Knobias ClipReport (8-28-2007)

Submitted from Knobias ClipReport

Monday’s session began with news that the housing supply hit a 16 year high signaling that speculators were still stuck and the bubble may have a ways to go before finishing its course. Internationally though, Hong Kong’s benchmark index, the Hang Seng, closed at its all time high of 23577.73. The index gained some 655 points on earnings news and expectations from Chinese investors after the mainland government announced a pilot program that would allow Chinese citizens to invest in the Hong Kong stock market.

The speculative action caused most of the gains as many were trying to get in ahead of the influx of Chinese money. The action spread to the domestic market as many Chinese related names saw a huge increase in action. Some of the momentum names included: China Resources Development Inc. (CHNR), China Technology Development Group Corp (CTDC), eFuture Information Technology, Inc. (EFUT), Fuwei Films Holdings Limited (FFHL), China Grentech Corp Ltd. (GRRF), and Home Inns & Hotels Management Inc. (HMIN) shares all saw increased buying on the international news.

One name had two catalysts causing the increase in buying. China Precision Steel, Inc. (CPSL) gained some 30% on 2.81M shares traded. The name not only benefited from the China related news but also the news regarding U.S. Steel Corp’s acquisition of Stelco for a 43% premium over Stelco’s Friday close.

The acquisition was noted as strengthening U.S. Steel’s position as a supplier of flat rolled steel products in the North American Market.

The number 2 steel producer, Nucor, also announced that it had completed the previously announced acquisition of Magnatrax for $280 million in cash. The deals come at a time when leveraged buyouts are becoming much more scarce compared to months before. Though the actions were noted as being strategic, it still leaves many to wonder the fate of CPSL and the reasoning behind its large move.

One answer could have come six weeks ago when U.S. Steel and Arcelor Mittal CEO’s made comments noting that they saw more consolidation in the industry with a specific focus on China.

CPSL, according to their latest 10-Q, had around $11.4 million in cash and equivalents, and only $4 million in long term debt. The Company’s cash from operating activities had decreased significantly though the revenues year over year had increased. The increase in inventory seems to have been the cause for the decreased operating cash which could signify a problem in sales, preparing for a busier season, or the warding off of a future acquisition.

In any event, the speculative nature of Monday’s trading has the attention of many. While the Company does have some $75 million in assets, it only trades at a market cap of $154.5 million which might make it a little cheap considering its trailing twelve month price to earnings ratio being in the 14’s.

But the Company is heavily involved in the China sector and has even less regulation being involved in the Hong Kong area. Following its reverse merger in late December of last year, shares spiked from the $6 range to over $16 in only a few days. While that valuation certainly wasn’t warranted at the time, the name could become something to follow over the coming days. Speculation is abound and investors would be wise to follow the Hang Seng to gauge the interest these names might see in the following trading day. Investors would be wise to watch.



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