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Wednesday, August 24, 2005

China Energy & Carbon Black Holdings (CHEY)

Sometimes I'll start reading a financial document and it's actually interesting, well-written, and easy to read and understand. That is always a good sign. This company (terrible website) makes carbon black which is used in tires and various other industrial applications. Here are notes from their 10-K/A.

Dec 29, 1995, Huayang International Trust signed over 95% of its investment in Haitong and 20% of investments in Hotel Group to Power Capital Corp in exchange for 6 million shares of PCC stock. PCC changed to Huayang International Holdings. Shares traded on OTC BB as HIHI in Jan 1996. Delisted in 1999 due to non-reporting. Jan 2002 re-listed back as HIHI. Aug 2004, HIHI completed share exchange with China Carbon Black Holdings Company in HK ("CCB"). HIHI acquired CCB in exchange for 6 million HIHI shares after a reverse split. CCB now owns 100% of Xin Jiang YaKeLa Carbon Black. Sept 2004, company name changed to current name. Sept 2004, Company sold 95% of Shenyang Haitong House Properties Development to former CEO Gao Wan Jun.
We buy stranded natural gas (a form of natural gas derived from oil exploration
and production) from SINOPEC and PetroChina. With the Company's proprietary
technology, we process stranded natural gas into various grades of carbon black.
Carbon black is widely used in tire making, road building and steel manufacturing
in China. The quality of our natural gas carbon black is superior to that of tar
carbon black in that our product is cleaner to make and easier to purify.
They make 2 kinds of carbon black: regular and ultra pure (which is used in metals).

The 10-K then spells out the facilities in excellent, precise detail. Also it lists the main customers of each type of carbon black.

12 sales people in 12 provinces, all report to the CEO.

Regular: 10 external regional distributors.
Ultra pure: 30 regional distributors, with main cities listed.

Limited competition.

Competitive advantages:
Regular: The major competitor is Guangxi Bei Hei Ocean Fossil Fuel Carbon Black Company Limited (8K tons/year).
Extra Crispy: The major competitor is Sichuen Chuen Nam Carbon Black Company Limited (700 tons/year).

120 full-time employees: sales (12), production, QA, admin, tech services.

Start of 2005, entered energy and power business, acquired South Xinjiang Power Holdings from HK for 1.338 million shares. Power plant in Xinjiang PRC. Estimated net asset value of $1 million.

In an August press release, they describe the details of this deal. Issuing 39 million shares!!! for a 14 megawatt power plant (which would power about 12,000 homes) which they claim is worth $6.8 million. A quick Google check seems to verify that value, roughly. But now they have what seems to be an inferior business with huge capital requirements for growth. The carbon black industry probably would generate $700K/year and grow with the economy.

7 million shares worth perhaps $11 million. (roughly $1.57/share)
now becomes
46 million shares worth perhaps $18 million. (roughly $0.39/share)
destroying roughly 75% of the value of each share!

Why not just wipe your butts with a Ming dynasty painting while you're at it?


Comments:
Bruce, you've outdone yourself with this post. I was getting really excited about carbon black for a few seconds.

Meanwhile YHGG's stock performance continues to shock and awe. But what's with all those press releases? They do about one a week except when they do two. And the releases range from from the extravagant (lysozyme DNA technology patent worth $1/2 bill./yr...if, if) to a weather report. I usually view this sort of corporate behavior as a big red flag, but maybe not in this case (?).
 
I was really excited about the stock, too. It seemed like the perfect investment. But they destroyed it. It's actually kind of funny because they had been making all sorts of changes until getting into the carbon black business. At that point, considering how well written the 10-K text is, you'd think they were brilliant at getting into the right business. This is an outstanding example of how management can destroy a business. I might want to do some sort of detailed writup about that if I had the time.

Every now and then I run into some interesting example of a business, like Mesabi Trust (MSB): "The Trust will terminate twenty-one (21) years after the death of the survivor of twenty-five (25) persons named in an exhibit to the Agreement of Trust. The youngest person on this exhibit is now 44 years old."

As far as YaSheng goes, I mean, don't all of your stocks go up 150% within a month or so after buying them? :-) I'm really amazed by it. There must be some people with serious money who want into that stock now, well before it goes onto NASDAQ or AMEX.

LiveWorld has also surprised me somewhat. Although it wasn't large volume, the stock jumped up to 65 cents a number of times and someone even briefly pushed it up to 70 cents (on tiny volume). The bid is now fairly consistently above 50 cents.
 
Oh yeah, I don't know what to think about the press releases. I also view it as somewhat of a red flag. Maybe they think the stock is languishing too much in a narrow range. The lysozyme thing seems overrated based on what I gathered in a quick look on the web.
 
Carbon black is an ultrafine chemical manufactured by the burning of hydrocarbons in a limited supply of air. This finely divided chemical in the size of nanometres offers vast industrial importance to a range of industries i.e. as a reinforcing agent for rubber, as a colorant for printing ink, paint, paper, plastics, etc. Carbon black is well renowned as world’s best reinforcing material for rubber related products. The global tyre manufacturers consume nearly 80% of the total carbon black demand. Recent changes in global carbon black market indicate that most of the carbon black manufacturing units in western world including North America, Europe are being forced to shut down their operations because of the heavy competition they are facing from low cost Asian manufacturers. China Carbon Black Market
 
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