Company Profile: China ACM is the industry leader for
supplying ready-mix concrete to key infrastructure
projects throughout China. Founded in 2002, CADC has
grown to employ over 1,000 people, and is now one of the
largest providers of specialty concrete mixtures in
What is Ready-Mix? Ready-Mix concrete, as opposed to
site-mixed concrete, is used in 21st-century building
practices. In China, High-Speed Rails, skyscrapers, and
much else requires the use of ready-mix concrete.
Why Ready-Mix? Ready- Mix is a better type of concrete, The Opportunity: With a growing presence in 10 provinces around
produced more efficiently, with reduced waste of basic China, CADC, through its proprietary technology, technical experience,
materials, and reduced noise and dust pollution. China’s superior reputation, and strong government ties, is positioned to
development into a 1st-word country comes with the use
capitalize on China’s incredible growth. Ready-Mix concrete is the fastest
of 1st-world construction techniques.
growing sub-segment of a highly fragmented market that has grown 25%
annually over the last ten years and is expected to continue into the
foreseeable future. With a proven track record of sales, CADC’s bottom
and top line growth has been phenomenal over the last three years.
Driving this growth is the construction industry’s transition into 21st
century building materials that are less pollutant and more structurally
sound. Lead by an experienced executive team, CADC is at the forefront of
the rapidly expanding Chinese ready-mix market.
Recent Price $5.60 Recommendation:
52 Week Range $1.01-$8.50
BUY 3,600 Shares for a NAV of ≈$20,000
Price Target $6.96
Margin of Safety 24% High-growth, Low P/E
Market Cap. $74.1 million
Portfolio lacks foreign exposure
Return on Equity 40%
Beta 1.74 Technical Timeliness
Current Ratio 1.26 “First to the Party”
P/B 1.8 Growing coverage
% Held by Insiders 30%
% Held by Inst. 4% Chris Crawford, Cherise Robinson, and Benjamin Thomas
TABLE OF CONTENTS
Company Overview & Investment Thesis ............................................................................................................................... 2
Competitive Advantages ................................................................................................................................................................ 4
Management ....................................................................................................................................................................................... 6
Product Mix and Operations ........................................................................................................................................................ 7
Growth Strategy ................................................................................................................................................................................ 9
Industry Analysis ........................................................................................................................................................................... 10
Macro Analysis ............................................................................................................................................................................... 11
Peers and Competitors ................................................................................................................................................................ 12
Investor Relations ......................................................................................................................................................................... 14
SWOT Analysis ............................................................................................................................................................................... 15
Porter’s 5 Forces ............................................................................................................................................................................ 17
Price Performance and News ................................................................................................................................................... 19
Comparative Ratios ...................................................................................................................................................................... 21
Pro Forma Income Statement ................................................................................................................................................... 25
Discounted Cash Flow Models .................................................................................................................................................. 31
Relative Multiples Valuation ..................................................................................................................................................... 34
Conclusion ........................................................................................................................................................................................ 36
Appendix ........................................................................................................................................................................................... 37
SEC Filings ........................................................................................................................................................................................ 38
Works Cited ..................................................................................................................................................................................... 42
Analyst Coverage ........................................................................................................................................................................... 43
COMPANY OVERVIEW & INVESTMENT THESIS
China Advanced Construction Materials is a concrete company that operates in the People’s Republic of
China, is legally incorporated in Delaware, and is traded on the NASDAQ.
China will soon exceed the United States as the world’s largest economy, and yet for all of the opportunity
that the country represents, it is relatively difficult to find qualified investment vehicles. China Advanced
Construction Materials Inc. is one rare, qualified investment. China ACM is a producer of ready-mix
concrete, an essential ingredient in high-quality, modern construction methods. Ready-mix is used
throughout the developed world, but has only recently been incorporated in large-scale Chinese
construction. As the People’s Republic of China strives to prepare its infrastructure for the 21st century,
its building materials must also be brought into the future.
TREND TOWARDS URBANIZATION
The PRC’s Ministry of Housing and Urban-Rural Development estimates that 300 million Chinese now
living in rural areas will move into cities between 2010 and 2025. This estimation would be incredible if
it were not for China’s recent history—its cities have exploded in size and economic power. Correlated to
this phenomenon is China’s ongoing need for urban services, including water supply, waste treatment,
heating, and transportation. Unlike in most western nations, most of these services are still provided
and controlled by the government.
China’s cities are the catalysts of its rapid growth, and the government will do whatever it takes to keep
the urban centers functioning. The budget for infrastructure development in China is staggering, as
evidenced by Beijing’s new Olympic Stadium, Shanghai’s new downtown, and the massive $586 billion
stimulus package, much of which is devoted to the construction of modern infrastructure. One
project in particular is the government’s plan to link all of its major cities by High-Speed Rail.
Encouraged by this commitment, Chinese and Foreign investors are finding ample reason to invest their
own resources in Chinese construction, with increasingly complex and technically demanding
NEED FOR ADVANCED CONSTRUCTION MATERIALS
China has, instead of shying away from foreign and costly building practices, embraced new methods and
materials such as ready-mix concrete. China ACM represents the country’s foremost provider of advanced
concrete mixtures, well on par with the manufacturers and technical consultants that the Chinese
previously had to outsource to regarding modern concrete solutions. The country has been the world’s
largest consumer of concrete for over 17 years, and it approaches the distinction of consuming more
concrete than the whole world combined, but it is only with the nation’s newfound appetite for
technologically-complex structures that this growth is reflected in the sub-industry of advanced concrete
First, China ACM has positioned itself as a technologically advanced manufacturer and consultant. Both
imported foreign technology and the company’s own research and development have made its product
offering among the most advanced in the market. Associated with their complex concrete mixtures are
the engineers, consultants, and workers that are needed to properly utilize the advanced mixtures.
The company has, related to its environmental initiatives, invested in processes that use recycled
materials and less energy. China ACM holds proprietary technology related to this concept, and maintains
partnerships with the PRC’s leading universities, including “China’s MIT,” Tsinghua, and the Beijing
Institute of Concrete, which is a research firm wholly owned by China ACM’s executives. These
partnerships also contribute to the strength of China ACM’s human resources, as they allow the company
to attract and recruit the best and brightest minds in the industry.
China ACM’s technical prowess is well-recognized, and has encouraged the company to expand its
practice of providing its personnel as consultants. Projects that require the use of advanced concrete
mixtures benefit from China ACM’s advice and experience. During a consultancy, China ACM develops
business relationships that often lead to larger contracts.
In addition, China ACM’s products bear a warranty of 100 years, versus the industry standard of 50 years.
Chinese government contractors are becoming increasingly conscious of quality, particularly after events
like the earthquake in Sichuan Province that leveled several government structures and the Beijing
Olympics, where the whole world could view Chinese workmanship.
China ACM enjoys extremely favorable tax exemptions for reasons mostly related to their status as a
technologically advanced producer, both in terms of the company’s commitment to the environment and
energy efficiency. The company has made significant investments in attaining government certifications,
using recycled materials, and employing energy-saving processes.
Older methods of producing concrete produce a large amount of air pollution as a result of the associated
heat processes, and are conducted on-site to reduce the cost of transportation. China ACM benefits from
government incentives to avoid both problems using modern methods. These benefits combine to make
China ACM’s estimated marginal rate of taxation 15%.
6% VAT – Enterprises who sell commodities in the People’s Republic of China, such as China ACM, are
subject to a Value-Added Tax rate of 6% on gross sales. The company is exempt from this tax because
their products use recycled materials. The company has enjoyed this benefit since 2005, and
management expects to continue to be exempt from the VAT into the company’s operating future.
10% Income Tax Deduction – China ACM qualifies as a “High-Tech Income Tax Beneficiary.” This amounts
to a 10% reduction in the standard 25% income tax in the PRC.
GOVERNMENT RELATIONSHIPS AND EXECUTIVE INSIDERS
China ACM benefits from excellent connections within the Chinese government, largely due to its
superbly well-positioned chief executives. As the tax environment for high-tech, “green” companies
become favorable, the government ministries and State-owned companies made room for two of their
own to start China Advanced Construction Materials. Xianfu Han and Weili He collectively own 30% of
XIANFU HAN – Concrete Expert and Lawmaker – Mr. Han has been working in the construction materials
business for over 25 years (within State-Owned Enterprises), and has most recently taken an active role
in shaping government policy concerning such matters. Through his Beijing Concrete Institute, Han has
contributed to two very important pieces of legislation: the “Local Standard of Mineral Admixtures”
regulations and the “Research and Application of Green High Performance Concrete” published by the
Ministry of Construction. The first document requires the use of ready-mix in urban areas, and the second
document advocates the use of tax incentives to encourage “green” concrete technology. In other words,
Han has essentially written the laws under which China ACM now operates under.
