February 17, 2010, 8:16 am

AMCF - solid little China microcap

AMCF - Andatee China Marine Fuel Services

AMCF - Andatee China Marine Fuel Services plans on offering 2.5 million shares at a range of $6-$8. With over-allotments the deal size will be 2.875 million shares. Rodman & Renshaw is leading the deal Newbridge co-managing. Rodman & Renshaw recently brought ZSTN public. Post-ipo AMCF will have 8.875 million shares outstanding for a market cap of $62.1 million on a pricing of $7. Ipo proceeds will be used for capital improvement, sales and marketing, research and development, funding possible future acquisitions as well as for general working capital purposes. Chairman, President and CEO An Fengbin will own 60% of AMCF post-ipo.

From the prospectus:

'We are engaged in the production, storage, distribution and wholesale purchases and sales of blended marine fuel oil for cargo and fishing vessels with operations mainly in Liaoning, Shandong and Zhejiang Provinces in the PRC.'

Chinese marine fuel stations. Facilities include storage tanks, vessels berths, marine fuel pumps, blending facilities and tankers. Note that AMCF refines their own fuel blends as well as sells them. AMCF's blend is a close substitute for diesel. Primary raw materials for AMCF's blended fuels are oil refinery by-products.

Marine oil for fishing boats account for 70%-80% of revenues, with marine oil for cargo vessels accounting for the other 20%-30%.

AMCF generally is able to pass-through oil price fluctuations to end customers. Total revenues will be impacted by the fluctuations in the price of oil, however margins should remain relatively consistent assuming AMCF remains successful passing through those fluctuations.

AMCF's primary business lies in the historical fishing towns of northern China, Dandong, Shidao and Shipu. AMCF has a 25% market share in the Bohai Bay.

As is customary in Chinese business, most of AMCF's revenues are derived from distributors who then sell to the end customers. Approximately 15%-30% of AMCF's revenues are derived from direct sales to retail customers, the rest is derived via sales to distributors. AMCF's margins are higher on direct sales, lower on sales to distributors.

Sector - Fragmented market in servicing fuel needs of small and medium size vessels. Characterized by intense price competition and uneven product/service quality. AMCF's own research has concluded that vessel operators are willing to pay a premium to berth with a service provider with consistently high fuel quality. AMCF believes they charge a premium for their consistent services.

Providing fuel has always been a low margin business and fuel to fishing/cargo vessels in China is no different. Gross margins through the first nine months of '09 were 12%.

Seasonality - The Chinese government prohibits fishing vessels from fishing from 6/15-9/15 annually, the breeding season for many fish. AMCF annually sees a 15% or so drop in revenues during this three month period. Due to this, 3rd quarter annually is the the weakest.

Growth - AMCF expects to grow primarily via acquisitions. As this sector is highly fragmented, expect AMCF to acquire a number of smaller competitors over the next few years. AMCF is setting aside 35% of ipo monies for future acquisitions. Notably AMCF plans to explore future growth in Southern China, an area they've just recently entered in 12/08.


AMCF will have approximately $1 per share in net cash on hand post-ipo. This number takes into account the $10 million short term debt AMCF has on the books post-ipo.

VAT - AMCF's fuel sales are subject to a value-added tax(VAT) of 17% across the board. AMCF's reported revenues are net after this VAT.

AMCF has no accounts receivables issues. They generally get paid upon purchase and delivery of fuel.

2010 fuel volumes increased an impressive 64% driven by acquisitions into southern China and expansion in their core market, Bohai Bay. Fuel volume is the metric to keep an eye on here more so than revenues. Revenues for AMCF will fluctuate with the price of oil, however margins on volume should stay rather consistent due to pricing pass throughs. A jump in volumes will lead to more net earnings, more so than a jump in revenues from just a rise in the price of oil.

AMCF is committed to investing in growth via acquisitions. As such, expect much of AMCF's operating cash flows to be used to invest in and expand the business.

2009 - Based on first nine months, revenues should be $118 million. Again the key metric here is that AMCF increased fuel volumes strongly in 2009, 64%. Gross margins 12%. As noted above this is a rather low margin business. With the volume increases, AMCF was able to improve gross margins significantly in 2009. Operating expense ratio of 4%, operating margins 8%. Taxes are in the 25% ballpark. Plugging in taxes, short term debt and non-controlling interests, net margins should be 5 1/2%. Earnings per share of $0.73. On a pricing of $7, AMCF would trade 9 1/2 X's 2009 earnings.

2010 - With the ipo, AMCF has cash on hand to continue growing business via small acquisitions. I would fully expect fuel volumes to increase nicely in 2010, even in a sluggish cargo ship environment. Keep in mind the bulk of revenues here are derived from fueling fishing vessels. As I tend to do, I want to be conservative here when plugging in volume growth. As AMCF's large recent acquisitions occurred in 12'08, I would not expect another 64% fuel volume increase in 2010. However I would expect at least a 25% increase directly due to expansion/acquisitions. The overall revenue number will depend on the price of oil/fuel, but a 25% volume increase along with small margin increases would put 2010 eps in the range of $1 per share.

Conclusion - 2009 was not an ideal year for fueling ships anywhere in the world. The economic slowdown impacted marine vessels worldwide, including the cargo industry in China. AMCF also notes that the fishing industry in China was also negatively impacted by the worldwide economic slowdown, although that sector is less economically sensitive than cargo. Still, AMCF was able to expand their business, open operations in the south of China and impressively grow volumes and expand the bottom line. This is another solid looking China microcap ipo that looks good in range. Coming 7 X's 2010 estimates(on a pricing of $7) with a good balance sheet, this one should work in range.

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