Monday, February 6, 2012

A turning point of US coal stocks and dry bulk shipping?

Due to the glut of natural gas and environmentalist pressure, the domestic demand for coal has been depressed. US coal producers are looking abroad.

From Marketwatch
"The U.S. Energy Information Administration estimates 2011 exports surpassed 100 million short tons for the first time since 1992, and some market watchers expect exports to top that this year. ....................................

Higher sales prices in Asia and Europe have made sending coal to those markets more attractive, while U.S. emissions regulations and competition from cheap natural gas limit domestic demand.

Fast-growing China and India have been sucking up shipments to fuel an expansion of coal-fired power plants, disrupting traditional supply channels. South Africa -- a traditional exporter to Europe -- has been sending more shipments to Asia, creating a hole in the market that the U.S. has helped fill. "
The US coal exports could eventually hit a ceiling, as transportation costs will make U.S.-produced coal less competitively priced than coal produced closer to major Asian customers. However, shipping rates that are hovering around historic lows can help US coal exports. Meanwhile, dry bulk shipping that has been abysmal amidst a gigantic glut of ships may get a lift from increased coal transportation across the ocean.

Watch lists:
Dry Bulk Shipping- DRYS, DSX, EGLE, EXM, SB, NM

Disclaimer: I have no position of the above mentioned stocks in my personal account as of 2/6/2012. However, I may have distributed the information to friends, family and affiliates prior to the post. My friends, family and business affiliates may have positions in stocks I mention.

Saturday, February 4, 2012

How Much is SINA Worth?

It is an understatement to say that the future of SINA lies with Weibo.

SINA, one of the largest media portals in China, is transforming itself into a Twitter-Facebook hybrid. Starting out as a Chinese version of Twitter, Weibo is on its way to becoming the Chinese version of Facebook. Sina Weibo has taken China by storm, gaining 250 million registered users in 2 years and showing no sign of slowdown. This is compared to 485 million internet users in China and 800 million users of Facebook.

With all the buzz, shares of SINA, however, are not considered bargains by traditional valuation standards. SINA, on February 2, 2012, was valued at $4.86 billion in the US stock market, with a forward PE ratio over 60. Has its shares price gone ahead of itself or this is just the beginning of a super growth stock?

In other words, how much is Weibo worth and how much has been priced in? I am not here to throw a single number out but instead I would like to find out, by a reasonable stretch of imagination, whether there is any room to the upside from its current market valuation.
Valuation 1: Taking away Sina's value as a media portal , how much is it worth?

As of February 1, 2012, the market capitalizaion of SOHU was $2.28 billion versus SINA at $4.86 billion. The estimated revenue of for SOHU in 2011 was $850.33 million versus $464.99 million. That leaves a Price-Sale ratio of 2.68 for SOHU. With the same multiple, SINA should have a market cap of $1.25 billion. That means SINA weibo reaps a market cap of $3.61 billion. Can it be worth that much? Since SINA weibo currently has no revenue, I will use a social media benchmark for a reasonable multiple.

Valuation 2: Comparisons with American peers, Facebook and Twitter

Both Facebook and Twitter are not yet publicly traded, thus rendering their valuations a guessing game. A recent private investment indicated Twitter valued between $8 and 10 billion while recent trading on SharesPost showed a value between $6.8 and 7.7 billion. Facebook, is valued between $70-$100 billion depending on the sources. Given an estimate of 2011 revenue of $140 milllion  for Twitter and $4 billion for Facebook, the price-to-sales multiple of Twitter is much higher than Facebook. Leaning to the conservative side, I use only Facebook as the benchmark. Considering the prejudice against Chinese concepts just very recently, 50% discount of Facebook's multiple for is assumed forWeibo.

As you can see from Figure 1 (click on the image to a larger view), assuming SINA without revenue from businesses other than Weibo and ignoring discounting, Weibo will have to reap a revenue of $600 million,$500 million, $400 million for a multiple of 7.5, 10 and 12.5 respectively to justfify any upside in market capitalization. Are these possible? Let's look into Weibo's monetization.

