San Teh revisited

1.5 years ago, I made a posting on San Teh:
http://level13-analysis.blogspot.com/2008/05/appraising-san-teh.html

Now I feel its time to sit up and take notice of this sleepy stock again. For the last 6 months, it has been trading at $0.25 to $0.35 with low daily volume. San Teh is currently in a sweet spot to ride on China's construction and infrastructure boom. The catalysts for its share price appreciation are slowly appearing.


Catalyst 1:
Demand for cement remains strong due to the re-construction after the Sichuan earthquake and China's infrastructure stimulus spending. So far the cement prices around different regions in China have held up well.
http://www.chinadaily.com.cn/bizchina/2009-03/02/content_7527574.htm

Catalyst 2:
The government is continuing to eliminate backward production capacity. China is looking to eliminate 600 million tons of production capacity from old, outdated plants by 2012. Initially announced in 2007, the move will involve over 3000 local enterprises, China Cement reported.


Strict restrictions on new cement projects and cement production are being enforced by various levels of the Chinese government. Provinces with a per capita cement clinker capacity over 1,000 kg are reportedly unable to build a new production line. Furthermore, provinces with a new dry process cement percentage exceeding 70% are to limit production capacity to 10% of the respective province's cement output during the previous year.


China's cement production overcapacity is approximately 300 million tons; with over 3,000 small vertical kiln factories having a production capacity of 100,000 tons. The price ratio between iron and steel and cement products in China reportedly eclipses to 20:1 – a stark contrast to the 3:1 international ratio. According to China Cement, the backward capacity is due mainly to the profit margin achieved from low costs and low-level technology; aggravated by rapid expansion and outdated production capacity.


Catalyst 3:
The price of coal, which is a major cost of cement production, has remained at reasonably low levels since the crash in commodity price last year. A great amount of costs can be saved in the near future when the cement factory successfully switched to using residual heat for the power generation plant.


The 3 scenarios described above will bode well for San Teh's future developments. Now lets take a look at the numbers to check if they tell the same story. A comparison is done for 1H09 vs 1H08. If we look at the core operating profit excluding exceptional items, we can see that the earnings for 1H09 is $2.88 million vs   -$2.5 million in 1H08. This shows a great turnaround in fortunes.


Debt and receiveables are at healthy levels. Cashflow from operation is at $15 million and moving forward, captial expenditure is expected to decrease. I will be looking forward to its earnings report very soon for 3Q2009. At $0.3, the downside is limited and P/BV ratio is 0.36. The forward P/E is estimated to be 18.7.


Lastly, the company has postponed its plan to list the cement subsidary in China in Y2008. With the change in macroeconomic conditions in China, we may not need to wait too long for the listing to take place.