 - $1.45

Short Term Sell:    $1.75 - $1.90

Long Term Sell:     $2.50 - $3.00+



Good Luck and Great Trading,


Jeffrey Dean


 

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