Lihua International [Part 3]: Strong Cash Flow, Strong Team, Strong Demand

Lihua International [Part 3]: Strong Cash Flow, Strong Team, Strong Demand

This is part three of a three part series on Lihua International Inc (NASDAQ:LIWA). Lihua is a Chinese company involved in the process of refining, marketing and selling copper wire. At present the company is currently trading below both its book value per share and cash value, which makes Lihua look like a deep value opportunity. What’s more, the company is profitable and cash generative.

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In part one, which can be found here, I covered the company’s financials. In part two, I covered the company’s operational performance and cash generative nature. And in this part, I’m going to cover Lihua International Inc (NASDAQ:LIWA)’s operating environment, management and summarize the series.

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Rapid growth for Lihua International

The past six years have been a period of rapid growth for Lihua International Inc (NASDAQ:LIWA). Indeed, during this period, Lihua’s revenue has expanded at a CAGR of 72%, from a low of under $50 million reported during 2007, to a high of $854 million reported for full-year 2012. Meanwhile, since 2008 the company’s cash balance has grown by a compounded 624%, from $26 million reported during 2008, to $188.3 million reported at the end of September this year.

Of course, one of the key reasons for Lihua International Inc (NASDAQ:LIWA)’s growth is its location within China. China’s insatiable demand for raw materials, combined with the growing trend for Western countries to export their unwanted recyclable electronics, means that Lihua operates within a near-perfect environment. Furthermore, it would appear that demand for the company’s copper as well as the supply of raw materials is not going to slacken anytime soon. In particular, as a net importer of copper, China is ever looking for ways like those offered by Lihua to reduce its dependence on outside factors.

Lihua International ramping up production of copper anode

So with a strong demand for copper in the domestic Chinese market, Lihua International Inc (NASDAQ:LIWA) is ramping up production adding 50,000 tons of copper anode capacity during 2012. This took the company’s annualized capacity to a maximum of 90,000 tons of anode per year. Further upgrades are expected during 2014, to bring total plant capacity to around 160,000 tons. It is likely that with such a high demand for copper within China, this capacity will be fully utilized rapidly. With project upgrades like these it would appear as if Lihua’s earnings are going to grow rapidly during the next year or so.

Also see: Energy Markets To Continue Rapid Evolution: Citi

Behind every great company lies a great management team and Lihua International Inc (NASDAQ:LIWA)’s management team would appear to know what they are doing. In addition, it would appear as if the team have a vested interest within the company. For example, Zhu Jian Hua, Lihua’s founder and CEO has over 25 years’ experience within the Chinese copper industry and built Lihua up from scratch with his partner and fellow director. The company’s CFO, Daphne Huang has experience working for Bank of America Corp (NYSE:BAC) and was previously a senior auditor at PricewaterhouseCoopers. Other directors’ experience includes a wealth of experiences in both the financial and base metals industry. Although one director was a former Lehman Brothers banker…

Lihua International’s management team

Still, all the information points to the fact that Lihua International Inc (NASDAQ:LIWA) has a strong management team with a good reputation within China and many connections within the industry.

In summary, Lihua International Inc (NASDAQ:LIWA) currently trades at a discount to the value of cash on its balance sheet. In addition, the company is ramping up production to meet demand and is led by a skilled and driven management team. Moreover, the company is profitable, cash generative and has little exposure to the volatile price of copper.

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Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. Prior to his investing and writing career, Rupert began his career as a proprietary currency trader. Rupert holds qualifications from the Chartered Institute For Securities & Investment and the CFA Society of the UK. Rupert covers everything value investing for ValueWalk and co-runs HiddenValueStocks with Jacob Wolinsky Email -
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