WEILI HE – Communist Party Insider – Mr. He is another impressively powerful individual. His
connections to the government are unshakable, evidenced by several key notes about his past. He, like
Han, has been working in the construction materials business for many years, also within State-Owned
Enterprises. He’s self-proclaimed skill is in strategic planning, which directly correlates to his constant
interaction with the government officials who originate high-profile contracts like those that he wins for
China ACM. The mystery of He’s success with the Chinese government is less confusing when considering
his deep affiliation with a single, supremely powerful group: The Communist Party of China. He was
born on the inside, and his bachelor’s degree from the Party School of the Central Committee is evidence
that He has only gone further inside China’s ruling class.
BEIJING INSTITUTE OF CONCRETE
Han and He are the joint founders of the B.I.C., a research group whose focus is developing
environmentally concrete mixtures—and assisting the government in crafting concrete-related policy.
Ready-Mix must be used in urban areas – In an effort to mitigate the noxious pollution that hangs above its
major urban areas, the Chinese government has mandated that all concrete used on urban worksites
be produced off-site and trucked in using ready-mix form. In an effort to reduce pollution and improve
the quality of its structures, all Chinese government building projects must use ready-mix concrete.
Green and High-tech Tax Incentives – The Chinese government is very interested in cultivating “green”
and high-efficiency industry to counterbalance the dirty and low-tech industry that is the overwhelming
We believe that China ACM’s managers are an integral part of the company’s future growth, and from a
review of their credentials, we have concluded that this young company is in good hands. Together, the
company’s top management and board of directors have 135 years of experience, mostly as the top
management for other firms, in addition to their high-quality educations and affiliations.
POSITION AND COMPENSATION
Name Age Position Salary ($) Ownership
Xianfu Han 50 Chairman, Chief Executive Officer and Director 140,000 5,285,750
Weili He 52 Chief Operating Officer, Vice Chairman and Director 109,342 3,523,833
Jeremy Goodwin 36 Chief Financial Officer, President, and Director
Denis Slavich 69 Director
Shaojian (Sean) Wang 45 Director
Larry Goldman 53 Director
All Officers & Directors 25,000 8,809,583
JEREMY GOODWIN – Mr. Goodwin has recently been named both Chief Financial Officer and President of
CADC. His resume cites his extensive experience in M&A, debt and equity financing, restructuring,
privatization, and business expansion. Goodwin has an undergraduate degree from Cornell University, an
advanced degree in Chinese affairs from Princeton University. He is fluent in Mandarin Chinese, French,
ECONOMIC VALUE ADDED 1 - Tax Rate
EVA for First Half 2010
An economic value added analysis (first-half 2010) of China Income Before Taxes $ 8,584,459
ACM’s management team demonstrates the quality of their Interest Expense (385,241)
operational decisions. NOPAT (6 months) $ 7,624,245
The company has already reached the threshold upon which it is WACC (6 month adjusted) 13.00%
returning value to its investors, despite the fact that the Fixed Assets $ 32,051,813
company’s earnings are completely unlevered. + Net Working Capital 8,322,724
Net Assets 40,374,537
Also, the company’s extensive use of lease agreements, a Money Cost of Capital (6 months) $ 5,248,690
function of the manager’s ability to form special relationships
EVA $ 2,375,555
with its lessors, has created value. EVA/Share 0.15
2010 EPS (1st half) $ 0.43
We acknowledge, however, that much of China ACM’s growth
and profitability stem from off-balance sheet assets, such as management’s strong ties to the central
government and general contractors.
PRODUCT MIX AND OPERATIONS
China ACM’s significant competitive advantages position the company to be the Chinese construction
market’s premier provider of modern concrete mixtures. That position would quickly erode in the hyper-
competitive Chinese marketplace, however, if the quality of China ACM’s products and the efficiency of its
operations were not consistently the best of its peers. China ACM has three main revenue sources:
concrete sales, manufacturing services, and technical consulting.
The company produces a range of high quality concrete, comprising 77% of current sales with a gross
margin of roughly 10%.
China ACM owns one concrete plant and the related equipment, and leases four additional plants in the
Beijing area. This regional focus has allowed China ACM to gain a dominant market share one of China’s
fastest-growing urban areas.
China ACM’s quality and expertise have been acknowledged by the American and French governments.
The French Government chose China ACM over Lafarge to build its new embassy in Beijing, despite the
fact that Lafarge is a French company with operations in Beijing. Similarly, the U.S. government selected
China ACM for the construction of their own new embassy. Both the U.S and the French governments
conducted rigorous due diligence on China ACM to evaluate its ability to fulfill the project’s stringent
requirements—further evidence of the company’s superior product, management, and capability.
Further information regarding these and other high-profile projects can be found in the appendix.
These services are used primarily with the large high-speed rail contracts. China ACM’s portable mixing
stations are used to produce concrete on-site, using raw materials provided by the general contractors.
This process dramatically reduces China ACM’s up-front capital investment and expands the gross margin
to roughly 40%. This service accounts for 14% of total sales.
PORTABLE MIXING PLANT
CHINA’S HIGH-SPEED RAILWAYS AND PORTABLE MIXING
A promising part of China ACM’s business, and a source of
strong income, is its participation in the government’s
ambitious plan to expand its network of High-Speed Rails.
These projects require China ACM’s technical expertise, but
are too far away to utilize the company’s Beijing-based
mixing plants. For this purpose, China ACM has invested in a “portable mixing” business unit.
As stated above, the raw materials in these projects are brought in by other contractors, resulting in
China ACM focusing entirely on the value added process of mixing and applying high-grade concrete.
China ACM has invested in 12 portable mixing stations (necessary for the construction of high-speed
rails) and has recently acquired the funds to purchase two more. The start-up cost for these plants is
$3,000,000 with a payback period of 4 years. The plants have a useful life of ten years with average
annual revenues of $1,700,000. The stations allow China ACM to expand its geographic footprint and
capacity while maintaining its commitment to the environment. The units can be dismantled and moved
to a new site within a few weeks, costing roughly $100,000.
TECHNICAL SERVICES AND RENTALS
China ACM provides technical service for companies lacking expertise in the production of high-quality
ready-mix concrete. Moreover, these services are provided only to projects located outside beyond China
ACM’s geographic reach. Currently, these services are employed in 5 plants; three in Beijing, one in
Sichuan, and one in Shanxi. China ACM is compensated with a percentage of the 3rd party’s cost savings
and additional profit. This highly-profitable and scalable model requires only 10 personnel per plant.
Furthermore, these services comprise 5% of total profit, but with a gross margin of roughly 93%.
China ACM also provides rental services, allowing the use of its property, plant, and equipment and
related personnel. This service comprises only 4% of total revenue, with a gross margin of about 80%.
As a testament to CADC’s expertise and experience, we have included photos of a few of the projects for
which the company has provided technical services.
Further information regarding high-profile projects can be found in the appendix.
China Advanced Construction Materials intends to continue their growth in operations and cash flow
through the following business practices, as stated on their 10-K:
EXPANSION OF CAPACITY: Through the building of new plants, Percent of total On-Site Ready-Mix
China ACM plans to grow their operating capability and thus concrete sales Mixing (low- (high-tech)
their ability to meet the growing demand for concrete in tech)
China. They have already added nine new portable mixing China 70% 30%
stations in 2009, and plan on adding more in both 2010 and Developed 20% 80%
2011. These portable mixing stations are very attractive World
investments for China ACM because of the high IRR on these investments. Furthermore, the portable mixing
stations provide high profit margins for the company, so expansion in this area is an obvious driver of
both growth in cash flows and gross profits.
MERGERS AND ACQUISITIONS: China ACM views the current fragmentation of its industry as an
opportunity to acquire smaller, struggling companies and utilize their assets. The company sees the
advantage in buying over building when replacement costs of assets are higher than purchase prices, and
given the opportunity, is ready and able to merge with or acquire another company at a favorable price.
Through this M&A, China ACM will encourage expansion in both capacity and geography. As the company
continues to grow, the only option will be to service regions elsewhere, and the acquisition of small
companies outside its current geographic base will provide the facilities necessary to support this
VERTICAL INTEGRATION: The company seeks to acquire not only companies with similar operations, but
also companies on either end of its supply chain, thus implementing a verticality to its supply chain. By
gaining control over the supply of its raw materials, China ACM will become less vulnerable to price
discrepancies for raw materials needed for manufacturing.
SUPPLY CHAIN EFFICIENCIES AND SCALE: Through its efforts to optimize its supply chain using both
vertical integration and mergers and acquisitions, China ACM expects to achieve a lower average total
cost and thus an increase in efficiency. Growth in these drivers will result in better pricing power.
