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YinhanZhang

Fushi Copperweld produces copper-clad aluminum and copper-clad steel wire products. It has manufacturing facilities in China, the US, and the UK. The company sees opportunities for growth in China's expanding telecom industry and through strategic acquisitions. While dependent on copper prices, the company's performance is expected to improve with economic recovery. Financial analysis shows the company has no debt, high margins, and the stock may be undervalued based on an APV valuation model. The presentation recommends buying the stock.

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FUSHI COPPERWELD (NASDAQ: FSIN) VALUE PITCH F. Batten Fund Yinhan Zhang November 1, 2010
Agenda ? Company Background ? Business Opportunities ? Financials ? Valuation ? Conclusion
Company Background
Line of Business ? ¡°One of the world¡¯s largest producers and a leading innovator of bimetallic wire products, principally copper-clad aluminum and copper-clad steel¡­¡± ¨C Company 10K ? Services telecommunication, utilities, transportation, auto, etc. ? Copper-Clad Aluminum (CCA) ? 37-41% density, >63% IACS (International Annealed Copper Standard) ? Copper-Clad Steel (CCS) ? 21%, 30%, 40% IACS
Leadership Fu, Li (Age 44) Chairman of the Board and Co-Chief Executive Officer since November 2009. He has served as Chairman of the Board, Chief Executive Officer since December 13, 2005. Mr. Fu is a founder of Dalian Fushi and has been the Chief Executive Officer since the Company commenced operations in 2001. Mr. Fu graduated from the PLA University of Science and Technology with a degree in Engineering. Longever, Joseph (Age 57) serves as Co-Chief Executive Officer since November 23, 2009. Prior to Fushi, he ran an independent consulting service which he founded in 2007. From 1999 to 2007 he held various Senior Management, Sales, Marketing and operations within Copperweld, including Vice President and Chief Operations Officer. He has also served as Executive Vice President and General Manager at Crest Manufacturing Company; and held sales roles at Texas Instruments.
Leadership Wang, Wenbing (Age 38) is President, Director or since January 21, 2008. He also served as Chief Financial Officer from December 2005 to August 2009. Prior to Fushi, Mr. Wang worked for Redwood Capital, Inc., China Century Investment Corporation, Credit Suisse First Boston and VCChina in various capacities. Fluent in both English and Chinese, Mr. Wang holds an MBA in Finance and Corporate Accounting from Simon Business School of University of Rochester. Mr. Wang also currently serves as a director of General Steel Holdings ,China Integrated Energy, Inc., and Orient Paper, Inc. Studwell, Craig (Age 62) is Chief Financial Officer, Executive Vice President since October 19, 2010. He brings 35 years of experience in banking and corporate finance in the United States, Asia, and Europe. Mr. Studwell holds a Bachelor of Science Degree in Finance from New York University.
Geographic and Product Segment SALES BY INDUSTRY TOTAL SALES 2009 Telecommunication 50% Utility 44% Transportation 1.7% Other 3.4% SALES BY GLOBAL DISTRIBUTION TOTAL SALES 2009 CHINA 80% US 16% EUROPE 3% OTHER 1% Source: Company 10K Manufacturing Capacity <= Dalian, China <= Fayetteville, TN <= Telford, U.K.
