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2010 China America Holdings Research Report


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China America Holdings, Inc. (OTCBB:CAAH) is a diversified global holdings company with operations in the U.S. and China. China America Holdings has three operating divisions.

Shanghai Aohong Chemical Co., based in Shanghai, China, is a distributor of assorted liquid coolants which are utilized in a variety of applications, primarily as refrigerants in air conditioning systems for automobiles, residential and commercial air conditioning systems, and a manufacturer of steel non-refillable cylinders. For more information, please visit

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2010 China America Holdings Research Report

  1. 1. MARKET SNAPSHOT China America Holdings, Inc. OTCBB : CAAH China America Holdings, Inc. (CAH) is a holding company that owns a 56% stake in Shanghai Aohong Chemical Co., Ltd. based in Shanghai, China. Shanghai Aohong Chemical Co., Ltd. is a distributor of distributes hydrofluorocarbon (HFC) refrigerants and assorted liquid coolants which are utilized in a variety of applications, primarily as refrigerants in air conditioning systems for automobiles, residential and commercial air conditioning systems. The Company’s customers include manufacturers of automobiles, refrigeration and air conditioning systems, as well as bulk coolant distributors in China. As a result of the Montreal Protocol, as well as China’s desire to reduce harmful emissions, CAH’s primary focus now is distributing and marketing environmentally friendly products, as substitutes for harmful hydrochlorofluorocarbons (HCFCs), hydrofluorocarbons, (HFCs) and chlorofluorocarbons (CFCs), worldwide to multiple markets. Refrigerants - A Primer There are a large number of refrigerants and foaming agents in use today. Some of these are single or pure substances, but many are blends of two or more substances. Sometimes pure substances are referred to using their chemical group name, for example, HCFC-22, HFC-134a and HCFC-141b. Refrigerant blends are referred to by their so-called “R-numbers” (developed by DuPont), which are internationally recognized classifications for particular mixtures of substances. For example, R-410a is a mixture of 50% HFC-32 and 50% HFC-125. Therefore, “HFC” and “R” are often used interchangeably. 1 Commonly used refrigerants are HCFCs (R-22, used in most homes today) and HFCs (R-134a, used in most cars) have replaced most CFC use. HCFCs in turn are being phased out under the Montreal Protocol and replaced by hydrofluorocarbons (HFCs), such as R-410a, which lack chlorine. These fluorinated gases have very high GWPs and are dangerous greenhouse gases. 2 According to our research, the most common refrigerants are indeed R-22, R-134a and R-410a. As with many environmental issues, there is still some debate as to the atmospheric harmfulness of various refrigerants. While it is common knowledge that CFCs and R-22 are bad for the ozone layer, there are questions as to the damage caused by others, such as R-134a. Furthermore, it appears that certain refrigerants, while better for the environment in one aspect, might be harmful in another. What can be generally agreed upon, however, are the important characteristics of refrigerants (the order of importance would be debated though): 1. Efficacy – how cool a refrigerant is, under what conditions, and in what quantities 2. Cost – supply and demand 1 Preparing for HCFC phase-out: Fundamentals of uses, alternatives, implications and funding for Article 5 countries, United Nations Industrial Development Organization 2
  2. 2. MARKET REPORT 3. Toxicity – if there is a leak or damage to a cooling unit (particularly important with transportation) 4. Flammability 5. Atmospheric Life Hydrofluorocarbons or “HFCs” have been increasingly used in the last decade or so as an alternative to ozone damaging CFCs in refrigeration systems. Unfortunately, though they provide an effective alternative to CFCs (now banned under the Montreal Protocol), they can also be powerful greenhouse gases with long atmospheric lives. The three main HFCs are HFC-23, HFC-134a and HFC152a, with HFC-134a being the most widely used refrigerant. Since 1990, when it was almost undetectable, concentrations of HFC-134a have risen massively. HFC-134a has an atmospheric lifetime of about 14 years and its abundance is expected to continue to rise in line with its increasing use as a refrigerant around the world. The production and consumption of HCFCs in developing countries, particularly in air conditioning, the refrigeration sector and foam industries, have also grown significantly over the past five years, and without action this growth is expected to continue. It is use in these developing countries, many of which do not subscribe to, or are behind in, the Montreal Protocol, that is of primary concern to environmentalists. Based on 2006 consumption trends, The Multilateral Fund estimates that global production and consumption of HCFCs could double by 2015, adding to the dual challenges of ozone depletion and climate change. The level of HCFCs and their emissions therefore poses a significant challenge to the reduction of ozone depletion. In the U.S., beginning in 2010, two important federal rules took effect regarding the use of certain HCFCs. The regulations’ main purpose is to further restrict the use of substances that allegedly harm the earth’s protective ozone layer and contribute to climate change. The restrictions are required both by an international treaty and federal law. The targeted chemicals are HCFCs primarily used as refrigerants, specifically R-22, -142b, -123, -124, -225ca, and -225cb. As with any phase out that affects business and industry on such a massive scale, however, it is likely to be 2