NEW PRODUCT OFFERING: The company is always working to innovate and develop new and better
concrete products. These products, added to the already strong product mix that China ACM offers, will
further the company’s reputation as a leading concrete provider, as well as diversify the company’s offering.
Products currently in the development stages are: light-weight aggregate concrete and pre-cast concrete.
The unprecedented growth within the Chinese construction industry reflects China’s building activity
accounting for half of all new building activity in the world. This growth is expected to continue till 2030
as increased urbanization unfolds, when 221 Chinese cities are expected to have a population over 1
million. During 2008, Chinese construction contributed to approximately 20% or $905 billion of
nominal GDP. According to the National Development and Research Commission, China’s stimulus
package of $593 billion has materially impacted the construction industry by contributing to
approximately $92 billion in growth during 2009. China’s stimulus package focuses on infrastructure
projects related to railways, roads, and airports.
RAILWAYS IN CHINA
According to the Ministry of Railways, China will double its investment in railways to approximately
$87.8 billion during 2010. Part of this investment will go to constructing 5,148 km of new rail lines this
year. In collaboration with these new lines, the ministry also plans to begin 70 other projects this year
which will cost approximately $219.6 billion upon completion. By 2012, China will have 110,000 km of
rail lines, of which 13,000 km will be high-speed passenger rails.
CEMENT IN CHINA
China has been ranked first in the world for cement production during the last 17 consecutive years.
Cement demand in China is forecasted to grow 6% annually through 2012 to account for 1.8 billion
metric tons. Rising construction expenditures are accountable for this demand. Furthermore, advances
in cement manufacturing technology will help stimulate concrete sales by enhancing product quality. By
2012, blended cement will account for 90% of total sales due to the cement’s versatility across a broad
range of construction applications, as well as its performance/price benefits over competitive cements.
China’s Central-Eastern region is projected to remain the largest cement market through 2012. Non-
residential and residential buildings are requiring more concrete due primarily to the short supply of
wood. As the largest consumer of cement in the world, China spends over $200 billion on the product
Construction contractors currently represent the largest market for cement, accounting for one-third of
total demand. However, the market for ready-mix concrete could exhibit the largest growth within
the cement industry, and could possibly have double-digit gains through 2012. This will result from the
government’s ban of on-site concrete and mortar mixing. Further demand for cement used in
concrete production will result from construction contractors increasing desire for precast concrete.
Also, the decreasing popularity of clay-bricks will drive demand for concrete blocks, therefore, increasing
the demand for ready-mix concrete.
China’s booming economy reflects major trade and foreign investment flows, which have stemmed from
large growth in fixed assets over the years. In 2008, China was the world’s third largest importer and the
world’s second largest exporter of merchandise. Furthermore, China totaled $92 billion in foreign direct
investment making it the world’s premier destination for FDI among developing nations. The PRC is the
world’s largest holder of foreign reserves totaling $2.3 trillion, which has resulted from large trade
surpluses, FDI flows, and large-scale purchases of foreign currency. After China’s GDP grew at an
astounding rate of 13% in 2007, growth slowed to 9% in 2008 and 7.1% in the first half of 2009 as a
result of the world financial crisis. Triggered by the financial crisis, the PRC government initiated a
staggering $586 billion dollar stimulus plan, thus, helping to stabilize the economy and increase GDP
growth. Due to the PRC’s healthy cash position and the success of its stimulus package, it is unlikely that
its pattern of large-scale public spending will change significantly.
In 2009, China’s GDP in terms of purchasing power parity equated to an estimated $8.791 trillion, and
was the world’s third largest economy. However, according to the official exchange rate, China’s GDP was
$4.758 trillion in 2009. The composition of China’s GDP by sector is 48.6% industry, 40.5% services, and
10.9% agriculture. As of a September 2009 estimate, China’s unemployment rate for urban areas was
4.3%. As the world’s largest employer, China currently has over 812 million workers. In 2009, China’s
revenues were $972 billion with expenditures totaling $1.137 trillion, which equates to public debt as a
percentage of GDP of 18.2%. Inflation was negative in 2009 at -.8%, and is currently 2.7% as of February.
However, quickly rising property values have given the Chinese government cause for concern, which has
resulted in curbing lending practices in order to control future inflation.
THREATS TO ECONOMIC STABILITY
While China’s economic outlook remains positive, certain catalysts, if unaddressed, threaten future
economic growth and stability. Such variables include an inefficient banking system, pervasive
government corruption, over-dependence on exports and fixed investment growth, severe pollution, the
lack of rule of law, and widening income disparities. In response to these threats, the Chinese government
intends to create a “harmonious society” over future years aiming to create balanced economic growth
and address certain economic and social ills.
In recent U.S. news, the U.S. Treasury Department will present to congress a report in which China could
possibly be accused of currency manipulation. The U.S. government has recently increased pressure on
China to let the Yuan (pegged at approximately 6.8 vs. the U.S. Dollar) appreciate. Furthermore, some
experts believe the Yuan is currently undervalued relative to the Dollar by up to 40 percent. Thus,
if China does not alter their currency, the U.S. is prepared to issue certain trade restrictions in the future.
In relation to China ACM, the increase in the Yuan relative to the Dollar should favorably affect
CADC’s stock price as all assets and income are reported in dollars.
PEERS AND COMPETITORS
China Advanced Construction Materials competes in a highly fragmented industry in the region
surrounding Beijing, PRC. Most of its most direct competitors are State Owned Enterprises, wholly owned
by the PRC government. Their financial information is therefore unavailable to the general public. Due to
this fact, we have chosen a variety of companies with similar operations in other regions of China and the
world as peers for China ACM. For the sake of our analysis, we believe that the following companies are
good representations of the variety and fragmentation seen in the construction materials industry, and
will effectively serve as comparable companies to China ACM.
Listed below are the company overviews and other items of interest regarding China ACM’s peers:
CHINA RUNJI CEMENT INC. (CRJI)
China Runji Cement Inc. is a producer and distributor of advanced dry-
production cement products in the Anhui Province in the People’s Republic of
China. The company has also enjoyed a “green building material” certification
due to its pollution control efforts. China Runji controls a mining facility and
thus supplies the raw materials for its one cement production line and one
cement clinker production line. This company is the largest producer of
cement materials in its region, and boasts a product mix containing high-
quality cement materials.
CHINA SHUANGJI CEMENT, LTD. (CSGJ)
China Shuangji Cement manufactures Portland cement in the PRC. Shuangji
controls three cement plant facilities - one in Shandong Province and two in
Hainan Province. Both of these provinces are located near sea ports, allowing
the company to access raw materials more easily than other inland cement
manufacturers. The Portland cement produced by China Shuangji is general-
use bulk cement, unlike that of China ACM, though it is still a high-quality
Ready-Mix, Inc. is a ready-mix concrete producer based in Phoenix, AZ. The company’s operations
include five ready-mix plants and two portable facilities, and mixing trucks. The company supplies
contractors, subcontractors, individuals and owners of both private and public construction
RMX operates in a completely different geographic and economic landscape to CADC, as the
construction industry in the United States is far more mature than the industry in China, primarily
due to the fact that the United States’ infrastructure is already well developed, while the PRC is
only beginning efforts to accommodate for its urbanization. This is the main reason why we
consider RMX a peer to CADC, and not a competitor.
Lafarge is a French-based company and a world leader in the production and sale of construction
materials such as concrete, gypsum, ready-mix and aggregates. The company operates in 78
countries worldwide under the “Lafarge” brand. Its products are used in residential, commercial,
and public infrastructure development. According to Lafarge’s annual report, it is currently the
world’s third largest producer of concrete.
Eagle Materials is an American producer of construction materials such as Portland cement,
gypsum wallboard, concrete, and aggregates. This company boasts that it is the “lowest cost
producer” in North America, with four plants and ten cement terminals, as well as vast aggregate
reserves located in Northern California. Its cement production represents 31% of its total sales,
second only to its gypsum wallboard sales (at 46% of sales in 2009).
INTERVIEW WITH GENE HSIAO, CFO
Conducted by IR, Summer 2009
IR : Your company has a reduction in the corporate tax rate from 25% to 15%, why, and how difficult is it
to get this tax break?
CADC : We have an Enterprise High-tech Certificate from the Government that is the result of our
involvement in Research and Development towards producing highly efficient products, such as our
recycled-materials concrete mixtures, and through our efforts to pass along this expertise via the
Technical Services we provide to other companies. It is very difficult. We currently have two patents that
play a key role in receiving these tax exemptions. The first is our patent for the high-performance,
recycled-material concrete’s formulation, and the second is our patent for the pumping that concrete,
which is designed to waste very little concrete.