Recent Acquisitions 2009 2008
Significant Developments ? Jan 21, 2010- Acquired Dalian Jinchuan Eletrical Cable Co., a manufacturer of electric wire and cables in Northeastern China for $10 million. ? Feb 1, 2010- issued 7,475,000 shares of common stock at $8.00 per share. Received $56.4 million net of underwriting discounts. ? May 27, 2010- Purchased Shanghai Hongtai, a bimetallic wire manufacturer (CCA, CCAM) for $3.9 million ~ $1.3 million in cash and $2.6 million in restricted stock.
Stock Pitch
Business Opportunities
Opportunities ? China ? Growth in Chinese telecommunication industry offers solid opportunities for growth. ? Penetration rate: China- 59.6% vs. US- 91.0% as of June 2010 ? Strategic expansion through acquisitions ? Jianchuan acquisition ventures into Chinese cable industry. ? Hontai acquisition expands sales and distribution network to Southeast China. ? Economic recovery ? Copper price upswing
Raw materials Copper 53% Aluminum 41% Steel 6% Total 100% ==>85% CGS ? Prices NOT hedged ? Suppliers are concentrated ? Top 5~ 65% (2008) vs. ~ 60% (2009)
Price of Raw Materials LME Copper Price Graph (US$/metric tonne)
Revenue and Cost
Global Economic Recovery ¨C Copper Price Rebound
The ¡°Triple Play¡± The economy Price of copper FSIN¡¯s performance
Recovery Negatives Positives
Recession Negatives Positives
Financials
Key Metrics ¨C LIWA comparison ? No debt <= retired $39million LTD in Q12010 FSIN LIWA Market cap 360mil 315mil Current price $9.57 $10.84 Ownership 34%/51%-Inst. 58% /38%-Inst P/E(ttm) 7.65 11.57 Operating margin 21.89% 17.33% Net Profit margin 17.61% 9.44% Current ratio 11.32 8.64 ROE 15.06% 23.84% ROA 9.82% 22.92% EPS 1.22 0.92 Capacity 52,400 MT- CCA 7,500MT-CCA 17,100 MT- CCS 25,000-CU
Stock
Insider Trading Nothing exciting¡­ but, it does show the company¡¯s effort to align management and shareholder interests.
Institution Trading
Valuation
APV Model ? Current price ~ $9.32 (4:00pm, Oct 29) ? Target price $13.62 ? Key assumptions ? Growth 40% near-term, 15% long-run, 4% terminal ? Gross profit margin slowly eroding ? SG&A ~ 8% historic ? Tax rate 15% ->26% due to expired tax break in China ? No significant CAPEX in 2010; growth with sales ? Depre/Amort 30% of CAPEX historic => 17.5% operating margin in the long-run
APV Model ? Working Capital percentage of sales ~ 25% in the long-run ? Small cap premium ~ 2% ? Midyear convention: 2010~ 0.5, 2011~ 1.5 etc ? Additional $5million for the Jinchuan purchase to be paid end of FY2010. Decreases free cash flow.
Scenario Analysis ? Bearish price: $8.17 ($7.37- $9.07) ? Terminal growth 1% slower than GDP ? Gross margin erodes at 1% annually, vs. 0.5% ? Unable to bring working capital requirements down from 40%. ? Bullish price: $16.15 ($14.53- $17.94) ? Able to secure gross margin at 30% ? Preferential tax benefit extended for 2011.
Conclusion
Conclusion ? Growth opportunities ? Well managed ? APV valuation puts stock price at $13.62 vs. current $9.32 => 46% return ? Q3 Earnings Announcement: November 2 Recommendation: BUY
Analyst Estimates ? EPS $0.34 Q3; $1.28 FY