What could be the revenue?
The biggest bang of Weibo monetization will come from its experimental business platform similar to Facebook page that caters to businesses' connecting directly with users and a spread of words among users. According to SIG analyst, Chunming Zhao's calculation, annual revenue of Weibo when the business platform is executed will be as much as $1 billion. This calculation assumes Weibo gets 150,000 business users (half of what Baidu currently has) and 40,000 RMB per customer (Baidu's average revenue per user (ARPU)). This is used as the upper limit of revenues in the second valuation.

From the above exercise, it is not totally unreasonable for SINA to have more upside, and possibly a big one if its plan to monetize Weibo follows the path of Baidu, Twitter or Facebook. Of course, skeptics could say it is a big “if"

Disclaimer: I have no position of SINA in my personal account as of 2/4/2012. However, I may have distributed the information to friends, family and affiliates prior to the post. My friends, family and business affiliates may have positions in stocks I mention.

Friday, February 3, 2012

3 cases for DANG

Coined as "Amazon of China", the Chinese B2C company, Dangdang (DANG) that was barely $5 at the start of the year, soared by 70% to as high as $8.50 before it retreated to $7+ toward the end of January. There were many non-DANG factors that contributed to a great run, namely, the revival of Chinese-concept stocks that were beaten up in most of 2011, the return of chasing "growth" as governments print money and European debt crisis was tentatively brushed aside, and last but not least, the euphoria surrounding the historic IPO of social media giant, Facebook. All these buzzes aside, DANG has some merits to itself. These may not merit a 70% run in less than a month but they may merit a much higher valuation in 12 months than what it is now.

1. Significant Upside of the Ecommerce market in China

The growth of the ecommerce market is of lightning speed. The ecommerce market in China is expected to reach 2 trillion RMB ($310 billion ) by 2015. A rising tide lifts all boats. Currently DANG’s market share is somewhere between 4-9% (depending on the source of data). Take the worst case scenario that Dang does not grow the market share at all from now on . The market share even goes down some to 3%, it gives a sale of $9 billion, about 18 times more than DANG’s revenue in 2011.

DANG stands to benefit and grow together with such a big wave in China’s ecommerce even if it performs somewhere between mediocrity and average.

2. The Peer Effect-Jingdong's IPO

One of the largest B2C player in China, Jingdong ( IPO is expected to be above $ 5 billion. Jingdong's market share of ecommerce is somewhere between 18 to 32% depending on the classification and source. Its recent private equity deals indicated that the company was valued at $10 billion. DANG’s current market cap is $579 million. If it doubles, it will still be far below Jingdong.

There are two possible effects on DANG after Jingdong’s IPO: 1. Jingdong’s high profile IPO, if successful, is likely to remind investors of the great potential of China’s ecommerce market again 2. Jingdong’s IPO is likely to take investors away from DANG as Jingdong’s market share in Ecommerce far exceeds that of DANG. With only a few Chinese B2C ADR listed in the US exchange and the current low stock price of DANG, I am leaning toward the first possibility.

3. Product Diversity and Logistic Improvement
One of the biggest obstacles facing Chinese E-commerce is the lacking in logistic and distribution system. E-commerce players find it hard pressed to guaratee quality and consistency in delivery. Customers are often frustrated with the quality and consistency of such service. B2B giant, Alibaba, the parent company of Taobao and B2C leader, Jingdong are both devoted to massive amount of capital in the improvement of logistic system.

DANG is focused on expanding product diversity and improving logistic system, e-book, baby, beauty, home décor,etc. With its dominance in book market, it can leverage its knowledge of reading pattern of its customer base and direct customers to products that may be of their interests. Of no lesser importance is a large amount of cash at hand . DANG has $246 million to put into the above implementation.