IR : You obviously have an excellent working relationship with the government of China. Could you tell
us about some of the contracts you have been awarded by the government?
CADC : The Chinese Government and the large general contractors are longstanding customers of China
ACM. The company is now involved in over 7 additional railway products, with expected revenues of over
$25 million in the next year related just to our Manufacturing Services, which uses portable mixing
stations to fill the railways contracts.
IR : What do you think is going to happen in the near term and then the long-term?
CADC : In the near-term our investment in portable mixing stations, combined with our relationships and
reputation, has put us in an excellent position to participate in additional railway projects. These new
projects are being announced almost monthly. Our long-term goals are to expand our fixed-plant
operations beyond Beijing and become a leading provider of ready-mix concrete in China. As other cities,
not just the top-5, look to use more advanced construction techniques, China ACM stands to benefit.
IR : Do you have any final words?
CADC : Yes, actually. The Chinese government has issued a $586 billion dollar stimulus package. Much of
this money is allocated for infrastructure projects, which is China ACM’s focus. The building of high-speed
railways through the year 2020 is a big focus for the Chinese government. It is trying to bring service to
the large amount of people that live outside of the major cities, connecting them to our commercial hubs.
This initiative expects to consume 20 million tons of cement and the length of the rails is expected to
expand 41,000 km over the next 11 years at a cost of $730 billion. Given our close relationship with the
Government and the general contractors we expect to be a long-term beneficiary of these projects.
Technology: China ACM already has the most advanced product offerings for concrete in China.
The company also maintains close ties with industry innovators, such as the Beijing Institute of
Concrete. These efforts towards research and development are geared towards further innovation
and advances within the concrete industry.
Superior Warranty offering: The industry average warranty on concrete materials in China is 50
years. China ACM’s warranty offering is double this: 100 years. This provides a very good
incentive for contractors to choose China ACM over its competitors, particularly related to
Track Record: China ACM has provided concrete and technical support for some very high-profile
projects in China, such as the Olympic Park, the CCTV Tower, the Beijing International Airport, the
new French Embassy in Beijing and the new United States Embassy in Beijing. Such high-profile
projects are a great source for publicity and should lead to more opportunities for the company
Tax Credit: Because of China ACM’s environmentally friendly products, the company has
certifications which provide tax exemptions, lowering their marginal tax rate to 15%. This
translates to a 6% value added to gross sales, which most of CACM’s competitors do not enjoy.
This advantage alone could conceivably lead to better economies of scale for the company.
Management Experience and Connections: The top management at CACM is highly connected to
the PRC government, and is also highly educated and experienced in the industry.
No leverage: China ACM operates with virtually no long-term debt, resulting in an unnecessary
premium paid for financing new projects, such as new plants and equipment.
Buyer Power: Five customer orders consisted of 32.03% of the net sales of the Company for the
fiscal year ended June 30, 2009, and the loss of any of these three would depress net profit
Dependence on sub-contractors and suppliers: China ACM depends on sub-contractors to
complete some of the work on projects, thus if China ACM were not able to find sub-contractors,
they would in turn not be able to bid on projects.
Heavy reliance on key managers and employees: While China ACM enjoys close business ties with
the Chinese government and other key industry players, these ties are dependent on a few
managers, whose turnover could adversely affect the company’s ability to get contracts. This is a
real threat, though several of the key managers mentioned are highly invested in CADC and are
thus not expected to leave the company.
China accounts for half of all new building activity in the world and rapid expansion is expected to
continue to 2030 as up to 400 million citizens are expected to move into urban areas. China ACM
is well positioned to take advantage of this massive development.
Mergers and Acquisitions: Part of China ACM’s plans for expansion into the future involves taking
advantage of the challenges other small concrete manufacturers are facing by acquiring them at
New Chinese legislation requires environmentally friendly concrete, as well as ready-mix. These
are two products which China ACM has already developed and used, so it provides an opportunity
for China ACM to continue its growth into the future
Vertical Integration and Economies of Scale: The company has stated that they plan to outsource
operations that it does not specialize in and also to optimize its economies of scale through more a
streamlined supply chain.
Highly competitive industry: There are currently 127 concrete mixture stations in Beijing alone.
Not one company has more than 10% market share. This segmented market is a potential threat
to CACM as fierce competition threatens any company.
High-risk nature of construction, in terms of injuries, damaged property: With any industry come
inherent risks. The construction industry is no different. China ACM’s on-site operations render its
employees and other parties at risk.
Economic Downturn: In the event that the Chinese economy slows, demand for construction will
also decline. This would pose a problem for China ACM to continue to generate revenues, and
RISKS ASSOCIATED WITH DOING BUSINESS IN CHINA
PRC Government: Policy changes can happen quickly and often without warning. The government
is involved in daily business operations beyond what is expected in Western nations, through the
joint channels of its regulations and state-owned enterprises. The state-owned organizations can
often set prices and exercise a high degree of control over its contractual engagements.
Legal Protection of Foreign Enterprises: Laws regarding the operation and ownership of foreign
enterprises in China are complex and, in many cases, very flexible at the discretion of the Chinese
government. For instance, Mergers and Acquisitions laws are very stringent in the advent of a
foreign firm taking over a domestic, Chinese firm.
Fluctuations in Exchange Rates: The Chinese government is under increased pressure from the
international community to allow its currency to “float,” thereby eliminating allegedly unfair trade
advantages. Generally, companies who do not import or export will have limited exposure to
PORTER’S FIVE FORCES
BARRIERS TO ENTRY: HIGH
The sub-industry in which China ACM operates has and currently is experiencing a high rate of growth.
This in addition to the fragmented nature of the industry reflects a low barrier of entry. That being said, a
new company’s competitive efforts remain high in some key aspects.
The capital requirements to buy or build and then maintain a plant are extremely high.
Product differentiation is very difficult. Though standard mixtures of concrete exist, companies
need a differentiated product in order to compete effectively within the industry. China ACM
competes with companies with patents and innovative mixtures. The development of such a
product mix requires further research and development as well as patent protection.
Economies of scale create momentum that already-operating firms use to distance themselves
from young competitors may, who may not be able to match.
Government obstacles that the PRC has implemented, such as policies and standards for the
concrete manufacturing industry, only add to the obstacles an up-start would need to overcome.
SUPPLIER POWER: MODERATE
For a concrete manufacturer operating within the same sub-industry as China ACM, the most important
raw material is cement. Cement in its most basic form is needed to then create the mixtures that a ready-
mix producer then sells.
The concentration of standard cement suppliers in China, and more specifically, the Beijing region,
is markedly high. This is a reflection of the fragmentation of the industry as a whole. Such a high
concentration of suppliers gives potential buyers the flexibility to find their raw materials
elsewhere, resulting in a low supplier power.
Another contributing factor to low supplier power is the shift in the concrete manufacturing
industry to recycled materials. Such a movement can only result in a decreasing supplier power
over time, as concrete producers begin to recycle and reuse their own raw materials.
Still, a steady supply of cement is an absolute necessity for a company operating in the industry.
Though supplier power may be dwindling due to recycling and high concentration, there remains
an ever growing demand for cement materials.
BUYER POWER: MODERATE
China ACM supplies technical expertise and concrete to the contractors and sub-contractors who carry
out building projects primarily for the PRC government.
The competitive environment for these contracts is fierce, as there are many concrete
manufacturers vying for only a few jobs (though the number of jobs is growing). This low number
of buyers relative to sellers results in a high buyer power in the concrete manufacturing industry.
Several factors exist which limit this power.
o First is the importance of the product to the contractors. Just as raw materials are
necessary for concrete manufacturers, so is concrete to builders.
o In addition, added product differentiation within the concrete industry and specialized
projects leave the buyers with limited choices as to which type of concrete they would
o One might also think that a contractor would be able to use multiple sources of concrete,
though in some cases, this is not possible, as the integrity of a building could be
compromised with inconsistent building materials.
THREAT OF SUBSTITUTES: MODERATE
Because of the variety and sheer number of products and companies with which it competes, China ACM
is always vulnerable to substitutes to its products. It is necessary for the company to have many
safeguards against substitutes, both in pricing and quality.
China ACM, through its efforts to minimize average total cost of production, has become a low-cost
provider of ready-mix concrete.
In addition, the company’s patented formulas, technical expertise, and extended warranty offering
reinforce the quality of their products.
Rivalry in the construction materials industry is intense.
Companies compete fiercely for contracts on the basis of price, quality, and expertise. Firms must
therefore maintain excellent standards of employee training, research and development, and
efficiency of operations in order to remain competitive.
