General Steel Holdings Inc (GSI): Waiting to Profit from China’s Building Boom

GSI reported earnings of $0.11 per share for the first quarter of 2010 compared to earnings of $0.20 for the first quarter of 2009, on 43% higher revenues. The company posted a net loss of $5.5 million for 2010 compared to net income of $7.3 million for the same period a year ago.

According to GSI Chairman and Chief Executive Officer Henry Yu: “It was a challenging quarter as the price for raw materials increased while average selling prices remained relatively flat from January to the middle of March. By the end of March, the market began to improve as average selling prices increased at a rapid rate and we were able to pass our costs onto our customers and achieve a positive gross margin. Going forward, we expect average selling prices to remain at healthier levels…”

GSI, the leading non-state owned steel company in China, operates a diverse portfolio of Chinese steel companies.

Comments: The company reported that Longmen JV, an agreement to supply rebar for hydropower infrastructure in China, comprised approximately 95.9% of total revenues in the first quarter of 2010. This is not a good formula for growth. Adding to the negative scenario are higher operating expenses, including debt, and flat pricing. Plus its status as a non-state owned producer of steel is a competitive disadvantage. Unless you are in the mood to short, better opportunities are likely to present themselves when pricing firms and China’s building boom brings more growth potential to GSI.

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