Longwei Petroleum Appears Undervalued
Longwei Petroleum Investment Holding Ltd. (LPIH) is a unique intermediary that stands to profit handsomely as demand for petroleum grows in China.
Longwei Petroleum Investment Holding Ltd. [[LPIH.OB]], a gasoline and diesel intermediary based in China, is a unique OTC stock based in China that could benefit handsomely from growing demand in China. The company earns a profit by purchasing fuels at competitive prices and selling them to other wholesalers that don’t have a license to purchase directly from refineries.
China is experiencing a significant shortage for refined oil products in relation to demand. Moreover, China’s stimulus spending on infrastructure only promises to increase this demand as heavy machinery consumes a large amount of oil. Longwei is a unique play on this demand that takes advantage of this imbalance between supply and demand.
A Simple, but Profitable, Business
Longwei operates a relatively simple, but profitable, operation that takes advantage of its Level 1 license in China. This license lasts forever, is very difficult to obtain, and allows them to purchase fuels at a discount directly from the refineries at a substantial discount. At the same time, the price of fuels in China is projected to rise over time.
Once purchased, the fuels are stored in Longwei’s storage facilities, which have a capacity of more than 50,000 metric tons. The company’s customers, such as power plants, then send trains directly to and from the facility to transport fuels for their own uses. The spread between the purchase price and selling price of these fuels then represents the profits.
Longwei’s operations are relatively lean with 57 employees being paid approximately $200 a month. Meanwhile, some analysts are projecting top and bottom line growth in the neighborhood of 25% over the next couple of years. This strong growth makes the company a compelling value play over the next couple of years as its position in strengthened in the Shanxi province.
A Look at the Financials
Longwei’s earned net income of $6.7 million on revenues of $49.7 million during the first quarter of 2009, while maintaining a net margin of approximately 13.4% and improving. Meanwhile, the company’s balance sheet remains strong with a current ratio of more than 14x and cash of more than $9.6 million or $0.12 per share.
The National Development and Reform Commission of China also announced that the retail price of gas and diesel in China will increase by 5.3%, which could help increase LPIH’s gross margins for the fourth quarter of 2009. Meanwhile, a recent purchase and sale agreement with Taiyuan Coal Gasification Group Rail Transport Company how represents its largest customer.
Finally, the Shanxi province continues to grow at a rapid pace, with Longwei being the third largest company in the area. As a result, it stands to benefit handsomely, especially as it works to increase its capacity down the road to fuel future growth.
Conclusions
Longwei is a unique intermediary that stands to profit handsomely as demand for petroleum grows in China. As a result, OTC investors may want to take a look at this opportunity as a relatively safe play on China down the road.
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