ShengdaTech Inc.

ShengdaTech Inc. (SDTH) has that rare combination of strong growth and value characteristics. The stock is cheap. It trades at only 6.4x forward earnings and yet earnings are expected to grow 20.67% over the next 5 years.

Company Description

ShengdaTech manufactures nano precipitated calcium carbonate (NPCC) and coal-based chemicals. The company also converts limestone into NPCC using proprietary technology. NPCC is used in tires, paints, and polyvinyl chloride building materials. The coal-based chemical products include ammonium bicarbonate, liquid ammonia, methanol and melamine.

ShengdaTech's coal-based products are used in chemical fertilizers and raw materials in the production of organic and inorganic chemical products, especially formaldehyde and pesticides.

Acquisition of Jinan Fertilizer Company

In September, the company announced that it expects to close on the acquisition of Jinan Fertilizer Company before Oct 31 because ShengdaTech is under government mandate to close its Tai'an City facility by that same date. ShengdaTech is transferring production from the closing facility to the Jinan facilities.

In the event that the acquisition is not completed by the date the government closes the Tai'an facility, the company said it intends to continue production by renting facilities from Jinan Fertilizer and expects a smooth transition from renting production to ownership.

The company has stated that the government's closing of the Tai'an facility was not the result of any safety violations but was due to China's increased environmental enforcement reform as a result of food safety scares and the facility's nearby proximity to residential and non-manufacturing areas.

Revenue Jumped 75.7% in the Second Quarter

On Aug 15, ShengdaTech reported second-quarter earnings that beat Wall Street estimates by 28.57%. Net income rose 66.3% to $10 million, or 18 cents, from $6 million, or 11 cents in the second quarter of 2007.

Revenues surged 75.7% to $39.8 million from $22.7 million in the year ago period. The company attributed the growth to higher selling prices and increased demand for both chemical and NPCC products.

ShengdaTech added 3 new stainless steel NPCC production lines in April 2008 which boosted NPCC production capacity to 190,000 metric tons compared to 90,000 metric tons from a year ago. The increase in production boosted revenue from NPCC products by 76.4% to $19.1 million from $10.8 million in 2007.

During the second quarter, the company added 6 new domestic clients as well as expanded its international reach by adding a Korean tire manufacturer, Vietnamese and Israeli polyethylene manufacturers and a Singapore automobile undercoating company to its customer list.

Full Year 2008 Estimates Rise

Consensus estimates for the third quarter have been stable in the past 90 days, holding at 15 cents per share. Consensus estimates for the full year are up 4 cents to 64 cents in the last 3 months.

ShengdaTech reports third-quarter earnings on Nov 17. It has surprised on estimates 3 out of the last 4 quarters by an average of 21.18%.

Value Fundamentals

ShengdaTech is an attractive value play, with a forward P/E of 6.49. Its price-to-book is 2.45. The company has an outstanding 1-year return on equity (ROE) of 34.66%.

Read the full analyst report on SDTH