The recent rally of Chinese concepts, especially internet related stocks, has put DANG at risk of an immediate pull back (which may have already taken place to a large extent) but it is definitely a stock worth a place in your watch list in 2012.

Disclaimer: I am long  DANG in my personal account as of 2/2/2012. However, I may have distributed the information to friends, family and affiliates prior to the post. My friends, family and business affiliates may have positions in stocks I mention.

Thursday, February 2, 2012

Short squeeze on GMCR's earnings

As I am writing, the shares price of Green Mountain Coffee (GMCR) soared by over 22%  to $65.81 following its earnings release yesterday.

The once enamored star had been brutally attacked, not the least, by a high profile bashing of the renowned hedge fund manager, David Einhorn in October, sending the shares plummet from over $100 to as low as $37.

Yesterday, the company's announcement of a 102% rise in sales and a stunning 526% increase in operating income seemed to have garnered some confidence. The call did sooth the nerves of investors who were worried about the growth potential of the Keurig system and K-cup pack sales.

The Keurig system and K-cup did not seem the least bit losing momentum. "Our brewer sales in the first quarter of fiscal year 2012 were above our expectations, with approximately 4.2 million brewers sold by the combination of GMCR and our licensed partners. That total is more than half of the 6.5 million brewers sold in all of our fiscal year 2011," said Blanford, the CEO of GMCR. Taking away the effect of the acquisition of Van Houtte that contributed 13% increase in K-Cup pack sales, the company managed to raise the price point of K-cup by as much as 21% (talk about pricing power) and brought in a whopping 81% rise in sales volume.

The inventory was cited by critics as an issue. According to the management, it was a deliberate effort to meet the increase in demand. In the quarter ended December 31, 2011, inventories were $606.7 million compared to $269.1 million at December 25, 2010. However, more than half of the increase was due to a 266% increase in raw materials, most notably from an increase in green coffee volume and a 44% average green coffee cost increase. Combined with the growth in sales, a $162.4 million increase in finished goods inventory was hardly a sign of slowing sales.

With a current market in the mode to chase "growth", GMCR, with "growth" written all over its head, is back to the game. This is not all without caveats though. The management guided a 60-65% growth in net sales for the fiscal year of 2012. Given a 102% growth in the first quarter, investors who was looking for super growth above the company's past 3 years (75% compound annual growth rate) could very well be disappointed.

Disclosure: I do not have any position of GMCR in our personal account.

Wednesday, February 1, 2012

It's time for a uranium rebound?

Source: Press Release from Paragon Financial Limited – Wed, Jan 25, 2012 8:20 AM EST
"The Global X Uranium ETF, which holds over 20 uranium stocks, has surged more than 25 percent over the last month as positive guidance from some of the industry's largest players has renewed investor optimism in the sector. In addition, recent remarks from Chinese Prime Minister, Wen Jaibao have highlighted the country's intentions to focus on nuclear energy and limit its use of coal......................
China's primary economic planning agency, The National Development and Reform Commission, estimates that China can expand its current nuclear capacity of 10.8 gigawatts to between 70 and 80 gigawatts by 2020. According to the U.S. Energy Information's International Energy Outlook for 2011, China intends to add 106 GW of nuclear capacity by 2035. China plans to have 40 reactors by 2020 and, by 2030, enough additional reactors to generate more power than all 104 reactors in the US. In early 2011, following the tragic meltdown of the Fukushima Energy Plant, the Chinese State Council temporarily halted the construction of 27 nuclear power plants declaring the need for new safety regulations. During the delay, China re-assessed the safety of its planned and approved Generation-II reactor projects. "
My watch list: URS, URZ, URRE, USU, CCJ, DNN

My notes: I am not a chartist but these stocks' charts look stretched in the very short term. The risk/reward of entering the play now is not favorable. However,  this is a policy change that is important enough to lift a relatively small sector, thus worth noting and finding opportunities for building some small positions.

Disclosure: I do not have any position of the above stocks in my personal account.