China steel maker strong despite stocks

The wild ride for China Precision Steel (CPS) stock seems to have no end. Gains of over 100%, only to see the same amount wiped out again, happened with amazing regularity. This volatility has led to many investors asking questions about the business at CPSL. These concerns are misplaced, however as throughout this rollercoaster share ride, investors seem to be overlooking one key element of the CPSL story: gross profit continues to grow with regularity.

Looking back over the last two years, CPS has had more volatility than Lou Pinella on steroids. This volatility has come in terms of both revenue and net income, and, combined with a large retail investor base, has directly resulted in incredible share volatility. Obscured by the volatility has been steady growth in manufacturing capacity and gross profit: numbers that should translate into higher net income now that the costs associated with going public are behind the company.

Slice up CPSL’s net income into 6 month segments and quickly the murkiness of their results crystalizes into a clearer story of growth; a story that should translate into higher share prices over time. Witness these 6 month trailing gross profit figures: Dec. 2007 - $11.7M, June 2007 - $8.0M, Dec. 2006 - $7.1M. These numbers clearly demonstrate the steady growth of the core business underlying the results at CPS.

Having just concluded another solid quarter on the operating side, CPSL is poised to continue its growth in gross profits. More importantly, year over year results should improve dramatically as the company moves beyond the costs associated with its reverse merger. Additionally, with the company’s prescient buildup in inventory prior to the recent steel price hikes, CPSL is positioned to continue if not build on its impressive operating leverage.

Don’t miss the forest for the trees. CPSL’s core business is continually growing. The company is executing on its vision of becoming the leader in Specialty Cold Rolled Steel in China. Its balance sheet is strong and the P/E is reasonable for the best positioned steel company in the fastest growing market in the world. Yes, the shares have been a rollercoaster but rest assured: this coaster is powered by a strong engine and will climb the big hills.