Posted by: donmihaihai | March 21, 2008

The silent shareholder value grower.

SP Chems grew their NBV 160% from Dec 2003 to Dec 2007, a CAGR of 27.4%, without any help from capital market, purely generated internally. Any company that can generate growth half as fast will be treated as a growth company with high valuation with some kind of publicity. But this is not the case for SP Chems, which is why I call it silent shareholder value grower. Some might be attracted to SP Chems through it fast growth but nevertheless, there is no recognition and SP Chems is always being associated as a basic chemical producer and high debt level, high risk, etc. The share price? Has it ever trade above 2X BV? I doubt.

Growing NBV is useless if the company unable to generate excess return out of the retained earnings so now the question is can SP Chems able to generate that excess earnings through it basic chemical products? The answer does not come from whether it is basic or niche. Surprisingly, the answer comes so easily from the comments by CEO in SP Chems 2007 annual report. Read it if anyone wants to know what is SP Chems all about. This is one of the best annual reports that I come across because it provided not just the basic requirements, it sum up what SP Chems is all about through the comments from CEO is just 2 pages. In addition to that, CEO Mr Chan listed down their strategic medium plan 2 and best of all, their achievement and setback. Thank you, as a shareholder, I can’t ask for more except to be selfish and asking you to keep doing it every year because annual report is the best place to receive information on the company. As long as you think we as shareholders should know, pour them out, the more the better. Looking forward to read your 2008 comments.

I can share Mr Chairman, Franics Lee joy and optimists which is not been taken back by the snow storm or teething problems from the initial production of VCM. It is not easy to help it when chairmaning a company with a long term vision with exciting future and extraordinary management. Now there is the CFO comment from Wira Tjendana, a surprise not just that this is the 1st year where shareholders can hear from him but of what he has written. I instantly wonder if he is a value investor, if so, he must have achieved outstanding results…… just wonder why he is not buying SP Chems shares in the open market.

Reading 2006 annual report was a joy, reading 2007 annual report is even better. Can’t wait for 2008 report.

SP Chems is the 1st chemical producer that I go through and fortunately it is the best too. After SP Chems, I followed on and read Jiutian Chemical, China Energy, Ouhua energy and Sunvic, currently reading China XLX fertiliser and the target for the future is going to be China Sunshine chemical and maybe SPC. In fact, any related new IPO won’t be missing as long as it helps to improve my understanding of the whole value chain and where profit can be earn.

If not for being trading in the market, SP Chems will never be sold at book value in any private deal, even if it is not managed by the current management. The same thing can be say about Ouhua Energy but I am not sure on the other 4 i.e Jiutian Chemical, China Energy, Sunvic and China XLX Fertiliser where it is hard to judge whether the assets they own already worth more than what is being recorded in the book. The reason for assets of Ouhua Energy to valuable is because they own almost all assets at the head of a “pipeline” where LPG can be “pipe” to the end consumer. How valuable are those assets depending on how many pipelines out there feeding internal sources from China or external sources from other countries. It is also depending on how many new pipelines are allowed to be built and operate in the future. So just by this alone, any private transaction will value Ouhua Energy assets much higher than book value. While Ouhua does not own that port terminal, Ouhua own a purchase option on the port terminal and supporting facilities.

SP Chems assets are valuable and it does not come from like Ouhua or a monopoly license but the last 10 years, SP Chems make themselves valuable and becoming the only producer of chlor-alkali producer in China Fine Chemical Industry Taixing park. This mean that there is actually local monopoly, a lousy kind of monopoly because there is actually no pricing power but with economics of scale and low cost, it deter other to come in, pour in capital and share the pie as long as other find that they are unable to earn a profit by doing so. By being a reliable supplier, more and more intermediate/end product producers come in which improve SP Chems competitive advantage. So, by this alone, the value of the empty shell without management is going to worth much more than book value because creating local monopoly is not easy. But combine that with good management, the value of SP Chems can be easily double that of an empty shell.

Operating a company selling commodity products is not easy because they are facing constant uncertainty on supply and demand with unknown product pricing. So it is really something when they can run this company well.

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