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China Gerui Adds Capacity to Meet Demand

China Gerui Advanced Materials Group (CHOP - Get Report) is the largest producer of high precision cold-rolled narrow strip steel products in China with a market share of 12.5%. CHOP is trading currently at a trailing 12-months price-to-earnings ratio of about 5, which is incredibly cheap for a company that will be doubling capacity over the next two years. With constant margins at 2012 full capacity, CHOP could be trading at a 2012 P/E of 2.5.

I had the chance recently to interview Edward Meng, chief financial officer of China Gerui.

Can you give me some background on your company?

China Gerui is the largest producer of high precision cold-rolled narrow strip steel products in China, with a market share of 12.5%. We started back in 2000 and over the last 10 years we have continuously been adding to our capacity. Our current production is 250,000 tons of cold-rolled narrow strip steel. We are currently in the process of expanding capacity because we have reached close to full utilization on the existing capacity, which admittedly is a good problem to have. We cannot churn out our product fast enough to meet the high demand.

By the end of 2010 we will add about 150,000 tons of cold rolled wide strip capacity. By the end of 2011 we will be adding another 100,000 tons, achieving a total production capacity of 500,000 tons, which is two times the capacity we have now. This is one of the major reasons we did the latest capital raise of $18.8 million.

What is the price per ton for your product?

The average selling price of our products ranged between $870 to $890 per ton over the last 12 months.

Where do you see the company in five years, 10 years? We will be adding capacity to meet market demand. Now we are focusing on adding to and optimizing our overall product mix. Our high-end products are of the same quality as products that are currently being imported into China except our products are sold at a much more competitive price, so we have had great success in enhancing our growth by replacing products that were until now imported into the country. In the next five-10 years, we will continue to strengthen our market leadership while optimizing our product mix with high-end products.

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