China ACM is already well-positioned to succeed in this competitive environment. The company recruits
its employees from China’s best industry-specific schools, maintains extremely close ties with top
innovators in concrete manufacturing, and already holds patents to the most advanced concrete formulas
in China. This, in addition to its superior profit margins and pricing abilities, will set China ACM apart
from a majority of its competitors.
Part of China ACM’s growth strategy is to acquire struggling companies at low prices. The intense rivalry
and fragmentation within the industry, therefore, will only further this agenda by making such companies
readily available. We believe that CADC has effective defenses against most of its industry’s hazards, and
will consequently be able to survive this hostile environment and perhaps even benefit from it.
Price Performance & News
1. China Advanced Con. Materials Gr. Inc Announces Exercise of Over-Allotment Option
Monday, 22 Mar 2010 08:00am EDT
China Advanced Con. Materials Gr. Inc announced that it has closed the sale of an additional 300,000 shares
of common stock at the recent public offering price of $4.60 per share for proceeds of $1,380,000, pursuant to
the over-allotment option exercised by the underwriter in connection with the Company's public offering that
closed on March 1, 2010. The exercise of the over-allotment option brings the total number of shares sold by
China ACM in its registered public offering to 2,300,000 and the gross proceeds to $10.58 million. The
Company plans to use most of the offering proceeds to purchase 2 additional portable concrete mixing plants
as a part of its growth strategy. In addition, the Company intends to use a portion of the proceeds for working
capital and general corporate purposes. Roth Capital Partners, LLC acted as the sole manager for the
1. China Advanced Con. Materials Gr. Inc Appoints Jeremy Goodwin To Be Chief Financial Officer
Monday, 22 Mar 2010 07:00am EDT
2. China Advanced Con. Materials Gr. Inc Receives New High-Speed Railway Contract
Tuesday, 2 Mar 2010 08:11am EST
3. China Advanced Con. Materials Gr. Inc Announces Pricing Of Common Stock Public Offering
Wednesday, 24 Feb 2010 09:20am EST
China Advanced Con. Materials Gr. Inc announced the pricing of its public offering of two million registered
shares of common stock at a price of $4.60 per share. In addition, the Company has granted the underwriter a
30 day option to purchase an additional 300,000 shares at the public offering price of $4.60 per share to cover
over allotments. The shares are being sold under the Company's previously filed shelf registration statement,
which was declared effective by the U.S. Securities and Exchange Commission on January 11, 2010. The
offering is expected to settle and close on March 1, 2010. The Company intends to use the net proceeds to
purchase 2 additional portable concrete mixing plants with the balance allocated for working capital purposes.
Roth Capital Partners was the sole underwriter for this transaction.
4. China Advanced Con. Materials Gr. Inc Appoints Jeremy Goodwin As President
Monday, 25 Jan 2010 09:25am EST
China Advanced Con. Materials Gr. Inc announced the appointment of Jeremy Goodwin, to assume the newly
created position as President of the Company, effective immediately. Mr. Goodwin has been a member of the
Company's Board of Directors since October 4, 2008.
5. China Advanced Const. Mat. Grp Inc Awarded Two New Contracts Totaling Approximately $4.2
Million For Hangzhou-Ningbo Railway
Monday, 2 Nov 2009 07:30am EST
6. China Advanced Const. Mat. Grp Inc Announces Approval Of NASDAQ Listing-First Call US
Wednesday, 28 Oct 2009 07:37am EDT
First Call US reported that China Advanced Const. Mat. Grp Inc has received approval to list its common stock
on the NASDAQ Global Market. The Company's shares are expected to commence trading on NASDAQ on
November 2, 2009, and will continue to trade under the symbol 'CADC'.
7. China Advanced Const. Mat. Grp Inc Wins Contract To Supply Concrete For France's New Embassy
Thursday, 22 Oct 2009 07:30am EDT
8. China Advanced Const. Mat. Grp Inc Wins Two New Contracts For XiangGui Railway Totaling $3.9
Wednesday, 2 Sep 2009 09:02am EDT
China Advanced Const. Mat. Grp Inc announced that it has been awarded two contracts totaling $3.9 million to
provide concrete manufacturing services for two sections of the XiangGui railway construction project. Upon
completion, the XiangGui railway will run from Hengyang in Hunan to Pingxiang in the Guangxi Autonomous
Region and will cover approximately 185 kilometers. This portion of the project is scheduled for completion in
2012. Upon completion, the XiangGui railway will run from Hengyang in Hunan to Pingxiang in the Guangxi
Autonomous Region and will cover approximately 185 kilometers. This portion of the project is scheduled for
completion in 2012.
9. China Advanced Const. Mat. Grp Inc Announces New Contracts Totaling $4.1 Million For Hangzhou-
Thursday, 16 Jul 2009 11:47am EDT
China Advanced Const. Mat. Grp Inc announced that it has been awarded two new contracts to provide
concrete manufacturing services for the Hangzhou-Ningbo railway construction project. Under the agreement,
China ACM will supply 500,000 cubic meters of concrete and expects to complete the project by mid-2011.
10. China Advanced Const. Mat. Grp Inc Announces Termination Of Xiangsheng Norman Xu From
President Role-Form 8-K
Thursday, 25 Jun 2009 08:54pm EDT
China Advanced Const. Mat. Grp Inc reported in its Form 8-K that on June 19, 2009, Xiangsheng Norman Xu
has been terminated as the Company’s President and removed as a Director of the Company, effective
immediately. Until such time as a permanent replacement is identified, the Company’s current Chief Executive
Officer, Xianfu Han, will serve as the Company’s Acting President.
11. China Advanced Const. Mat. Grp Inc Announces $3.3 Million Railway Contract
Tuesday, 2 Jun 2009 09:02am EDT
China Advanced Const. Mat. Grp Inc announced that it has been awarded a new contract to provide ready-mix
concrete for a major railway construction project in China. The Company will provide the concrete under its
new manufacturing services business line, whereby the general contractor supplies the raw materials and the
Company produces the ready-mix concrete. The contract is expected to generate approximately $3.3 million
over a two year period.
DU-PONT MODEL - 2009
A Du Pont analysis of China ACM, relative to its peers, illustrates the company’s ability to achieve strong
returns for its shareholders. China ACM’s profit margin of 30% drives its impressively high Return on
Equity, which is expected to grow further as the company expands its high-margin services.
The company’s equity multiplier is deceptively high when considering that the firm holds no long-term
debt. Instead, the company maintains significant amounts of Accounts Payable, thus slightly inflating the
metric. It is our expectation that the equity multiplier will decrease in the future, again due to the
expansion of high-margin Manufacturing and Technical Services, which require few Accounts Payable.
Simultaneously, Total Asset Turnover will improve as the company’s utilization rates increase.
Overall, China ACM’s ROE is very high; especially in regards to its minimal leverage.
Profit Equity Total Asset Return on
Margin Multiplier Turnover Equity
China ACM 30.4% 1.87 0.71 40%
CRJI 6.9% 2.99 0.72 15%
CSGJ 5.7% 1.28 0.31 2%
RMX -50.1% 1.66 1.24 -
LG 6.6% 2.35 0.40 6%
EXP 6.9% 2.49 0.56 10%
China ACM’s ability to meet its short-term obligations, as measured against its peers, is healthy. Its 3-year
average falls roughly in between RMX and CRJI, with high and low liquidity respectively. Adjusting for
inventory does little to affect China ACM’s position—the company holds very little in inventory. CADC’s
close relationship with general contractors and other state owned organizations has allowed it to have
unusual control over its liquidity.
Current Ratio Quick Ratio
2009 2008 2007 3 yr. avg. 2009 2008 2007 3 yr. avg.
China ACM 1.26 1.24 1.04 1.18 1.20 1.22 1.01 1.15
CRJI 0.36 0.54 1.08 0.66 0.32 0.36 0.93 0.54
CSGJ 2.48 2.55 0.80 1.94 1.19 1.29 0.25 0.91
RMX 2.48 2.55 0.80 1.94 0.83 2.44 2.34 1.87
LG 1.10 0.86 1.24 1.07 0.82 0.61 0.92 0.78
EXP 0.49 0.47 1.61 0.86 0.19 0.23 0.88 0.43
FIXED COVERAGE CHARGES AND PREPAYMENTS
China ACM makes extensive use of lease arrangements and short-term debt, creating a cash flow concern.
However, the company has so far been adequately able to cover its fixed charges, even going so far as to
make use of prepayment arrangements.
China ACM’s prepayments are akin to factoring, wherein the company’s receivables are substituted for
lease and rent payments. This arrangement would not be possible were it not for the company’s special
relationships with its customers and clients.
Rent payments for the next five years amounted to $6,055,289. Currently, China ACM has prepaid a
majority of this, to the amount of $4,417,287. Thus, the burden of fixed charges is lifted considerably.