  3. 3. MARKET REPORT a slow process. First, most countries’ laws choose installed equipment of a certain age for a given ban. The U.S. with R-22, for example, is anything in use before the end of 2009. There are also exceptions for certain medical equipment and reclaimed and recycled R-22. Therefore, as evidenced below, demand for R-22 is and will remain strong for the foreseeable future. And in rapidly developing countries such as China, likely even more so. Chinese Environmental Policies China is in fact part of the Montreal Protocol on Substances That Deplete the Ozone Layer, an international treaty designed to protect the ozone layer by phasing out the production of a number of ozone depleting substances (ODSs), including CFCs and some HCFCs used as refrigerants. It is believed that if the international agreement is adhered to, the ozone layer is expected to recover by 20503 . Over the past five years, China’s central government has undertaken aggressive policies to improve pollution, with new and revised pollution control laws and open information measures creating more transparency and pressure for many industries. Each province, autonomous region and municipality has made increasing efforts in environmental protection, phased out a range of out-of-date productivity with high consumption of resources and heavy pollution, accelerated pollution control and construction of urban environmental infrastructure. Indeed, Beijing's allocation of more than $220 billion of its $586 billion stimulus package to green projects seems proof that China as a whole is concerned with reducing harmful emissions. China is now in its 11th “Five-Year Plan” (2006-2010) to reduce ODSs and certain harmful emissions. During the 10th plan, overall societal investment in environmental protection doubled that of the “9th Five- Year Plan” period, exceeding 1% of GDP for the first time. Huge Demand for Alternatives All of this leads to huge demand for alternative refrigerants in the coming years. Many alternatives to HFCs, such as hydrocarbon (HCs) based coolants, are already commercially available, but the cost effectiveness is the issue. Phasing out of HFC and HCFC use, and careful collection and disposal of existing refrigerants, seems the best option now available in the context of limiting their greenhouse gas impact. But scientists are constantly developing new refrigerants that will likely replace the existing menu eventually. 3 Speth, J. G. 2004. Red Sky at Morning: America and the Crisis of the Global Environment New Haven: Yale University Press, pp 95. 3
  4. 4. MARKET REPORT Chinese Automotive Market It’s no surprise that China is one of the most lucrative and rapidly expanding economic markets in the world. Even in the midst of the global economic downturn, China's retail sales hit ¥12.5 trillion ($1.8 trillion) in 2009, up 15.5% over the previous year. China's booming retail sales are underpinned by the steady rise of household income. In 2009, the per capita disposable income in urban areas reached ¥17,175 ($2,515), nearly triple what it was a decade ago. Within the retail market, personal transportation (motor vehicles, motorcycles, fuel, and auto parts) is among the most lucrative retail businesses in China (see Table 1 above). These businesses contributed over 39% of China's total retail revenue in 2008. A natural consequence of the rise in income comes the increased desire for personal transportation rather than public. CAH is also heavily focused on the automotive market and is expected to increase that focus over time. China’s sales of passenger cars grew by almost two-thirds in March to 1.26 million after surging over 85% in the first two months of this year. Chinese consumers are forecast to buy a record 15 million vehicles in 2010, shattering the record 13.5 million in 2009 that made the country the world's top car buyer. China has approximately 35 million cars on the road today and experts predict that there will be 120 million cars by 2020. In addition, Chinese automakers are seeing demand surge like never before, currently enjoying an approximate 25% global market share and second in the world after Japan. China’s biggest automaker SAIC said that the booming domestic auto sales boosted its first-quarter net profit which more than quadrupled to ¥627 million from a year ago. Source: Competition As most industries in China, the refrigerant industry both within China and globally is increasingly competitive and very fragmented. The Company’s competitors include the hundreds, if not thousands, of smaller independent suppliers, as well as large chemical companies that are eager to enter the Chinese 4
  5. 5. MARKET REPORT market and who would most likely have significantly more financial resources to penetrate. In addition, large companies are constantly developing alternative coolants, addressing the burgeoning demand alluded to previously. Honeywell (NYSE:HON) and DuPont (NYSE:DD), for example, recently announced a joint venture to manufacture a new, environmentally friendly automotive air conditioning refrigerant called HFO-1234yf. The companies state that this new product has 99.7% lower global warming potential (GWP) than R-134a. This is likely not the last of new developments in this industry. Furthermore, DuPont recently announced its intent to acquire a minority share in Changshu 3F Zhonghao New Chemical Materials Co., Ltd., a Chinese company and incidentally CAH’s largest customer. According to DuPont, the relationship is expected to “enable a faster response to rapidly growing regional markets for our broad portfolio of fluorochemicals across all applications. This applies for existing and future chemistries for refrigerants or for our specialty fluorochemicals markets.” Clearly DuPont sees getting a foothold in China as smart (and necessary) business. One advantage for CAH, however is that it is a distributor, not a manufacturer. Therefore, the Company relies largely on relationships as much as product. There are many bulk distributors that can supply product, so to separate itself from the major players, as well as the myriad smaller competitors, the Company needs to maintain a competitive advantage through building relationships, custom mixing, superior delivery and top-notch customer service. CAH Key Competitive Advantages Advantage Explanation The Company fills a unique wholesale link in the supply chain, with one of China’s largest refrigerant manufacturers, Changshu Unique Supply Chain Position 3F Zhonghao New Chemical Materials Co., Ltd. This shows that not only can CAH distribute directly to end user manufacturers (mobile air conditioning systems, appliances, etc.), but also can provide raw material to other refrigerant manufacturers. As China moves toward ever stricter environmental policy, Key Government Relationships relationships with federal, provincial and local policymakers and enforcement agencies will be crucial. With unique access to raw materials, the Company has a leading Custom Mixing market position with custom chemical mixing for the various constituents within its target markets. As a chemical distributor, CAH has proven its ability to timely deliver products of correct properties in the right quantities. Superior Customer Service Failure to do so can quickly jeopardize or eliminate a company from a fragmented industry of this type. By being well-connected in the industry among users, manufacturers and technological innovators, the Company has distinctive access to market intelligence not enjoyed by all R&D / Market Intelligence members in the supply chain. Within the Chinese business environment, this is absolutely vital in maintaining a leading position. 5