Knobias Clip Report (02-21-2008)
Submitted By Knobias ClipReport
NOEC: Winter Storms in China Provide Problems and Opportunity
The winter storms that recently devastated parts of Southern China have impacted many industries in the country. The month long snow and ice storms left over 100 people dead and killed 69 million head of livestock while destroying nearly 62 million acres of farmland according to recent reports. The culprit was named as La Nina, which creates unusually low temperatures across the eastern and central Pacific Ocean, bringing extreme weather.
With the worst winter storm in decades, the country is left to pick itself up and clean up the aftermath in time for the coming Summer Olympics. With that large burden placed on its shoulders, many companies operating in the area will suffer setbacks while some will see increased demand for their products and services. New Oriental Energy & Chemical Corp. (NOEC) could see a little of both.
The Company is an emerging alternative fuel and specialty chemical manufacturer based in Henan Province, China. They are focused on the production of Dimethyl ether (DME), methanol and fertilizer products, and the Company expects to begin production of bio-diesel within the next year. The Company sells its products primarily through a network of distribution partners.
China has been experiencing an inflationary environment in food and other goods already. The storm wiped out all crops which will only exacerbate the pricing situation and undoubtedly end with higher demand for fertilizer products to increase crop yields. The same environment is being experienced in the US but doesn’t have the extra stimulus of lost crops due to winter storms.
But the storms have also brought logistical problems and energy shortages. The Company noted that its winter coal contracts were secure but that not all of the supply was stored at the Company’s facility. Transportation to and from storage facilities had become increasingly hampered. The storms also cut off 30% of its electricity supply. But as with any power outages, the resumption of normal conditions will eventually resume. And the Company has taken steps to expand internal production of methanol, which has seen price fluctuations because of the storm. With greater internal production of methanol, the feedstock for DME, the Company could easily cut costs and have greater flexibility.
Taking into account the storm, the Company released guidance when it reported third quarter results last week. Earnings for the third quarter were reported at 17c v 9c on revenue of $20.2 million versus $10.6 million. In its second quarter earnings report, guidance for fiscal 2008 predicted revenues of “at least $75 million.” Following the storm and its disruptive impact, the Company still believes it will show considerable growth on the top and bottom line but with revenue of $66 million, only a 70% year over year growth.
Looking past fiscal 2008, the Company believes in its alternative fuel growth strategy and should be able to control costs with additional internal methanol production. With a difficult short term environment weighing on the Company, clean up and resumption of normal production should be able to occur at least by the time the Olympics roll around. The country certainly wouldn’t drag its feet in repairing infrastructure with the entire world about to watch the games. With that in mind, investors would certainly be wise to watch this name following this difficult time in logistics and pricing with growing agricultural demand looming in the distance.
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