Any investor buying into this Aim-listed Chinese stock will have to have a very thick skin in order to cope with greater volatility. But for the adventurous investor, it looks like good value.
HaiKe Chemical Group (Aim:HAIK)
HaiKe Chemical Group is a Chinese oil refiner (77% of revenues) and speciality chemical producer (23%) in Shandong province, next to the Shengli oil field – the second largest in China. Its main products are petrol and diesel oil, as well as chemicals included in pesticides, plastics and foods.
The firm listed on Aim in February 2007 at 80p per share, raising $17m. The funds were used to expand its oil refining capacity by 70% and its Isopropyl Alcohol operations by 30%. Construction has gone according to plan, with its new heavy oil catalytic cracking facility now on stream, which should improve performance considerably this year.
House broker Hanson Westinghouse predicts that HaiKe will report 2007 revenues and underlying EPS of $320m and 16.5p respectively, rising to $564m and 28.3p in 2008. As such, the shares are trading on undemanding p/e ratios of 6.3 and 3.7, which I think offers good value to the more adventurous investor.
Encouragingly, in mid-December the chairman Mr Yang Xiaohong said the company expects “results for 2007 to be in line with expectations, despite higher crude prices”. He believes the group is “well-positioned to deliver further shareholder value in 2008.”
The stock is not without risk. The Chinese government strictly controls the price of all petrochemicals, which has made it hard for HaiKe to pass rising crude prices on to customers, leading to reduced profitability in the first half. Going forward, though, the new cracking facility will enable the group to focus on higher margin products that generate more predictable income streams.
The next concern relates to the company’s borrowings. As at 30 September it had $47.4m of net debt with interest cover of about three, while all of its loans were short term in nature. Although rolling over these overdrafts has not traditionally been a problem for HaiKe, there is clearly a danger that due to the global credit crunch, its banks could soon start to impose more onerous lending conditions. To the company’s credit, however, both the cash and the interest cover positions should improve dramatically in 2008 as the extra capacity kicks in.
Finally, as with all Chinese stocks listed on Aim, investors need to have thick-skins and lengthy time horizons to cope with greater volatility. But despite the risks, HaiKe looks far too cheap for a business operating in a large and rapidly-expanding sector.
Further out, there is also the chance that the board may consider a listing in Hong Kong, which could significantly boost the downtrodden rating.
Recommendation: SPECULATIVE BUY at 103p (market cap of £39m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments