Check on China: ShengdaTech, Inc.

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Investors are having great chemistry with ShengdaTech, Inc. (Nasdaq: SDTH). The Chinese manufacturer and seller of nano precipitated calcium carbonate (NPCC) and coal-based chemicals is ramping up production capacity, which is translating into stellar top and bottom lines.  

While the company still generates a pretty penny from coal-based chemicals such as ammonium bicarbonate and liquid ammonia, which the company then markets as chemical fertilizers and raw materials for the production chemicals, ShengdaTech’s revenue growth stems from its NPCC production. NPCC is extracted from limestone and used in the manufacturing of paints, rubber, plastic and tires.

NPCC production climbed to 130,000 metric tons (MT) from 30,000 MT in the past year. The Chinese small cap brought 40,000 MT of NPCC online in July and jumpstarted construction of 60,000 MT of NPCC capacity at a new facility in Xianyan City, Shaanxi Province in September. The new lines are expected to be completed in the first quarter of 2008 and will begin contributing to revenue at that time, according to ShengdaTech’s CEO, Xianghzi Chen.  

Once capacity at the company’s new facility is completed, total annual production capacity is expected to reach 190,000 MT.

In addition to strong product production, the company is creating efficiencies within its operations. ShengdaTech upgraded equipment used in its chemical factory in the third quarter, which created operating efficiencies that offset decreases in chemical prices and resulted in record gross margins in the third quarter.

The proof is in the pudding. Capacity is being ratcheted up as demand is surging and third-quarter results are evidence that this company is a rising star. Net income surged 62.7% to $7.8 million, or $0.14 per share, from $4.8 million, or $0.09 per share, in the third quarter of 2006. Revenues swelled 44.4% to $27.2 million, from $18.8 million in the third quarter of 2006.

Revenue from the NPCC segment was $13.1 million for the third quarter of 2007, up a hefty 144.8% from $5.4 million in the third quarter of 2006. Revenue from the chemical segment was $14 million, up 4.4% from $13.5 million in the third quarter of 2006.

The NPCC segment contributed 48.3% to total revenue, while the chemical segment contributed the remaining 51.7% of total revenue compared with 28.5% and 71.5%, respectively, in the same period a year ago.

For 2008, Toll Cross Securities analyst Alex Harbin is forecasting top line growth of at least 35%, with NPCC business growing at a 70% to 75% clip in 2008, and the chemical business remaining flat.

Aside from employing NPCC in the manufacturing of paints, rubber, plastic and tires, which has materialized in the form of strong results, the company remains on the forefront of innovation for new NPCC applications through continued research and development. These new uses include applying NPCC to the area of latex and for use in polyethylene and polypropylene.

“Polyethylene is the most widely used plastic in the world,” said Harbin. “Translate that to use in China and the company could potentially generate $100 million from the plastic and $500 million from the NPCC.”

While ShengdaTech has flourished in the domestic market, the company is also in the process of expanding its international scope. The company has already penetrated South East Asian countries, such as Malaysia and Singapore and is currently in discussions with potential customers in Japan and South Korea to use NPCC in PVC and rubber. The company has also mentioned teaming up with a major North American paper manufacturer to work with a local university to develop paper using NPCC.

ShengdaTech (SDTH) is rapidly becoming a domestic player in the China market and gaining traction internationally, as demand for its NPCC product remains robust. With a committed customer base, a tenacious R&D arm and a thriving market, the prospects for this little company are bright.