China Gerui Advanced Materials Group Ltd. Earnings Call Insights: Blackout, China Steel Industry

On Tuesday, China Gerui Advanced Materials Group Ltd. (NASDAQ:CHOP) reported its first quarter earnings and discussed the following topics in its earnings conference call. Here’s what executives shared.

Blackout

Dmitriy Shapiro – Global Hunter Securities: On the last earnings call, you talked about having some technical issues with achieving desired thickness on your recently added wide-strip line. However, this time in the press release you have mentioned that your overall utilization has improved to approximately 75%. So, does this mean that those issues have been fixed?

Edward Meng – CFO: Thank you, Dmitriy. Let me take that question. Let me do a little bit correction. Actually what we mean, it is not really technical problem. It’s actually when we have the new wide-strip capacity officially in operation, at the very beginning you kind of like do fine tuning and the testing steel production. For example, the average thickness of the finished wide-strip products has not reached designed average yet. So, we are driving our machines reasonably hard. So, I mean understandably at the very beginning if you don’t get to that kind of designed average thickness then you are somehow (indiscernible) yourself with the commodity type product offering. As I said, we are very glad that getting to another quarter, we see improvement in the overall precision as well as well for example the thickness of the wide-strip, so that’s why you see, that also I mean helped with the real margin improvement, then actually going forward with the further improvement on the precision side of the new capacity, with the ramp-up of the new capacity and also with the further utilization of the chromium plating capacity, as I said earlier. We are very hopeful that they are still room for margin improvement going forward.

Dmitriy Shapiro – Global Hunter Securities: So, I understand that you’ve been in a prolonged blackout period regarding to your ability to repurchase stock with your Q4 blackout rolling into the Q1 blackout, but now that this out of the way, are you planning to continue repurchasing stock given how cheap the valuation is right now, and also when is the first day that you’re going to be able to do this the first day that you’re out of your blackout period?

Edward Meng – CFO: Thank you. Good question. I think a lot of the investors are also I mean actually from the emails and the calls I got from the investors, they also ask about same question. Let me explain a little bit here. I think our legal – we would be – or I don’t think they will object to I mean what we’re talking about here. First of all, our stock repurchase program is subject to the restrictions in our insider trading policy, bascially the blackout usually starts from the 16th day of the last month of each quarter and then the blackout is finished starting from the third day after the earnings release. So, unfortunately, the last blackout started in December 16, and then we’re doing a full year audits. We do not I mean disclose the full year audit results until earlier this month, and then at the same time once we release that we’re actually in a process of the Q1 review, the audits. So, I guess we do appreciate your patience, but once we (indiscernible) you will see that the Company will start repurchase again. The commitment from the management is, we will continue to do the repurchase, and we will be more active to provide update to our investors on the progress of that program.

Dmitriy Shapiro – Global Hunter Securities: So, hopefully next week, we will see you guys in the market repurchasing stock?

Edward Meng – CFO: I guess yeah I think we have every reason to believe it’s going to happen.

Dmitriy Shapiro – Global Hunter Securities: Also, can you tell us an approximate breakdown of your revenues by end market and also where do you see the most demand during the current year?

Edward Meng – CFO: (Indiscernible) go ahead.

Unidentified Company Speaker: You mean the breakdown by the industry, right, by its end market?

Mingwang Lu – Chairman and CEO: With reference of our wide-strip production line, actually we are leading the market and for the most end industry, we could say it’s food packaging industry as we see the demand is very, very good and also telecommunications wire and cable is also good as well.

Edward Meng – CFO: Let me add on top what Mr. Lu has just talked about. If you look at the recently filed Annual Report on the 20-F, that provides further breakdown of the revenue by sector for year 2011. Actually I believe that breakdown provides some indication of where the Company is actually heading to given the overall macro and the microeconomic situation here in China. I wish I can give you more clarity by looking at a crystal ball for year 2012, but we can’t. But I want to say that’s going forward, we’ll see the food and beverage packing, yes, it’s going to be a very strong sector. The demand, I won’t say is going to be immune from what’s happening in the other economy, but it will continue to be very strong. Then just now I talked about, there is going to be some uncertainty to the construction and decoration material as well as home appliances sector, because as I said earlier, the government – even beginning of this year they sounded very harsh and we are going to continue to be very stringent on the real estate markets and then last week they said yeah, but the message has been interpreted as there might be – there might be a turning point if the real estate market loosen ups, people are buying houses, they are going to put in the appliance or electric appliance. So, that’s going to stimulate the home appliance sector as well as construction and decoration material sector. Then the government has been given – they agreed to provide subsidy to stimulate the consumption of energy efficient home appliance. So, that provides a good opportunity for us. However, as I said right now even within the steel industry, there have been some fluctuations given the iron ore cost coming down and the overall price and depression starting from October to March, so there is some uncertainty, business back to your question, yes, it’s consumption driven sector are going to be continue to be strong including our telecom, fiber optic cable sector too.

China Steel Industry

Rachel Yu: I have two questions. First of all, could you please give us some color on your current supply and demand situation of the China steel industry? I think that there might be some signs in the late March showing some demand recovery, and also in ASP, is this the trend you’re still seeing now and then also I’m just wondering what is your ASP in April and then like the first half of May. I will ask my second question later?

Edward Meng – CFO: Let me take that question. On average, well, right now heading to the May of this year, the overall steel sector in China continue to be relatively slow a little bit depressed, but I mean I am pleased to emphasize that has actually been taking through consideration when we reevaluated of guidance for 2012. Secondly, I mean, Rachel to your question about the overall average selling price, I mean declining which is starting October the last year and actually getting to March. In April, it recovered slightly. I think in May there has been some hesitation, I mean adjustment too. I wish we can be certain of the future, but as I said earlier, there has been a lot of uncertainty right now about the overall average selling price trend both for raw material cost for the hot-rolled coil as well as for the finished our cold-rolled steel products that the Company produce, but I mean, we have done our own homework consulting with some industry experts and then look out to competition too. We think that’s why we think right now we would reiterate our guidance for 2012. So going forward, if the overall microeconomic situation changes, the demand fixed on different terms, whether it’s going to be positive or negative, we want to be very transparent and communicate that message to you and to our investors.

Rachel Yu: Actually, the second question is more – just can you repeat – I know you just mentioned, and can you repeat the breakup sales volume and then was it coated and uncoated and what was ASP of the coated and uncoated, I missed some numbers?

Edward Meng – CFO: Let me just – I think Jimmy, you want to do a translation? I’ll flip through the pages and find this?

Mingwang Lu – Chairman and CEO: Talking about the volume here, the sales volume for the wide-strip cold-rolled steel product including both plated and unplated was approximately 38,500 tons, that’s about 50.4% of the total sales volume. Then, the narrow-strip either chromium-plated or unplated was about 37,900 tons, accounted for about 49% of the total sales volume. Although the wide-strip accounts for a larger percentage of the total sales volume, if you look at the revenue contributions, it’s actually – the percentage is slightly lower than narrow-strip. So what does that mean? I mean, that basically means we are still working on improving the overall precision or thickness of the wide-strip. There’s a still room for marginal contribution, because once you improve moving to the high end wide-strip product offering spectrum, than that’s where we will come back and charge the premium, that’s where, I mean, the margin improvement is going to be happening. Now, the other thing is, for the chromium plated product, the total sales volume is 22,600 for both narrow and wide-strip, and that accounted for about close to 30%, actually 29.6% of the total sales volume.

Rachel Yu: What is average selling price again for the premium plated?

Edward Meng – CFO: For the chromium plated including both wide and narrow-strip, the average selling price is about RMB6,280 and then, for the wide-strip. The average selling price of the wide-strip is about RMB5,830, and then for the narrow-strip it’s about RMB5,000. Now, if you do a comparison between when you look at the average selling price between this last quarter Q1 with the same period of 2011, you’ll see that all three category the average selling price is actually coming down. So that reflects actually in tandem or in accordance with the overall economic slowdown that’s happening in China.