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Stock Pitch

  • 1. FUSHI COPPERWELD (NASDAQ: FSIN) VALUE PITCH F. Batten Fund Yinhan Zhang November 1, 2010
  • 2. Agenda ? Company Background ? Business Opportunities ? Financials ? Valuation ? Conclusion
  • 4. Line of Business ? ¡°One of the world¡¯s largest producers and a leading innovator of bimetallic wire products, principally copper-clad aluminum and copper-clad steel¡­¡± ¨C Company 10K ? Services telecommunication, utilities, transportation, auto, etc. ? Copper-Clad Aluminum (CCA) ? 37-41% density, >63% IACS (International Annealed Copper Standard) ? Copper-Clad Steel (CCS) ? 21%, 30%, 40% IACS
  • 5. Leadership Fu, Li (Age 44) Chairman of the Board and Co-Chief Executive Officer since November 2009. He has served as Chairman of the Board, Chief Executive Officer since December 13, 2005. Mr. Fu is a founder of Dalian Fushi and has been the Chief Executive Officer since the Company commenced operations in 2001. Mr. Fu graduated from the PLA University of Science and Technology with a degree in Engineering. Longever, Joseph (Age 57) serves as Co-Chief Executive Officer since November 23, 2009. Prior to Fushi, he ran an independent consulting service which he founded in 2007. From 1999 to 2007 he held various Senior Management, Sales, Marketing and operations within Copperweld, including Vice President and Chief Operations Officer. He has also served as Executive Vice President and General Manager at Crest Manufacturing Company; and held sales roles at Texas Instruments.
  • 6. Leadership Wang, Wenbing (Age 38) is President, Director or since January 21, 2008. He also served as Chief Financial Officer from December 2005 to August 2009. Prior to Fushi, Mr. Wang worked for Redwood Capital, Inc., China Century Investment Corporation, Credit Suisse First Boston and VCChina in various capacities. Fluent in both English and Chinese, Mr. Wang holds an MBA in Finance and Corporate Accounting from Simon Business School of University of Rochester. Mr. Wang also currently serves as a director of General Steel Holdings ,China Integrated Energy, Inc., and Orient Paper, Inc. Studwell, Craig (Age 62) is Chief Financial Officer, Executive Vice President since October 19, 2010. He brings 35 years of experience in banking and corporate finance in the United States, Asia, and Europe. Mr. Studwell holds a Bachelor of Science Degree in Finance from New York University.
  • 7. Geographic and Product Segment SALES BY INDUSTRY TOTAL SALES 2009 Telecommunication 50% Utility 44% Transportation 1.7% Other 3.4% SALES BY GLOBAL DISTRIBUTION TOTAL SALES 2009 CHINA 80% US 16% EUROPE 3% OTHER 1% Source: Company 10K Manufacturing Capacity <= Dalian, China <= Fayetteville, TN <= Telford, U.K.
  • 9. Significant Developments ? Jan 21, 2010- Acquired Dalian Jinchuan Eletrical Cable Co., a manufacturer of electric wire and cables in Northeastern China for $10 million. ? Feb 1, 2010- issued 7,475,000 shares of common stock at $8.00 per share. Received $56.4 million net of underwriting discounts. ? May 27, 2010- Purchased Shanghai Hongtai, a bimetallic wire manufacturer (CCA, CCAM) for $3.9 million ~ $1.3 million in cash and $2.6 million in restricted stock.
  • 12. Opportunities ? China ? Growth in Chinese telecommunication industry offers solid opportunities for growth. ? Penetration rate: China- 59.6% vs. US- 91.0% as of June 2010 ? Strategic expansion through acquisitions ? Jianchuan acquisition ventures into Chinese cable industry. ? Hontai acquisition expands sales and distribution network to Southeast China. ? Economic recovery ? Copper price upswing
  • 13. Raw materials Copper 53% Aluminum 41% Steel 6% Total 100% ==>85% CGS ? Prices NOT hedged ? Suppliers are concentrated ? Top 5~ 65% (2008) vs. ~ 60% (2009)
  • 14. Price of Raw Materials LME Copper Price Graph (US$/metric tonne)
  • 16. Global Economic Recovery ¨C Copper Price Rebound
  • 17. The ¡°Triple Play¡± The economy Price of copper FSIN¡¯s performance
  • 21. Key Metrics ¨C LIWA comparison ? No debt <= retired $39million LTD in Q12010 FSIN LIWA Market cap 360mil 315mil Current price $9.57 $10.84 Ownership 34%/51%-Inst. 58% /38%-Inst P/E(ttm) 7.65 11.57 Operating margin 21.89% 17.33% Net Profit margin 17.61% 9.44% Current ratio 11.32 8.64 ROE 15.06% 23.84% ROA 9.82% 22.92% EPS 1.22 0.92 Capacity 52,400 MT- CCA 7,500MT-CCA 17,100 MT- CCS 25,000-CU
  • 22. Stock
  • 23. Insider Trading Nothing exciting¡­ but, it does show the company¡¯s effort to align management and shareholder interests.
  • 26. APV Model ? Current price ~ $9.32 (4:00pm, Oct 29) ? Target price $13.62 ? Key assumptions ? Growth 40% near-term, 15% long-run, 4% terminal ? Gross profit margin slowly eroding ? SG&A ~ 8% historic ? Tax rate 15% ->26% due to expired tax break in China ? No significant CAPEX in 2010; growth with sales ? Depre/Amort 30% of CAPEX historic => 17.5% operating margin in the long-run
  • 27. APV Model ? Working Capital percentage of sales ~ 25% in the long-run ? Small cap premium ~ 2% ? Midyear convention: 2010~ 0.5, 2011~ 1.5 etc ? Additional $5million for the Jinchuan purchase to be paid end of FY2010. Decreases free cash flow.
  • 28. Scenario Analysis ? Bearish price: $8.17 ($7.37- $9.07) ? Terminal growth 1% slower than GDP ? Gross margin erodes at 1% annually, vs. 0.5% ? Unable to bring working capital requirements down from 40%. ? Bullish price: $16.15 ($14.53- $17.94) ? Able to secure gross margin at 30% ? Preferential tax benefit extended for 2011.
  • 30. Conclusion ? Growth opportunities ? Well managed ? APV valuation puts stock price at $13.62 vs. current $9.32 => 46% return ? Q3 Earnings Announcement: November 2 Recommendation: BUY
  • 31. Analyst Estimates ? EPS $0.34 Q3; $1.28 FY

Editor's Notes

  • #17: Source: Energy & Metal Consensus Forecasts, Minerals Monitor, Consensus Economics