China ACM, as most Chinese companies, is extremely conservative regarding the use of debt. The
company has never held long-term debt, nor would a Chinese bank customarily offer it (this is discussed
in more detail under “Pro Forma”). Therefore, China ACM makes use of revolving amounts of short-term
debt, primarily to cover working capital requirements.
As of 2009, China ACM’s D/E ratio reflects the company’s tendency to pay off short-term debt as quickly
as possible. It should be noted that, since China ACM bears no long-term debt, all growth will be financed
internally and through equity, denying shareholders a leveraged position.
Debt/Equity Debt/ Assets
2009 2008 2007 3 yr. avg. 2009 2008 2007 3 yr. avg.
China ACM 0.87 1.01 3.03 1.64 0.47 0.50 0.75 0.57
CRJI 1.99 2.10 2.45 2.18 0.67 0.68 0.71 0.68
CSGJ 0.28 0.33 2.96 1.19 0.22 0.25 0.75 0.41
RMX 0.66 0.49 0.58 0.58 0.40 0.33 0.37 0.37
LG 1.35 1.77 1.34 1.49 0.58 0.64 0.57 0.60
EXP 1.49 1.76 0.78 1.34 0.60 0.64 0.44 0.56
Times Interest Earned Equity Multiplier
2009 2008 2007 3 yr. avg. 2009 2008 2007 3 yr. avg.
China ACM 17.67 41.34 4.89 21.30 1.87 2.01 4.03 2.64
CRJI 3.30 161.08 2.97 55.78 2.99 3.10 3.45 3.18
CSGJ 57.36 5.15 5.44 22.65 1.28 1.33 3.96 2.19
RMX - - - - 1.66 1.49 1.58 1.58
LG 1.98 2.91 5.04 3.31 2.35 2.77 2.34 2.49
EXP 3.15 7.85 57.05 22.68 2.49 2.76 1.78 2.34
As noted above in “Fixed Charge Coverage,” China ACM is able to cover its interest obligations, despite its
expensive short-term debt (17%). Historically, the company’s short-term debt has not exceeded 15% of
the company’s capital structure.
China ACM’s asset management is roughly in line with its peers. China ACM is smaller and operates at
higher margins than its larger foreign counterparts, Lafarge and Eagle Materials. We expect the Total
Asset Turnover and Fixed Asset Turnover to increase in the future as utilization on the company’s fixed
plants increases. Also, the company’s prepayments are accounted for as assets, which understate the
performance of income-generating assets.
Total Asset Turnover Fixed Asset Turnover
2009 2008 2007 3 yr. avg. 2009 2008 2007 3 yr. avg.
China ACM 0.71 0.73 0.81 0.75 1.80 1.65 2.67 2.04
CRJI 0.72 0.59 0.67 0.66 1.07 0.79 0.99 0.95
CSGJ 0.31 1.37 1.41 1.03 0.61 4.42 3.75 2.93
RMX 1.24 1.54 1.67 1.48 2.15 2.53 2.94 2.54
LG 0.40 0.47 0.62 0.50 0.95 1.12 1.48 1.19
EXP 0.56 0.67 0.95 0.73 0.90 1.06 0.93 0.97
Inventory management should also improve as the company makes greater use of its portable mixing
stations (which do not use inventory). The dramatic decrease in inventory turnover between 2008 and
2009 is a direct result of a temporary ban on construction within the Beijing area during the Olympics.
During this period, China ACM focused on expanding its geographic footprint through Manufacturing and
Inventory Period Inventory Turnover
2009 2008 2007 3 yr. avg. 2009 2008 2007 3 yr. avg.
China ACM 141.73 5.74 4.64 50.70 2.58 63.58 78.73 48.30
CRJI 18.63 29.54 11.41 19.86 19.60 12.35 31.98 21.31
CSGJ 372.25 100.35 57.02 176.54 0.98 3.64 6.40 3.67
RMX 14.42 7.72 6.29 9.47 25.32 47.30 58.04 43.56
LG 60.75 52.59 48.92 54.09 6.00 6.94 7.55 6.83
EXP 71.32 54.09 43.47 56.29 5.11 5.23 5.58 5.31
Due to China ACM’s extensive dealings with the Chinese government, its average collection period is
significantly longer than its peers. However, this risk is mitigated by greatly reduced collection risk.
Furthermore, China ACM’s special arrangements with its customers and clients allow the company to use
its receivables as rent and lease payments (see above “Fixed Payment Coverage and Prepayments”).
Receivables Turnover Average Collection Period
2009 2008 2007 3 yr. avg. 2009 2008 2007 3 yr. avg.
China ACM 3.36 2.94 1.70 2.67 108.59 124.01 214.48 149.03
CRJI 7.17 13.05 9.22 9.81 50.90 27.96 39.60 39.48
CSGJ 3.46 15.10 10.90 9.82 105.35 24.17 33.50 54.34
RMX 8.86 8.99 9.80 9.22 41.19 40.60 37.24 39.67
LG 9.43 8.20 7.00 8.21 38.72 44.49 52.12 45.11
EXP 13.61 11.91 11.90 12.47 26.83 30.65 30.66 29.38
China ACM’s profitability metrics show a healthy, growing company relative to its less nimble Chinese
peers and its large foreign counterparts. The company’s high profit margins set it apart from its rivals and
highlight the value of its competitive advantages. China ACM operates in a corner of the industry that is
protected by significant barriers to entry, such as technological expertise and government relations. This,
accompanied by the company’s strategic entry into high-margin value-added services (e.g. Manufacturing
and Technical), have driven the company’s outperformance.
China ACM’s participation in the Chinese government’s ambitious plan to build the world’s largest
network of high-speed rails is an important near and mid-term driver.
Net Profit Margin Gross Profit Margin
2009 2008 2007 3 yr. avg. 2009 2008 2007 3 yr. avg.
China ACM 30% 19% 18% 23% 38% 25% 22% 28%
CRJI 7% 17% 3% 9% 7% 24% 11% 14%
CSGJ 6% 46% 8% 20% 12% 15% 16% 14%
RMX -50% -5% 2% -18% -27% 0% 8% -6%
LG 7% 10% 12% 10% 26% 28% 28% 27%
EXP 7% 13% 22% 14% 13% 20% 32% 22%
The company’s return on assets is also impressively high, between two and four times its competitors.
This trend is expected to continue, though the company’s recent capital expenditures to expand capacity
may temporarily return ROA to 2007-2008 levels.
Again, return on equity remains very high relative to its unlevered capital structure.
Return on Assets Return on Equity
2009 2008 2007 3 yr. avg. 2009 2008 2007 3 yr. avg.
China ACM 21% 14% 15% 17% 40% 27% 60% 43%
CRJI 5% 10% 2% 6% 15% 32% 6% 17%
CSGJ 2% 63% 12% 26% 2% 85% 46% 44%
RMX - - - - - - - -
LG 3% 5% 8% 5% 6% 13% 18% 12%
EXP 4% 9% 21% 11% 10% 24% 37% 24%
Note that RMX has been posting negative earnings.
China Advanced Construction Materials Pro Forma Income Statement
2007 2008 2009 2010E* 2011E 2012E 2013E
Concrete Sales 21,082,534 27,565,044 28,118,492 70,406,518 91,528,473 109,834,168 126,309,293
Manufacturing Services - - 7,053,728 12,937,456 23,800,000 27,200,000 30,600,000
Technical Services - - 1,924,089 4,959,310 6,000,000 7,000,000 8,000,000
Mixer Rental - - 2,618,493 1,921,280 1,164,675 - 3,446,776
Marketing Cooperation - - - 495,592 599,590 699,522 799,453
Sales of Materials - - - 570,740 - - -
Total Revenue 21,082,534 27,565,044 39,714,802 91,290,896 123,092,738 144,733,690 169,155,523
Cost of Sales
Concrete 16,393,134 20,799,398 20,657,312 65,580,024 84,663,838 98,850,751 116,836,096
Manufacturing Services - - 2,768,255 7,641,626 14,280,000 16,320,000 18,360,000
Technical Services - - 147,418 271,998 1,200,000 1,400,000 1,600,000
Mixer Rental - - 945,057 181,716 110,156 - 325,999
Marketing Cooperation - - - 94,122 113,873 132,852 151,831
Sales of Materials - - - 478,086 - - -
Total Cost of Sales 16,393,134 20,799,398 24,518,042 74,247,572 100,367,867 116,703,603 137,273,926
Gross Profit 4,689,400 6,765,646 15,196,760 17,043,324 22,724,871 28,030,086 31,881,597
Total Selling, General and Admin. 1,273,415 1,946,541 1,717,794 4,104,562 4,307,044 4,579,628 5,927,995
Income from Operations 3,415,985 4,819,105 13,478,966 12,938,762 18,417,828 23,450,458 25,953,602
6% VAT Subsidy 1,264,952 1,586,192 2,109,290 5,000,638 6,919,708 8,222,050 9,414,558
Non-Operating Income/Expense 14,494 (79,312) 602,020 - - - -
Interest Expense, Net (797,378) (149,419) (802,650) (770,482) (1,233,010) (1,444,074) (1,547,033)
Total Other Income 482,068 1,357,461 1,908,660 4,230,157 5,686,698 6,777,976 7,867,524
Income Before Taxes 3,898,053 6,176,566 15,387,626 17,168,919 24,104,526 30,228,434 33,821,127
Provision for Income Taxes - 1,012,382 2,115,097 2,575,338 3,615,679 4,534,265 5,073,169
Net Income 3,898,053 5,164,184 12,068,489 14,593,581 20,488,847 25,694,169 28,747,958
Dividends and Accretion on Convertible Stock: 33,387 1,229,473 1,319,398 - - -
Net Income avail. to Common Shareholders: 5,130,797 10,839,016 13,274,183 20,488,847 25,694,169 28,747,958
Shares Outstanding: - - 17,000,000 18,300,000 18,700,000 18,700,000
EPS - - $ 0.78 $ 1.12 $ 1.37 $ 1.60
* First-half of 2010's figures reflect actual revenues, the second half (E) are those figures doubled.
Concrete prices and input costs will hold at mid-year 2010 levels.
Projections carry out to 2013 because of the unpredictable nature of a small, high-growth
The company will not engage in Mergers and Acquisitions through 2013, despite management’s
stated desire to grow inorganically in the future.
On February 2nd, 2010, China ACM released financial data for the first half of its fiscal year 2010, and
revenue for those 6 months has already exceeded revenue from the entire fiscal year of 2009. Our Pro
Forma Income Statement is, for the most part, based on specific details regarding the company’s revenue-
In 2009, China ACM’s utilization neared capacity, prompting the company to double its maximum output
via lease agreements.
Estimates for 2010 are derived from doubling the 1st half of fiscal year 2010 (this method is supported by
historical data, though it slightly understates full-year revenue).
REVENUES AND COSTS
China ACM’s sub-industry has grown at 25% annually throughout the past decade. In 2011, we assume
the company’s competitive advantages will allow it to increase sales an additional 5% by capturing
market share. We assume competitors will soon enter the market, and as such Concrete Sales growth will
decline from 30% to 15% between 2011 and 2013.
2011 2012 2013
30% 20% 15%
Currently, the industry for ready-mix concrete is highly fragmented, consisting mostly of operators who
are unable to capitalize on the recent changes in the concrete market, such as the tax environment and
technological needs. As China transitions into a modern, developed country, we assume the use of ready-
mix concrete will reflect the developed world’s standard.
From an asset-based perspective, this growth comes from the company’s new plants, operating at 60%
capacity in 2010. We assume that China ACM will increase its utilization rate up until 2012, when its
plants will reach capacity, thus prompting it to expand capacity by 73% in 2013. This increase will return
the company’s plants to the same ratio of utilization-to-capacity as in 2011.
2010 2011 2012 2013
Utilization 2.9 3.8 4.5 5.2
Capacity 4.9 4.9 4.9 6.8
Raw materials and transportation costs are relatively volatile. In 2009, China ACM enjoyed substantially
lower costs related to cheap fuel. Fuel and input costs have rebounded in 2010, which decreased margins.
We have made the assumption that current fuel and material costs will remain high for the near future,
using 1st-half 2010’s cost ratios.
Labor costs are flat relative to the quantity of concrete produced, though China ACM does hire larger
numbers of skilled technicians than competitors.
China ACM’s management has suggested that the cost of selling concrete is 90% of revenue. We have
modified this assumption slightly. In the first half of 2010, when utilization rates were very low, the gross
profit margin was 7% rather than 10%, as management stated. In 2011, we assume higher utilization
rates will increase margins to 8.5%. These economies of scale will again increase the gross margin to
10% in 2012. An expansion of capacity in 2013 will return the gross margin to 2011 levels, mirroring the
ratio between capacity and utilization for those years.
2010 2011 2012 2013
Utilization 60% 77% 92% 77%
Gross Margin 7% 8.5% 10% 8.5%
China ACM’s High-Speed Rail contracts
are a steadily growing source of high-
margin income for the company. To the
right is a chart of China ACM’s publicly
disclosed rail project pipeline.
Management has stated that half of
these projects will be completed by the
end of 2010, and the rest by 2011.
In 2009, China ACM had 9 portable
mixing stations. By the time the 2nd
quarter of 2010 was reported, the firm
had 12 portable mixing stations.
Management has indicated that they
will add another two mixing stations by the end of 2010. We have conservatively assumed that China
ACM will add two more mixing stations every year, meaning that the company will have 18 portable
mixing stations operational by 2013.
Management comments and revenue analysis indicate that the portable mixing stations have $1,700,000
average annual revenue per unit, with a 4-year payback period and 20% IRR.
Growth : 2 units per year, or $1,700,000 * 2 = $3,400,000
There is a $3,000,000 one time startup cost, which is amortized over the 10-year life of the unit, as well as
a $100,000 redeployment cost. The general contractors supply all raw materials, while China ACM
provides the portable mixing station, personnel, and equipment. This arrangement dramatically
improves margins. Management has stated that all the costs associated with the portable mixing stations
sum up to 60% of its revenues. Thus:
Gross Margin : 40%
TECHNICAL SERVICES AND MARKETING COOPERATION
Management has said that a single Technical Services contract lasting one year can bring in an average of
$1,000,000 in revenue. Historical data suggests that China ACM adds one new contract per year, thus:
Growth : One new contract per year, or $1,000,000
Marketing Cooperation is essentially a referral fee. Revenues have been about 10% of the revenues
derived from technical services.
Growth : Pegged to Technical Services at $100,000 per year
The technicians and sales engineers who carry out the consulting work are paid their salary, travel
compensation, and commission.
Although historical data suggests the gross margin on Technical Services hovers around 95%, China
ACM’s President and CFO, Jeremy Goodwin, has stated that the company’s target gross margin on these
services is 80% moving forward. We have accepted management’s suggestion and kept costs at 20% of
revenue for this service. Marketing Services’ costs are also maintained at 20% of revenue. Thus:
Gross Margins : 80%
These revenues are based on renting-out equipment that is not being utilized. The company’s capacity, as
noted earlier, is at 60% in 2010, leaving some equipment to be rented for a fee. As utilization increases,
less equipment is available for rent, and thus revenues decline. Our assumption (noted above) is that as
utilization rates increase there will be less equipment to rent out.
Given that utilization will approach maximum capacity in 2012, there will be no equipment to rent out
that year. The new capacity gained in 2013 will, however, allow the company to once more rent out
equipment, returning rental revenue to the same proportion as achieved in 2011. 2010’s figures suggest
that, per 1 million cubic feet of free capacity, China ACM derives approximately $1,000,000 of revenue
from Mixer Rentals. Thus:
all revenues 2010 2011 2012 2013
Extra Capacity 2 mi. cu. meters 1.1 .4 1.4
Rental Revenues $1,921,280.00 $1,164,675 $0 $4,221,052
Costs associated with this service have been roughly 9.5% of rental revenue, a figure that we carried
forward. This figure includes maintenance of the equipment.
Gross Margin : 90.5%
SELLING, GENERAL, AND ADMINISTRATIVE
These costs consist of administration-related expenses and leases on operating space, including its offices
and factories. Costs associated with China ACM’s reverse merger, various equity issuances, and other
legal fees have been historically included in this figure. These costs are not carried forward in our
SG&A in previous years roughly correlates to China ACM’s total capacity. Since the company nearly
doubled its capacity in 2010, SG&A saw a similar increase. SG&A will remain roughly flat between 2010
and 2012, but will increase in 2013 to mirror the expansion of capacity.
Not including factory lease expense, SG&A costs have historically been 4.5% of total revenues. This
expense is added to future lease expenditures (derived directly from the company’s 1st-half 2010 10-Q).
China ACM entered into four new 5-year leases in the fourth-quarter of 2009, greatly increasing the size
of its fixed lease payments. This reality changes, however, by the end of 2012. The plant capacity that
China ACM acquired in 2010 will be fully utilized, necessitating more capacity. Thus, China ACM will take
out another series of plant leases for 2013 (increasing capacity by roughly 73%).
All of China ACM’s debt is short-term debt, reflecting Chinese preference for conservative capital
structure. Despite doubling revenues between 2007 and 2009, China ACM spent roughly the same
amount ($800,000) in both 2007 and 2009. This is attributable to China ACM’s interest income-
generating activities, which are expected to continue, and the company’s recently volatile capital
structure. By mid-year 2010, China ACM had no debt on its books.
For our assumptions, we decided that China ACM would continue to use short-term financing for working
capital needs, despite new equity issuances and management’s conservative tendencies. Interest is
calculated as a percent of Income from Operations in 2010.
VALUE-ADDED TAX AND PROVISION FOR INCOME TAXES
The value added tax, for which China ACM is eligible due to their use of recycled materials and energy
efficiency, is calculated as 6% of Concrete and Manufacturing Services Sales. In other words, the 6% VAT
subsidy does not apply to all of China ACM’s business. This subsidy is added to China ACM’s revenue’s
before the final provision for taxes.
China ACM does not expect to lose this subsidy as the parameters for eligibility are the company’s core
Income taxes are calculated at 15% of taxable income. The normal statutory rate in China is 25%, but
again due to China ACM’s environmental commitments and high-tech efficiency, the company is eligible
for a reduction. Like the VAT subsidy, China ACM does not expect to lose this subsidy due to the
assumption that China ACM’s business will continue to meet this tax-break’s requirements.
PREFERRED STOCK ACCRETION AND DIVIDENDS
China ACM pays out dividends on its Class-A preferred convertible stock. At the beginning of 2010 there
were approximately 875,000 preferred convertible shares outstanding. By the end of the 1st half of that
year, there were roughly 500,000 preferred shares outstanding. We took this rate of conversion and
applied it to the rest of 2010, meaning that there would be approximately 250,000 preferred shares
outstanding by the end of 2010, and no preferred convertibles left after 2011. By extension, the company
will cease to pay out dividends after 2010.
It is customary among Chinese companies to be financed mostly through equity. China ACM is no
different, as exemplified by the fact that the company has no debt and recently raised over $10 million
with a stock issuance less than one year ago. By mid-year 2010, the company had roughly 15.5 million
common shares outstanding, 875,000 preferred convertibles worth 4 common shares each, and
approximately 1,000,000 warrants (worth 2 common shares) outstanding. Our assumptions, based on
historical conversion rates, find all preferred shares and warrants converted by 2013.
All figures approx., and 2010 2011 2012 2013
expressed in common
Outstanding 17,000,000 18,300,000 18,700,000 18,700,000
Outstanding 1,000,000 - - -
Outstanding 1,000,000 700,000 400,000 -
DISCOUNTED CASH FLOW MODELS
Discounted Cash Flow Model
2007 2008 2009 2010E 2011E 2012E
EBIT $ 3,415,985 $ 4,819,105 $ 13,478,966 $ 12,938,762 $ 18,417,828 $ 23,450,458
Cash-back from subsidies 1,264,952 1,586,192 2,109,290 5,000,638 6,919,708 8,222,050
Total Pre-Tax Income 4,680,937 6,405,297 15,588,256 17,939,400 25,337,536 31,672,508
1 - Tax - 0.85 0.87 0.85 0.85 0.85
Depreciation $ 1,091,740 $ 1,178,745 $ 2,184,462 $ 2,673,266 $ 3,850,453 $ 5,044,955
Change in Captial Expenditure - 8,835,344 7,567,768 9,156,431 11,771,865 11,945,021
Change in Net Working Captial - 2,544,035 2,114,777 2,489,652 4,216,924 2,869,590
Free Cash Flow to the Firm - $ (4,756,132) $ 6,063,700 $ 6,275,673 $ 9,398,569 $ 17,151,975
FCFF Growth - - - 3% 50% 82%
Weighted Average Cost of Capital - - - 26.0% 24.0% 22.0%
Discounted Cash Flow - - - $ 2,795,407 $ 6,806,584 $ 10,433,129
Terminal Growth 3% *2010 is calculated as half a year
Terminal WACC 18%
Terminal Value $ 151,616,357
Discounted Terminal Value $ 74,404,298
Discounted Cash Flows $ 31,699,609 Shares Outstanding 15.5M
Net Debt $ 1,839,000 Target Price $ 6.96
Firm Value $ 107,942,907 Margin of Safety 24%
Our earnings before interest and taxes are derived directly from the Pro Forma Income Statement.
CASH-BACK FROM SUBSIDIES
We believe that China ACM’s subsidy advantages are significant enough to warrant its inclusion in our
DCF model. Again, this subsidy is 6% of Concrete and Manufacturing Sales. Cash from this subsidy is
taxed as if it were operating income.
1 – TAX
As above, the statutory rate is 25%, but China ACM’s rate is 15%.
Depreciation was calculated as the sum of the previous year’s depreciation and the depreciation of all
newly-acquired assets. All assets have a 10-year operating life, and all currently held assets will have a
life beyond 2013, with none completely depreciating until after that year.
CHANGE IN CAPITAL EXPENDITURE
Capital Expenditures were calculated using the same assumptions we made related to our Pro Forma
sales figures. The company must expand capacity and output by CapEx on two main business units: the
fixed plants, or Concrete Sales, and the portable mixing stations, or Manufacturing Services. Note that
CapEx does not include factories, as those assets are acquired through lease arrangements.
Each Portable Mixing Station costs $3,000,000. 3 new stations were bought in 2010, and our assumption
is that two more will be bought each year thereafter.
Correlated to the factory’s utilization is the need for trucks and fixed mixing stations. 1 million cubic
meters of output is related to approximately $7,200,000 in capital expenditures.
CHANGE IN NET WORKING CAPITAL
Net Working Capital was calculated on a historical basis as a percent of total revenues, about 13.2%.
WEIGHTED AVERAGE COST OF CAPITAL
China ACM’s capital structure is, as noted above, very conservative, and has pushed up the company’s
WACC considerably. By midyear 2010, China ACM held no debt, and the company has never held long-
term debt. Despite the fact that short-term debt is commonly rolled over, this money is used primarily to
fund working capital.
The company’s beta, 1.7, was calculated using CADC’s weekly stock price returns relative to the S&P 500
since August of 2009. We derived the market return for our risk premium calculation from Ibbotson’s
Morningstar SBBI Classic Yearbook, which stated a 17% arithmetic mean return for small-cap companies
since the Great Depression.
TERMINAL GROWTH RATE
We decided to use a terminal growth rate of 3% rather than China’s average GDP growth of roughly 10%.
This assumption is in line with the GDP growth of a fully developed nation, which China will eventually
STYLIZED DCF MODEL
Our assumptions in this model focus on our industry analysis and historical growth in Free Cash Flow.
2010-2013 : The company’s position as the market leader of a high-growth industry, combined with recent EBIT growth of roughly 180%
(2008-2009), warrants our use of a high growth rate for these early years. We decided to use 20%, a rough average of what we believe to be
China ACM’s Free Cash Flow growth during those years.
2014-2020 : As China ACM’s operations scale up and the Chinese government’s stimulus packages slow down, the company’s Free Cash Flow
growth rate will slow. We felt that using China’s GDP growth rate, roughly 10%, was appropriate for these years.
2020+ : As in our terminal growth rate in the previous DCF model, we decided that China’s growth will eventually slow to that of a typical
developed nation, roughly 3%.
REVERSE STYLIZED MODEL
Paired with the Stylized DCF Model, the Reverse Model illustrates the market’s expectations for China ACM’s growth. Instead of ending with
a projected stock price, the Reverse model starts with the current stock price and solves for the FCFF growth rates. We used the “Solver”
function in Microsoft Excel for this calculation.
The analysis revealed that the stock’s current price ($5.60) reflects FCFF growth of 17% from 2010-2013, 13% growth from 2014-2020, and
3% growth into perpetuity. The significant difference between the stock’s implied growth and our expected growth helps to clarify the
investment decision. China ACM’s growth prospects are clearly undervalued.
Stylized DCF Model Reverse Stylized DCF Model
Year WACC Growth Discounted CF Year WACC Growth Discounted CF
2010-2013 26%, 24%, 22%, 20% 20% $ 25,822,022 2010-2013 26%, 24%, 22%, 20% 17% $ 24,110,424
2014-2020 18% 15% 39,360,883 2014-2020 18% 13% 32,806,340
2020+ 18% 3% 35,381,108 2020+ 18% 3% 28,044,227
Sum of Discounted Cash Flows: $ 100,564,013 Sum of Discounted Cash Flows: $ 84,960,991
Net Debt: 1,839,000 Net Debt: 1,839,000
Firm Value: $ 102,403,013 Firm Value: $ 86,799,991
Shares Outstanding: 15,500,000 Shares Outstanding: 15,500,000
Stock Price: $ 6.61 Stock Price: $ 5.60
Margin of Safety 18%